Contractual Stipulations of Irreparable Harm: Helpful But Not Determinative
Business contracts frequently contain remedy clauses whereby the parties agree that a breach constitutes irreparable harm entitling the nonbreaching party to specific performance or injunctive relief to enforce the agreement. The effect of such clauses seemed to be settled in Delaware when the Delaware Supreme Court in Martin Marietta Materials v. Vulcan Materials, 68 A.3d 1208, 1226 (Del. 2012), stated that "contractual stipulations as to irreparable harm alone suffice to establish that element for the purpose of issuing ... injunctive relief." However, cases before and after Martin Marrieta make clear that such clauses constitute a party stipulation and admission, but do not alone establish irreparable harm sufficient to warrant preliminary injunction relief. In a recent Court of Chancery decision, Vice Chancellor John W. Noble discussed the helpful, but nondeterminative, effect of such remedy clauses, making clear that the ultimate determination of harm necessary to support injunctive relief rests with the court, not the parties, as in The Renco Group v. MacAndrews AMG Holdings, C.A. No. 7668-VCN (Del. Ch. Feb. 19, 2016).
The plaintiff in Renco had sought a mandatory preliminary injunction against the defendant to secure its information rights under the parties' LLC operating agreement. The court denied the motion because it concluded that "there was not a sufficient showing of risk of irreparable harm in the absence of interim injunction relief." The plaintiff moved for reargument, citing Martin Marietta and contending that the contractual stipulation conclusively established the irreparable harm element. It also argued that the defendant was judicially estopped from avoiding the remedy stipulation because it had previously relied on the provision to seek injunctive relieve at an earlier stage of the case.
In denying the motion for reargument, the Court of Chancery rejected the binding effect the plaintiff sought to ascribe to the remedy clause. The court said:
"Such a provision can be used by the court to meet the irreparable harm standard, but such a provision does not deprive the court of its discretion with respect to one of the critical forms of equitable relief. When a moving party who has the benefit of a similar provision seeks interim injunctive relief, its burden to show irreparable injury will be reduced. If there is a close debate about irreparable harm, such a party will prevail."
This ruling reflects the very proper need of the court to preserve its discretion and jurisdiction to grant equitable relief. The ruling thus declines to surrender such authority to the parties. A court of equity will not permit the parties by their own agreement to confer subject matter jurisdiction on the court when it would not otherwise exist. In the same way, the court will decline to be bound by a contractual stipulation of irreparable harm where the facts plainly do not warrant a finding of irreparable harm. The court noted that the Supreme Court in the Martin Marietta case examined the record to determine if actual harm existed to support the contractual stipulation, and found that such harm was present. Similarly, former Chancellor William B. Chandler III inKansas City Southern v. Grupo TMM S.A., C.A. No. 20518-NC (Del. Ch. Nov. 4, 2003), observed that such contractual stipulations allow the court to make the irreparable harm finding, but cannot limit the court's discretion to deny injunctive relief or require the court to ignore facts that plainly do not warrant a finding of irreparable harm.
In Renco, several factors caused the court to deny injunctive relief notwithstanding the contractual stipulation. Because Renco sought mandatory affirmative relief for the production of books and records and not simply preservation of the status quo, granting the request would afford essentially final relief on a mere showing of reasonable probability of success.
Practitioners must recognize that remedy clauses stipulating to irreparable harm are helpful devices to establish the element in a close case, but they are not conclusive or outcome-determinative. The court retains discretion to deny injunctive relief for lack of irreparable harm notwithstanding such clause. A party seeking to rely on such provision to enforce an agreement should also be prepared to identify and prove imminent actual harm in order to meet its burden of proving an entitlement to interim injunctive relief.