Court of Appeal Clarifies Duty of Full Disclosure for Injunctions in Derma Med Ltd v Dr Zack Ally Case

Introduction

In the recent judgment of Derma Med Limited & Anor v Dr Zack Ally & Ors [2024] EWCA Civ 175, the Court of Appeal (Civil Division) revisited several pivotal legal principles underlying the granting and setting aside of injunctions in the context of alleged breaches of non-compete and confidentiality clauses. The appellate court’s analytical dissection of the High Court’s previous decision serves as a guiding beacon for legal professionals in understanding the nuances of full and frank disclosure obligations, adequacy of damages as a remedy, and the enforcement of negative covenants. This article delves into the case law, parsing the legal reasoning direct from the judgment summary.

Key Facts

Dr Zack Ally and his wife sold their business, Derma Med Ltd, to Peal Athena Ltd, on terms including non-compete and confidentiality obligations. Subsequent suspicions of Dr Ally breaching these obligations led to a suspension, and a without notice injunction was granted to enforce the non-compete and confidentiality clauses. The High Court later discharged the injunction, citing significant failures of full and frank disclosure by the claimants and determining that damages would be an adequate remedy.

The claimants appealed, contending that the High Court judge erred in his decision to discharge the without notice injunction and in declining to grant a fresh injunction.

Legal Principles

Full and Frank Disclosure

The case underscores the imperative duty of applicants to make full and frank disclosure when seeking without notice injunctions, as detailed in the authorities such as Brink’s Mat Ltd v Elcombe and Tugushev v Orlov. The Appeal Court critiqued the High Court’s findings of non-disclosure, emphasizing the importance of maintaining a sense of proportion in complex matters and acknowledging that even a significant failure of disclosure need not automatically lead to the discharge of an injunction. The overriding consideration, as referenced in Tugushev v Orlov, is always the interests of justice.

Adequacy of Damages

The Court of Appeal further revisited the enduring principle that an injunction is typically the most fitting remedy for enforcing negative covenants. Echoing Sunrise Brokers LLP v Rodgers, the court explained that damages are generally not an adequate remedy in cases involving breach of non-compete agreements due to the evidential difficulties in quantifying loss. Drawing upon this principle, the court determined that the High Court had not properly considered the claimants’ bargaining for specific performance through an injunction and that damages could not suffice for the intangible and speculative losses involved.

Repudiatory Breach and Non-compete Obligations

In addressing the Respondent’s Notice, which argued that the claimants’ withholding of an Earn-Out payment was a repudiatory breach that rendered the non-compete clause unenforceable, the Court of Appeal deferred a summary determination. Referencing the principle that contracting parties should generally be held to their bargains unless exceptional circumstances dictate otherwise—as explored in D v P—the court underscored that this is a matter requiring a full trial for resolution.

Outcomes

The Court of Appeal allowed the appeal, rectifying the perceived missteps in the High Court’s analysis by granting fresh injunctions to restrain Dr Ally from competing with Derma Med. It restrained the use of claimants’ confidential information until trial, refuting the defendants’ claims that there was no serious issue to be tried on the merits.

Conclusion

The case of Derma Med Limited & Anor v Dr Zack Ally & Ors serves as an exemplar of the judicial rigor necessary when addressing the application and discharge of injunctions, particularly the duties of full and frank disclosure and the suitability of damages as a remedy. The Court of Appeal’s judgment clarifies that where a party seeks to uphold its contractual protections through an injunction, the courts will robustly scrutinize the justification for such equitable relief, prioritizing the integrity of the contractual arrangement and the interests of justice. The ruling reiterates to the legal profession that substantial adherence to disclosure obligations and a nuanced approach to evaluating remedies are cornerstone practices in upholding the rule of law.