AB and CD were contractual parties. CD was AB’s only customer. CD sought to terminate the contract between them but AB claimed that it had no entitlement to do so. AB therefore sought an injunction compelling CD to continue to perform its contractual obligations. The parties in the case were anonymised because of the risk of commercial damage to AB if its identity was revealed.
The court initially decided that no injunction should be granted. However, on appeal, the Court of Appeal concluded that an injunction was appropriate and compelled CD to continue the contract.
What is required to obtain an injunction?
When parties are in dispute, the effect on one party will sometimes be so severe that they cannot afford to wait for a final trial of the matter. In those circumstances, the party will seek an injunction from the court to either prevent the party from taking a particular action or to compel them to do so.
In considering whether to grant an injunction, a court will decide:
- Is there a serious issue to be considered by the court at a final trial; and
- Would damages be an adequate remedy if an injunction was not granted.
In cases where a party is seeking to compel another party to continue a contract, the usual loss will be the profits that would have been obtained had the other party continued to perform the contract. Damages will usually be an adequate remedy.
What was different about AB v CD?
In AB v CD, the lower court had found that there was a serious issue to be tried and that finding was not challenged on appeal. The question was whether damages were an adequate remedy.
On appeal, AB argued that damages were not an adequate remedy as the contract between the parties contained a limitation of liability clause. The clause excluded AB’s right to recover lost profits and there was also a cap on damages generally. AB argued that CD’s liability would be capped at £17,000. That sum would not have adequately compensated AB for its losses.
The Court of Appeal held that damages would not be an adequate remedy. Giving the main judgment, Lord Justice Underhill stated that:
“The primary obligation of a party is to perform the contract. The requirement to pay damages in the event of a breach is a secondary obligation, and an agreement to restrict the recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligation…”
Otherwise, Lord Justice Underhill found that, even in the most flagrant breach of contract, the contract-breaker would be able to simply walk away without any consequences.
Limitation of liability clauses are common in most commercial contracts and can be a significant defence to any claim and a bar to a party pursuing a breach of contract. However, the decision in AB v CD does indicate that there may be an alternative mechanism by which to apply pressure on the party in breach, by obtaining an order compelling them to continue with the contract.
If you are concerned that another party to a contract has ceased to comply with the contract, in breach of its terms, it is important to seek legal advice on your options as soon as possible as delay may reduce the available options.