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Charlotte Davies: Supreme Court judgment on Wrotham Park or ‘negotiating’ damages

The Supreme Court yesterday handed down judgment in the case of Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20, holding that whilst ‘negotiating damages’ may be appropriate in certain breach of contract claims it is very difficult to see how they could be appropriate in claims for breach of covenants to prevent competition. Charlotte Davies discusses the recent judgement.

The case arose out sale of a business by the appellants to the respondents, as a result of which the appellants entered into various restrictive covenants. The appellants later set up a new company which began trading in competition with the respondent. The respondent subsequently brought proceedings for breach of the appellants’ restrictive covenants including the non-compete and non-solicitation clauses and of contractual and equitable duties of confidence.

At trial, it was found that the appellants had breached their covenants and that the respondent was entitled to damages to be assessed on a Wrotham Park basis i.e. for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from their contractual obligations. This was said to be the just response in the circumstances of the case. No separate award was made in respect of breach of confidence.

This decision was upheld by the Court of Appeal. The appellants appealed to the Supreme Court on the question of damages.

Supreme Court judgment
The question for the Supreme Court was: in what circumstances can damages for breach of contract be assessed by reference to the sum that the claimant could hypothetically have received in return for releasing the defendant from the obligation which he failed to perform?

Whilst the Court was unanimous in its decision that in the circumstances of this case it was not appropriate to award such damages and the appeal should therefore be allowed, there was some divergence in reasoning. The main judgment is given by Lord Reed, with whom Lady Hale, Lord Wilson and Lord Carnwath agreed. Lord Sumption gives a separate judgment advancing different reasoning. Lord Carnwath gives the final judgment considering the differences between the two previous judgments (and concurring with that of Lord Reed).

Lord Reed’s judgment provides a detailed overview of the development of the law in relation to damages assessed by reference to a hypothetical release fee, in the course of which he considers: (i) user damages in tort; (ii) damages in equity under s.50 of the Senior Courts Act 1981 (originally available under s.2 of the Chancery Amendment Act 1858 known as “Lord Cairns’ Act”); and (iii) common law damages for breach of contract.

Lord Reed also analyses many of the key authorities, splitting them into a ‘first phase’ beginning with Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 and a ‘second phase’ including cases such as Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323. The case of Attorney General v Blake [2001] 1 AC 268 is said to have divided these two phases, and to have sown the ‘seeds of uncertainty’ relating to the availability of such damages. Lord Reed also introduces the new umbrella term of ‘negotiating damages’, formally renouncing the term ‘Wrotham Park damages’.

Having reviewed both the various jurisdictions for such damages, and the authorities considering their availability in breach of contract cases, Lord Reed comes to the following key conclusions:

  • Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset [95(10)].
  • Examples of cases where such circumstances might exist include those concerned with a breach of a restrictive covenant over land, an intellectual property agreement or a confidentiality agreement [92].
  • However, in the case of a breach of a non-compete covenant, whilst this may cause the claimant to suffer pecuniary loss resulting from the wrongful competition (such as loss of profits and goodwill) this is measurable by conventional means. In the absence of such loss it is difficult to see how there could be any other loss [93].
  • In this case the claimant’s only interest in the defendants’ performance of their obligations under the covenants was commercial. The effect of breach of such covenants was to expose its business to competition, the natural result of which was a loss of profits and possibly goodwill. Although such loss may be difficult to quantify, it is possible to do so in a conventional manner [98].
  • This case was not one in which the breach of contract had resulted in a loss of a valuable asset created or protected by the right which was infringed. Although considered in isolation the breach of the confidentiality covenant might have been considered to be of that character, in reality the loss suffered was the cumulative result of a number of breaches of which the non-compete and non-solicitation covenants were the most significant [99].
  • It is, however, a matter for the judge to decide whether, in the particular circumstances of a case, evidence of a hypothetical release fee is relevant and what weight should be placed on it [94].

While Lord Sumption agreed that the appeal should be allowed in this case, he took a different approach and found that there were three categories of cases in which damages based on a notional release fee could be awarded: (i) where the claimant has an interest, such as a property right, which extends beyond financial reparation; (ii) where the claimant would be entitled to specific performance of his right and the notional release fee is the price of non-enforcement; and (iii) where the notional price of release may be relevant as an evidential technique for estimating the claimant’s loss [110-123]. He considered that the present case may fall into this third category [106].

Where does this leave us?
Following this decision, it seems that the circumstances in which negotiating damages will be available in employee competition cases are now extremely restricted, if they exist at all.

Breaches of covenants such as non-competes and non-solicits will apparently not warrant such an award. Negotiating damages may be available for breaches of confidence, although it seems this will depend on the facts including the extent to which such breaches contributed to any actual loss.

As a result, claimants will now need to focus even more stringently on trying to identify and quantify actual loss.

However, it remains to be seen to what extent the courts will be amenable hearing evidence of a hypothetical release fee for the purposes of quantifying compensatory damages.

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