AB v CD

[2014] EWHC 1 (QB)

The parties entered into a licensing agreement concerning an eMarketplace – an internet-based electronic platform used internationally to buy and sell goods and services by entities involved in the mining, metals and other natural resources businesses. Clause 11.4 of this agreement limited the damages either party could recover and excluded certain heads of loss altogether, namely loss of profit. On 6 June 2013 the Defendant gave notice that it would terminate the agreement at midnight on 31 December 2013. The Claimant disagreed and expressly reserved its right to seek an injunction to stop this. On 20 December 2013, the Claimant commenced an arbitration under the LCIA Rules and applied to the Court under s.44 of the Arbitration Act 1996 for an injunction to restrain the Defendant from terminating the agreement, pending the outcome of the Arbitration.

When deciding on whether to grant an injunction, Mr Justice Stuart-Smith referred to American Cyanamid Co v Ethicon Ltd (1975) in which Lord Diplock had held that the guidelines when making an order for an injunction include:

(i) whether there is a serious question to be tried;

(ii) whether damages would be an adequate remedy;

(iii) what would be the balance of convenience of each of the parties should an order be granted; and

(iv) whether there are any special factors.

The issue in this case principally concerned the meaning of “adequate remedy”: does it mean full compensation for what had been lost or something that might be less than this, yet regarded as adequate in the eyes of the law? Lord Diplock said:

“the governing principle is that the court should first consider whether … he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable would be [an] adequate remedy and the defendant would be in a financial position to pay them, no interim injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.”

The Claimant submitted that if the termination went ahead, its business would cease to exist as it would lose its only source of income and therefore it would not be able to fund the costs of the arbitration. It submitted that the fact that the parties had entered into an agreement which limited the recovery of damages should not prevent the Court from looking objectively at whether those recoverable damages amount to full compensation. The Claimant asserted that it would not be able to recover “adequate damages” because its main head of claim would be for loss of profits, which is or may be excluded by clause 11.4. The Claimant urged the Court to follow the CA’s approach in Bath and North East Somerset DC v Mowlem plc (2004) and grant the injunction.

In Bath, the parties had an agreed LADs clause in the contract: £12,000 per week was the genuine pre-estimate of full compensation. The CA upheld the injunction, recognising that it may be difficult to assess the totality of any likely loss before the event and that such an assessment (the agreed LADs rate) “may prove in the event not to give rise to adequate compensation, so that to leave a party to a claim in damages may mean that it will suffer loss which the grant of an interlocutory injunction would completely avoid”.

Mr Justice Stuart-Smith noted a tension between the decision in American Cyanamid, as applied by the CA in Bath, and the approach suggested in Vertex Data Science Ltd v Powergen Retail Ltd (2006), as applied in Ericsson AB v Eads Defence and Security Systems Ltd (2009). In Ericsson, there was a limitation of liability clause. Ericsson argued that termination would have a seriously adverse effect on its business. Nevertheless, Mr Justice Akenhead refused the injunction as he “[could not] see that it is unjust that a party is confined to the recovery of such damages as the contract, which it has entered into freely, permits it to recover”.

Mr Justice Stuart-Smith held that the distinction between the authorities boils down to what the intention of the parties was when they entered into the contract. In Bath, the agreement and intention was that the Council’s losses should be fully compensated (via the LADs clause) while in Ericsson, the agreement and intention was that the relevant heads of damage should not be compensable.

Applying this approach, Mr Justice Stuart-Smith refused the Claimant’s application for an injunction on the basis that the commercial expectations of the parties were set by the package of rights and obligations that constituted the agreement (namely clause 11.4). Damages were therefore an adequate remedy. However, he admitted to “a degree of unease at the result” which stemmed from the authorities he considered in his judgment. He had a “nagging doubt” that the approach that he had adopted “may be too inflexible in a case such as the present”.

Accordingly, Mr Justice Stuart-Smith awarded permission to appeal as the point potentially had wider implications.

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