Inadequacy of Damages: A Moral Hazard

Federal Court rules that contractual stipulation that damages not adequate remedy not binding on courts.


It is well-established that a party who applies to the court for interim injunctive relief, usually to preserve the status quo or to prevent irreparable damage from being done to that party pending the disposal of a case, must satisfy the principles enunciated by the House of Lords in American Cyanamid Co v Ethicon Ltd [1975] AC 396 as well as by the Malaysian Court of Appeal in Keet Gerald Francis Noel John v. Mohd Noor @ Harun bin Abdullah & 2 Others [1995] 1 MLJ 193. There must be a serious issue to be tried. Damages must not be an adequate remedy. The balance of convenience must lie in favour of granting the injunction.

It is increasingly common for parties to commercial contracts or even contracts of employment to expressly stipulate that, in the event of any fundamental breaches of contractual provisions prohibiting the disclosure or use of confidential information or trade secrets, the parties agree and acknowledge that in any subsequent proceedings for injunctive relief damages shall not be an adequate remedy for the innocent party. The wording of such clauses vary from contract to contract, and are received with varying degrees of enthusiasm by the courts. But their purpose is tolerably clear, namely to satisfy the “inadequacy of damages” requirement for obtaining an interim injunction, and they are directed towards the legitimate aim of protecting confidential information or trade secrets of the innocent party, the unauthorised use of which may cause irreparable and unquantifiable damage. Monetary compensation is unlikely to be a panacea if Colonel Sander’s recipe was no longer a secret.

In the recent case of AV Asia Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd (Civil Appeal No. 02(i)-67-09/2012 (W), 20 January 2014), the Federal Court had occasion to consider the legal effect of such clauses, and the extent if any to which the courts were bound to give effect to such clauses.

The respondent Measat Broadcast Network Systems Sdn Bhd (“Measat”) had engaged the appellant AV Asia Sdn Bhd (AV Asia) to provide its expertise and services with a view to addressing and reducing interruptions to Measat’s satellite transmission during inclement weather, and to that end the parties had entered into a Mutual Non-Disclosure Agreement (MNDA), whereby Measat was prohibited from disclosing or utilising confidential information received by it from AV Asia in the course of dealings between the parties. Clause 15 of the MNDA provided that:

[Measat] understands and agrees that monetary damages will not be sufficient to avoid or compensate for the unauthorized use or disclosure of Confidential Information and that injunctive relief would be appropriate to prevent any actual or threatened use of disclosure of such Confidential Information.

AV Asia subsequently commenced arbitration proceedings against Measat alleging that Measat had breached its confidentiality obligations under the MNDA and had exploited the confidential information received by it for its own commercial gain. AV Asia also sought an interim injunction to restrain Measat from relying or using the confidential information pending the conclusion of the arbitration proceedings between the parties. However, both the High Court and the Court of Appeal dismissed AV Asia’s application for an interim injunction on the ground that although there was a serious issue to be tried vis whether or not Measat was in breach of the MNDA, damages were an adequate remedy for AV Asia, notwithstanding clause 15 of the MNDA.

AV Asia’s appeal to the Federal Court was dismissed. In respect of clause 15 of the MNDA, the Federal Court observed as follows:-

We are of the view the mere existence of clause 15 of the MNDA to the effect that damages may not be an adequate remedy does not ipso facto entitle [AV Asia] to an interim injunctive relief. We agree with the contention of [Measat]that the test as enunciated in … American Cyanamid regarding the grant of an injunction case must still be satisfied. The existence of such a clause as in clause 15 of the MNDA does not as a matter of law fetter the jurisdiction and the discretion of a court of law to decide whether to grant an interim injunctive relief. The justice of the case must be considered in determining whether an interim injunctive relief ought to be granted. With respect, we cannot agree with the position taken by [AV Asia] that a negative covenant existing in a contract would obviate the need for the court to consider the balance of convenience test as enunciated in American Cyanamid.

We also noted that the said clause 15 of the MNDA does not provide that the parties have agreed or consented to the fact that the granting of an injunction is automatic and as of right … The discretion, whether to grant the injunctive relief, is therefore still vested with the Court. It is the inalienable duty and power of the Court to exercise such a discretion and it will not be exercised lightly …

After referring to the Canadian case of Jet Print Inc v Cohen [1999] OJ No. 2864 and the American case of First Health Group Corp v. National Prescription Administrators, Inc. and David W. Norton 155 F Supp 2d 194, the Federal Court concluded:-

… [W]e are of the view it is clear that a clause in a contract stipulating that injunctive relief “may” or “shall” be the appropriate remedy where damages may not be appropriate or where there is irreparable harm does not mean that such relief will be granted as of right. The party seeking to secure equitable relief of such a nature must still satisfy a Court of law that the pre-requisites for granting injunctive relief are prevalent. A Court is free to exercise its jurisdiction and ultimately the discretion whether to grant or to dismiss an application for injunctive relief notwithstanding the attempts by the parties to a contract to oust that jurisdiction and discretion.

The grant of an injunctive relief is an equitable remedy which is within the court’s absolute discretion. In this regard the principles for the granting of such a remedy must be strictly adhered to at all times and cannot be curtailed by a contract entered into between the parties;

As a matter of law, [Measat] is not disentitled from asserting that damages are an adequate remedy in opposing an application for an interim injunctive relief notwithstanding clause 15 of the MNDA.

Several comments may be made in relation to the Federal Court’s judgment in the AV Asia case.

First, it is curious to note that the Federal Court appeared to have approached clause 15 of the MNDA as if its purpose was to “oust” or “fetter” the court’s jurisdiction and discretion to grant injunctive relief or to “curtail” the principles governing the granting of interim injunction. That is neither the purpose nor effect of such clauses. The court still has the same jurisdiction and discretion, and still exercises its discretion based on the same principles. The real aim of such clauses is simply to demonstrate that, for the purposes of the “inadequacy of damages” requirement, the parties to the contract have mutually agreed that due to the importance of the confidential information and the irreparable and unquantifiable damage which may be caused in the event of breach, damages will not be sufficient to compensate the innocent party. In this regard, the Federal Court’s hostility towards clause 15 of the MNDA may not have been wholly warranted.

Secondly, where sophisticated commercial entities such as AV Asia and Measat dealing at arms’ length have agreed on a clause such as clause 15 of the MNDA, there is much to be said for the view that (i) the courts ought to have given effect to the reasonable expectations of commercial men (Cipta Cermat Sdn Bhd v Perbandaran Kemajuan Negeri Kedah [2007] 2 MLJ 746), and (ii) clause 15 of the MNDA gave rise to a contractual estoppel precluding Measat from contending that damages were an adequate remedy for AV Asia (Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd’s Rep 511). As Millett LJ observed in Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1996] Ch 286:

The equitable jurisdiction should not be exercised in a manner which would defeat the commercial expectations of the parties at the time when they entered into their contractual obligations.

Finally, the Federal Court does not appear to have sufficiently appreciated the commercial reality that in cases of unauthorised disclosure or use of confidential information or trade secrets, it is highly improbable that the party seeking an injunction to restrain further disclosure or use of such information is capable of ascertaining, at the interlocutory stage, the gravity or magnitude of the loss or damage it may suffer for the purposes of determining whether damages are an adequate remedy. The effect of the Federal Court’s judgment is that contractual provisions such as clause 15 of the MNDA are now wholly ineffective and useless in preventing or deterring a contracting party from breaching its confidentiality obligations. The moral hazard which has now been created is that the more valuable or sensitive the confidential information or trade secret obtained, the more tempting it is for a party to deliberately breach its duty of confidentiality and pay monetary compensation in exchange for the ability to continue disclosing or utilising such information for its own commercial gain.

The irony is that following the AV Asia case, a contracting party arguably stands a better chance of obtaining interim injunctive relief for breaches of a confidentiality or non-disclosure agreement if the agreement in question did not contain provisions such as clause 15 of the MNDA to begin with.