UK: Limitation Of Liability Clauses And The Adequacy Of Damages

Last Updated: 19 February 2014
Article by Julia Stephenson

Will the inclusion of a contract clause limiting the liability of the parties for certain heads of damages support the argument, in an application for an interim injunction, that damages are an inadequate remedy, applying the guidelines from American Cyanamid? This question was considered by Stuart-Smith J in the High Court recently, in the case of AB v CD [2014] EWHC 1 (QB). The case raises important commercial contract issues in relation to the impact of limitation of liability clauses when seeking an interim injunction and the relationship between such clauses and wrongful termination.

The facts

The case concerned an application under s44 of the Arbitration Act 1996 for an interim injunction to prevent the termination of a licensing agreement ("LA"). The LA related to the provision of an internet based service for buying and selling goods (an "eMarketplace"). The licensor (CD) gave notice to the licensee (AB) in June 2013 that it was terminating the LA effective 31 December 2013. The licensee rejected the licensor's entitlement to terminate the LA and in mid-December 2013 made a request for arbitration. It also applied for an interim injunction to prevent the licensor from terminating the contract prior to the conclusion of the arbitration process.

The licensee argued that an interim injunction should be granted to prevent the termination of the LA, as if the licensor was allowed to terminate, the licensee would no longer be able to provide services to its sole customer. The licensee held that it would therefore cease trading as a result of losing its sole source of income.

American Cyanamid guidelines

Under the American Cyanamid guidelines, the court considers the following questions when deciding whether to grant an interim injunction:

  • Is there a serious question to be tried?
  • Are damages an adequate remedy?
  • What is the balance of convenience of each party if the injunction is granted?
  • Are there any special factors to consider?

Stuart Smith J agreed that there was a serious question to be tried, then went on to consider whether damages were an adequate remedy. The licensee argued that damages were not an adequate remedy on two main points:

  • if the licensor was allowed to terminate, and the licensee lost its sole customer, it would be unable to fund the arbitration and therefore would not have access to damages; and
  • the limitation of liability clause contained in the LA prevented the parties from claiming damages for (amongst other things) loss of profits and also limited liability to "the total amount of RevShare entitlement of that Party during the previous six (6) calendar months prior to the calendar month in which such damages accrued". The licensee argued that its main head of claim would be loss of profits and as it would not be able to claim for loss of profits in relation to the period following the termination of the contract (whether wrongful or not) it would bear damages that it was unable to recover and therefore would suffer irreparable harm. As such the licensee argued that an injunction should be granted to prevent such losses.

In relation to the second point, the licensor argued that the parties had negotiated the exclusion of liability clause in the LA: this was a bargain that the parties had agreed to. The licensee therefore could not now ask the court to prevent the operation of terms to which it had previously agreed.

The decision

In making his decision, Stuart-Smith J considered the application of the second limb of the American Cyanamid guidelines. In particular he considered the cases of Bath and North East Somerset DC v Mowlem plc [2004] EWCA Civ 115, [2004] B.L.R. 153 (relied upon by the licensee) and Ericsson AB v EADS Defence and Security Systems Ltd [2009] EWHC 2598 (TCC) [2010] B.L.R. 131 and reflected on the wider issue of is meant by "the adequacy of the remedy of damages in the American Cyanamid sense".

Stuart-Smith J said that the issue to be considered is whether the parties to a contract intend for losses to be fully compensated (which was held to be the case in Bath), or agree that certain heads of loss should not be compensated (as held in Ericsson).

Stuart-Smith J decided that the commercial expectations of the parties in AB v CD were indeed set by the rights and obligations in the LA. The block on any claim to loss of profits was therefore held to be part of the price that the licensee agreed to pay when executing the agreement, and the application for the interim injunction was denied.

Further points

In obiter Stuart-Smith J did, however, express unease with the application of the approach in Ericsson to AB v CD, as he felt it may be too inflexible in the instant case. Due to this, and the potential wider implications of the case, including the consideration by what is meant by the adequacy of damages as a remedy, Stuart-Smith J gave the licensee permission to appeal the decision.

Comment

This case highlights the importance of considering the impact of limitation of liability clauses. When negotiating contracts, parties should carefully consider the heads of damage that are being excluded, particularly when considering the damage limitations linked to wrongful contract termination. It is always difficult to estimate the damages that would be sustained in the event of a breach or wrongful termination of a contract. However parties should think about likely areas of concern and ensure that the terms agreed in a contract address these points as far as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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