Friday, June 10, 2011

Restraining the Breach of a Negative Covenant

It is common knowledge that an injunction is granted only if the applicant satisfies the court on the three-pronged test of prima facie case, irreparable injury and balance of convenience. While there is controversy over the scope of some of these elements, notably prima facie case, and over the relationship between these elements, there are also circumstances in which an applicant may be able to obtain an injunction without satisfying the three-pronged test. The recent judgment of the Court of Appeal in Araci v Fallon contains a clear exposition of this point.

The case arose out of rather unusual circumstances. As is well-known, the 2011 edition of the Epsom Derby, one of the most prestigious horse races in Britain (“the Derby”) took place on 4 June, 2011. The claimant, Mr Araci, was the owner of one of the favourites (“Native Khan”) which he expected would be ridden by Mr Fallon, a highly regarded jockey. Mr Araci and Mr Fallon had entered into a Rider Retainer Agreement (“RRA”) on 1 April 2011, under which Mr Fallon received £10,000 for undertaking two important obligations: first, to ride Mr Araci’s horse whenever requested by him to do so, and secondly, to not ride a rival horse in any race in which he has been requested by Mr Araci to ride the latter’s horse. In other words, the RRA contained a positive as well as a negative covenant. Invoking these provisions, Mr Araci asked Mr Fallon to ride Native Khan at the Derby. Mr Fallon communicated his refusal to do so on 30 May 2011, and indicated that he intended to ride “Recital”, owned by a rival and also a favourite. Mr Araci promptly sought an injunction to restrain him from acting in breach of the negative covenant.

The judge at first instance dismissed the application, finding that there was an adequate remedy in damages, and that it was unjust in all the circumstances to grant the equitable relief sought. The Court of Appeal, in an instructive judgment, reversed. Jackson LJ began by noticing that the practice of considering the strength of a party’s case on the merits and the balance of convenience is rarely appropriate when an injunction is sought to restrain a clear breach of a negative covenant. This principle goes back to Lord Cairns LC’s classic, albeit obiter, observations in Doherty v Allman:

If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a court of equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done … It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury – it is the specific performance, by the court, of that negative bargain which the parties have made, with their eyes open, between themselves

The clear rationale that emerges from this passage is that it is inappropriate to require the applicant to demonstrate that the balance of convenience favours the grant of an injunction when the defendant has contractually agreed to refrain from doing the very thing in respect of which the injunction is sought. However, Doherty was a perpetual injunction case and it was not clear whether the same approach would prevail so far as interim injunctions are concerned. In granting an injunction restraining the defendant from playing a musical instrument in breach of a negative covenant, Megarry J. confirmed that it does, because there is “…no reason for allowing a covenantor who stands in clear breach of an express prohibition to have a holiday from the enforcement of his obligations until the trial” [Hampstead and Suburban Properties Limited v Diomedous (1969) 1 Ch 248].

Thus the rule is that an injunction will be granted to restrain a clear breach of a negative covenant unless there are “special circumstances”. In this case, Jackson LJ concluded that Mr Araci did not have an adequate remedy in damages, and Elias LJ made the additional point that it was not even necessary to decide that question, because adequacy of damages is not relevant when an applicant seeks to merely hold the respondent to his negative covenant. Nor did there exist special circumstances making it oppressive to grant the relief sought. Mr Fallon suggested that granting an injunction would adversely affect the public, because some may have made bets on the assumption that Mr Fallon would ride, while for others it would detract from the quality of a major national event. Jackson LJ rejected the first point because a member of the betting public runs the risk of an unexpected change in sporting variables, and the second because there was no risk that the Derby would not take place, although Mr Fallon himself could not participate. Mr Fallon’s loss was disregarded because he had “brought this predicament upon himself by his own deliberate and cynical disregard of a contract.” It was accepted that the position would have been different if the injunction could have affected the event itself.


vswami said...

The discussion is confined to what the foreign court has ruled.

A point which arises, which will be worthwhile to make a special study, is this:

Is there any Indian court case, though cannot be cited or relied on as a ‘precedent’, which has dealt with or covered in any manner whatsoever all or any of the facets of the subject proposition; especially, in the matter of granting an 'injunction' of this kind.?

Renganath said...

As an aside, did Ladbrokes or William Hill take bets on which way the Court of Appeal would rule ?

Renganath said...

As an aside, did Ladbrokes or William Hill take bets on which way the Court of Appeal would rule?

Renu Gupta said...

Section 42 of the Specific Relief Act provides for similar position under Indian law.

Cases where negative covenants have been enforced are:

Dirk India Private Ltd. v. Mahagenco, 2007 (5) Bom CR 207: MANU/MH/0748/2007

Burn & Co. Ltd. v. McDonald, 31 CWN 255

Indian Charge Chrome Ltd. v. Tata Iron and Steel Co. Ltd., (1996)1CALLT214(HC) : MANU/WB/0229/1995

Anonymous said...

This is an informative post. Thanks. But don't you think the Indian position is a bit different? let me cite a couple of paras from Gujarat Bottling case:

42. In the matter of grant of injunction, the practice in England is that where a contract is negative in nature, or contains an express negative stipulation, breach of it may be restrained by injunction and injunction is normally granted as a matter of course, even though the remedy is equitable and thus in principle a discretionary one and a defendant cannot resist an injunction simply on the ground that observance of the contract is burdensome to him and its breach would cause little or no prejudice to the plaintiff and that breach of an express negative stipulation can be restrained even though the plaintiff cannot show that the breach will cause him any loss. [See Chitty on Contracts, 27th Edn., Vol. I, General Principles, paragraph 27-040 at p. 1310; Halsbury's Laws of England, 4th Edn., Vol. 24, paragraph 992.] In India Section 42 of the Specific Relief Act, 1963 prescribes that notwithstanding anything contained in Clause (e) of Section 41, where a contract comprises an affirmative agreement to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstance that the Court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement. This is subject to the proviso that the plaintiff has not failed to perform the contract so far as it is binding on him. The Court is, however, not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee either to idleness or to serve the employer. [See: Ehrman v. Bartholomew MANU/SC/0364/1967 : (1967)ILLJ740SC .

43. The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercise of discretion of the Court. While exercising the discretion the Court applies the following tests-(i) whether the plaintiff has a prima facie case; (ii) whether the balance of convenience is in favour of the plaintiff; and (iii) whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed. The decision whether or not to grant an interlocutory injunction has to be taken at a time when the existence of the legal right assailed by the plaintiff and its alleged violation are both contested and uncertain and remain uncertain till they are established at the trial on evidence. Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved. The object of the interlocutory injunction is to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection has, however, to be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The Court must weigh one need against another and determine where the "balance of convenience" lies. [See: Wander Ltd. v. Antox India (P) Ltd. MANU/SC/0595/1990.]

Renu Gupta said...

If you read the judgments mentioned in my comment above, the Indian position will be clarified further.

V. Niranjan said...

Thanks for your comments. The differences between Indian and English law are especially sharp when the covenant potentially infringes the restraint of trade prohibition, because it is widely thought that the Indian version of that doctrine (s. 27 Contract Act) is more stringent. Gujarat Bottling is a s. 27 case, as is Murgai, where Sen J. held that s. 27, unlike the common law principle, does not permit a reasonableness enquiry so far as post-contractual restraints are concerned - in Percept D'Mark, the Court left the question open. Shantanu has discussed the cases in detail in a recent paper, at

In Araci, Jackson LJ acknowledged that restraint of trade is one of the "special circumstances" that may justify the refusal of an injunction, but it was common ground in the case that the particular covenant was not in restraint of trade (para 56).

Anonymous said...

slightly off the topic comment. Would u mind mentioning some good foreign journals in the area of corporate law, tax etc?

V. Niranjan said...

@Anonymous, the leading specialist journal in taxation is the British Tax Review. The Journal of Corporate Law Studies and Company Lawyer are specialist company law journals. The finest general journal is the Law Quarterly Review - it features several articles on commercial law, and some on taxation. Lloyd's Maritime and Commercial Law Quarterly and the Journal of Business Law are also very useful for practitioners.

Anonymous said...

Thx a lot Niranjan for letting us know abt these prestigious journals..Generally, how long does it take for these journals to publish the articles (of course, after acceptance)?

Vivek Sarin Advocate said...

Hi Niranjan, It is worth look at Yogesh Radhakrishnan Case on negative covenant by Delhi High Court. it is of 2013.