Gavel and contractIt’s open to parties to agree in any contractual arrangement that the damages payable in the event of breach of any particular element of the agreement by either party may be capped or for that matter that certain types of loss (such as loss of profit) will be limited. On the face of it, contractual limitations of liability represent a sensible opportunity for parties (assuming of course that they are of equal bargaining power) to agree in advance what will happen if a particular clause is breached or a particular situation arises.

The perhaps surprising implications of a cap on damages is that where the damages, as capped or limited, are inadequate to compensate the aggrieved party for the loss which they will suffer as a result of the breach and (given the circumstances of the breach) the cap itself may be taken into account by a court in determining whether to grant an injunction (i.e. to force the party in default to perform the contract).

As a matter of law an injunction generally will not be granted where damages are deemed to be an adequate remedy given the overall circumstances of any breach and the requirement to ensure that justice is done. The relevance of any clause limiting damages to the decision on whether or not to grant an injunction was handed down in the case of Bath & North East Somerset DC v Mowlem Plc. Bath v Mowlem was considered in the recently reported case of AB v CD by the Court of Appeal. The Court upheld the application of the rule in Bath v Mowlem and took the view that the primary commercial expectation of parties must be that the parties will perform their obligations. Any expectations relating to limitations on liability in relation to damages are distinct from the primary obligation itself and a court will, where it considers appropriate, take steps to enforce that primary obligation (by way of granting an injunction to require the party in default to perform the contract).

AB v CD doesn’t create any new law but serves as a cautionary reminder of the fact that caps on contractual liability don’t necessarily provide the party in default with a way of avoiding either their contractual obligations or liability in respect of them. A cap or limitation may in fact create more uncertainty as to the remedies available than might have been the case had the agreement been silent on the point.

If you wish to discuss any issue raised in this blog please contact me.