Corporate & Business/Mar 21, 2016

Who Determines Irreparable Harm in Contracts: The Parties or the Court?

Most contracts containing covenants not to compete or non-solicitation provisions also contain language within those provisions stating that any breach or threatened breach will result in “irreparable harm,” and that it may be difficult to determine or adequately compensate the non-breaching party through monetary damages. Contract drafters include this language because courts only award two types of remedies: (1) remedies at law – or monetary damages; and (2) equitable relief – or non-monetary damages. Enforcement of these types of provisions lends itself to equitable relief. In other words, if a person breaches a covenant not to compete by working for the other party’s competitor, it serves little purpose to have the breaching party pay damages while continuing to work for a competitor. Instead, the non-breaching party seeks to have the court stop the breach by issuing an “injunction,” that is, a court order requiring the breaching party to discontinue the act that is considered a breach.

This practice of inserting such language into contracts to satisfy the requirements for issuance of injunctive relief is considered the “norm” in contract drafting because, as a general rule, courts will place some quantum of reliance on such clauses. See, e.g., Martin Marietta Materials v Vulcan Materials, 68 A3d 1208 (Del, 2012). There is some indication, however, that this general rule is no longer being uniformly followed, as some courts are now viewing such stipulations in remedy clauses as not necessarily outcome-determinative. In fact, despite the inclusion of irreparable harm stipulations in a contract, one court decided that determining whether irreparable harm exists, should be left to the discretion of the court. Renco Group Inc v MacAndrews AMG Holdings LLC, unpublished memorandum opinion of the Court of Chancery of Delaware, issued June 25, 2013 (CA No. 7668-VCN). This remains an open issue under Michigan law. A number of Michigan judges, however, defer to Delaware decisions as Delaware has a history of being on the cutting edge of legal reforms.

The wisdom derived from this court’s decision and others that may follow is that parties seeking injunctive relief cannot rely wholly on the language contained in the contract; rather, they must be prepared to demonstrate irreparable injury despite the existence of stipulations in contracts.