Can’t claim damages because of a limitation of liability clause? Thought about trying for an injunction instead?
June 2015
Rating system:
Reading time (1-10 minutes): 3
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 7
Background:
Under normal contract law, if a party to a contract is in breach, the other party can ask a court to order the naughty party to compensate it for the loss it suffered as a result of the breach. It is common in contracts for parties to exclude and limit their liability for breaches. (For a fascinating article I have written about exclusion and limitation of liability clauses click here). They generally try to exclude liability for indirect losses and loss of profits (click here for another article I have written about this). And they try to limit the amount of liability, for example to the amount they have insurance cover for, or even the amount they have been paid under the contract.
Normal contract law is based on ‘common law’. But there is a different kind of law – the law of equity. Under the law of equity an innocent party can ask the court to order another party to stop doing something it shouldn’t be doing (an injunction) or to carry on doing something it should be doing (specific performance). If you breach the court order you are in contempt of court and you can be sent to prison or fined. These ‘equitable’ remedies have developed over a long period of time as part of good old fashioned English notions of fair play. They come with a set of principles, such as that you must have clean hands, you must do it if you seek it, and you have to watch out for laches (perhaps I can explain these some other time).
Another of its principles is that equity will not suffer a wrong to be without a remedy. So a court may award you an equitable remedy if normal contract law remedies wouldn’t do the job. The converse of this is that a court won’t award you an equitable remedy if normal contract law remedies would do the job. And that’s what this case is about (or at least the part I am telling you about).
Case:
This case involved a contract between CD, which owned an internet platform called eMarketplace for selling things in the international mining and metals market, and AB, who were given a licence to market eMarketplace in the Middle East. The contract had all sorts of exclusions and limitations protecting CD in the case of any breach of contract or indeed anything else ‘arising out of or in connection with the performance or observance of its obligations, or otherwise, in respect of this Agreement’.
CD told AB it was going to rip up the contract and said it wasn’t liable (or its liability was very limited) because of the exclusion and limitation clauses. AB went to the High Court asking for an injunction/specific performance, requiring CD to perform its obligations under the contract. The High Court said it couldn’t because AB was entitled to damages, and AB had clearly agreed that the limited damages it was entitled to receive after all the exclusions and limitations in the contract were an adequate remedy. AB said something like ‘what the heck, but CD said they would perform a contract and haven’t done so, can they really just rip the contract up like that?’ They thought it very unfair so they went to the Court of Appeal. What did the Court of Appeal say?
Decision:
The Court of Appeal agreed it was unfair, so they allowed the appeal and awarded AB an injunction. They came up with some kind of reasoning on the lines that the fact that AB had agreed that limited damages were an adequate remedy for a breach of contract was not the same as saying that they were an adequate remedy for the fact that AB did not want CD to stop performing its obligations under the contract in the first place. Basically, they were just trying to be fair, which is what equity is meant to be all about. So they said that the key question should be whether it is fair in all the circumstances that a claimant should be confined to his remedy in damages. They said that where parties have capped or excluded damages, that “opens the door” to the possibility of the court exercising its discretion to grant an injunction. Whether or not it exercises its discretion depends on the circumstances, including the level of shortfall between agreed limited damages and actual likely damages as well as the level of risk of the breach occurring.
Advice:
None really on the contract drafting front. You’re not going to weaken your exclusion and limitation of liability clauses just to reduce the chance of the other party getting an injunction.
On the other hand, if the other party to a contract you have signed is threatening to rip it up and telling you to whistle you can remind them of your rights to seek an injunction (but be careful about those laches).
Case:
AB v CD [2014] EWCA Civ 229
