8 June 2018
Author: Colin Ricciardiello
The significance of this decision was set out in the first paragraph of the leading judgment delivered by Lord Reed:
“This appeal raises an important question in relation to the law of damages: 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? Damages assessed on this basis, sometimes described as Wrotham Park damages, after the case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd  1 WLR 798”.
Lord Reed also warned against using the term “Wrotham Park damages” given the “opacity” of its reasoning and his judgment instead used the expression “negotiating damage” introduced in an earlier case.
Overturning the two previous judgments, the Supreme Court ruled that a claim for damages for breach of restrictive covenants contained in the sale of share agreement – anti-competition and soliciting clients and confidentiality – could not be claimed. The judgment illuminates how damages for breach of this type of commercial contract can be assessed and dispenses with the starting point of what sum a claimant could hypothetically have received in return for releasing a defendant from the requirement which it had failed to observe. Therefore, the quantification of damages was remitted to the High Court based on actual financial loss and not the hypothetical reasonable cost of a negotiated release. The judgment also restricts cases where such damages can now be claimed.
The claimant (One Step) had set up a business which provided rental accommodation and support services for vulnerable individuals referred to it by local authorities. In 2006 the shareholders began to fall out which led to a shareholder buyout agreement. The Defendant’s agreed to observe non –competition restrictive covenants for 3 years but had also (unknown to One Step) set up a new company – Positive Living. In late 2007 One Step heard that Positive Living had started to compete – although Positive Living denied that. One Step’s business had suffered a significant downturn which it claimed was due to Positive Living’s trading undertaken in breach of the restrictive covenants.
The High Court found there were breaches of the covenants. The Claimant had said that damages would be very difficult to calculate and sought either an account of profits or Wrotham Park damages.
The Court of Appeal upheld the High Court. In so doing decided that Wrotham Park damages were not limited to identifiable financial loss or exceptional cases. Further the test for awarding them was whether that was a “just response”.
Judgement in the Supreme Court
In the Supreme Court the issue was in what cases can damages for breach of contract be awarded according to the amount that a claimant could hypothetically receive as the price for releasing a defendant from an obligation (one which in fact it had failed to perform)?
Before deciding whether negotiating damages were recoverable in claims for breach of commercial contracts, Lord Reed (who delivered the leading judgment) set out some general conclusions for the recovery of damages and on: “Applying these conclusions to the present case, it is apparent that neither the judge nor the Court of Appeal applied an approach which can now be regarded as correct”.
Lord Reed’s conclusion in relation to damages for breach of contract noted that they were compensatory and a substitute for performance, intended to place the innocent party in the position as if the contract was performed and not breached.
Three of the four of the Judges expressly agreed with Lord Reed. The majority made it clear that negotiating damages cannot be awarded at the discretion of the Court (or at the election of a claimant) or as a means to avoid difficult calculations as to pecuniary loss. Therefore, negotiating damages would not normally be available for breaches of non-competition and non-solicitation clauses and loss would have to be proven. In such cases the only interest in observance was commercial and the effect of breach was to expose to competition, the natural result of which was loss of profits and possibly goodwill. Although the loss might be difficult to quantify it was familiar territory for the Court. [Paragraph 98].
Negotiating damages may be awarded for breach where a claimant’s loss is measured by the economic value of the right which has been breached [Paragraph 95(10)] – as in breach of restrictive covenants over land, an IP agreement or confidentiality agreement [Paragraph 92].
The Supreme Court emphasised the distinction between breach of contract cases and invasion of property rights where negotiating damages (“user damages”) are familiar. Indeed Wrotham Park was a restrictive covenant over land infringement case. There was no contract between the parties and was concerned with the invasion of a property right based on damages in lieu of an injunction to prevent that infringement.
Similarly, the Supreme Court made it clear that restitutionary damages (calculated by reference to a defendant’s unlawful gain) were not the same as negotiating damages. Those damages were available in exceptional circumstances as in Attorney-General v Blake - an account of profits case aimed at depriving the wrongdoer of the benefits derived from his breach.
The Supreme Court has clarified the law on negotiating damages when there was genuine ambiguity to the point they may have been regarded as a usual and alternative measure of damages available at a claimant’s election.
That clarification is likely to be “good news” for Defendants - the emphasis is that negotiating damages are not the norm.
Further, the wrongdoer’s flagrancy of his breach is irrelevant damages and there is no discretion to award them for this type of breach – “Common Law damages for breach of contract are not a matter of discretion. They are claimed as of right and they are awarded or refused on the basis of legal principle” [paragraph 95(12)].
In this regard Lord Reed said that the Court of Appeal was mistaken in: treating the deliberate nature of the breach; or the difficulty of establishing the consequential financial loss; or the claimant’s interest in preventing the defendant’s profit making activities as justifying a monetary remedy which was not classic breach of contract compensatory damages. “The idea that damages based on a hypothetical release fee are available whenever that is a just response, that being a matter to decide by the judge on a broad brush basis, is also mistaken. The basis on which damages are awarded cannot be a matter for the discretion of the primary judge”.
The judgment is less clear on when negotiating damages would be awarded than when they will not.
It would appear that they would be awarded in cases where the breach “… results in the loss of a valuable asset created or protected by the right which was infringed, as for example in cases concerned with the breach of a restrictive covenant over land, intellectual property agreement or a confidentiality agreement”. [Paragraph 92]
The restrictive covenants in this case were not ones “… where the breach of contract has resulted in the loss of a valuable asset created or protected by the right which was infringed” [paragraph 99).
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.
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