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When is an Injunction an Appropriate Remedy?

In this news alert, Partner Andrew Pavlovic and Associate Yulia Fedorenko consider the legal hurdles that need to be overcome in order to obtain an injunction and the strategic, commercial, and reputational considerations that need to be evaluated when deciding whether or not to apply for injunctive relief, following the recent case of Transparently Ltd v Growth Capital Ventures Ltd.

BACKGROUND

An injunction is a discretionary remedy, which is only granted by courts in exceptional circumstances. There are two main types of injunctions: prohibitory and mandatory. A prohibitory injunction prevents someone from doing something, whereas a mandatory injunction requires someone to do something.

Examples of prohibitory injunctions include:

  • Applications for orders under the Protection from Harassment Act 1997 – preventing individuals from harassing other individuals and/or employees of an organisation.
  • Springboard injunctions –- preventing former employees from using confidential information to their own advantage to gain a head start in competition with their former employer.
  • Restrictive covenants – interim applications to prevent breaches of non-competition, non-dealing and non-solicitation of restricted clients, and non-solicitation of restricted staff post-termination restrictions (amongst others) in contracts, often pending a final hearing at which the Court will consider whether such clauses are enforceable.

Examples of mandatory injunctions include:

  • Applications for orders requiring the delivery up of documents – for example where confidential information has been removed from a firm by a departing employee.
  • Applications for orders enforcing contractual provisions.
  • Applications for “search and seize” orders requiring the defendant to give the claimant access to specified premises and the ability to remove documents.

In most cases, injunctions are sought on an interim basis at the earliest stage of proceedings.  If an interim injunction is granted, a full trial will be listed in due course to consider whether the order should be made final or discharged.  At the time of applying for the interim injunction, it is usual for the claimant to provide a cross-undertaking in damages, undertaking to the Court that, if the injunction is subsequently discharged, and the defendant has suffered loss as a result of the injunction being in place, the claimant will compensate the defendant for this loss.

The general test that is to be applied in respect of applications for interim injunctions is set out in the case of American Cyanamid v Ethicon Limited, namely:

1. Is there a serious question to be tried?

The court needs to satisfy itself that the claim is not frivolous or vexatious, and that there is a real prospect of the claimant succeeding in a claim for a permanent injunction at trial.  Therefore, whilst the Court will not conduct a “mini-trial” of the merits of the claim, the claim needs to have sufficient merit to satisfy this initial hurdle.

2. Would damages be an adequate remedy?

If the damages are unquantifiable and would not adequately compensate the claimant for the potential loss that would be caused if the injunction was not granted, then the injunction will be granted subject to the balance of convenience test.

3. Where does the balance of convenience lie?

The court will then need to consider which party would be most disadvantaged if the injunction was or was not granted. If the disadvantage is evenly balanced, then the court will preserve the status quo.

THE FACTS IN TRANSPARENTLY LTD V GROWTH CAPITAL VENTURES LTD

The Claimant, a lawtech start-up, had entered into a software development agreement with the Defendant, under which the Defendant would carry out the development of the Claimant’s online management platform, in consideration for cash and shares.

There was a dispute about the Defendant’s performance of the contract, resulting in a dispute over payment, the Defendant stopping work, and the Claimant terminating the contract.   At the time of termination the Claimant had paid the Defendant the sums provided for in the contract but had not allotted shares.

The Claimant sought a mandatory injunction on an interim basis, requiring the Defendant to deliver up the software source code and all other necessary documentation required to take effective control of the platform.  The Defendant denied that the Claimant was entitled to terminate the contract but argued that the contract required the Claimant to allot shares to the Defendant upon termination, which they had not done, meaning any obligation to deliver up the source code had not been triggered.

THE COURT’S DECISION

The Court dismissed the Claimant’s application for an interim injunction, finding that the Claimant has failed to meet any of the requirements set out in American Cyanamid.  Taking each requirement in turn:

1. Serious question to be tried

The Court noted that the application had not been supported by a draft Claim Form or Particulars of Claim, and that it appeared that the Defendant had the much better argument that it was not required to deliver up any software unless/until it had received the shares.

2. Would damages be an adequate remedy?

The Claimant argued that, unless its platform could be launched in the near future, it was unlikely to survive, meaning damages would be an inadequate remedy.  However the Court found that the Claimant had produced insufficient evidence to substantiate this assertion, and that it appeared that damages could be quantified and were an adequate remedy.  Furthermore, the evidence suggested that the Claimant would not be able to satisfy any cross-undertaking in damages if the claim for a final injunction failed at trial and accordingly damages would not be an adequate remedy for the Defendant.

3. Balance of convenience

The Court found that the balance of convenience favoured maintaining the status quo.  The Claimant had the option of allotting shares to the Defendant to secure the delivery up of the required documentation, and it could do so whilst reserving its position in respect of any claims it may wish to bring in the future.

KEY CONSIDERATIONS

The case highlights a number of the key issues which need to be considered when applying for an injunction:

Strategic – A failed application for an injunction can have a substantial impact on the case going forwards.  An indication that one side or the other has the better of the arguments, even if made on a provisional basis, is likely to leave the other party facing an uphill battle in the negotiations from that point.

Evidential – A failure to support an application with appropriate evidence can be fatal.  In the Transparency matter, the Claimants were unable to satisfy the Court that damages would not be an adequate remedy, and that they would be able to satisfy the required cross undertaking in damages.

Commercial – Applying for an injunction can be costly due to the need to martial evidence and prepare any application at short notice.  Furthermore an interim injunction is just the start of the process, so consideration needs to be given at the outset as to the total costs of the action if the case cannot be settled and a full trial is required.

Reputational – A failed application for an injunction can impact on reputation.  Cases involving injunctions are often of interest to the legal press and can end up being reported.

CONCLUSION

Making a decision whether or not to apply for an injunction is not straightforward.  All of the above factors need to be considered promptly, as an application for an injunction can be dismissed on the basis of delay.  Injunctions have considerable commercial advantages and are a useful tool in any litigator’s arsenal. However, they are only appropriate in certain circumstances and a failed application for an injunction can have significant consequences. When an application is successful the injunctive relief is granted immediately and will most likely remain in place until the final hearing, giving the successful party leverage in any settlement discussions.

If you are a firm or an individual seeking to apply for injunctive relief, or if you have any questions arising from this alert, please contact our Partner Andrew Pavlovic, who specialises in regulatory and professional discipline issues for law firms and partners, high-net-worth individuals, companies, charities and regulators, or our Associate, Yulia Fedorenko, who specialises in employment and partnership issues for multinational employers, senior executives, partnerships and partners.