'Contracting For Irreparable Harm May Not Be As Effective As You Think'

In the widely-watched case of Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254-2012 (Del. July 10, 2012), the Supreme Court of Delaware upheld the Chancery Court's ruling that temporarily enjoined Martin Marietta from engaging in a hostile takeover of Vulcan. The Chancery and Supreme Courts' opinions have rightfully garnered significant attention in corporate and legal circles. However, one aspect of the opinions that has been largely overlooked highlights an underappreciated distinction between Delaware and federal law involving the movant's burden in seeking injunctive relief for breaches of contract.

Before issuing a temporary restraining order (''TRO'') or preliminary injunction, Delaware state courts and all federal courts require a movant to demonstrate that it will suffer ''irreparable harm'' if the court does not issue an injunction pending trial. To account for this requirement and add predictability in the event of a breach, it has become increasingly common for contracting parties to include a clause stating that a breach of the underlying agreement will cause irreparable harm. However, depending on the chosen forum, such ''irreparable harm clauses'' can be either extremely helpful or of little use at all in securing a TRO or preliminary injunction.

As indicated by Chancellor Strine and Justice Jacobs in their respective Martin Marietta opinions, Delaware courts essentially view irreparable harm clauses as binding admissions that are sufficient, standing alone, to meet the irreparable harm requirement. Federal courts, however, afford such clauses little, if any, weight and evaluate the evidence presented by the parties to independently determine whether irreparable harm will befall the movant if the court does not issue an injunction. This disparate treatment of irreparable harm clauses has wide-ranging implications for contract drafters, parties to agreements, and litigators seeking to enforce various types of agreements.

The Legal Framework for Temporary or Preliminary Injunctive Relief

Although a breach of contract claim is governed by state substantive law, federal courts apply federal law in determining whether to issue a TRO and preliminary injunction.1 In addition to demonstrating that they are likely to suffer irreparable harm in the absence of preliminary relief, movants seeking TROs or preliminary injunctions must demonstrate that they are likely to succeed on the merits, that the balance of equities tips in their favor, and that an injunction is in the public interest.2 A movant's failure to persuade the court that all factors weigh in its favor will result in the denial of the motion.3 However, ''[a] showing of irreparable harm is the single most important prerequisite for the issuance of a preliminary injunction.''4

To satisfy the irreparable harm requirement, a movant must demonstrate that without a TRO and preliminary injunction, it will suffer actual and imminent injury that cannot be remedied if the court waits until the end of trial.5 It follows that absent exceptional circumstances, economic loss does not constitute irreparable harm.6

The standards in Delaware state courts for a TRO or preliminary injunction are similar to those applied in federal courts. The movant must establish a reasonable probability of success on the merits, a reasonable likelihood that it will suffer irreparable harm absent the injunction, and that the harm to the moving party if relief is denied...