In the following case the court had to consider whether to issue an injunction to prevent termination of a sub-contract prior to the outcome of an adjudication and whether to issue an injunction preventing a sub-contractor taking any further steps in an adjudication on the basis that it had already embarked on mediation.

Ericsson AB v EADS Defence and Security Systems Limited [2009] EWHC 2598

The contractor (a supplier and provider of defence, security and public facility systems) was appointed by the employer to provide an emergency communications system to the Fire and Rescue Service in England, known as FiReControl. The contractor entered into a sub-contract with the sub-contractor (a provider and developer of telecommunication systems) for the development and supply of software, and the provision of related support services. A key part of the sub-contract involved the supply of the Initial Supplied Software (ISS) which was based on a software system owned by the sub-contractor.

The sub-contract provisions

The sub-contract contained provisions which required the sub-contractor to ensure that each milestone set out in the sub-contract would be successfully met by the relevant milestone date “to the extent that it was not delayed or prevented by any event beyond its reasonable control”. The parties further agreed that there would be no liability on the sub-contractor for failure to meet any milestone or milestone date, other than milestones 3 and 5.

The failure to achieve milestone 5 was at the centre of this dispute. Milestone 5 involved the delivery of the ISS, originally scheduled for 7 January 2009. By November 2008, the sub-contractor (in compliance with its contractual obligations to notify the contractor of any reported delays to delivery) reported that the ISS delivery would be in January 2010. This delayed delivery date was not acceptable to the employer and the parties agreed a compromise delivery date of 31 August 2009.

The sub-contractor notified the contractor that the compromise date would not be achievable and that delivery would take place on 30 September 2009. When in July 2009 the contractor became aware that the September date would also not be met and that delivery was most likely to be in November 2009 the contractor became concerned that this subsequent slippage in the delivery timetable would adversely impact on its own delivery programme to the employer.

The termination and the dispute resolution provision

The provisions of the sub-contract entitled the contractor to terminate the sub-contract if the sub-contractor was in material default upon giving reasonable notice, subject to a grace period within which the default was to be remedied. The sub-contract also provided for a process of stepped dispute resolution. First, the parties were to consult in good faith to resolve the dispute. This was to be followed by mediation or adjudication.

In particular, Clause 31 provided as follows:

“31.2 If a dispute arises in relation to any aspect of this [sub-contract], [the sub-contractor] and [the contractor] shall first consult in good faith in an attempt to come to an agreement in relation to the disputed matter.

31.3 If [the sub-contractor] and [the contractor] fail to resolve the dispute through such consultation within … 10 Business Days, either party may give notice of its intention to proceed to mediation …, or to refer the matter to adjudication.

31.6 … Unless and until revised, cancelled or varied by a decision of the courts, the Adjudicator’s decision shall be final and binding on both parties save for manifest error.”

The applications

The deteriorating relations between the parties resulted in:

29 September 2009 - the sub-contractor issued mediation proceedings on the question of whether the sub-contractor was contractually obliged to deliver the ISS by 30 September 2009.

1 October 2009 - the contractor purported to give notice of material default to the sub-contractor for failure to deliver the ISS by 30 September 2009 and required the sub-contractor to remedy the material default by 22 October 2009.

1 October 2009 - the sub-contractor gave notice to adjudicate on the question of whether there was a contractual requirement to deliver the ISS by 30 September 2009.

2 October 2009 – the contractor accepted the sub-contractor’s election to refer the dispute to mediation.

5 October 2009 – the contractor disputed the sub-contractor’s right to adjudicate since it had elected to mediate.

6 October 2009 – the sub-contractor disputed the termination notice on various grounds. These included that the 30 September 2009 delivery date was not a contractual delivery date; that liquidated damages were an exclusive remedy for delay, and that employer- related delays had been ignored.

Both parties applied to the court for interim relief. The sub-contractor sought an injunction preventing the contractor from terminating the sub-contract at least before the adjudication had taken place. The contractor sought an injunction to prevent the sub-contractor from taking any further steps in the adjudication, seeking a declaration that any decision would be invalid.

Injunction to prevent termination prior to outcome of adjudication: the principles

The court observed that the practice relating to the award of interim injunctions was well established (American Cyanamid v Ethicon Ltd [1975] AC 396).

According to American Cyanamid, the court, when considering whether to exercise its discretion to grant an interim injunction, needed first to consider if there was a serious question to be tried at trial. If the answer to this question was yes:

  • The court then needed to consider whether damages would be an adequate remedy for a party injured by the court’s grant of, or its failure to grant an injunction.
  1. i.If damages would be an adequate remedy for the claiming party (the sub-contractor), no injunction should normally be granted, however strong the claim appeared to be.
  2. ii.If damages would not provide an adequate remedy for the claiming party (the sub-contractor), the court should then consider whether, if the sub- contractor were to succeed at trial, he would be adequately compensated under the contractor’s undertaking as to damages.
  • Where there was doubt as to the adequacy of either or both of the respective remedies in damages, then the court would consider whether on the balance of convenience it was appropriate to grant an interim injunction. For that purpose, the court would consider all the circumstances of the case.

Applying the principles

The court found that there were serious arguable issues so far as the 30 September 2009 delivery date was concerned and went on to consider the further related questions set out in American Cyanamid.

The court was satisfied that damages would be an adequate remedy as between the two parties. More particularly the judge held that:

  • both parties were substantial commercial entities. They had entered into a sub-contract which mutually prevented them from recovering most types of economic loss and contained termination clauses which, if exercised, could impact on the commercial reputations of the parties;
  • the damages which were recoverable under the sub-contract were capable of being quantified; and
  • it was not unjust that a party’s recovery of contractual damages was limited to only those which the sub-contract permitted, particularly given that the sub-contract was freely entered into and agreed between both parties.

The court was also satisfied that the balance of convenience did not require the court to prevent the contractor from exercising a right to terminate on the basis that:

  • the dispute provisions did not prevent a right to terminate from being exercised pending a resolution of the dispute as to a party’s entitlement to terminate. There would need to be clear words that significant contractual rights were to be frozen pending an adjudicator’s decision if that construction was to be supported.
  • an injunction to restrain the termination from proceeding would require the two parties (whose relationship had irretrievably broken down) to continue to work together in circumstances where they had a sophisticated sub-contract which purported to provide commercial solutions and remedies when a lawful (or unlawful) termination occurred.

Accordingly, the court refused the sub-contractor’s application for an injunction to prevent termination.

Injunction to prevent the adjudication taking place: impact of the dispute resolution provisions

The contractor sought an injunction to prevent the sub-contractor from taking any further steps in the adjudication and seeking a declaration that any decision of the adjudicator would be invalid.

The issue before the court was whether the mediation and adjudication were mutually exclusive alternatives so that if a party had embarked on one process in relation to a specific dispute it could not at the same time embark on the other process.

The court considered that Clause 31.3 of the sub-contract gave each party a right to mediate or adjudicate. The wording did not prevent or limit a party from going down either route. It was open to either party on a specific dispute to mediate or to adjudicate or to do both. Logically the use of the word “may” suggested that the parties wanted flexibility in the dispute resolution process and did not want to specify an absolute requirement that the parties have good faith negotiations first, then mediation, then adjudication followed by the final form of dispute resolution.

The court also viewed the wording of Clause 31.6 as further evidence to suggest that Clause 31 as a whole was intended to provide for various forms of dispute resolution:

  • The inclusion of the words “Unless and until revised, cancelled or varied by a decision of the courts, the Adjudicator’s decision shall be final and binding on both parties save for manifest error” pointed to that conclusion.
  • Errors in adjudicators’ decisions did not usually prevent enforcement of those decisions; and so the inclusion of such words meant that the parties had agreed that adjudication decisions would be enforceable, except to the extent that there was an obvious error. This was a “very strong pointer” that clause 31 provided for various forms of dispute resolution but reserving to the court the right to revise, cancel or vary the decision of an adjudicator.

The court concluded that the contractor was not entitled to an injunction to restrain the sub-contractor from pursuing remedies in adjudication concerning delays and termination. The sub-contractor could pursue the adjudication even though it had also instituted mediation proceedings.

Editors’ comments

This case is a reminder that the test for obtaining an injunction as set out in American Cyanamid can be a difficult test to satisfy, particularly where the parties have agreed sophisticated contractual entitlements in relation to both the recoverability of damages and termination provisions.

The case is also a reminder that parties need to consider their dispute resolution provisions carefully, particularly if one takes into consideration the cost, time and administrative burden of operating two forms of intermediate dispute resolution at the same time or having them one after each other.

View: Ericsson AB v EADS Defence and Security Systems Limited [2009] EWHC 2598