Supreme Court closes gate on "Wrotham Park" damages in breach of contract claims

In Morris-Garner and another v One Step (Support) Ltd, the UK Supreme Court considered the circumstances in which damages for breach of contract can be assessed by reference to a hypothetical release fee (i.e. the sum that the claimant could hypothetically have received in return for releasing the defendant from the obligation breached). Commonly referred to as Wrotham Park damages or, as the Supreme Court preferred, "negotiating damages", the decision is now the leading authority on the issue.

In allowing the appeal, the Supreme Court considered that both lower courts had erred in considering that "negotiating damages" should be available whenever the court considers that to be a "just" response. Judicial discretion has no part to play in deciding the basis on which damages are awarded. "Negotiating damages" should be awarded for breach of contract only where it is appropriate to measure the claimant's loss by reference to the economic value of the right that has been breached, that right being treated as an asset. In other words, where the defendant has taken something for nothing for which the claimant had the right to require payment.The breaches complained of in Morris-Garner (non-compete and non-solicitation clauses) did not fall within that category. As such, the claimant had to prove financial loss in the usual way. 

In clarifying the limited circumstances in which damages based on a hypothetical release fee will be available, the Supreme Court has restricted their use in breach of contract claims. While the Court recognised that economic value can be given to contractual rights such as the right to control the use of land, intellectual property or confidential information, it found it difficult to envisage other circumstances where "negotiating damages" might be appropriate. Absent exceptional circumstances, it is unlikely that a claim for such damages for breach of contract will now succeed. 

Background

Damages for breach of contract are compensatory in nature, intended to put the claimant in the position it would have been in if the contract had been performed. As such, damages are usually assessed by reference to the actual loss suffered by the claimant. If unable to establish loss, a claimant will only be entitled to nominal damages. 

However, there are exceptions to the rule, one of these being the entitlement to Wrotham Park damages. These are so named as a result of the decision in Wrotham Park Estate Co Ltd v Parkside Homes Ltd. That case concerned the breach of a restrictive covenant where houses were built without first seeking the plaintiffs’ approval. The plaintiffs brought proceedings for an injunction. Although the injunction was denied (as it would have involved the demolition of the houses), the Judge awarded damages. He recognised that the plaintiffs had not suffered any actual loss as a result of the breach, but considered that a just substitute for an injunction would be "such a sum of money as might reasonably have been demanded by the plaintiffs from [the developers] as a quid pro quo for relaxing the covenant". In other words, a hypothetical release fee, which he calculated at 5 per cent of the anticipated profits from the development. 

Wrotham Park damages are typically claimed where there is an unlawful use of property (not confined to land), for example breach of a restrictive covenant, copyright infringement, or a breach of confidence claim. However, damages on that basis are not limited to such cases and can be available in principle in breach of contract claims. Prior to the Supreme Court decision, such awards were made where that would be "the just response".¹ In Experience Hendrix LLC v PPX Enterprises Inc, factors that justified a Wrotham Park award included: 

• the defendant's deliberate breach of its contractual obligations for its own reward;
• the claimant's difficulty in establishing financial loss from that breach; and
• the claimant's legitimate interest in preventing the defendant's profit-making activity in breach of contract.²  

Facts

Morris-Garner and another v One Step (Support) Ltd concerned breach of non-compete and non-solicitation covenants. The claimant, One Step (Support) Ltd, had bought a business which had previously been run by the defendants. In connection with the acquisition, the defendants agreed to be bound by restrictive covenants prohibiting them from competing with the claimant or soliciting clients for a limited period. 

In breach of those agreements the defendants set up another company in direct competition with the claimant. The claimant commenced proceedings and claimed damages.

The trial judge dealt with liability and entitlement to remedies first. Having found the defendants to be in breach of the non-compete and other ancillary provisions, he considered that the claimants were entitled to have damages assessed on a Wrotham Park basis. He took into account the claimant's difficulty in identifying the financial loss suffered (caused in part by the degree of secrecy involved in the defendant's breach) and the fact that the covenants provided that the restraint was subject to consent, not to be unreasonably withheld. The decision on damages was upheld by the Court of Appeal, the factors present in Hendrix being considered applicable in the case. The defendants appealed to the Supreme Court.

The decision

The Supreme Court allowed the appeal, finding that both the trial judge and the Court of Appeal  had erred in their approach to the assessment of damages. Lord Reed gave the leading judgment with which the majority agreed. 

While he agreed with Lord Reed's decision, Lord Sumption differed in his analysis of the categories of cases in which "negotiating damages" are available. Lord Carnwath also added his comments in light of the issues raised by Lord Sumption's judgment. However, neither have a practical impact on the majority decision for the purposes of this briefing. 

The Supreme Court's decision is now the leading authority on the issue of availability of "negotiating damages". Lord Reed referred to the fact that academic debate and "the confused state of the authorities, have reflected a lack of clarity as to the theoretical underpinning of such awards, and consequent uncertainty as to when they are available.” He therefore proceeded to conduct a thorough analysis of the law underpinning these awards, to determine the circumstances in which they should be available in breach of contract claims. 

Back to first principles

He started by going back to first principles:

• Damages for breach of contract are not a matter of discretion. They are claimed as of right, and are awarded or refused on the basis of legal principle.
• The compensatory principle is the bedrock that underpins damages for breach of contract. Their purpose is to put the claimant in the position it would have been in if the contract had been performed. As such, damages are usually assessed by reference to the actual loss suffered by the claimant. If unable to establish loss, a claimant will only be entitled to nominal damages. 
• "Negotiating damages" are not fundamentally incompatible with that compensatory purpose. Historically, they have been used in tort (user damages) to compensate the owner of property (which includes IP) against unlawful use of that property. In such circumstances, the wrongdoer has taken something for nothing, and the owner is entitled to compensation. Likewise, "negotiating damages" have been used as a means of assessing the level of damages that should be awarded in lieu of an injunction. The claimant is in effect being compensated for what he has lost by the refusal of an injunction.

Wrotham Park line of authorities

He then reviewed the key Wrotham Park authorities. Initially, Wrotham Park awards were made in substitution for injunctions to prevent interferences with property rights and breaches of restrictive covenants over land. In other words, the legal underpinning of the awards had not changed: damages were assessed according to the amount which might fairly have been charged for the voluntary relinquishment of the right which the court had declined to enforce.

That changed after the House of Lords' decision in Attorney General v Blake. In Lord Reed's opinion, it was this decision, and the comments made by Lord Nicholls (who gave the leading judgment) that set the scene for confusion and uncertainty. Although that case concerned restitutionary damages calculated by reference to the profits made by the defendant, Wrotham Park damages were discussed and an analogy made between an account of profits and an award of damages in lieu of an injunction. In Lord Reed's opinion, this has since been misinterpreted as meaning that the judicial basis on Wrotham Park awards is restitution of the defendant's gain, rather than compensatory in nature.

Post-Blake, the courts were more prepared to award damages on the Wrotham Park basis in breach of contract cases. While Lord Reed did not disagree with the decisions reached, he was critical of the reasoning, in particular the perception that:

• damages assessed on the basis of a hypothetical release fee, and an account of profits, are similar remedies (partial and total disgorgement of profits, respectively), at different points along a sliding scale; and
• damages assessed on the basis of a hypothetical release fee are available at the election of the claimant, and can be awarded by the court at its discretion whenever they might appear to be a just response.

In his opinion, "neither view can be justified on an orthodox analysis of damages for breach of contract". 

The new test: back to first principles 

In light of the above, Lord Reed held that "negotiating damages" should be awarded for breach of contract only where it is appropriate to measure the claimant's loss by reference to the economic value of the right that has been breached, that right being treated as an asset. In other words, where the defendant has taken something for nothing for which the claimant had the right to require payment.

Applied to the facts of the present case 

On the basis of his conclusions, Lord Reed overturned the Court of Appeal's decision and ordered loss to be quantified on the usual basis. 

He considered that both the trial judge and the Court of Appeal, in following the Hendrix approach, had applied the incorrect test. The difficulty of quantifying the claimant's financial loss did not justify the abandonment of any attempt to quantify it. And the deliberate nature of the breach, or the claimant’s interest in preventing the defendants’ profit-making activities, did not justify the award of a monetary remedy which was not compensatory. 

In addition, the judge was mistaken in thinking that the claimant had a right of election and the Court of Appeal had been mistaken in considering that such damages could be awarded on a discretionary basis.  

In Lord Reed's opinion, the case was not one where the breach of contract had resulted in the loss of a valuable asset created or protected by the right which was infringed. While the breach of a non-compete obligation may cause the claimant to suffer pecuniary loss resulting from the wrongful competition, for example loss of profits and goodwill, these can be measured by conventional means. The matter was therefore referred back to the judge with the instruction he should measure, as accurately as possible on the available evidence, the financial loss which the claimant has actually sustained. 

Game over for negotiating damages?

Going forward, a claimant will only be able to have damages assessed on a negotiating basis if an economic value can be placed on the contractual right that is breached, so that it can be considered as an asset. However, other than contractual rights such as the right to control the use of land, intellectual property or confidential information, or rights of veto that minority shareholders may have under a joint venture or shareholders' agreement, it is difficult to envisage other circumstances where "negotiating damages" might be appropriate. Absent exceptional circumstances, it is unlikely that a claim for such damages for breach of contract will now succeed. 

However, it's not completely game over for negotiating damages. As noted by Lord Reed, it would be going too far to limit their use as evidence of loss in this way. If, for example, the parties had been negotiating the release of an obligation prior to its breach, the valuations which the parties had placed on the release fee might be relevant to support, or to undermine, a subsequent quantification of the losses claimed to have resulted from the breach. He also acknowledged the evidential role negotiating damages could play in the present case, in ordering that the trial judge assess damages on the usual basis. 

So while the gate may have closed, it has not been locked.

Cases referred to: 

• Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20
• Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798
• Attorney General v Blake [2001] 1 AC 268
• Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323