Limitation Of Liability Clauses And The Adequacy Of Damages

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...