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LDs, exclusive remedies and an injunction

It goes without saying that one of the most important advantages of the “rule of law” for commercial parties is the right to enforce contractual obligations. Coupled with this is a need for contractual certainty. The law is there to enforce rights, particularly where those rights have been agreed upon. It provides a system for the resolution of disputes as to what those rights are.

Many years ago (I’ve noticed that I keep saying that nowadays) I wrote a dissertation entitled “The Autonomous Contract”. This looked at the question of whether a commercial contract between experienced parties could be completely self-regulating, with no possibility of interference by the courts, except to enforce its terms. Was it possible to draft the perfect exclusive remedies clause?

Of course the answer was no (and it still is).

This is because the law is also there to be an instrument of social policy. Examples particularly relevant to construction include the mandatory provisions of the Construction Act 1996 and the unenforceability of liquidated damages if they are, in truth, a penalty.

Many of the most important reported cases turn on the balance between the two competing objectives of:

  • Implementing social policy.
  • The freedom of parties to enter into contractual terms as they see fit and then to enforce those terms if they are not complied with.

If we think of these two objectives as planets, there was an interesting astrological alignment (or perhaps an opposition) in a recently reported case enticingly named AB v CD [2014].

Injunction

The case concerned an application for a temporary injunction (that is, an injunction sought before the dispute has been fully resolved by the court). The general rule set out in American Cyanamid is that a temporary injunction will not normally be granted where it can be shown that monetary damages would be an adequate remedy if the case were to be proved. The problem is that predicting the eventual outcome of a dispute (including any appeals) is not always easy.

Adequate remedy?

But what is meant by an adequate remedy? The court said that:

“… it is not clear whether the phrase ‘adequate remedy’ means a remedy that provides (so far as money can) full compensation for what has been lost or means a remedy that is regarded as adequate by the law even though it may fall short of providing full compensation.”

It is common for parties to limit liability for particular breaches and particular types of loss. So what happens where the limiting of the contractual liability means that the remedy for the breach complained of would (objectively speaking) not be “adequate”?

The authorities present two lines of argument:

  • First, that the residual liability is not an optional price to be paid to exonerate a breach of contract. Therefore the court should look afresh at the question of adequacy and grant the injunction if the residual liability is inadequate.
  • Second, that parties are free to agree what the remedy should be (or should not be) for particular breaches therefore the agreed remedy is to be treated as adequate.

The court favoured the second approach. Freedom of contracting didn’t exactly win over policy, but the policy was constrained so as not to overly interfere with freedom. Quite a topical issue at the moment.

Practical possibilities

I have always been a big fan of risk analysis and contingency planning. If there are particular breaches which might prompt an application for an injunction, perhaps the limitation of liability clause should expressly not apply to those breaches. Of course, that’s easy to say. It is not always possible to foresee every situation that might arise.

The judge felt “a degree of unease” about the result and has granted leave to appeal. I think that was understandable. This topic merits further consideration.

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