Breach of contract – Damages – Appellant entering into confidentiality agreements with respondents as intended partners for oilfield development – Appellant losing oilfield contract – Contract awarded to respondents – Breach of confidentiality agreement – Award of damages in lieu of injunction – Measure of damages – Hypothetical negotiations for release of relevant contractual obligation – Whether events after date of hypothetical negotiation to be taken into account – Appeal allowed
Between July 1995 and October 1996, the appellant applied for an oilfield development project in Iran for which the National Iranian Oil Company (NIOC) was inviting tenders. The appellant established good relations with the NIOC, formulated first-stage proposals and secured exclusivity as the preferred bidder. The second respondent, a company with experience of drilling oil wells, was brought in with a view to developing the oilfield as a joint venture, as part of a consortium. The third respondent, an Indonesian company, was the principal source of finance for the project. The first and fourth respondents were companies associated with the second respondent. The appellant and the second respondent entered into confidentiality agreements, by which the latter undertook to treat all data provided to the appellant by the Iranian company as confidential, to work exclusively with the appellant on the project or to approach the Iranian company directly on the project without the appellant’s written consent.
The appellant entered into a conditional contract with the NIOC but was unable to satisfy it on certain matters, including proof of satisfactory finance. Relations between the appellant and the second respondent deteriorated and discussions took place with a view to a buyout of the appellant’s interest. The second respondent offered to pay $3m to the appellant on the conclusion of a service contract with the NIOC, $4.5m for work linked to production and a further $2.5m if the project was extended to include a submarine pipeline. However, a buyout was not concluded. The NIOC regarded the appellant as an unacceptable contractual partner and, in July 1997, it entered into an agreement directly with the second and third respondents. The project was not as profitable as had been expected, producing profits of only $1m to $1.8m for the respondents.
In 2004, the appellant brought proceedings against the respondents alleging, inter alia, breach of the confidentiality agreements and breach of confidence. The Royal Court of Jersey found for the appellant on the sole ground of breach of confidence and awarded £500,000 damages. The Court of Appeal allowed the appellant’s appeal with regard to the proper construction of the relevant confidentiality agreements, and found that the respondents had breached their express terms. However, it held that the £500,000 damages award should stand as the appropriate sum of Wrotham Park damages, representing the amount that could have been demanded in hypothetical negotiations for the release of the relevant contractual obligation. It ruled that damages should be assessed as at July 1997, and that since the appellant had by then lost its exclusivity, the buyout agreement it had been negotiating with the second respondent was irrelevant. The appellant appealed. It contended that the damages should reflect sums offered by the second respondent in the actual negotiations that had almost been concluded, in late June 1997.
Held: The appeal was allowed.
(1) Where damages were awarded under Lord Cairns’ Act in respect of a non-proprietary breach of contract, namely a breach that did not involve the invasion of a property right, they were intended to compensate for the court’s decision not to grant equitable relief in the form of an order for specific performance or an injunction in cases in which the court had jurisdiction to entertain an application for such relief: Attorney-General v Blake [2001] 1 AC 268 and Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 applied. Although such damages were awarded in lieu of an injunction, it was not necessary for an injunction actually to have been claimed or for there to have been any prospect, on the facts, of it being granted; that was relevant to the instant case in the light of the appellant’s long delay in bringing the proceedings. The damages awarded would represent the sum that might reasonably have been demanded in a negotiation between a willing buyer, the contract-breaker, and a willing seller, the party claiming damages, for the release of the relevant contractual obligation. Both parties were assumed to act reasonably, such that the fact that one or other of them might in practice have refused to make a deal was to be ignored.
(2) The damages awarded were intended to be compensatory. Although they would normally to be valued as at the date of the breach of contract, such that post-breach events were irrelevant, in a case where the parties had not entered into actual negotiations it would be reasonable for the court to look at the eventual outcome and consider whether that was a useful guide to the parties’ intentions at the time of the hypothetical bargain: Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2005] EWCA Civ 430; [2006] 2 EGLR 29; [2006] 25 EG 210 applied. However, in the instant case, the parties had conducted negotiations, which had indicated their expectation that the contract would be more profitable than it in fact turned out to be. Accordingly, the Court of Appeal had erred in holding that the negotiated buyout figure was irrelevant. Although it was no longer conclusive, it was relevant as contemporaneous evidence of the parties’ view of the likely profitability of the project, and the amount that they were prepared to pay to participate in it. By the valuation date, the appellant had lost its exclusivity and had nothing to assign to the respondents in terms of legal rights or commercial goodwill, but it none the less retained contractual rights to prevent the respondents from entering into direct negotiations with the NIOC and from using confidential information for that purpose. The confidentiality agreements gave a power of veto to the appellant, which stood between the respondents and what they considered to be a valuable opportunity. Consequently, the sum of £500,000 awarded was too low and an award of $2.5m damages would be substituted.
Sir Sydney Kentridge QC, Ian Geering QC and Anthony de Garr Robinson (instructed by Olephant) appeared for the appellant; Adrian Beltrami QC and Matthew Parker (instructed by Crill Canavan, of Jersey) appeared for the first, second and fourth respondents; the third respondent did not appear and was not represented.
Sally Dobson, barrister
