Whether damages constitute an adequate remedy where there is a contractual provision limiting damages

Rachel Price

In AB v CD, the Court of Appeal held that a party which applies for an interim injunction to prevent a breach of contract may argue that damages will not constitute an adequate remedy where there are contractual terms which exclude or limit liability for loss that would be caused by such a breach.  The decision suggests that the court will be more likely to grant interim injunctions in circumstances where damages are excluded or limited by the relevant contractual provisions.

As set out in American Cyanamid v Ethicon, when exercising its discretion as to whether to grant an injunction, the court must consider that:

  • there is a serious issue to be tried;
  • damages are not an adequate remedy; and
  • the balance of convenience favours granting an injunction.

The adequacy of damages is therefore a common issue for parties applying for injunctive relief.

The Court of Appeal overturned the first instance decision, in which the High Court refused an interim injunction on the basis that damages could amount to an adequate remedy despite there being a contractual restriction on recoverable damages.  The decision is a useful illustration of the circumstances in which the court is likely to find that damages will not constitute an adequate remedy.

The distinction between a claim to recover damages and a claim for an injunction which is designed to avoid such damages accruing in the first place was developed in Bath and North East Somerset DC v Mowlem plc [2004] EWCA Civ 115, where the court held that a party threatening breach of contract was not entitled to treat an agreement to restrict the damages recoverable in the event of breach as the “agreed price” for committing that breach.

Here, the Court of Appeal held that Bath v Mowlem had correctly concluded that:

  • the agreement of the parties as to the quantification of damages was not conclusive of a claim for an injunction to prevent breach of contract;
  • the primary obligation of a party was to perform the contract;
  • the requirement to pay damages in the event of breach was a secondary obligation;
  • an agreement to restrict the recoverability of damages in the event of breach could therefore not be treated as an agreement to excuse performance of a party’s primary obligation.

The Court of Appeal concluded that it would be unjust if the court could not exercise its discretion to grant an injunction in cases where there had been a gross and cynical breach of contract and the innocent party would be unable to recover damages for the losses it had suffered because of a contractual provision limiting recoverability.  The underlying rationale was that the party in breach should not be entitled to walk away from its obligations with impunity, and the Court of Appeal determined that the principle that an injunction should not be granted where damages would be an adequate remedy should not be applied in a mechanistic way, but rather in a way that reflected the substantial justice of the situation.

The real question is not whether damages are an adequate remedy but that set out in Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349, i.e. whether it is “just, in all the circumstances, that a plaintiff should be confined to his remedy in damages“.  As Mr Justice Cooke commented in Lauritzencool Ab v Lady Navigation Inc [2004] EWHC 2607 (Comm), “the purpose of an interlocutory injunction is protection not just against loss which would sound in damages but against violation of any right where damages would not be adequate compensation. Loss of goodwill, loss of reputation and […] loss of competitiveness or marketability are all matters which can be taken into account”.

AB v CD [2014] EWCA Civ 229

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