Event review: Restraining Contract Termination by Injunction

April 8, 2022

In a webinar organized by the SCL IT Disputes Group held on 25 February 2022, Gideon Shirazi (4 Pump Court), Zoe O’Sullivan QC (Serle Court) and Iain Rutherford (Brodies LLP) discussed issues which commonly arise in applications for interim injunctive relief which seek to prevent a party from terminating an IT contract. 

Zoe O’Sullivan QC focused on the following scenario and question: where performance of a long-term IT contract between A and B requires a degree of continuing cooperation, can A obtain an interim injunction preventing B from serving a threatened notice of termination (or acting on a notice already served)?

Zoe set out four objections which are frequently raised by respondents to applications in those circumstances as part of the balance of convenience ‘limb’ of the American Cyanamid test. They include the argument that the injunction should not be granted because performance requires a relationship of trust and confidence which has broken down irretrievably, and that it would be impossible to define the terms of any order with sufficient provision.

Zoe then highlighted some key cases which illustrate the sorts of factual scenarios in which a judge is likely to be persuaded (or not) of those arguments. On one end of the spectrum, the Court of Appeal in Regent International Hotels (UK) Ltd v Pageguide Ltd [1985] WLUK 577 decided that the balance of convenience was in the applicant’s favour where, among other matters, the terms of the contract were clear and there was an arbitration clause to deal with any disputes arising out of it. 

As an illustration of a court reaching the opposite conclusion, in Vertex Data Science v Powergen [2006] EWHC 1340 (Comm) an injunction was refused where the relationship of trust and confidence had on the evidence broken down, and where the contract (a complex outsourcing agreement) did not make it sufficiently clear what continuing performance would require. 

Zoe extracted some practical tips from the case law for practitioners who are seeking (or resisting) interim injunction applications in the IT sphere. These include the importance of:

  • Interrogating whether the relationship of trust and confidence really has broken down or whether that is merely being asserted for tactical purposes;
  • Considering whether the parties have a vested self-interest in continuing performance notwithstanding the assertion that trust and confidence has been lost; and
  • Determining whether the contract is sufficiently detailed and clear to enable an order to be drawn up which tells a respondent what it needs to do to in precise terms.

Gideon Shirazi then spoke about the nuts and bolts of how to apply for interim injunctions successfully. He stressed from the outset the dual importance of ‘analysis, analysis, analysis’ and ‘evidence, evidence, evidence’ (quoting Tony Blair in the process). 

It was stressed that not only is service of a claim form, particulars of claim and a witness statement in support a requirement in most cases for obtaining an order, but that the proper handling of those documents is crucial if one is to persuade a judge that the injunction should be granted or refused as a matter of the proper analysis of the evidence.

Gideon usefully reminded attendees that, as shown by Series 5 Software v Clarke [1996] CLC 631 and NWL v Woods [1979] 1 WLR 1294, courts tend not to apply the American Cyanamid test inflexibly and are more concerned with deciding the application according to the path of least injustice. Practitioners should bear that question in mind as part of their analysis and compiling of evidence accordingly. 

Another note of warning was sounded about interim injunction applications issued on an urgent, ex parte basis. Gideon said that while almost every case that comes to lawyers is considered by clients to be urgent, only rarely will cases meet the threshold for urgency justifying an application on an ex parte basis. The greater the urgency, the greater the need for evidence which justifies that urgency, a position which the new edition of the Commercial Court Guide adopts.

Similarly, the threshold is high for obtaining a quai timet injunction in anticipation of an imminent breach, as shown Vastint Leeds v Persons Unknown [2018] EWHC 2456 (Ch), [31]. Gideon stressed that this sort of order is an inappropriate mechanism for gaining a convenient tactical advantage over a contracting party if the ‘strong probability’ of an imminent breach causing ‘grave and irreparable’ harm test cannot be made out.

Gideon’s final piece of practical advice on evidence was that it can be more persuasive for a witness statement to be from somebody inside the business of the client who can speak directly to the impact that any injunction is likely to have than a solicitor who has taken instructions to that effect.

The final speaker, Iain Rutherford, discussed the approach taken by courts in Scotland to injunctions (or ‘interdicts’) to restrain contract termination. It was said that the approach is broadly similar to that in England and Wales. However, as ‘specific implement’ (the Scots equivalent to specific performance) is the primary remedy in the civil courts in Scotland, available as of right where a party is owed a contractual obligation, the bar for obtaining a mandatory interim interdict is lower than in England and Wales. 

While the Scots law test for injunctive relief is similar in certain respects to the American Cyanamid test (with balance of convenience and the need for the applicant to show a prima facie case relevant), Scottish Power Generation v British Energy Generation (UK) [2002] SC 517 shows that a factor which weighs against the granting of an injunction in Scots law is where the order sought would involve ‘significantly innovating’ on the existing terms of the agreement between the parties. Iain noted that this factor suggests that Scottish courts, like courts in England and Wales, are reticent to grant injunctions where the terms of the order will not be sufficiently clear given the complexity or informality of the parties’ contractual relationship. 

Whyte & Mackay v Capstone International [2011] SC 221 was then turned to, a case concerning an agreement to distribute a Whyte & Mackay brand of whisky in the USA which was terminated by Whyte & Mackay on grounds of material breach. Capstone International sought an order for ‘specific implement’ requiring continued supply of whisky. The order was granted before being overturned on appeal on the basis that it was a ‘significant innovation’ of the parties’ agreement because the agreement did not oblige Whyte & Mackay to accept orders when they were placed. 

Iain suggested that the lesson which can be drawn for IT practitioners from Whyte & Mackay v Capstone International is that the best way of ensuring continuity of supply where termination is threatened or notice to that effect is served is to draft contracts for the supply of IT goods and services with clarity and precision. 

Iain’s presentation ended with an explanation of the ‘caveats’ system in Scotland: courts are not required to notify a party that an interim application has been made against it unless a caveat has been lodged with the court (for a price). It was suggested that if a caveat is not lodged by a party against whom an interim injunction application is made, the court is more likely to grant the order on an ex parte basis on the assumption that there is no objection. An important system to know about for those advising on contracts governed by Scots law!

A PDF of the presentation slides and a recording can be found at SCL IT Disputes Group webinar: Restraining Contract Termination by Injunction

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Jacob Haddad is a second six pupil at 4 Pump Court. He was called to the Bar in 2021 after studying the GDL and Bar Course at City, University of London as a Scholar of Lincoln’s Inn