In a case arising out of an anti-competition clause in a manufacturing and distribution agreement for a medical compound, the High Court has held that no loss was suffered despite meaningful preparatory steps having been taken to launch a competing product. In doing so, the court considered that any diminution in value of the business that may have been suffered was more likely caused by threatened, as opposed to actual, breaches of contract, which were not actionable.

This case offers an important reminder of the basic principles of causation that will need to be considered prior to expending significant time and money on court proceedings. Anti-competition clauses, particularly in manufacturing and distribution agreements, are often the result of hard-fought negotiations and assumed to offer protection in the event of a breach. However, even if a claimant is able to establish one or more actual breaches of such clauses, relief will still only be awarded if there is clear evidence that such breaches were the dominant or effective cause of recoverable loss.

Background

In YJB Port Ltd v M&A Pharmachem Ltd [2021] EWHC 42 (Ch), the claim arose out of an exclusive manufacturing and distribution agreement dated 1 December 2014 between the claimant (“YJB”) (as supplier) and the first defendant (“M&A”) (as distributor). It concerned a starch-based medical thickening compound known as ‘ThickenAid’ used in the treatment of dysphagia. The first trial was concerned with liability, and determined that the agreement terminated on 6 February 2019 when the claimant accepted the defendant’s repudiatory breaches of contract. This second trial was concerned with the quantification of damages and other relief claimed as a result of those breaches.

Specifically, YJB sought:

  1. Damages for breaches of the anti-competition clause in the agreement; and

  2. Final injunctive relief to restrain the Defendants’ use or disclosure of certain confidential information.

Breaches

Clause 3(f) of the agreement prohibited M&A, without prior written consent, from being directly or indirectly involved in “the manufacture, production, promotion or sale of any goods which compete or are likely to compete with any of the Products [i.e. ThickenAid] during the term of this agreement or for a period of 6 months following termination.

At the liability trial, the judge held that M&A had breached this clause in three ways, and in doing so it had taken meaningful preparatory steps in 2017 towards launching a competing gum-based thickening product:

  1. It had produced sufficient quantities of a competing product to carry out patient acceptability trials prior to submitting an application to the Advisory Committee on Borderline Substances (“ACBS”) for product approval;

  2. It had agreed, prior to the date of its application to the ACBS, to manufacture the competing product; and

  3. It, or the second defendant, CD Medical Limited (“CDM”), which was closely related to M&A, had ordered 480kg of xanthan gum for the intended production of the competing product.

M&A was also held to have threatened a material future breach of the anti-competition clause, by its repeated assertion that it intended to promote and sell the competing product during the term of the agreement.

The court noted that the above circumstances “throw into sharp focus the court’s approach to causation” in the context of specific or threatened future breaches of contractual anti-competition covenants, where such breaches involve internal preparatory steps rather than commercial production or actual competition in the market.

Causation

The determinative question in a claim for damages for breach of contract is whether the relevant breach is an ‘effective’ or ‘dominant’ cause of the loss suffered by the innocent party. No damages are recoverable for a threatened (anticipatory) breach of contract.

In this case, YJB had the burden of proof in showing that one or more of the breaches were an effective cause of some diminution in the capital value of the relevant business. The judge held that none of the three breaches listed above was an effective cause of any diminution in the capital value of the ThickenAid brand/business. They were isolated preparatory steps that, while breaching the agreement, did not cause any loss.

The judge also held that the threatened future breaches of the agreement were more likely to be the dominant cause of any diminution in capital value of the ThickenAid business. It was this factor that had most likely persuaded a potential buyer of the business to lose interest in the sale, and which led to a subsequent purchase option agreement valuing the business at a fraction of the original offer price. However, as threatened breaches are not actionable, they were not relevant to the question of causation and could not be taken into account when assessing the loss suffered by YJB.

Outcome

The judge concluded that no compensation was required to put YJB into the position it would have been in if none of the breaches had occurred (being the purpose of damages for breach of contract). He awarded nominal damages only of £3 (£1 for each breach). The judge further noted that to award damages in this case would have had the opposite effect of putting YJB in a better position than it would have been had M&A not breached the agreement, because it would compensate YJB for putative breaches, or breaches that never occurred or, worse still, for the mere prospect or threat of future lawful competition. As it happened, even by the date of the judgment (12 January 2021), no lawful competition had occurred.

As to the claim for final injunctive relief, the judge was not persuaded that there was a real risk of misuse or disclosure of any confidential information, in circumstances in which there was no evidence that M&A or CDM had used or disclosed such information. There was only an inference of a risk that it would do so in the future, which seemed fanciful, particularly given that M&A/CDM had taken no meaningful steps to launch their competing product. The defendants ultimately offered an undertaking that obviated the need for the judge to reach a final decision on this aspect of the case.

Comment

Anti-competition clauses, particularly in manufacturing and distribution agreements, are often the result of hard-fought negotiations and assumed to offer protection in the event of a breach. However, this case offers an important reminder that threatened, as opposed to actual, breaches of contract are not, without more, actionable, and will not give rise to an award of damages. As noted by the judge in this case, there are few areas of law more difficult than causation, and it is one thing to state the test; another thing to apply it in practice. Even if a claimant is able to establish one or more actual breaches of such clauses, relief will still only be awarded if there is clear evidence that such breaches were the dominant or effective cause of recoverable loss.

In giving judgment in this case, the judge acknowledged that “the bitter truth for an innocent party is that some breaches by its counterparty, however unscrupulous or unethical, result in no loss that can be recovered by an award of compensatory damages.” Companies may still want to consider seeking other forms of redress, such as injunctive relief, in instances where for example there is sufficient evidence that a breach has or is about to occur that will have a significant effect on the relevant business. The need for injunctive relief, for example in the context of breaches of confidentiality, can often be avoided by a timely offer to give an undertaking to the party affected that adequately protects its interests.

This Law-Now article was written with the assistance of Constantina Neocleous, trainee solicitor at CMS.