It is usually the case that when one party serves a notice of breach, with a view to terminating the contract (if the breach is not remedied), the other party does not believe that it is in breach. As a result, it will argue that the notice is invalid and the contract cannot be terminated. Certainly, any sudden or unexpected termination of a major contract can leave the other party up the proverbial gum tree.
The party on the “wrong” end of a notice of breach, believing it is wholly innocent, may want to try to stop the other party from serving the notice of termination. If it applies to the court for an injunction seeking to stop the other party from terminating the contract, what are its chances of success?
This is what Ericsson did, when its employer, EADS Defence and Security Systems Ltd, served a notice in breach in relation to a contract between them. The injunction proceedings came before Akenhead J in the Technology and Construction Court (TCC) (Ericsson AB v EADS Defence and Security Systems Ltd).
In deciding whether Ericsson was entitled to an injunction, the court applied all the “usual” American Cyanamid principles:
- Did Ericsson have a real prospect of success in persuading the court that EADS’ notice of breach was invalid?
- Would damages be an adequate remedy for Ericsson, if it was refused an injunction (but won at trial)?
- Would damages be an adequate remedy for EADS, if Ericsson was granted an injunction (but it was subsequently held that its notice of breach was valid)?
- Where did the “balance of convenience” lie?
Having reviewed the facts giving rise to the notice of breach, Akenhead J concluded that he could accept that there was a basis for EADS to serve the notice of breach.
With regard to the adequacy of damages, Akenhead J noted that both parties were substantial commercial organisations and had entered into a detailed contractual arrangement. The fact that the contract precluded the recovery of economic loss did not mean that damages could not be said to be an adequate remedy. The parties had, after all, freely entered into the contract and had been prepared to limit themselves to claiming certain damages only.
Akenhead J was slightly more troubled by Ericsson’s argument that, given its contractual obligation as to confidentiality, it would be “muzzled” and not able to tell its employees (where jobs depended on the contract) and the commercial world at large its side of the story. However, rather ingeniously and perhaps mischievously, Akenhead J:
- Believed that Ericsson could get round the problem by relying on the fact that the confidentiality clause was subject to the proviso “unless otherwise required by law”. He considered that the matter may have to be reported to the relevant stock exchange, or included in company accounts or reports.
- Believed Ericsson could rely on the court judgment itself (which was a public document), setting out its general position.
- Noted that as a result of the internet, nothing ever stayed confidential for long.
- Said, as an advocate of the TCC, that given the TCC is so efficient, any unjustified damage to Ericsson’s reputation would be of limited duration, on the basis that the matter moved promptly to trial.
Although Akenhead J went on to hold that, notwithstanding the parties had already referred to adjudication the question of EADS’ entitlement to serve a notice of breach, “sensible parties” would not have agreed to having their contractual rights frozen pending an adjudicator’s decision. If they had wanted this, they would have said so expressly in the contract but they hadn’t.
So, while the court can and will (in the right circumstances) grant an injunction to prevent one party from seeking to terminate a contract, it appears fair to say that it will be an uphill struggle. A court is much more likely to allow two parties, whose relationship has irretrievably broken down, to go their separate ways and for the wronged party to be compensated in damages (subject to any limitation agreed in the contract).
