To Bond Or Not To Bond: Enforceability Of Contractual Waivers Of Bond Requirements For Injunctive Relief

Parties to commercial agreements often include provisions that seek to remove or limit potential roadblocks to injunctive relief in the event of a breach. A recent decision from the Delaware Chancery Court shows that one such provision — the waiver of a bond requirement for a preliminary injunction — is not ironclad.

On August 1, 2022, Vice Chancellor Glasscock issued a decision in Steward Health Care Sys. v. Tenet Bus. Servs. Corp., requiring the posting of a bond as a condition to the issuance of a preliminary injunction. The Vice Chancellor imposed that condition despite the parties’ contractual waiver of bond requirements in connection with an award of equitable relief.

The case arose from a dispute between the purchaser and seller of a group of hospitals in Florida. In connection with the transaction, the seller agreed to provide post-acquisition services to the buyer pursuant to a Transition Services Agreement (the “TSA”). Under the terms of the TSA, the seller was obligated to provide certain patient services following the transaction, and the buyer was obligated to pay for these services in an amount that varied based on the utilization of those services on a monthly basis. The TSA also granted the seller the right to terminate services for non-payment but permitted the buyer to offset payments due under the TSA to the extent of other amounts due to the buyer from the seller. The TSA further provided for enforcement through specific performance.

After the closing, a dispute arose regarding the apportionment of payments under what is known as the Florida Directed Payment Program (the “DPP”). The buyer ceased making payments under the TSA, claiming that the US$16 million in DPP payments owed to it could be used as an offset against monthly TSA payment obligations. The seller thereafter sought to cancel services because, according to their interpretation of the DPP provision, no offset was warranted. Both parties agreed that the interpretation of the DPP payment provision determined whether the seller could rightfully cancel services.

The buyer sought a preliminary injunction to prevent the seller from canceling services under the TSA. The seller’s response was unusual: the seller agreed to entry of an injunction provided that the buyer posted a reasonable bond as security. The seller argued that a bond was necessary because there was some evidence that the buyer was insolvent, including that buyer had not been paying certain other debts as they came due. The buyer argued that it should not be required to post a bond because the purchase agreement contained a provision waiving any “security or bond” requirements “as a prerequisite to obtaining equitable relief.”

The court noted that it was permitted to enforce bond waivers but held that “the existence of such a waiver does not bind the Court.” The court held that the particular circumstances presented in this case weighed in favor of the imposition of a security bond. In particular, the court considered: (1) evidence that the buyer was insolvent, and (2) the likelihood that the seller would prevail on the merits. The court reasoned that the seller’s interpretation of the DPP provision was more persuasive, and that it therefore had a strong likelihood of success on the merits. Based on these factors, the court concluded that a preliminary injunction would deprive the seller of an important contracted-for right, namely: avoiding counterparty credit risk through cancelation of services under the TSA for non-payment. The court found that “the parties’ agreement to waive a bond is persuasive,” but under the particular circumstances presented in this case, “equity requires a bond, notwithstanding the parties’ agreement.”

The court’s treatment of bond requirements in this case is unsurprising given the Chancery Court’s similar treatment of contractual stipulations of “irreparable harm” as a precondition to the issuance of preliminary injunctions in other cases. In AM Gen. Holdings LLC v. The Renco Grp., Inc, for instance, the court held that a contractual stipulation of irreparable harm “can be used by the court to meet the irreparable harm standard, but such a provision does not deprive the court of its discretion with respect to one of the critical forms of equitable relief.” AM Gen. Holdings LLC v. The Renco Grp., Inc., No. CV 7639-VCN, 2016 WL 787929, at *2 (Del. Ch. Feb. 19, 2016).

Drafters of agreements subject to Delaware law should be aware that the Court of Chancery may not enforce contractual waivers of bond requirements if considerations of equity weigh in favor of requiring a bond. More generally, drafters of agreements should be aware that the court is reluctant to view contractual arrangements between the parties as limiting its exercise of its equitable powers.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.