Mandatory Injunctions in IT Disputes

June 30, 2004

The breakdown of a commercial relationship can often be fraught. Frequently, there is a gradual build-up of tension until eventually some conduct on the part of one or other party is seen as the final straw. A tactical battle ensues in which each party attempts to exert contractual and commercial pressure on the other in order to get itself into the best position to force the introduction of new terms, to negotiate out of the agreement or to instigate or defend litigation. One party may be tempted to take abrupt or high-handed action which could cause serious damage to the other party’s legitimate commercial interests. In such circumstances, a mandatory injunction may be required from the court in order to compel compliance with the parties’ agreement either permanently or, more frequently, for the period between the commencement of proceedings and their final determination (whether by formal decision or by settlement).

Traditionally, the grant of a mandatory as opposed to a prohibitory injunction has been approached with caution by the courts, as discussed below. But, over recent years, a more robust approach appears to have been adopted by first-instance judges, particularly at the pre-trial, interim stage. This is welcome because commercial realities sometimes demand, and are best met by, a swift compulsory order as opposed to a drawn-out and expensive battle over compensation.

The following are typical examples, in the IT context, of situations in which it may be necessary or appropriate to seek a mandatory injunction:

1. The software company or service provider refuses to allow the customer’s employees to enter buildings where the customer’s servers and software are hosted.

2. The software company or service provider changes passwords or cuts off and refuses access to software used by the customer for its business.

3. The software company or service provider physically removes software from the customer’s servers.

4. The software company or service provider walks out leaving the client and/or its customers without support and with a system that they cannot operate or maintain.

5. The software company refuses to hand over source code or to place source code in escrow.

Very often, but not necessarily, the situation which prompts such action has its roots in a dispute about money, and action is taken by one party in an endeavour to force the other party’s hand.

If one party to the contract threatens to act in breach of contract, the solution in appropriate circumstances is to apply for a prohibitory injunction restraining such conduct in advance. Where action is taken unilaterally, the only options may be to negotiate (expensively) or to seek mandatory relief. The purpose of this article is to discuss the principles that lie behind the granting or refusal of a mandatory injunction in the context of some of the more recent cases on the point.

The Courts’ General Approach

The breadth of the jurisdiction to grant prohibitory injunctions has never been in doubt. Traditionally, however, a mandatory injunction compelling the defendant to perform a specified act or series of acts has been described as one which will be granted only in “exceptional cases”.

In Redland Bricks Ltd v Morris [1970] AC 652 Lord Upjohn set out the following principles:

(i) The grant of a mandatory injunction can never be “as of course”.

(ii) It should only be granted where the claimant shows a very strong probability on the facts that he will suffer serious damage in the future.

(iii) It should only be granted where it can be shown that damages will not be a sufficient or adequate remedy if such damage does occur.

(iv) The cost to the defendant of having to carry out the works or services necessary to avert or reduce the potential damage to the claimant must be taken into account.

(v) If, in the exercise of its discretion, the court decides that it is a proper case to grant a mandatory injunction, then the court must be careful to see that the defendant knows exactly in fact what he has to do.

Despite the general nature of propositions such as these, a distinction needs to be drawn between those cases where what is being sought requires the defendant to undo a wrongful act and restore the position to what it was before he committed it, and those where what is sought is an order compelling the defendant to perform or to continue to perform some positive (typically in the IT sphere, contractual) obligation. The traditional caution expressed about the grant of mandatory injunctions only applies with full rigour to an injunction of the latter kind. An order seeking to restore the previous status quo is seen as less intrusive than an order to perform future obligations – had the claimant known of, or had time to act before, the defendant’s wrongful action, he could have restrained it in advance. To grant a mandatory order restoring the parties to the position which would have been maintained by prohibitory injunction in advance of the defendant’s wrongful action is a step which the courts are normally much more ready to take.

The principles which apply to restorative mandatory injunctions may be summarised as follows:

(1) The wrongful act which it is sought to undo must be one which the claimant could have restrained by a prohibitory injunction, had an application been made before it occurred.

(2) Events must not have taken place which make it impossible for the defendant to restore the previous status quo (eg the intervention of innocent third-party rights).

(3) The grant of a mandatory injunction must be more appropriate than an award of compensation by way of damages having regard in particular to the balance of hardship and inconvenience as between the parties.

Why have the courts traditionally been cautious about granting mandatory injunctions which require future performance of positive actions or obligations? The most widely expressed reasons are these:

(1) The reluctance of the Court to become involved in detailed superintendence of commercial activities.

(2) The reluctance of the Court to enforce obligations which compel the maintenance of personal relationships between parties.

(3) The difficulty in precisely describing (for the purposes of enforcement) a detailed series of positive acts which the defendant must perform in order to satisfy the Court’s order (in contrast to the relative ease of describing activities which he must refrain from doing).

(4) The difficulty of enforcement of an order requiring positive action when dispute may arise as to whether or not the terms of the order have been complied with.

(5) The inconvenience, hardship or expense which may be imposed upon a defendant by obliging him to perform positive actions.

(6) The fact that the expense the defendant will incur may be out of proportion to the damage which the claimant will suffer if a mandatory order is not made.

(7) The fact that the only sanction for breach of a mandatory injunction is punishment for contempt of court – a heavy-handed mechanism for enforcing the maintenance of a commercial relationship.

(8) The potentially expensive nature of proceedings for contempt of court.

Reasons of this kind are analogous to the reasons why the Courts are reluctant to order specific performance of certain types of contract – particularly those requiring detailed work or the maintenance of personal relationships between parties – preferring instead to leave the aggrieved party to his remedy in damages (see eg the discussion in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1).

Given the conceptual link between mandatory injunctions and specific performance, it is worthy of note that there has, in modern times, been a softening of the test by reference to which specific performance is granted or refused. The traditional formulation was that specific performance should be granted only if damages would be an inadequate remedy – a threshold test to be overcome before other discretionary factors come into play. The modern tendency is not to apply that threshold test but, instead, simply to assess whether it would be more just to grant specific performance than to award damages.

For example, in Rainbow Estates Ltd v Tokenhold Ltd [1999] Ch.64 Lawrence Collins QC ordered specific performance of a tenant’s repairing covenant, involving expenditure of about £300,000. He took the view that a modern law remedy requires specific performance of a tenant’s repairing covenant to be available in appropriate circumstances. He said, using what he described as “the more modern formulation”, that specific performance should be available “when specific performance is the appropriate remedy”. This less restrictive approach to the award of specific performance provides a guide to the way in which a modern court ought to approach the question of mandatory orders.

Indeed the gradual abandonment of a threshold test for injunctions can be seen in a number of recent cases, particularly those concerning interim injunctions. Lord Nicholls, dealing with injunctions generally rather than mandatory injunctions specifically, stated in Mercedes Benz AG v Leiduck [1996] AC 284:

The Court may grant an injunction against a party properly before it where this is required to avoid injustice. The exercise of the jurisdiction must be principled, but the criterion is injustice. Injustice is to be viewed and decided in the light of today’s conditions and standards, not those of yester-year.”

The “avoidance of injustice”, as we shall see, is the principle upon which interim mandatory injunctions are nowadays based and appears, incipiently at least, to provide a more broad-based general principle (consistent with the overriding objective under the Civil Procedure Rules) for the grant of even permanent mandatory injunctions.

Interim Injunctions

Section 37(1) of the Supreme Court Act 1981 provides that:

(1) The High Court may by order (whether interlocutory or final) grant an injunction . in all cases in which it appears to the Court to be just and convenient to do so.

(2) Any such order may be made either unconditionally or on such terms and conditions as the court thinks just.

Part 25 of the Civil Procedure Rules governs the grant of interim remedies. The court is expressly empowered by r 25.1(1(a)) to grant an interim injunction. It may do so even where there is no claim for a final injunction: r 25.1(4). In exercising its powers under Part 25, the court must give effect to the overriding objective set out in Part 1 of the Civil Procedure Rules, namely to deal with the case justly (which includes, so far as practicable, dealing with it expeditiously, proportionately, and in a way which saves expense).

The traditional approach to the grant of an interim mandatory injunction can be found in Shepherd Homes Ltd v Sandham [1971] 1 Ch 340 where Megarry J stated that, at the interlocutory stage, “the court is far more reluctant to grant a mandatory injunction than it would be to grant a prohibitory injunction. In a normal case, the court must . feel a high degree of assurance that at the trial it will appear that the injunction was rightly granted; and this is a higher standard than is required for a prohibitory injunction”.

We have already noted that such comments do not necessarily hold true of purely restorative injunctions. But the approach of the courts to interlocutory mandatory injunctions generally has become less restrictive and circumscribed by strict rules.

In Leisure Data v Bell [1988] FSR 367 Dillon LJ stated:

“The statutory authority.for the grant of mandatory and prohibitory injunction stems alike from section 37 of the Supreme Court Act 1981. The court is give full weight to the practical realities of the situation and weigh the respective risks that injustice may result from a decision one way or the other”

In Zockoll Group Ltd. v Mercury Communications Ltd [1998] FSR 354 the Court of Appeal specifically approved the following succinct propositions (formulated by Chadwick J in Nottingham Building Society v Eurodynamics Systems [1993] FSR 468):

First, this being an interlocutory matter, the overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be “wrong” . Secondly, in considering whether to grant a mandatory injunction, the court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage may well carry a greater risk of injustice if it turns out to have been wrongly made than an order which merely prohibits action, thereby preserving the status quo.

Thirdly, it is legitimate where a mandatory injunction is sought, to consider whether the court does feel a high degree of assurance that the plaintiff would be able to establish this right at a trial. That is because the greater the degree of assurance the plaintiff will ultimately establish his right, the less will be the risk of injustice if the injunction is granted.

But, finally, even where the court is unable to feel any high degree of assurance that the plaintiff will establish his right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory stage. Those circumstances will exist where the risk of injustice if this injunction is refused sufficiently outweigh the risk of injustice if it is granted.

It will be seen, therefore, that the modern test for the grant of an interlocutory mandatory injunction is not one which starts from a presumption against, or a reluctance to make, such an order. Nor does it require some threshold to be crossed before the Court will consider the exercise of its general discretion. Instead, the test is a pragmatic one, rooted in the practical realities of the case, and is guided by whether the risk of injustice is greater if a mandatory injunction is respectively granted or refused.

In two recent cases in which the authors have been involved, the courts have shown themselves to be quite prepared to grant mandatory orders in the context of an IT contract.

Case 1: Youatwork Ltd v Motivano Ltd

In this case, M had agreed to licence, support and maintain a Web site through which Y carried on its business. The site was hosted on Y’s servers located at a third-party hosting facility. Y served notice of termination, as it was entitled to. Some two months after service of the termination notice, M accessed the servers at the third-party hosting facility and removed the Web site to an environment set up in its own offices. It claimed the right to do so both under the contract and, it said, because protection of its intellectual property was reasonably required.

Y immediately sought an interlocutory mandatory injunction compelling M to restore the Web site to the third-party hosting facility. The application came on before Neuberger J on 2 May 2003, within two days of the act complained of. Y’s evidence was to the effect that M had no right to remove the site and that the removal posed a very serious risk to the Web site and Y’s business which could not be compensated for in damages. M informed the court that it would take between 6 to 8 weeks of work to restore the Web site to the third-party hosting facility. After lengthy argument, the mandatory injunction was granted.

Neuberger J’s unreported judgment is instructive. He proceeded on the basis that he had to be satisfied that Y had a strong claim, not merely that there was a serious question to be tried (the guideline threshold laid down by the House of Lords in American Cyanamid Co v Ethicon Ltd [1975] AC 396). Secondly, he took the view that it was necessary to look at the merits a little more carefully than would normally be the case because notice to terminate had been given and the contractual relationship would end before a full trial of the issue could take place. In such circumstances, the grant or refusal of the mandatory injunction was likely to be determinative of the issue. In determining the strength and merits of Y’s case, Neuberger J focussed on whether M was entitled to effect the transfer of the Web site to its own offices. If not, Y would have a powerful argument for the grant of the mandatory injunction (but not an automatic right).

In the event, the judge formed the strong view that Y’s contentions were correct. He then went on to consider Issues of prejudice and the balance of injustice. The judge took particular account of the risk of disruption to Y’s business and issues of security if the Web site was not returned.

The judge also addressed the status quo. Although, on the face of it, the status quo was the position as it now obtained, he found that this was not a fair analysis because M had acted secretly in removing the Web site and (it was strongly arguable) had no right to do so. On balance, he found that the status quo was marginally in M’s favour because they were doing the hosting at that time.

In assessing the adequacy of damages and the worth of each party’s cross-undertakings, the judge acknowledged that it was not appropriate for wealthy individuals or corporations to “buy” injunctions. Nevertheless he considered that the relative strength of each party’s financial ability to pay damages in the event that the grant or refusal of the injunction was subsequently shown to be “wrong” was a factor to be weighed in the balance. The judge was, however, more persuaded by the fact that the damage that Y might suffer if the injunction was refused was likely to be substantial and difficult to quantify. In contrast, the damage that M was likely to suffer if the mandatory injunction was ordered was likely to be restricted to the cost of the transfer back to the third-party host.

Because the order for the mandatory injunction was framed in terms of achieving a result rather than setting out the actual steps M had to take to restore the Web site, the judge was not troubled by the traditionally perceived problems of supervision already discussed in this article.

Youatwork v Motivano is perhaps best regarded as an example of a restorative injunction – despite the work and time involved in “undoing” M’s “wrongful” act, the effect of the order was to restore the parties to the position in which they had been before it was committed, and such conduct could and, no doubt, would have been restrained had it been possible to apply for a prohibitory injunction in advance.

Case 2

In this case, the parties entered into a lengthy distributorship and licensing agreement under which D granted to C an exclusive licence to market and install its software throughout the UK and for those purposes to enter into sub-licenses with C’s customers. D agreed to support and develop the software for the life of the contract. Working relationships between the parties were good, but D became dissatisfied with the commercial terms and sought to re-negotiate them. When these negotiations failed to bear fruit, D sought various pretexts to terminate the agreement and served notices of termination citing a number of grounds, all of which were disputed.

C’s customers were reliant on application support which only D could provide. Under the agreement between C and D, D was required to provide “third line” support – in summary the resolution of bugs or errors in the core software which could only be carried out by skilled and experienced programmers who had access to and understood the source code. D, having purportedly terminated the agreement on strongly disputed grounds, then refused to provide support to C’s customers. This was likely to result in severe inconvenience to those customers and possibly their clients and serious damage to the reputation and financial interests of C (who would be directly liable to its customers, under its agreements with them, for any malfunctioning of the software).

Under the agreement, D was also obliged to supply C and its customers with any developments, enhancements and modifications to the software which D implemented. Although D was admittedly about to bring out enhancements to its software, it refused to make these available to C or its customers.

Negotiations between the parties failed to make progress and C therefore applied for a mandatory interlocutory injunction compelling D to provide application support and to provide C and its customers with the benefit of any developments, enhancements or modifications to the software which D from time to time implemented. The application came on before Peter Smith J, who made it clear in the course of argument at the hearing of the application that he would make such an order, which was in the circumstances disposed of by consent.

The following factors clearly played a part in the judge’s thinking. The parties had successfully worked together until the disputed termination of their agreement had been contrived by D. There was no reason to think that the agreement would not work if an interim order was made that D should comply with its terms. Nor was there any reason to believe that D would not obey the order. D would be paid, under the terms of the agreement, for the support services which it provided, and would suffer little real damage in being compelled to provide them. The potential damage to C and its customers was very substantial. C might find itself in a position of having to pay substantial damages to its customers which it would then seek to pass on to D. D’s financial position did not encourage confidence that it could meet any damages which C would suffer. D was in the business of supplying and developing software, and providing software support – a business which it intended to carry on quite apart from the agreement with C. There was no question therefore of it being forced to continue or carry on a business against its wishes. The effect of the order would merely be that, in the course of the business which it was carrying on in any event, it would have to provide to C the services which it had agreed to provide under the contract. The risk of injustice if the injunction was refused was therefore greater than the risk of injustice if the injunction was made.

This was a case in which D was being compelled to perform positive acts, necessitating co-operation with C and C’s customers. It was therefore a positive as opposed to restorative injunction. Nevertheless, the judge was plainly and explicitly more impressed by the practical realities of the situation, the balance of potential injustice and with what he perceived to be the likely compliance with his order than he was by the traditional fears of difficulties in supervision or enforcement. The judge dealt with any such potential problems by ordering a speedy trial.

Another Recent Authority

A similar process of thought can be discerned in the (non-IT) case of Land Rover Group Ltd v UPF (UK) Ltd (in administrative receivership) [2000] EWHC 303 (unreported). In that case HHJ Norris QC granted an interim mandatory injunction against UPF ordering them to continue to supply Land Rover chassis pursuant to an agreement for the supply of such a chassis between the two parties. UPF was the sole supplier and both parties had made a substantial investment in the tooling and manufacturing capability at the UPF Plant. The judge held that Land Rover would suffer incalculable losses in relation to its market position and in relation to its goodwill towards its other suppliers and dealers as a result of the time which it would take to establish an alternative source of supply and provide the investment for a second production line. UPF would be unable to meet such a claim for compensation. The fact that UPF was in receivership was not in itself a bar to a claim for an interim mandatory injunction.

A More Practical Approach

It would be going too far to suggest that mandatory injunctions are now as willingly granted as prohibitory injunctions. They are not. There is still a significantly greater reluctance to compel the active performance of positive obligations than there is to prevent unlawful actions by restraining injunctions.

But the courts have responded to the commercial realities of modern life and have shown themselves to be less fearful of the perceived problems of compelling parties to work with each other, at least in the interim period until trial. It is interesting that the recent leading cases on the grant of this kind of relief have mostly involved IT contracts of one kind or another.

The gradual change in approach may partly have been stimulated by the willingness of Parliament to think the previously unthinkable. In the area of employment law, for example, where orders for specific performance would archetypally not have been granted by the courts, employment tribunals are expressly empowered to make orders for reinstatement, and have done so in appropriate cases for many years.

In part the change in approach has been a consequence of the explosion over the last 30 years in the frequency with which interlocutory injunctions are sought, and the accompanying realisation of the benefits which they can confer. Over this period, previously untested and intrusive injunctions (eg asset freezing injunctions and search orders) have become routine, and the courts’ whole approach to the grant of injunctions has developed and become more sophisticated.

Finally, the change of approach may have been brought about by practical experience of the way in which commercial parties react to injunctions. In civil systems, the starting point is that specific performance or its equivalent will be granted unless it is shown to be impossible. In the recent (non IT) case of Highland and Universal Properties Ltd v Safeway Properties Ltd [2000] 3 EGLR 110, both Lord Roger and Lord Kingarth pointed out that experience of decrees of specific performance in Scotland (which has a civilian system) did not suggest that defendants had any difficulty in practice in abiding by the orders, or that such orders gave rise to the heavy and expensive type of litigation feared by the English authorities, or that the problem of constant court superintendence had been encountered.

This pragmatic experience of situations in which compulsory orders have been made is significant as a matter of fact. It suggests that the fears of complications voiced in the English authorities may be exaggerated or even unfounded. The greater readiness of courts at first instance to award interim mandatory injunctions suggests that they are beginning to accept this approach, at least so far as short-term relief is concerned.

Considerations Influencing the Grant or Refusal of Mandatory Injunctions

The overriding legal question at the interlocutory stage is whether the risk of injustice is greater if the court respectively grants or refuses to grant a mandatory injunction. A restorative injunction will be more readily granted than one which requires positive conduct over a period of time. Probably the most important practical question which the court must ask itself in the latter type of case is whether, if a mandatory order is made, it will work in practice. This will be influenced by a number of disparate factors.

· Where it is shown that, in the course of their commercial relationship prior to the dispute, the parties have managed to co-operate with each other, the court is likely to be more optimistic that the making of a coercive order will not lead to insuperable difficulties between the parties.

· Where the party at whom the order is directed conducts a general business of which the contract in dispute is merely one part, the court is less likely to feel concerned by the prospect that its order is unduly intrusive or that it is compelling a party to remain in business against its wishes.

· Where practical reality suggests that it is in the wider interests of the party against whom an injunction is granted to comply with the order then that, too, will be an important factor. For instance, a supplier of software is likely to suffer damage to his commercial reputation if he simply refuses to support it in defiance of a court order, and the court may well therefore take the view that its order will be complied with.

· Even where the court has some misgivings about granting a long-lasting injunction, it can overcome some of its fears if the case is suitable for a speedy trial. It is frequently the case that a court granting a mandatory interlocutory injunction will at the same time order a speedy trial (anecdotal evidence from court officials suggests that very few speedy trials are ever actually tried, suggesting that in practice the grant of a mandatory injunction in an appropriate case tends to lead to a resolution of the issues rather than further protracted dispute).

· One factor which will be relevant is the question of the parties’ conduct. If the court comes to the conclusion that one party has deliberately or cynically disregarded the claimant’s rights, this will tend to influence the Court in favour of granting an injunction.

· Although the courts are careful to make the point that a wealthy claimant cannot “buy” an injunction by playing on the fact that its undertaking in damages is stronger than the defendant’s, the relative financial strength of each party will play a part in the exercise of the court’s discretion. This is inevitable, particularly where significantly greater damage will be suffered by one party than the other, depending on which way the court exercises its discretion.

· The merits of the parties’ respective cases may be influential in an appropriate case. Although the court must not embark upon a trial of the action at the interlocutory stage, there may be (and in IT cases often is) some disputed point of contractual interpretation which effectively gave rise to the dispute and the resolution of which plays an important part in determining which party is right or wrong. A clear view one way or the other may have a strong bearing on whether the court grants or refuses an injunction.

· In other cases, the issues at the interlocutory stage may be time-critical, so that the court’s decision whether or not to grant the injunction may effectively determine the whole or part of the dispute between the parties. In this sort of situation the court will be more concerned to go into the merits in detail, in order to reassure itself that the decision which it makes is “correct”.

In the modern age, it would be hard to find an IT system which was not business-critical. The degree to which customers are dependent upon their service providers and systems varies, of course, but in many cases such dependence is absolute. The types of conduct listed at the beginning of this article may threaten the continued existence of a business. Even where the business will survive, the loss inflicted upon the claimant may be out of all proportion to the cost or inconvenience to the defendant of having to honour his contract until trial. In other situations the claimant will be in great difficulty in proving loss of profit. In situations such as these, damages are unlikely to be an adequate (or the most appropriate) remedy. For these reasons IT contracts are fertile ground for the potential award of mandatory injunctions.

Michael Douglas QC and Alex Charlton are barristers and members of the IT Group at 4 Pump Court, Temple, London EC4Y 7AN. Jeremy Drew is a partner in the Technology Group at Ashurst, Broadwalk House, 5 Appold Street, London