In the recent case of YJB Port Ltd v M&A Pharmachem Ltd and CD Medical Ltd  EWHC 42 (Ch), the High Court had to consider whether a claim for damages could be pursued in respect of separate actual breaches of the non-compete clause of a contract.
In this case, the court had to make a distinction between a claim for damages in respect of separate actual breaches and a claim for loss of bargain consequent on the early termination of the contract arising from anticipatory repudiatory breaches, in circumstances where the actual breaches of the non-compete clause occurred in conjunction with threatened future breach(es).
Background of the case
The case concerned an exclusive manufacturing and distribution agreement dated 1 December 2014 between YJB Port Ltd (“YJB”) and M & A Pharmachem Ltd (“M&A”) (the “Agreement”). Pursuant to this Agreement, M&A was to be the exclusive distributor of YJB’s product ‘ThickenAid’ (a starch-based medical thickening compound used in the treatment of dysphagia). According to its express terms, the earliest date of the expiry of the Agreement was 1 December 2019.
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 [ThickenAid] during the term of this agreement or for a period of 6 months following termination".
First trial on liability
In an earlier trial on liability in 2019, the judge had been asked to determine certain other aspects of YJB’s claim for breach of clause 3(f) (the “Competition Claim”), namely (i) whether M&A’s breaches of clause 3(f) caused no loss or some loss to YJB; and (ii) if the latter, the basis and date of assessment of any loss.
It was found that during mid-late 2017, M&A breached clause 3(f) in three specific ways by taking meaningful internal preparatory steps to an intended future launch of a competing product "Simply Thicken" (a gum-based thickening compound) which, if launched, would compete with ThickenAid.
The first trial judge also found that in late October 2017 M&A stated an intention to launch Simply Thicken within two months (i.e. within the duration of the Agreement), and repeated this intention thereafter. No such rival product was ever launched, however, meaning that no actual competition had occurred and no interference to YJB’s business caused until disclosed. Nonetheless, by stating its intention M&A clearly threatened a material future breach of clause 3(f) which amounted to an anticipatory repudiatory breach of the contract. It was found that YJB validly accepted this anticipatory repudiatory breach and terminated the Agreement on 6 February 2019, some 10 months before the earliest expiry date of 1 December 2019.
Coincidentally with YJB's discovery of M&A's breach of the clause 3(f), YJB had proposed sale of the ThickenAid business to a third party, Aymes International Limited ("AIL"). AIL had offered YJB £425,000 however this offer was withdrawn upon discovery of M&A’s plans to develop and launch Simply Thicken in future. The next day after YJB’s termination of the Agreement, YJB and AIL entered into a distribution agreement and a separate purchase option agreement in respect of ThickenAid, with the business valuation under that option agreement being a fraction of AIL’s original offer price.
YJB subsequently brought a claim for damages against M&A for M&A's specific breaches of clause 3(f) of the Agreement during mid-late 2017, amongst other claims. YJB sought injunctive relief in early/mid-2018 to prevent further breaches of clause 3(f), but such relief was denied on the basis that damages would be an adequate remedy.
Further trial on quantification of damages and other final relief
Following trial on liability in December 2018 where some of the claims were settled, the court had to determine whether any, or all, of M&A’s breaches of clause 3(f) of the Agreement were the effective cause of some capital diminution of the ThickenAid business between mid-late 2017 and the valuation date in February 2019; and what, if any, loss suffered by YJB was recoverable in respect of the three breaches. The three breaches were:
M&A producing sufficient quantities of Simply Thicken during mid-2017 in order to carry out patient acceptability trials prior to the second defendant, CDM (who are closely related to M&A), submitting an application to the Advisory Committee on Borderline Substances (“ACBS”) for product approval;
M&A agreeing, prior to the date of the ACBS application on 18 September 2017, to manufacture Simply Thicken;
M&A or CDM ordering 480kg of Xanthan Gum during December 2017 for the intended production of Simply Thicken.
YJB originally pleaded a claim for loss of opportunity to sell the ThickenAid business to AIL. It subsequently made a last minute amendment to its claim to include "threatened" breach(es) by M&A and the diminution in value of the ThickenAid business caused by the three breaches of clause 3(f), as part of its causation case.
M&A’s request for permission to appeal the order made by the first trial judge in respect of the breaches (amongst other issues) was refused by Males LJ on the basis that the breaches caused some damage, thus entitling YJB to at least nominal damages limited to those caused by the specific breaches of clause 3(f).
The Court’s decision on damages
YJB’s claim for damages failed on causation. The Judge held that M&A’s specific breaches of clause 3(f) were not an effective cause of any capital value diminution of the ThickenAid business during the relevant period, as firstly, M&A did not launch Simply Thicken upon premature expiration of clause 3(f) and indeed still have not taken any known steps towards such launch. Secondly, he found that the ultimate cause of AIL’s withdrawal of their initial offer was their concern over the threat of actual future competition combined with the specific threat of M&A’s unlawful misuse of YJB’s confidential information in the context of commercial launch of Simply Thicken.
As such, YJB suffered no recoverable loss as a result of these breaches, whether individually or collectively, and were awarded nominal damages only in the sum of £3, representing £1 for each proven breach. The Judge noted that damages are not recoverable for a risk of injury or for a threatened (i.e. anticipatory) breach of contract per se without more, contrary to early termination for repudiation or anticipatory breach(es) at common law where damages may be recoverable in respect of actual breach(es) of contract as at the (lawful) point of termination, as well as for 'loss of bargain'.
The so-called 'fair wind' principle did not apply in this case either, as there was no evidential uncertainty or difficulty being resolved in favour of an innocent claimant rather than a culpable defendant. Doing so would put YJB in a better position than if M&A had not committed the breaches.
Finally, the Judge commented on the expert evidence not being particularly helpful given the various extraneous factors at play in the market that may have impacted the capital value of the ThickenAid business in February 2019.
This case illustrates the importance of ensuring that when accepting repudiation of the contract, the innocent party clearly identifies what losses (if any) are caused by each of the actual breaches of contract and what losses are caused by the early termination of the contract, and refer to the relevant causative breach(es) when pleading each of its heads of loss. One should also keep in mind that damages are not recoverable in respect of anticipatory breach itself; however, a claim for damages for wrongful termination at common law can arise from the renunciation (if accepted). A claim for an injunction to restrain the threatened breach may also be available.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.
If you have any questions relating to this article or if you are in doubt and require advice on termination of a contract or any other aspects of a contract, please contact Elina Mockevicute on [email protected]