Interlocutory Injunctions and the Usual Undertaking as to Damages

As we have set out in previous articles, an interlocutory injunction can be an important tool for a party that is seeking to uphold their rights via the legal system. An interlocutory injunction is essentially an order from the Court that someone be forbidden from doing something pending the outcome of a trial. The benefits of such injunctions are obvious – they can stop someone who might otherwise infringe your rights or at least lessen the damage of them doing so. If the party who is ordered not to do something were then to proceed anyway, they would put themselves at risk of contempt of court proceedings, and the criminal charges that follow.

In some litigation matters, obtaining an interlocutory injunction will restrain a party committing any further wrongful acts before trial. Consider, for instance, a party who seeks an interlocutory injunction to prevent their house’s demolition to build a road. If the homeowner were simply to proceed to litigation without the benefit of an interlocutory injunction the house may be demolished, and the road built, before the matter even comes to trial. Clearly, an interlocutory injunction is valuable however, it’s important to understand the associated risks in an application.

What is the Test for Obtaining an Interlocutory Injunction?

We have previously set out the factors that the Court will consider when deciding whether to grant an interlocutory injunction. Essentially, the Court must be convinced that:

• The applicant has a prima facie case (a case on face value); and
• The balance of convenience weighs in favour of granting the interlocutory injunction.

The second limb of this test requires the Court to weigh the potential injury that the applicant would suffer if the application is refused, against the potential injury to the party who is to be injuncted if the application is granted. This test is not always an easy one to assess, and there will often be good arguments for both sides.

Take for instance a situation where a person wants to enter the market with a new product that another party says infringes upon its IP. The party seeking to enter the market may lose out on substantial profits if it is not allowed to start selling its goods. On the other hand, the party that is currently selling their goods may argue that they would suffer irreparable harm as a result of the loss of their position as the sole supplier within the market.

Even ignoring the issues raised by having another competitor, there may be cases where the party who claims that their intellectual property is infringed would suffer irreparable harm due to the operation of a statutory scheme. For instance, in the pharmaceutical space, the entry of a competitor into the market will lead to a 16% price cut as a result of the Government subsidy being reduced. The applicant for an injunction may argue that this harm cannot readily be fixed by the payment of damages, as the calculation of the loss suffered could be difficult, if not impossible.

One way in which the Courts combat the obvious difficulties that arise in this area is to generally require that an applicant for an interlocutory injunction provide what is referred to as the “usual undertaking as to damages”. The Uniform Civil Procedure Rules 2005, Reg 25.8 and Federal Court Practice Note CM14 contains the usual form of the usual undertakings as to damages.

The Usual Undertaking as to Damages

The usual undertaking as to damages is an undertaking the applicant gives to the Court, agreeing to submit to the Court’s orders to pay compensation to any party affected by the order. This means that if it is ultimately shown at trial that the applicant should not have received the benefit of the interlocutory injunction, they must pay damages to parties who suffered loss as a result of the restraint.

Crucially, the usual undertaking as to damages is not limited to damages suffered by the party restrained from doing the act that was the subject of the interlocutory injunction. The effect of this is that any third party, even if they were not involved in the litigation themselves, may claim to have been affected by the interlocutory injunction and seek damages from the party who obtained the injunction.

Failure to offer the usual undertaking as to damages will usually be fatal to an attempt to obtain an interlocutory injunction. However, there are some possible exceptions to the rule, such as where an impecunious plaintiff is acting in their personal capacity who is seeking injunctive relief (see Allen v Jambo Holdings Ltd [1980] 1 WLR 1252).

The Courts now typically require a plaintiff seeking interlocutory relief provide the usual undertaking as to damages and consequently, it has become commonplace. However, any applicant for an interlocutory injunction should be very careful before providing such an undertaking, as they could potentially expose themselves to substantial damages.

The Risks of Giving the Undertaking as to Damages

You may remember our example at the outset of a property owner seeking to stop the construction of a road on their property, and obtaining an interlocutory injunction to do so. That was not an abstract example. In Love v Thwaites & Anor [2014] VSCA 56 the Victorian Court of Appeal upheld the judgment of Justice Dixon, ordering Mr Love to pay over $5 million in damages the Roads Corporation suffered as a result of the delay. Mr Love had obtained an interlocutory injunction to prevent the construction of a bypass on some of his property that the Roads Corporation had acquired.

In dismissing the appeal, the Court held that Mr Love should have foreseen the damages that the Roads Corporation would suffer. Mr Love’s case demonstrates the dangers of having to pay substantial damages to the party who has been restrained from acting. However, it is also important to remember (as we pointed out above) that the usual undertaking as to damages is not limited to loss the restrained party suffered. Rather, any aggrieved party can make an application to the Court for an order that the recipient of an interlocutory injunction should pay them damages.

The dangers of an unrelated third party claiming against an undertaking as to damages have become especially apparent in the context of the pharmaceutical patent space. The Commonwealth Government has recently claimed against pharmaceutical company Sanofi for over $60 million under an undertaking as to damages Sanofi offered in the course of their dispute with generic pharmaceutical company Apotex. In that case, Sanofi had obtained an interlocutory injunction to prevent Apotex from entering the market with a generic version of a pharmaceutical product called clopidogrel. At trial (and on the subsequent appeal), the Sanofi patent was found to be invalid. The Commonwealth’s claim was that essentially, as the Sanofi’s patent was invalid, the interlocutory undertaking was wrongly granted. Consequently, Apotex should have been able to enter the market sooner, with the effect that the automatic 16% price cut that occurs when a generic version of a drug is introduced for sale should also have happened earlier.

The practical effect of the Commonwealth Government claiming against Sanofi is that all pharmaceutical patentees must now strongly consider whether they should apply for an interlocutory injunction to prevent a competitor from joining the market or allow the competitor to join ‘at risk’ and sue them for damages if their patent is ultimately upheld. However, the choice pharmaceutical companies face is not unique. Every applicant for an interlocutory injunction must grapple with the same potential issues, as it will not always be immediately apparent who a potential claimant could be.

Key Takeaways

The question of whether to give the usual undertaking as to damages will often come down to a question of risk v reward. The risk of being required to pay possibly substantial damages to the injuncted party and other affected third parties, balanced against the reward of being able to prevent a party from potentially infringing your rights in the first place.

In some cases, the applicant may feel that they are left with little choice, particularly if the alternative would be irreversible (e.g. our example of the home owner who will lose their house without applying for an injunction). However, the decision of whether to give the undertaking must be more than just a box-ticking exercise. It is important for a party to work through the potential implications with their legal counsel, as well as to make a genuine assessment of the merits of a claim. The party giving the undertaking should be confident of their chances of success. Or, at least, confident of their ability to pay the damages of any party who might claim against them, some of whom may not be readily apparent.

If you have any questions about interlocutory injunctions, get in touch with our disputes team on 1300 544 755.