Background
In 2010, the plaintiff commenced an action against the defendant, alleging it breached a restrictive covenant contained in a share purchase agreement. Shortly after the action was commenced, the plaintiff sought and obtained an interim injunction restraining the defendant from selling automotive cores for five years. As is typically required, the plaintiff gave an undertaking as to damages – namely, to abide by any subsequent order the court may make to pay the defendant's damages.The matter stalled in 2012 after the principal of the plaintiff fell ill and later died. Almost nine years after it began, the action was dismissed for want of prosecution. The chambers judge determined that the plaintiff's undertaking as to damages should be enforced because it never established its case. The plaintiff appealed.
British Columbia Court of Appeal
The court noted the undertaking is required to address the fact
that an injunction can cause the responding party to suffer a loss
as a result of being prevented from doing something it was entitled
to do.
The court acknowledged there was some variation in the case law
regarding when an undertaking as to damages should to be enforced:
in some cases, courts held that a defendant should be compensated
if the plaintiff failed to establish a meritorious claim; and in
others, courts held that the undertaking was enforceable only if
the injunction was wrongly obtained or the claim was dismissed on
the merits.
In two sets of reasons, the Court of Appeal unanimously allowed the
plaintiff's appeal and declined to enforce the undertaking as
to damages.
- Majority reasons: Relying on the Supreme Court of Canada's comments in Vieweger Construction, the majority held that damages caused by compliance with an interlocutory injunction are payable only when the plaintiff (i) has failed on the merits or (ii) has been found to have obtained the injunction improperly. Since a dismissal for want of prosecution is not a dismissal on the merits, the defendant could not be entitled to damages, unless it could be shown that the plaintiff obtained the injunction improperly. The court noted that it is always open to the defendant to set the matter down for trial to enforce the undertaking.
- Minority reasons: In contrast, Justice Wilcock concluded that a defendant should be allowed to seek to enforce an undertaking as to damages following a dismissal for want of prosecution. However, in such a case, there is no presumption in favour of enforcement. Instead, the court would need to consider all the surrounding circumstances of the injunction and dismissal.
Takeaway
Undertakings as to damages are required to offset the fact that interlocutory injunctions are powerful tools that can inflict considerable economic harm. When deciding to seek injunctive relief, the moving party must carefully consider its potential exposure. The Ralph's Auto Supply decision reminds defendants seeking to recover on the undertaking to move promptly and obtain either a finding that the injunction was obtained improperly or the claim failed on its merits.
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