AB v CD

A contractual exclusion or limitation of damages governs the secondary obligation to compensate for breach. It does not excuse performance of the primary contractual obligation or prevent the court from granting an injunction.

An applicant may establish that damages are potentially inadequate by showing a substantial risk of loss which would ordinarily be recoverable but may be excluded or capped. This only opens the door to the court’s discretion. The agreed limitation, the likely shortfall and the risk of its occurrence may remain relevant when deciding whether relief is just.

The respondent licensed the appellant to market an internet-based commercial platform. After the respondent purported to terminate the agreement, the appellant commenced arbitration and sought an interim injunction under section 44 of the Arbitration Act 1996 requiring continued performance.

Stuart-Smith J found a serious issue to be tried and held that the balance of convenience would favour relief. He nevertheless refused the application because damages were adequate. In reaching that conclusion, he disregarded a clause excluding lost profits and capping recoverable damages.

The appeal concerned whether that contractual restriction could be taken into account when assessing the adequacy of damages.

1. Appeal allowed. Bath and North East Somerset District Council v Mowlem Plc [2004] BLR 153 was binding authority that an agreed restriction upon recoverable damages does not prevent the court from considering the applicant’s probable uncompensated loss when deciding whether damages are adequate.

2. Underhill LJ held that a party’s primary obligation is to perform the contract. Its obligation to pay damages following breach is secondary. An exclusion clause or damages cap regulates that secondary obligation; it does not excuse performance or establish an agreed price for breach. A restriction upon damages is conclusive in a damages claim but does not, without more, preclude injunctive relief.

3. Clause 11.4 addressed only the damages recoverable following breach. Its references to liability and to “in no event” did not limit the respondent’s primary obligations or extend to the court’s assessment of injunctive relief.

4. The adequacy-of-damages principle must reflect the substantial justice of the case and the broad discretion under section 37(1) of the Senior Courts Act 1981. Commercial expectations were not undermined by this approach. The parties’ primary commercial expectation was performance, while the limitation clause governed compensation if breach occurred.

5. An applicant cannot rely upon every exclusion or limitation clause automatically. It must show at least a substantial risk of suffering loss which would ordinarily be recoverable but which the clause may prevent it from recovering in full or at all. That establishes only that damages may be inadequate and opens the door to discretion. The agreed restriction, the scale of the potential shortfall and the likelihood of its occurrence may then be relevant.

6. Ryder LJ agreed and emphasised that the appropriate question was whether, in all the circumstances, it was just to confine the claimant to damages. Laws LJ agreed, adding that a contractual cap or limitation tends in justice to favour an injunction restraining breach. The parties were expected to agree the injunction’s terms, failing which the court would resolve them on written submissions.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The court held that the damages exclusion and cap could be considered when assessing whether damages were adequate, and directed that an interim injunction be granted.
2. High Court, Queen’s Bench Division: Stuart-Smith J refused the interim injunction. Although there was a serious issue to be tried and the balance of convenience favoured relief, he held that damages were adequate after disregarding the contractual exclusion and limitation.