The Supreme Court has overturned the Court of Appeal's decision in Morris-Garner and another v One Step (Support) Ltd, which had made it easier for damages to be claimed by reference to a hypothetical fee that the claimant could have charged the defendant for releasing it from an obligation. In clarifying the limited circumstances in which Wrotham Park damages are available, the Supreme Court has curtailed their use in breach of contract claims.
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.
There are exceptions to the rule, and Wrotham Park damages are one such example. Originally used in property cases involving breach of restrictive covenants, Wrotham Park damages are assessed by reference to a hypothetical fee that the claimant could have reasonably demanded in return for releasing the defendant from the obligation breached. The use of Wrotham Park damages as a basis of assessment for breach of contract claims has increased in recent years, with the courts making such awards where it considered it "just" in the circumstances.
The Supreme Court case concerned breach of non-compete and non-solicitation covenants given in connection with the sale of a business. Both the trial judge and the Court of Appeal considered it just in the circumstances to allow the claimant the option of assessing its damages on the Wrotham Park basis. The relevant circumstances included the difficulty in quantifying the claimant's financial loss, the deliberate nature of the defendants' breach, and the claimant’s legitimate interest in preventing the defendants’ profit-making activities.
The Supreme Court considered that both lower courts had erred in considering that "negotiating damages" (the term preferred by the majority) 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, with 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, effectively depriving it of that right. Breaches of non-compete or non-solicitation clauses did not fall within that category and the claimant must prove financial loss in such cases 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 curtailed 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.
