Energy Sector: ‘consequential loss’ clause may impact on injunctive relief

In the recent case of AB v CD, the Court of Appeal considered whether a broad ‘consequential loss’ exclusion clause (along with a limitation of liability clause) precluded the granting of an interim injunction to restrain a breach of contract in advance of it taking place.

Granting the injunction, the Court of Appeal decided that it did not and, in fact, the existence of such ‘consequential loss’ and limitations clauses made the granting of an interim injunction restraining a breach of contract more likely.

Although this is not an energy industry case, the Court of Appeal’s reasoning will be of critical interest to those negotiating broad contractual ‘consequential loss’ clauses (or other exclusion / limitation clauses) in the energy industry, as it indicates that interim injunctive relief is more likely available to restrain a breach where a broad ‘consequential loss’ (or exclusion / limitation) clause applies to damages that may otherwise arise from the breach in question.

Facts

The parties were involved in an arbitration dispute concerning the terms of a licence agreement when ‘AB’ (the appellant) sought an interim injunction which required ‘CD’ (the respondent) to continue performing its obligations under the disputed agreement. The appellant wished to restrain the respondent from terminating or suspending the agreement pending the arbitration award.

The licence agreement under consideration contained a broad ‘consequential loss’ clause, which excluded liability for “loss of data, lost profits, costs of procurement of substitute goods or services, or any exemplary, putative, indirect, special, consequential or incidental damages” and also contained a limitation of liability (cap) on other damages that might nevertheless be recoverable.

Issues

In exercising its discretion to grant an interim injunction, the court relies on the American Cyanamid v Ethicon guidelines. The second stage of the court’s approach under these guidelines is to consider whether damages would be an adequate remedy to the applicant. An injunction is not generally granted in cases where damages would be an adequate remedy.

In this case, the issue of the adequacy of damages was complicated by the broad ‘consequential loss’ and limitation clause in the contract. In the High Court the judge noted that any award of damages would – by reason of the ‘consequential loss’ and limitation clause – be far less than the loss which could otherwise be recovered at common law. However, the High Court found that this was what the parties had agreed as ‘adequate damages’ in the event of a breach and the application for an injunction should be refused, as the applicant had an adequate remedy in damages in the agreed contractual sum.

The implication of this decision, if correct, was that it would be extremely difficult for an innocent party to succeed in an application for an interim injunction were a broad ‘consequential loss’ clause applied, as even though all damages may be excluded by the contract the court would consider there to be ‘adequate damages’ available.

Permission to appeal was granted.

Court of Appeal Decision

The Court of Appeal overturned the High Court decision and granted an interim injunction to restrain the attempted termination of contract.

The Court of Appeal decided that the “primary commercial expectation” under a contract is one of performance. In contrast, the expectations created by ‘consequential loss’ or limitation clauses are about the damages that will be recoverable in the event of breach and are therefore secondary to the performance obligation. Underhill LJ explained that “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” and he thought that the importance of protecting the “primary commercial expectation” of performance seemed to “sit better with the acceptance by this Court that an injunction may in an appropriate case be granted even where the loss causes by the threatened breach would not sound in damages”.

Counsel for the respondent noted the far reaching impact of the Court of Appeal’s approach and argued that it would not be right that in every case where the innocent party of a threatened breach of contract sought an interim injunction it could rely on the existence of an exclusion or limitation clause to claim that damages would not be an adequate remedy.

However, Underhill LJ explained that he thought Counsel for the respondent overstated the consequences of the case and a “claimant will still have to show that if the threatened breach occurs there is (at least) a substantial risk that he will suffer loss that would otherwise be recoverable but for which he will (or at least may) be prevented from recovering in full, or at all, by the provision in question”.

Comment

This case has specific resonance to those in the energy industry where wide ‘consequential loss’, exclusion and limitation clauses are commonplace. Such broad exclusions had previously been understood to remove the possibility of obtaining any remedy (whether by damages or interim injunctive relief), as the ‘damages’ specified in the contract have been agreed to be the ‘adequate’ remedy for a breach. However, AB v CD suggests that broad exclusion clauses could actually have the opposite impact and increase the likelihood of the courts granting interim injunctive relief to an innocent party to restrain a threatened breach of contract. As Laws LJ noted, in circumstances where a limitation clause exists in a contract, justice will tend to “favour the grant of an injunction to prohibit the breach in the first place”.

It is unlikely that this case will mean that parties refrain from putting ‘consequential loss’ or limitation of liability clauses in contracts. However, it serves as a reminder that such clauses may not prevent interim injunctive relief being granted to restrain a breach. In fact, it seems that they will make the grant of such interim relief more likely. As a consequence, a party’s usual ability to walk away from a contractual obligation by paying damages for its breach might be restricted by the existence of such a clause.

A transcript of the hearing can be found here.

AB v CD [2014] EWCA Civ 22