To: Vice President, Law, Fortune 50 Corporation

From: LegalEase Solutions, LLC

Date: 12/23/2005

Re: Interpretation of Contractual Stipulations

Question Presented

Will courts give deference to a contract clause that stipulates that any breach of
the agreement "will" cause irreparable harm and will warrant injunctive relief without reference to any specific facts regarding what is otherwise a finding of fact?

Short Answer

Courts are generally willing to enforce such contractual stipulations, and have consistently held that such provisions alone are sufficient for a finding of irreparable harm. However, courts are reluctant to allow such provisions from proscribing their power to decline such a finding if the facts clearly do not warrant it.

Discussion

Contractual stipulations are generally interpreted by courts in the strictest sense and courts endeavor to permit them their literal meaning. This is the conventional manner in which courts interpret contractual stipulations whereby they adhere to the letter of the document and glean the intention of the parties from the four corners of the contract itself. Generally construction of the contract’s meaning begins with its specific language. The words used in the contract are afforded the plain meaning that a reasonable person would give to them.

The intention of the parties is to be determined from the language of the agreement and the words should be given their common and generally accepted meaning. Turner v Shirk 49 Ill. App. 3d 764, 364 N.E.2d 622 (1977); Bonde v Weber 6 Ill. 2d 365, 128 N.E.2d 883 (1955).

In Smith Sons Lumber Co. v Steiner, Crum & Weil, 204 Ala. 306, 309 (1920), the
Court held:

The contract is to be construed as a whole, and we are to gather the intention of the parties from the four corners of the instrument, giving to the language used its natural and ordinary meaning.

Under the instant facts, the contract stipulates that when there is a breach it “will” result in irreparable harm and will warrant injunctive relief. Applying the principle with respect to interpretation as articulated in Smith, supra, it is apparent from the ordinary meaning that it was the intention of the parties to specifically agree that any breach necessarily results in irreparable harm and warrants injunctive relief.

Having established that the contract provision is clear on its face and would likely be afforded its plain meaning, the next and crucial analysis is whether courts would honor a stipulation like the one at hand without regard to the specific facts surrounding a breach of the contract.

A survey of case law in all 50 states resulted in very little discussion on point, with the noticeable exception of Delaware. The courts in Delaware have treated the instant question at significant length, and have shed light on the extent to which courts rely on contractual stipulations relating to irreparable harm and preliminary injunction vis-à-vis findings of facts.

Courts apply a series of standards while deciding whether an injunction should be granted to the movant, and the “irreparable harm” is one of the essential elements to a court’s decision regarding such a remedy.

In Wieck v Sterenbuch, 350 A.2d 384, 387 D.C.App (1976), the Court articulated
the standard for issuing injunctive relief, stating:

A preliminary injunction is an extraordinary remedy, and the trial court's power to issue it should be exercised only after careful deliberation has persuaded it of the necessity for the relief. A proper exercise of discretion requires the trial court to consider whether the moving party has clearly demonstrated:

See also, District 50, United Mine Workers of America v International Union, United Mine Workers of America, 134 U.S.App.D.C. 34, 412 F.2d 165 (1969); Canal Authority v Callaway, 489 F.2d 567, 572 (5th Cir. 1974).

In the case of House of Sight & Sound, Inc., v Faulkner, 912 P.2d 357, 361 OK
Civ. App. (1995), irreparable harm was defined as:

Injury is irreparable when it is incapable of being fully compensated by
money damages, or where the measure of damages is so speculative that arriving at an amount of damages would be difficult or impossible.

The Delaware Chancery Court has defined irreparable harm as that type of harm that exists where injury cannot be adequately compensated by damages and:

Essentially, the injury claimed "must be of such a nature that no fair and reasonable redress may be had in a court of law and that to refuse the injunction would be a denial of justice."

Nutzz.com v. Vertrue Inc., 2005 Del. Ch. LEXIS 101 at 37.

In Vitalink Pharmacy Services Inc., 1997 Del. Ch. LEXIS 116, the parties had entered in to a non-competition agreement, which stipulated that a violation could cause substantial and irreparable harm. The court held that since there was a clear stipulation that a breach would suffice to establish substantial and irreparable harm, that “[t]hat alone suffices to establish the element of irreparable harm.” Id. at 32. However in a subsequent case (discussed below) the court made a distinction to its decision in Vitalink, stating that a court need not find irreparable harm pursuant to a stipulation if the facts do not plainly warrant it.

In Kan. City S. v Grupo TMM. S.A. de C.V., 2003 Del. Ch. LEXIS 116, the parties had entered into an acquisition agreement, which the seller ultimately refused to perform due to its rejection by the seller's shareholders. The agreement between the parties specified various conditions that had to be fulfilled before the buyer's performance became due. The contract between the parties stipulated that “irreparable damage wouldoccur in the event that any of the provisions of the Agreement were not performed in accordance with their specific terms or were otherwise breached." The Plaintiff argued that this stipulation by the parties was sufficient to establish the irreparable harm element of the preliminary injunction standard.

Considering the question of irreparable harm, the court found:

The parties agreed "that irreparable damage would occur in the event that any of the provisions of the Agreement were not performed in accordance with their specific terms or were otherwise breached." KCS argues that this stipulation by the parties is sufficient to establish the irreparable harm element of the preliminary injunction standard. Several decisions of this Court support KCS's position. TMM argues that in the cases cited by KCS the relevant contractual provisions were "accompanied by the actual presence of demonstrable harm of a sort that would have been deemed irreparable even in the absence of the contractual provision." TMM then argues that because prior courts have relied on the contractual stipulation and since the underlying facts independently support such a stipulation, this Court is required to do likewise. [The court] reject[s] this proposition.

Id. at 20. The court, in rejecting TMM’s argument that the court must find independent facts supporting irreparable harm, relied on its decision in Vitalink. Importantly, however, the court proceeded to explain that while a stipulation providing for irreparable harm was sufficient and need not be supported by independent facts, such a stipulation would not limit the court’s discretion to decline to order injunctive relief. Id. at 21. The court went on to explain that if the facts plainly do not warrant a finding of irreparable harm, the court is not required to ignore those facts, especially since the "parties cannot confer subject matter jurisdiction upon a court." Id.

The court in True North Communications, Inc. v Publicis S.A. 711 A.2d 34 (Del. Ch., 1997), similarly held that a contractual stipulation between the parties that breach of a certain provision would constitute irreparable harm, would be enforceable and sufficient to find irreparable harm. Id. at 44. The court discussed and affirmed the court’s earlier decision in Vitalink supra, explaining that that decision found a contractual stipulation sufficient to establish the elements of irreparable harm. Id. Interestingly, the court did not stop its analysis at the contractual provision, but rather made separate factual findings that plaintiff had established that irreparable harm would result without an injunction. Id. at 44-45.

In SLC Beverages, Inc. v Burnup & Sims, Inc., 1987 Del. Ch. LEXIS 472, the dispute centered on more than a million shares of defendant's subsidiary corporation, which defendant had sold to plaintiff. As a condition of that sale, defendant was to register the shares with the Securities and Exchange Commission within a reasonable time. Defendant failed to do so, however, prompting plaintiff's lawsuit. In granting the plaintiff an injunction, the court noted that plaintiff had established the fact that it would suffer irreparable injury if the injunction were not granted and the fact it had a substantial probability of success on the merits. The injunction was therefore ordered. Defendant claimed that plaintiff would not suffer any irreparable harm if a preliminary injunction was not granted. The court held:

Unfortunately for defendant, this argument is precluded by the Agreement itself which provides that a breach of the Agreement would cause irreparable harm to the non-breaching party and gives the non-breaching party the right to specifically enforce the Agreement. While defendant concedes that this is so, it argues that this language is not binding because it claims plaintiff must establish imminent irreparable harm and not just irreparable harm. This argument is without merit. Having agreed that a breach by it will constitute such irreparable harm as would justify plaintiff seeking to specifically enforce the Agreement, defendant cannot now assert that plaintiff cannot seek to do so.

Id. at 6 (Emphasis Added).

See also Nutzz.com v Vertrue Inc., 2005 Del. Ch. LEXIS 101, where the court had occasion to once again consider the applicability of contractual stipulations to findings of irreparable harm. The company tried to develop a motor sports-themed membership program with a partner entity. The contract, with the exception of a confidentiality clause, was subject to arbitration. The company alleged that the partner entity had breached that clause. Additionally, the parties had agreed that any remedy at law for a breach of the confidentiality clause would be inadequate and the non-breaching party would be entitled to obtain injunctive relief without proof of irreparable injury or posting bond. The company explicitly limited its breach of contract claims to violations of the confidentiality clause. The court found that though such stipulations as to irreparable harm have been found sufficient to establish that element for purposes of preliminary injunction, the court would not enforce the clause in this case, because the plaintiff had failed to demonstrate a reasonable likelihood of success on the merits. Id. at 38. The court delved into the facts and found that plaintiff’s claim for irreparable harm was not substantiated by the facts and were cursory and largely conclusory. Id. at 38-39.

Conclusion

In conclusion, while Delaware courts have been willing to enforce contractual stipulations for irreparable harm, and have consistently held that such provisions alone are sufficient for such a finding, the courts are reluctant to allow such provisions from proscribing their power to decline such a finding if the facts clearly do not warrant it. In some instances, the courts have discarded wholesale such a provision, when the facts do not warrant a finding of irreparable harm. Moreover, while Delaware cases have honored such stipulations relating to irreparable harm, we did not come across any case where the court ordered injunctive relief purely based on a contractual stipulation.1 The finding of irreparable harm is only one of three factors required to be demonstrated for court to grant preliminary injunction, the other two being a reasonable probability of success on the merits at a final hearing and a balance of the equities that tips in favor of issuance of the requested relief. Nuttz.com, supra, at 20. It is reasonable to assume that Delaware courts would not order preliminary injunction solely based on a contractual stipulation, where the facts do not clearly warrant it, notwithstanding the clear language of the stipulation.