When drafting commercial contracts, attorneys often insist on including a provision requiring one or both parties to waive claims for money damages in the event of an alleged breach. For example, commercial leases often include a provision requiring the tenant to waive claims for money damages in matters pertaining to the landlord's exercise of its judgment in withholding consent or approvals under the lease. While these provisions are intended to reduce risk by removing the exposure to money damages, they may have the unintended consequence of a finding that the parties have contracted for, and consented to, the granting of injunctive relief. Such was the case in Rockwood Pigments NA, Inc. v Elementis Chromium LP, 2014 N.Y. Slip Op. 32127[U], 2014 WL 3899214 (Sup Ct., N.Y. County 2014), affd as mod, 124 A.D.3d 509 (1st Dept. 2015).
Before exploring Rockwood, it must be understood that the purpose of injunctive relief is to preserve the status quo pending the outcome of an action. For this reason, preliminary injunctions can be used as a significant weapon in commercial litigation, provided that the party seeking such relief can satisfy the following standard: (1) a probability of success on the merits, (2) danger of irreparable injury in the absence of an injunction, and (3) a balance of the equities in its favor. Each of these elements must be proved by clear and convincing evidence.
By definition, the concept of irreparable injury seeks relief for a type of harm for which there is no adequate remedy at law (e.g., no monetary damages). Accordingly, establishing the second prong of the test often proves to be difficult. The vast majority of commercial and business litigation cases seek monetary damages – something that can be remedied at the disposition of a litigation and therefore not worthy of the extraordinary remedy of injunctive relief.
Enter Rockwood. In Rockwood, Elementis, a wholesale supplier of chemical products, entered into a distribution agreement with Rockwood pursuant to which Rockwood agreed to distribute and promote a certain amount of Elementis' chemical products to its customers. The distribution agreement contained an arbitration clause. About six years into the agreement, Elementis purported to terminate the agreement for material breach, alleging that Rockwood was underperforming. Five days after receiving the notice of termination, Rockwood petitioned the court for a temporary restraining order and preliminary injunction in aid of arbitration to stave off termination of the distribution agreement throughout the pendency of the arbitration.
At first glance, the Rockwood case presents a prime example of a monetary dispute that does not involve any threat of irreparable harm warranting injunctive relief. However, the distribution agreement contained a provision that "no party shall be liable by reason of, among other things, termination for damages on account of the loss of prospective profits on anticipated sales." Accordingly, the Court held that "the mutual waiver of lost profits in the Distribution Agreement by itself establishes the irreparable harm requirement" and granted Rockwood's request for a preliminary injunction. Rockwood, 2014 WL 3899214, citing Daily Bread Cafe Inc. v City Lights at Queens Landing Inc., 17 Misc. 3d 1126(A) (Sup. Ct., Queens County 2007) (commercial tenant established irreparable harm where the commercial lease contained a limitation on remedies, including waiver of money damages).
Desperate to avoid the injunctive relief granted by the I.A.S. Court, Elementis was forced to take the extraordinary legal position on appeal that it should be liable to Rockwood for money damages – including lost profits and damage to goodwill – in the event that the arbitration panel were to find that Elementis breached the agreement. The First Department did not accept this argument, and instead agreed with the I.A.S Court's conclusion that Rockwood would suffer irreparable harm because "[t]he distribution agreement prohibits the recovery of damages for lost profits on anticipated sales and for lost business damages due to diminished goodwill. Thus, absent preliminary relief, petitioner's ability to be made whole after a wrongful termination would be seriously jeopardized." Rockwood, 124 A.D.3d at 511.
In conclusion, attorneys should think twice before including a contract provision requiring a counterparty to waive its claim to money damages. As the Rockwood case illustrates, where the parties make an express choice to exclude money damages, that provision may be used as a weapon to obtain injunctive relief.
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