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
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
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.
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’
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
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”.
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  EWCA Civ 22