No minor undertaking – the high price of “winning the battle, but losing the war”

What’s better than getting an award of damages to compensate you for your loss?  Well, many things, but “preventing the loss from occurring in the first place” is pretty high up on the list.  It’s for that reason that an early decision which will often have to be made in litigation is whether to seek an interlocutory injunction to prevent loss from occurring until the matter can be heard by a court.

However, the “price” for the grant of an interlocutory injunction will almost always be the requirement that the party with the benefit of the injunction give “the usual undertaking as to damages”. What this means is that if the party with the benefit of the injunction ultimately loses the case, that party will be required to compensate any party (not only the opposing party in the case) which suffers damage as a result of the undertaking.  As recent cases show, the amounts payable under the “usual undertaking” can be substantial, and the losing party which is liable to pay these amounts has to pay them in addition to whatever costs orders have been made following the loss of the case.

In a case considered by the NSW Court of Appeal last month, the plaintiffs were purchasers of “off the plan” units in a block in Wolli Creek.  By the time the units had been completed, the units were worth more than the amounts for which they had been sold, and the vendor/developer subsequently rescinded all contracts on the basis that the strata documents had not been registered within the time required by the contracts.  The plaintiffs challenged the rescission of the contracts and obtained injunctive orders restraining the vendor from dealing with the units.  To obtain that injunction, the purchasers had to give the usual undertaking as to damages.  The consequence of the injunction was that the vendor could neither sell, nor rent out, the units in the block.

However, the purchasers lost at trial, and it was held that the vendor was entitled to rescind.  The vendor argued that but for the injunction, it would have rented out the units, and accordingly, the vendor claimed damages against each plaintiff in amounts varying from $20,286 to $54,252 (totalling approximately $653,000) equivalent to the lost rent.

The plaintiffs responded that the increase in value of each unit exceeded the amount of the rent, so that the vendor had not suffered any loss.  However, as the vendor had not sold any of the units, the increase in value was an unrealised gain, so it did not assist the plaintiffs.  The Court of Appeal agreed that the plaintiffs were liable, as a result of the undertaking, to pay damages to the vendor for the lost rent.

In 2014, the Victorian Court of Appeal considered a case in which an injunction had been granted to restrain interference with a property in the course of the construction of a freeway by-pass.  The injunction was granted in 2003, and the owner of the property (who had given an undertaking as to damages) ultimately failed in a judgment handed down in June 2009.  The injunction had required the redesign of certain construction works, and it was ultimately established, at first instance, that the additional costs incurred exceeded $3.4 million, to which was added some $2.4 million for interest.  Rejecting the appeal by the property owner, Tate JA said:

“In my view, these consequences provide a salutary lesson to practitioners and their clients to appreciate the conditions governing the grant of an interlocutory injunction. The usual undertaking carries serious risks; it would be wholly erroneous to view it as no more than a ritual or a formality.”

However, even $5.8 million may not be the high-water mark for much longer.  At present, the Commonwealth of Australia is pursuing a claim against the pharmaceutical company Sanofi, which obtained an injunction against another pharmaceutical company, Apotex, in a case in which Sanofi claimed that Apotex was infringing a Sanofi patent.

Although Sanofi succeeded at first instance, it failed on appeal, with the consequence that Sanofi became liable on its undertaking.  The argument of the Commonwealth is that because the injunction prevented the Apotex drug from being sold in Australia, the Commonwealth paid out more money under the Pharmaceutical Benefits Scheme than would have been the case if the injunction had not been in force.  Although the case is some distance from hearing, the amount sought by the Commonwealth is estimated to be in the vicinity of $60million.

So, what are the lessons from these cases?  The most important is that when approaching litigation, there are worse “worst case scenarios” than simply losing the case and having to pay the other side’s costs.  The next most important is that it is necessary to consider what you can afford to lose (and whether, regardless of the legal strength of your claim for an injunction, the commercial risks of obtaining one, but then losing the war, are too great).

And the final lesson comes back to our first question, “What’s better than getting an award of damages to compensate you for your loss?” – sometimes, a better answer is “avoiding having to litigate the dispute in the first place”.  When disputes arise, there are always other options to litigation if the problem is recognised early enough.  A pro-active approach to identifying and dealing with disputes may well mean the difference between calling on an undertaking and calling in the undertakers.

For more on our litigation capabilities, contact Dennis Vuaran or Angus Macinnis

May 1
Litigation and dispute resolution