Wrongful Termination Argument to Go to Court of Appeal

June 9, 2014

Wrongful Termination Argument to Go to Court of Appeal

In a case with potentially wide implications for businesses whose activities depend on licensing agreements, a company that faced destruction of its Internet-based business, due to the termination of the licensing agreement that underpinned it, has failed in a High Court bid to maintain the status quo pending arbitration of the dispute, although it has been granted permission to fight its case in the Court of Appeal.

The company (company A) ran an international 'eMarketplace', which had the objective of bringing together buyers and sellers of goods and services linked to mining, metals and other natural resources. Its business model rested entirely on a licensing agreement with another company (company B), which owned the intellectual property in the eMarketplace.

Company B purported to terminate the agreement on the disputed basis that company A had failed to comply with an agreed sales and marketing plan and that the two businesses had developed in different directions. Company A submitted the dispute to arbitration and sought an interim injunction to restrain termination of the agreement pending the outcome of that process.

The Court acknowledged that there was a serious issue to be tried as to whether or not the proposed termination was wrongful or ineffective. It also found that, given the dire impact that termination would have on company A's business, the 'balance of convenience' lay in favour of granting the injunction sought.

However, in refusing company A's application, the Court ruled that damages would be an 'adequate remedy' if it subsequently turned out that the agreement had been wrongfully terminated.

Company A pointed out that a term of the agreement could have the effect of circumscribing its right to damages, in particular for loss of profits. However, in declining to take the existence of that limitation clause into account when considering the adequacy of damages as a remedy, the Court noted that submission to the relevant term had been part of the price that company A had agreed to pay when executing the licensing agreement.

Such limitation clauses are 'a ubiquitous fact of commercial life' and the Court observed that, if such terms were held to render damages inadequate, the road to an interim injunction might be opened in practically every similar case. However, acknowledging that the issue had 'wider implications', the Court conceded that it had 'a degree of unease' about the result of the case and granted company A permission to challenge its decision in the Court of Appeal.