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When is a Dismissal not a Dismissal? Court of Appeal Clarifies Limited Entitlement to Enforce Undertaking for Damages

In most cases, a plaintiff seeking an interim or interlocutory injunction is required to give an undertaking as to damages. The purpose of this practice is to ensure that the defendant will be adequately compensated in the event that the injunction is granted, but the plaintiff is ultimately unable to prove its case on its merits. The defendant may suffer damages (such as lost business revenue) as a result of complying with the terms of the injunction, even if only temporarily. For that reason, the order granting the injunction will typically include a term requiring that the plaintiff undertake to abide by any subsequent order the court may make against it to pay damages to the defendant.

The circumstances in which an undertaking as to damages will be enforced are typically not controversial. A plaintiff who obtains an interlocutory injunction but is unsuccessful at trial, for instance, can clearly be said to have failed to prove its case on its merits and is likely to be held responsible for financial losses incurred by the defendant in abiding by the injunction order.

However, what if the action never proceeds to trial? A recent B.C. Court of Appeal decision considered whether an undertaking as to damages is enforceable where the plaintiff’s claim is eventually dismissed for want of prosecution, and never actually heard on its merits. In this scenario, can the defendant still apply to court for damages in accordance with the undertaking?

The parties in Ralph’s Auto Supply (B.C.) Ltd. v. Ken Ransford, 2020 BCCA 120, were partners in the business of selling automobile cores. The land on which the business was located was owned separately by a numbered company. Pursuant to a share purchase agreement made in July 2006, the respondent sold his shares in the business to the appellant. The agreement included a restrictive covenant precluding the respondent from operating a competing business for five years. Approximately one year later, the appellant, through its subsidiary company, entered into a second agreement with the respondent whereby the appellant purchased all of the shares in the numbered company that owned the land. This second agreement included a standard release form in favour of the respondent.

In February 2010, the respondent filed a claim against the appellant for breach of the restrictive covenant in the first agreement. The respondent defended the claim on the basis that the terms of the release in the second agreement discharged him of any obligation to abide by the restrictive covenant.

The B.C. Supreme Court granted an interim injunction against the defendant in April 2010. Few steps were taken over the following eight years, and the principal of the appellant passed away in 2014. In August 2018, the defendant successfully applied to have the claim dismissed for want of prosecution. In granting the order, the Court held that the defendant was also entitled to have his damages assessed in accordance with the undertaking as to damages. The appellant subsequently filed an appeal.

The Court of Appeal unanimously agreed that there was no basis for overturning the dismissal of the claim for want of prosecution. However, the Court was divided as to whether the respondent was entitled to apply for damages pursuant to the undertaking. The Honourable Mr. Justice Hunter, writing for the majority, held that an undertaking as to damages will only be enforced in two scenarios: (i) where the plaintiff has failed on the merits; or (ii) where the plaintiff has been found to have obtained the injunction improperly. By contrast, the Honourable Mr. Justice Willcock expressed that the undertaking as to damages may still be enforceable where the action is dismissed without an assessment on the merits, and courts should assess the circumstances as a whole in deciding whether the undertaking should be enforced.

This case offers significant clarity as to when courts will enforce an undertaking as to damages, and when they will be less inclined to do so. Practically speaking, and in light of the majority’s remarks, a defendant should always consider applying to court at the earliest reasonable opportunity to vary or set aside an interim injunction if it is causing harm. In addition, when dealing with an aging and inactive claim with an injunction in place (or that was in place), a defendant should be aware that a dismissal for want of prosecution may yield less benefit to a defendant than a dismissal on the merits. In some cases, it may even make sense for a defendant to force, or threaten to force, a dormant matter on for determination on the merits, such as by way of summary trial, in order to preserve a right to claim damages pursuant to the plaintiff’s undertaking, as opposed to seeking dismissal for want of prosecution. While it is incumbent on a plaintiff to prosecute its case, the Court of Appeal’s decision suggests that a defendant cannot count on the plaintiff’s undertaking as to damages to be enforced if the plaintiff fails to do so.

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