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Injunctions in Contract Disputes – Overall Justice Prevails

In a guideline decision, the Court of Appeal has ruled that the requirements of overall justice can sometimes trump the long-established principle that, in contract disputes, injunctions to restrain threatened breaches will only be granted where damages would not be an adequate remedy.

The proprietors of a trading software package (company A) had sought to terminate the licence of company B to market the product in the Middle East. Company B had, pending arbitration, applied for an injunction restraining withdrawal of the licence, upon which its entire livelihood depended.

In refusing to grant such an injunction, the High Court found that, notwithstanding the fact that company B would be put out of business by the termination of its licence, damages would be an adequate remedy.

In allowing company B’s appeal and granting the injunction sought, the Court of Appeal noted that the contract between the parties included a clause which limited the damages that would be payable by company A in the event of a breach. Amongst other things, the clause precluded company B from seeking compensation for its lost profits.

The Court noted that the primary obligation of the parties was to perform the contract and that the requirement to pay damages in the event of a breach was secondary. An agreement to restrict the recoverability of damages in the event of a breach could not be viewed as an agreement to excuse performance of the primary obligation.

Noting that it could not be just for contracting parties to be able to ‘walk away’ from their commitments with impunity, the Court observed, “The rule – if ‘rule’ is the right word – that an injunction should not be granted where damages would be an adequate remedy should be applied in a way which reflects the substantial justice of the situation.”

Giving guidance for the future, the Court concluded, “Where a party to a contract stipulates that, if he breaches his obligations, his liability will be limited or the damages he must pay will be capped, that is a circumstance which in justice tends to favour the grant of an injunction to prohibit the breach in the first place.”