Legal Briefing

Araci v Fallon – are all bets off for American Cyanamid?

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Dispute resolution | 01 October 2011

On Saturday 4 June 2011 the Court of Appeal granted a prohibitory injunction preventing Kieren Fallon, one of the best known flat-racing jockeys in the country, from racing in the most prestigious event of the flat-racing calendar, the Epsom Derby. This article discusses the Court of Appeal’s decision. It then goes on to consider the possible impact of this decision on the traditional American Cyanamid test for the granting of injunctive relief and on the approach of the courts to the granting of injunctive relief more generally.

 BACKGROUND

The claimant, Vefa Ibrahim Araci, is the owner of Native Khan, who was one of the favourites to win the Derby at this year’s meeting. Prior to the Derby, Mr Fallon had ridden Native Khan twice and won on both occasions, making a more formal partnership between champion jockey and champion horse a very attractive prospect for Mr Araci. To this end, in April 2011, Mr Araci entered into an agreement with Mr Fallon by which Mr Fallon agreed, for a period of one year, to:

  1. ride Mr Araci’s horses (including Native Khan) when requested to do so; and
  2. not ride a rival horse in any race where he had been asked to ride Native Khan.

Unsurprisingly, Mr Araci then asked Mr Fallon to ride Native Khan in the Derby on 4 June 2011. However, less than a week before the meeting, Mr Fallon informed Mr Araci that he would instead be riding a rival horse, Recital. This created a twin problem for Mr Araci. First, he had to find a new (and ideally similarly successful) jockey to ride Native Khan; and second, he had to deal with the fact that Mr Fallon, who knew Mr Araci’s race strategies, was now intending to ride a rival horse.

To deal with his first problem, Mr Araci engaged Johnny Murtagh to ride Native Khan in the Derby. To deal with his second problem, on 1 June 2011, Mr Araci commenced proceedings for a prohibitory injunction against Mr Fallon, restraining him from riding any horse other than Native Khan in the 2011 Derby.

THE DECISION OF THE HIGH COURT AT FIRST INSTANCE

In giving judgment following a hearing on 2 June 2011, Mr Justice MacDuff held that, while Mr Fallon had breached the terms of his agreement with Mr Araci, the court would not exercise its discretion to grant an injunction to prevent Mr Fallon from racing.

In coming to his decision, MacDuff J set out four propositions to be applied to cases where a prohibitory injunction is sought. Referring to Treitel: The Law of Contract (12th ed), MacDuff J stated that:

  1. where an agreement imposes a negative covenant, breach of that covenant may be restrained by an injunction;
  2. the American Cyanamid balance of convenience test applies to applications for interim injunctions, save where there is a clear breach of a negative covenant;
  3. where the granting of an interim injunction amounts in substance to a final determination, the court will take into account the strengths and weaknesses of the cases of the respective parties; and
  4. these three propositions are subject to an overriding judicial discretion to refuse to grant an injunction where its result would be oppressive to the respondent or cause them particular hardship.

In considering his propositions in the context of the present case, MacDuff J considered, inter alia, that:

  1. preventing Mr Fallon from riding in the Derby could constitute a restraint of his trade;
  2. it would be very difficult for Recital’s owner to find a suitable substitute jockey on one day’s notice;
  3. the British Horseracing Association (BHA) might not even permit such a change in jockey on such short notice;
  4. the betting public had placed bets on Recital with Mr Fallon as jockey and replacing the jockey at this stage could therefore mislead the betting public; and
  5. the general public interest in the Derby ran in favour of Mr Fallon taking part in it.

MacDuff J also considered whether or not damages were an adequate remedy for Mr Araci. The agreement included a liquidated damages clause, which provided that if Mr Fallon, in breach of the agreement, opted not to ride one of Mr Araci’s horses, liquidated damages would be assessed at a minimum of £30,000 per race not ridden. This clause provided only for a minimum payment and it would be possible for Mr Araci to recover a higher sum in damages if he could show that his losses exceeded £30,000. Nevertheless, the inclusion of the liquidated damages clause in the agreement demonstrated, in the judge’s view, that the parties had contemplated damages as a remedy. The judge described this as being ‘of significance’ and held that damages were an adequate remedy.

Having weighed the issues as to the adequacy of damages and the impact on Mr Fallon (and indeed the impact on Recital’s owner and the wider public) of his not being allowed to race in the Derby, MacDuff J exercised his judicial discretion under his fourth proposition to refuse to grant the injunction. Mr Fallon was therefore all set to ride Recital in the Derby on Saturday 4 June 2011.

However, unfortunately for Mr Fallon, at 3pm on Friday 3 June 2011, Mr Araci issued an appeal to the Court of Appeal. The appeal was heard by Lord Justice Jackson and Lord Justice Elias at 4pm on the same day.

THE DECISION OF THE COURT OF APPEAL

Judgment was handed down at 9am on 4 June 2011, a mere seven hours before the start of the race in question. Jackson LJ, in giving the leading judgment, considered that two separate questions emerged from the first instance decision: firstly, was MacDuff J correct to conclude that damages were an adequate remedy; and secondly, had he properly exercised his discretion to withhold the injunction in the circumstances of the case.

Adequacy of damages

Jackson LJ noted that the phrase ‘adequate remedy’ was a ‘convenient shorthand’ but said that it was ‘not entirely appropriate’. He said that the real question was whether it was ‘just in all the circumstances that the claimant should be confined to his remedy in damages’. He then went on to hold that this would not be just in the circumstances of this particular case for the following reasons.

  1. Assessing the damages for breach of the obligation not to ride other horses would be an extremely complex and unsatisfactory exercise because it would be difficult to speculate as to the likely outcome of the race if different jockeys had been riding different horses. The court could, with the assistance of expert evidence, do its best to reach a conclusion on this point but there was no ‘right answer and no answer which would properly do justice between the parties’.
  2. There was a risk that the defendant would not be able to meet any order for damages made against him.
  3. Financial reward was not the only benefit of winning the Derby. Significant prestige would also attach to the winning horse and its owner.

Jackson LJ also rejected Mr Fallon’s argument that the inclusion of a liquidated damages clause in the agreement demonstrated that the parties contemplated that damages were an adequate remedy. He said that the liquidated damages clause was intended for less serious breaches of contract and did not provide a proper means for calculating damages in more serious cases of breach. Furthermore the clause itself was directed to breaches of Mr Fallon’s positive obligation to ride Native Khan and not his negative obligation to not ride a rival horse.

The valid exercise of judicial discretion

The Court of Appeal accepted the four propositions, which MacDuff J had derived from Treitel (see above), subject to one qualification, namely that, where a respondent is proposing to act in clear breach of a negative covenant, there must be ‘special circumstances’ before the court will exercise its discretion to refuse relief.

The Court of Appeal went on to consider each of the factors that MacDuff J cited as reasons for his decision to exercise his discretion to refuse relief and considered whether these factors constituted the special circumstances required for relief to be so refused.

In short, the Court of Appeal considered that they did not constitute special circumstances, either in isolation or when considered as a whole. Considering each of MacDuff J’s factors in turn, Jackson LJ, inter alia, held that:

  1. there was no restraint of trade since Mr Fallon would only be prevented from riding in one race on one day;
  2. Recital’s owner should be able to find a replacement jockey just as Mr Araci had a few days previously – given the furore surrounding the breaches of the Araci/Fallon agreement, Recital’s owners must have already been seriously considering the prospect of having to find another jockey;
  3. the BHA would be flexible given the unusual circumstances;
  4. the betting public would have to accept that when they bet on a horse ‘he or she is running a multitude of risks’, including a last minute change of jockey; and
  5. while the Derby was a major national event and, if the injunction was granted it would go ahead without a major champion rider, this was unfortunate but did not detract from the event as a whole.

In granting the injunction to prevent Mr Fallon from racing that afternoon, Jackson LJ accepted that the effect of the injunction on Mr Fallon would be a ‘grievous blow’ but not that it would be oppressive or otherwise unjust. Mr Fallon had ‘brought this present predicament upon himself by his own deliberate and cynical disregard of a contract entered into’.

Mr Fallon did not take part in the 2011 Derby. Johnny Murtagh finished fifth on Native Khan and PJ Smullen finished sixth on Recital. We will, of course, never know where either horse would have been placed with Mr Fallon as jockey.

COMMENTARY

The test for whether an injunction should be granted is derived from s37(1) of the Senior Courts Act 1981, which provides that the High Court may grant (an interim or final) injunction where it appears ‘just and convenient to do so’. This is a flexible test but, when deciding whether to grant an interim injunction, the courts will normally consider the following guidelines derived from the case of American Cyanamid Co v Ethicon Ltd [1975]:

  1. Is there a serious question to be tried?
  2. Are damages an adequate remedy for the claimant?
  3. Does the claimant’s undertaking in damages provide adequate protection for the defendant?
  4. Where does the balance of convenience lie?

At first instance, MacDuff J referred to the American Cyanamid test but he did not discuss it in any detail, which is unsurprising given the time constraints he was under. Instead the judge focused on what he considered to be the key issue, namely the exercise of his discretion. There was no discussion of American Cyanamid in the Court of Appeal, which is also unsurprising as the focus was on the findings of the first instance judge and, in particular, the exercise of his discretion not to grant an injunction.

However, the Court of Appeal judgment suggests that there will be circumstances where the American Cyanamid guidelines will not apply. As explained above, Jackson LJ held that:

‘Where the defendant is proposing to act in clear breach of a negative covenant there must be special circumstances (eg restraint of trade contrary to public policy) before the court will exercise its discretion to refuse an injunction.’

Elias LJ, who gave a supporting judgment, went further. He said that:

‘In a case where the breach of a negative covenant is clear… all questions of balance of convenience are then immaterial.’

He also said that the adequacy of damages are not ‘generally’ a relevant consideration where the injunction restrains the breach of a negative covenant.

This case suggests, therefore, that a claimant who can show that the defendant intends to commit a clear breach of a negative covenant will normally be able to obtain an interim prohibitory injunction without reference to such issues as the balance of convenience (which, when it is relevant, is often the key issue in interim injunction applications).

This raises the question of when a breach will be sufficiently clear to bring the principle into play. In this case, Mr Fallon raised two defences, one legal and one factual. At first instance both were given short shrift by the first instance judge (who described Mr Fallon’s evidence as ‘verging on fanciful’) and were not revived on appeal. In the Court of Appeal, Elias LJ said that he was satisfied, on the limited material available to him, that Mr Fallon’s defence was ‘fanciful and has no prospect of success’, which is broadly the test for summary judgment. It appears, therefore, that the burden of establishing a ‘clear’ breach is a high one. This suggests that, whilst Araci v Fallon will be very helpful to claimants when it applies, it will require a relatively unusual set of circumstances.

The other interesting issue arising out of Araci v Fallon is the question of whether the inclusion of a liquidated damages clause in a contract means that the parties should be taken to have agreed that damages are an adequate remedy for breach of that contract. This question remains open. MacDuff J clearly thought this was a relevant consideration. While the Court of Appeal held that the liquidated damages clause did not have that effect in this particular case, this was on the basis that the clause in question did not cover Mr Fallon’s breach. It may be that a well-drafted and sufficiently wide liquidated damages clause (that does not amount to a penalty) could be sufficient to prove that the parties considered damages to be an adequate remedy and therefore persuade a court not to grant injunctive relief.