Protecting Contract rights – interlocutory injunctions

In the recent Federal Court case of Gardena (Australia) Pty Ltd v Nylex Corporation Pty Ltd [2008] FCA 1846 two iconic companies in the Australian garden and irrigation products market became embroiled in a turf war resulting in an interlocutory injunction being granted by the Federal Court.

Background

For many years Nylex was the exclusive distributor of Gardena products in Australia. In November 2007 Gardena gave notice terminating the agreement to take effect in December 2008.

The Federal Court said the termination was in accordance with Gardena’s contractual entitlements to bring the arrangement to an end. The Court noted that it was done for rational and explicable commercial reasons.

Nylex had agreed in the distribution agreement not to manufacture, distribute, promote or sell any products which competed with specified Gardena products in Australia. There were also other best endeavour obligations.

In breach of the distribution agreement Nylex had taken steps to supply products in competition with the Gardena products.

Gardena sought an interim injunction to protect its contractual rights. There were only a few weeks until the expiry of the distribution agreement.

The decision

The Federal Court said Nylex’s breaches were wilful, numerous and systematic. They were carried out to advance the financial position of Nylex at the expense of Gardena.

The decision in the Nylex case is a useful reminder of the legal principles considered by a Court when exercising its discretion to grant an interlocutory injunction to protect contract rights. Some of the key principles include:

• The legal rights and the relief that would be finally sought at a trial must be identified.
• There must be a “serious question to be tried” or if the evidence remains as it is there is the probability that at the trial of the action the applicant would be entitled to the relief sought.
• Whether the applicant would suffer irreparable harm for which damages will not be adequate compensation unless an injunction is granted.
• Whether the balance of convenience favours the granting of an injunction.
• In exercising its discretion the Court is required to assess and compare the prejudice and hardship likely to be suffered by the defendant, third persons and the public generally if an injunction is granted, with that which is likely to be suffered by the claimant if no injunction is granted.
• Hardship caused to third parties or the public generally by the interlocutory injunction being granted will rarely be decisive in exercising the Court’s discretion.
• The grant or refusal of any interlocutory injunction depends upon the particular circumstances of the case.

In applying the legal principles the Federal Court carefully considered the evidence presented by the parties, particularly in relation to the issues of prejudice and the balancing of the competing interests. The quality of the evidence was particularly relevant.

The Federal Court noted that the breaches by Nylex were serious and significant.

In resisting the application, Nylex argued that an injunction would cause serious damage to Nylex. Described as a “very bold submission indeed” the Federal Court said that the consequences flow directly from Nylex’s own premeditated breach of contract.

Nylex also sought to resist the injunction on the basis that the injunction would seriously harm innocent third parties. The Judge observed that the evidence put forward by Nylex was vague and general in form, being unsubstantiated and uncorroborated by any primary or reliable third person. For example there was no direct evidence from any third party retailer who was said to be affected by the grant of an injunction.

On the facts, damages were not an adequate remedy for Gardena. The Judge observed that it was almost always difficult to measure the full impact of the breach of non-compete obligations.

Protecting contract rights

The Nylex decision is instructive when considering the protection of contract rights.

The non-compete and best endeavour obligations in the agreement were the basis for Gardena’s application for the interlocutory injunction. The importance of having appropriate evidence, whether to seek or resist an interlocutory injunction cannot be over emphasised. Tellingly, even though there were only a few weeks until the expiry of the distribution agreement, the interlocutory injunction was still granted.