Excluding damages for wrongful contract terminations: AB v CD

January 8th, 2014 by Barry Sookman Leave a reply »

A recent UK case addressed an important contract issue for IT lawyers. Will a limit of liability clause that prevents recovery of damages for a wrongful termination of an agreement be a ground for granting an injunction to prevent the irreparable harm associated with the breach for which full damages cannot be recovered? Alternatively, will the liability exclusion be accepted as the bargain reached by the parties for such breaches and not be a basis for a finding of irreparable harm? The court in AB v CD [2014] EWHC 1 (QB) (03 January 2014) considered that the latter position was the law, but expressed doubts as to its correctness.

The question arose from an application for an injunction to restrain the defendant from terminating a Licensing Agreement between the parties, pending the resolution of an arbitration. The Licensing Agreement concerns the “eMarketplace”, an internet-based electronic platform used internationally to buy and sell goods and services by entities involved in the mining, metals and other natural resources businesses.

The defendant gave notice that it would terminate the Licensing Agreement at midnight on 31 December 2013. The applicant contended that the defendant had no right to terminate the contract. It further claimed that if the contract was terminated it would suffer damages that would be irrecoverable because of a limit of liability clause that excluded such damages. It contended that since such damages would not be recoverable that it would suffer irreparable harm and should therefore obtain an injunction to prevent such losses. The defendant contended that since the applicant had bargained to exclude such damages that it would not suffer irreparable harm.

The court, after canvassing the leading cases on the point, concluded that although the matter was not free from doubt, the defendant’s argument was the correct one and refused to grant the injunction.

In giving reasons for decision, the court framed the issue as follows: As a new point in oral submissions, Mr Taylor referred to Clause 11.4 which provides (so far as material): “… in no event will either Party be liable to the other Party or any third party for … lost profits, … or any … indirect, special, consequential or incidental damages , under any cause of action and whether or not such Party or its agents have been advised of the possibility of such damage. … either Party’s total liability in contract, tort, negligence or otherwise arising out of or in connection with the performance or observance of its obligations, or otherwise, in respect of this Agreement shall be limited to a sum equal to the total amount RevShare entitlement of that Party during the previous six (6) calendar months prior to the calendar month in which such damages accrued. This limitation will apply notwithstanding any failure of essential purpose of any limited remedy provided herein.”… However, the fact that the recoverable damages are (or may be) limited by Clause 11.4 of itself raises a broader question about the adequacy of the remedy in damages in the American Cyanamid sense. Given the number of times that parties seeking injunctions must have been doing so in circumstances where there is a contractual restriction on the quantum of recoverable damages, there is a surprising lack of authority on the point. The Court’s approach to the adequacy of damages question is not bound by inflexible rules. The phrase “adequacy of damages” is itself derived from the following passage from Lord Diplock’s speech in American Cyanamid v Ethicon Ltd [1975] AC 396, 408: “… the governing principle is that the court should first consider whether, if the plaintiff were to succeed at trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable would be [an] adequate remedy and the defendant would be in a financial position to pay them, no interim injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.” There is a latent ambiguity in this well known passage, as it is not clear whether the phrase “adequate remedy” means a remedy that provides (so far as money can) full compensation for what has been lost or means a remedy that is regarded as adequate by the law even though it may fall short of providing full compensation.

Then, after canvassing the relevant cases on point, the court concluded as follows:

Having reached this conclusion I admit to a degree of unease at the result. It stems from a tension that I perceive between the American Cyanamid approach as applied by the Court of Appeal in the Bath case, and the approach suggested by Tomlinson J in Vertex and adopted by Akenhead J in Ericsson. I see the force of the argument that the parties’ commercial expectations are set by the bargain that they have made so that a person whose claim for damages, if substantiated, will be reduced by an agreed limitation clause should not have cause to complain if that is the eventual outcome. I also acknowledge that limitation clauses are an ubiquitous fact of commercial life and contracting and that, if the existence of such a clause were held to render damages inadequate, the road to an interim injunction may be open in practically every similar case. However, Mance LJ’s judgment in the Bath case hints that the equitable jurisdiction has a more fundamental objective, namely “to avoid any further financial loss and any cause for a claim to such damages.” It is also evident that the Court of Appeal in the Bath case objected to treating the contract freely entered into by the parties as setting a price for a party’s breach of contract: see [15] of Mance LJ’s judgement. In addition, the Court of Appeal’s willingness in Bath to take a view of the liquidated and ascertained damages clause before an event that is liable to give rise to loss that differs from the view to be taken after such an event and when considering whether to grant an injunction suggests a flexibility of approach that does not sit easily with the more doctrinaire approach adopted in the two subsequent first instance decisions. It is to be noted that the facts as understood by the Court in the Bath case suggested that the Council had a strong case with good prospects of proving that Mowlem was acting in breach of contract. In the present case there is a serious issue to be tried, but I remind myself that the outcome of any arbitration is unknown and cannot be predicted with any certainty. That reduces my concern to some extent, but does not eliminate it. In the result, I have said that I am not persuaded that the approach adopted in Ericsson was wrong; and I have therefore followed that approach. But I have a nagging doubt that the approach I have adopted may be too inflexible in a case such as the present. Because of the concern that I have expressed above, and because I consider that the point has wider implications, I have given permission to the Claimant to appeal.

Parties to heavily negotiated license agreements often exclude certain types of damages from limit of liability clauses. IP infringements and breach of confidence are two examples. In some cases, wrongful termination of a contract also is an exclusion or is subject to a differential liability regime. In light of this decision, parties may wish to consider the appropriateness of damage limitations associated with wrongul contract terminations.

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