Disclosure failures not fatal to non-compete injunction

Cases involving alleged breaches of non-compete provisions after the sale of a business can sometimes be so urgent that they justify applying for an interim injunction without giving any prior notice of the application to the defendant. However, when making such a “without notice” application, the claimant comes under an obligation to give full and frank disclosure to the court of all material issues whether helpful or harmful to its case. In Derma Med Ltd v Ally, the Court of Appeal has recently considered what should happen when a claimant fails to fully discharge that obligation. The decision offers some comfort to claimants in such a situation, but also serves as a warning.

In summary, the Court of Appeal has confirmed that, while the duty of full and frank disclosure remains very important, an interim injunction should not necessarily be discharged where this principle has been breached if doing so would be contrary to the interests of justice. The judgment also questions the adequacy of damages as an alternative to an interim injunction where non-compete covenants have been breached.

Background

The claimants were initially granted an interim injunction following a without notice application. The interim injunction restrained the defendant from breaching non-competition and confidentiality covenants entered into as part of the sale of his Botox and cosmetics business to the claimants. The defendant was also ordered to preserve various devices and electronic accounts that might evidence the alleged breaches.

When such interim injunctions are made without notice to a defendant, the defendant will be given an opportunity to challenge the injunction at a later hearing, called the “return date”, where both parties will be able to make submissions to the court and present evidence.

In this case, at that return date hearing, the court discharged the injunction. The return date judge decided that there had been culpable and serious failings on the part of the claimants to make full and frank disclosure of relevant matters to the judge who dealt with the without notice application. Four matters were relied on by the return date judge in reaching this conclusion:

• A failure to fully explain the legal principles: the claimants had not drawn the without notice judge’s attention to commentary in a leading textbook which suggested that whilst without notice applications might be appropriate for document preservation orders, they were inappropriate to enforce non-compete provision.
• A failure to disclose all material correspondence: the defendant had already been made aware of the allegations against him through correspondence from the claimants, but not all of that correspondence had been shown to the without notice judge. If it had been, that judge would have concluded that the application should be dealt with on notice to the defendant rather than without notice. It would also have been apparent that the order for preservation of evidence was pointless because if the defendant was going to cover his tracks by destroying evidence he would have already done so.
• A failure to point out flaws in the orders sought: the definition of “confidential information” sought in the injunction was overly imprecise and this had not been pointed out to the without notice judge.
• Finally, a failure to disclose material facts: the claimants had withheld a substantial payment due to the defendant under the sale agreement, so the without notice judge had not been made aware of a potential argument in favour of the defendant that the claimants had committed a repudiatory breach that could have released the defendant from the non-compete and confidentiality covenants.
  
  

The return date judge also refused to grant a fresh injunction, concluding that damages would be an adequate remedy as the defendant was a person of means who would be in a position to meet any such award should he later be found at trial to have breached the non-compete and confidentiality provisions.

Court of Appeal Decision

On appeal, the Court of Appeal held that the return date judge was wrong to discharge the injunctions, even though there had been failures on the part of the claimants to give full and frank disclosure.

Historically, the court has indicated that where a failure of full and frank disclosure is substantial, even if innocent, immediate discharge of the interim injunction is likely to be the court’s starting point and the discretion to reach a different view should be exercised sparingly. This reflects the courts emphasis on deterrence: get it wrong on full and frank disclosure and you are in trouble as the applicant.

However, in Derma Med the Court of Appeal emphasised that the relevant case law also establishes that the overriding consideration when deciding whether to continue an injunction or grant a fresh injunction despite a failure of full and frank disclosure is the interests of justice and the court needs act proportionately in that respect. In addition, the relevant sanction for a failure of full and frank disclosure might not be so draconian as a refusal to continue the injunction but could be something else such as an adverse costs order against the claimant. This would retain the need for some element of proportionate deterrence.

Turning to the alleged failings, the Court of Appeal disagreed with the return date judge that the first two were failings in disclosure. The third was a failing on the part of the claimants, but the Court of Appeal said it was not deliberate and had little significance. However, the fourth one (the failure to disclose that the claimants had withheld a substantial payment due to the defendant under the sale agreement) was material and culpable.

Despite this finding, the Court of Appeal decided the injunction should not have been discharged. Applying the principles explained above, and taking account of the apparently strong prima facie case that the defendant had materially breached his obligations and taken extensive steps to cover up what he had done, the Court of Appeal granted an Order to enforce the non-compete provisions until 24 March 2024 and restrained the defendant until trial from using any confidential information.

In doing so, the Court of Appeal pointed out that damages will rarely be an adequate remedy for a breach of non-competition covenant. They explained that this is because there are often evidential challenges in identifying and quantifying loss which is a result of such a breach and, in any event, an injunction will generally be appropriate as this is what the parties have contracted for: an employer or business purchaser has bargained for the opportunity to develop its business free of competition from the defendant during the currency of the non-compete obligation rather than an uncertain and evidentially difficult remedy in damages.

Conclusion

This judgment emphasises that a failure to comply with the duty of full and frank disclosure when seeking a without notice interim injunction is not necessarily fatal to its continuance. A failure, even if material, is not all or nothing. There are alternative routes available to the return date judge other than refusing to continue the injunction. The overriding interests of justice are paramount in this respect.

However, without notice applicants should continue to take great care to comply with the duty of full and frank disclosure. In cases of serious breach, discharge of the injunction remains the “starting point” and even if the court does not discharge the injunction, other sanctions such as costs orders may well be imposed.

The full Court of Appeal decision is here.

With thanks to Leo Salem, current trainee in the team, for his help in preparing this briefing.

This publication is a general summary of the law as at the date of publication. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2024