Supreme Court decision clarifies basis for the award of Wrotham Park damages

In a recent decision, the Supreme Court overturned a Court of Appeal judgment which potentially expanded the availability of “Wrotham Park” or negotiating damages, and signalled a return to more orthodox reasoning in relation to the award of damages for breach of contract and the quantification of economic loss: Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20.

The key issue before the Supreme Court was: where a party is in breach of contract, in what circumstances, if any, will the counterparty be entitled to an award of damages assessed by reference to a hypothetical negotiation between the parties, for such amount as the claimant might reasonably have demanded to release the defendant from its obligations?

The Supreme Court rejected the idea that negotiating damages would be available whenever the court considers them to be the “just” response. It held that such an award would not be justified by any of: the deliberate nature of the breach of contract; the difficulty of establishing precisely the resulting loss; or the claimant’s interest in preventing the defendants profiting from the activities that had put them in breach. The Supreme Court stressed that 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.

The court held that negotiating damages can be awarded for breach of contract where it would be appropriate to measure the claimant’s loss by reference to the economic value of the contractual right that has been breached. The question is whether a breach of the contractual right results in an identifiable loss equivalent to the economic value of the right. That may be the position where the breach results in the loss of a valuable asset created or protected by the relevant right (for example, in relation to the breach of a restrictive covenant over land). However, it is not an approach that is applicable to most contractual disputes, even if it is difficult precisely to quantify the loss incurred.

James Baily, a partner, and Ramyaa Veerabathran, an associate in our dispute resolution team, consider the decision further below.

Background

In 2002, the first defendant sold a 50% interest in her business, which provided support services to vulnerable individuals leaving care, to Mr and Mrs Costelloe. The claimant company, One Step (Support) Ltd (“One Step”), was incorporated as the vehicle for this transaction. The first defendant and Mrs Costelloe each became 50% shareholders and directors of One Step. The first defendant and Mr Costelloe ran the business and the second defendant took on a managerial role.

Relations between the first defendant and the Costelloes began to deteriorate in 2004, leading to the service of a “deadlock notice” under the shareholders’ agreement by Mrs Costelloe in August 2006. This required the first defendant to either buy out the Costelloes or sell her shares to them for a certain price. The first defendant opted to sell her shares to the Costelloes for £3.15m and both defendants agreed to restrictive covenants that prohibited them from competing with One Step or soliciting its clients for three years.

In 2004, unbeknownst to the Costelloes’, the defendants had incorporated a company called Positive Living. In 2007, Positive Living began trading in competition with One Step, which started to suffer a significant downturn in its business by early 2008. The defendants sold their shares in Positive Living for £12.8m in 2010.

In 2012, One Step brought a claim, among other things, for breaches of the restrictive covenants. The trial judge found that the defendants had breached the restrictive covenants and that One Step was entitled to damages to be assessed “on a Wrotham Park basis…or alternatively ordinary compensatory damages”. Wrotham Park damages, named after the case Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, refer to the hypothetical sum that, before a breach, might reasonably have been demanded by the claimant and paid by the defendant as a fair exchange for releasing the defendant from the covenant in question.

The Court of Appeal upheld the decision of the trial judge, holding that the test for the award of Wrotham Park damages is whether it is the “just response”. The Court of Appeal further held that the award of Wrotham Park damages is not restricted to cases where the claimant has suffered no identifiable financial loss, nor to cases that are exceptional.

The appellants appealed to the Supreme Court on the question of damages.

Decision

The Supreme Court allowed the appeal on the basis that the courts below had erred in their approach to the assessment of damages.

The court preferred the term “negotiating damages” to “Wrotham Park damages” and held as follows:

  • Negotiating damages can be awarded for breach of contract where it would be appropriate to measure the claimant’s loss by reference to the economic value of the contractual right that has been breached, the right being considered as an asset. It is important for the nature of the contractual right to be such that its breach results in an identifiable loss equivalent to the economic value of the right, even in the absence of any economic losses that are quantifiable in the usual way. That may be the position where the breach results in the loss of a valuable asset created or protected by the relevant contractual right, for example where a restrictive covenant over land, an intellectual property agreement or a confidentiality agreement has been breached. The rationale is that the claimant has, in substance, been deprived of a valuable asset, the value of which represents his loss and which can be measured by determining the economic value of the right in question. The court noted that the hypothetical negotiation is only a tool for arriving at the value of the claimant’s loss.
  • Where the claimant’s interest in the performance of a contract is purely economic and it cannot establish that any economic loss has resulted from the breach, the usual inference would be that the claimant has not suffered any loss and, therefore, cannot be awarded more than nominal damages.
  • Common law damages for the breach of contract cannot be awarded merely in order to deprive the party in breach of the profits resulting from that breach, save in exceptional circumstances.

Applying its conclusions to the case before it, the Supreme Court held that the Court of Appeal had been mistaken in treating the deliberate nature of the defendants’ breach, the difficulty of establishing precisely the claimant’s resulting financial loss, and the claimant’s interest in preventing the defendants’ profiting from their breach, as justifying the award of a non-compensatory monetary remedy in the form of negotiating damages. Further the court rejected the idea that damages based on a hypothetical release fee would be available whenever such an approach would be a “just” response (that being a matter to be decided by the judge on a broad brush basis). The basis on which damages are awarded could not be a matter for the discretion of the judge.

The substance of the claimant’s case was that it had suffered financial loss in the form of lost profits and goodwill. The Supreme Court found that, although difficult to quantify, this is a familiar type of loss which can be quantified in a conventional manner. The claimant’s loss was not in the nature of the loss of a valuable asset created or protected by the contractual right which was infringed.

Accordingly, the case was remitted to the High Court for the assessment of the claimant’s actual financial loss. The Supreme Court noted that, if evidence were to be led in relation to a hypothetical fee for the defendants’ release from the covenants in question, it would be for the judge to determine its relevance and weight, if any. However, the court emphasized that such a fee would not itself be the measure of the claimant’s loss in a case of this nature.

James Baily
James Baily
Partner
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+44 20 7466 2122
Ramyaa Veerabathran
Ramyaa Veerabathran
Associate
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+44 20 7466 2070

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