Question: I have the benefit of a restrictive covenant which a developer has breached. Can I obtain an order that it pays me a share of the profit it has made?
Answer: No, but if you would in principle be entitled to claim an injunction, you may be able to obtain user damages, being an amount assessed by reference to the value of the use wrongfully made of the property. This is not a general rule that will apply regardless of the circumstances. If negotiating damages are appropriate, it may be possible to take into account the profits expected to be made by the developer.
Explanation
There has been considerable confusion in this area since Attorney General v Blake [2000] UKHL 45, in which the House of Lords declared that the Crown was entitled to be paid a sum equal to the profit due to the traitor George Blake from sales of a book written in breach of his contract not to divulge official information gained as a result of his employment. Following the decision many claims were brought for what have been described as restitutionary damages or an account of profits.
In Morris-Garner v One Step (Support) Ltd [2018] UKSC 20; [2018] PLSCS 20, the Supreme Court considered an important question in 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 it failed to perform? Such damages are commonly referred to as negotiating damages.
In Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798; [1973] 229 EG 617 the court awarded damages in substitution for a mandatory injunction requiring the removal of houses built in breach of a restrictive covenant. Damages were awarded at 5% of the anticipated profits from the development (which were taken to be the same as the actual profits) on the basis that the judge decided that in all the circumstances this was a fair figure. The Supreme Court described Wrotham Park as “a source of potential confusion because of the opacity of its reasoning, [which] can now be regarded as being of little more than historic interest.”
The Supreme Court has confirmed and clarified that, despite some confusing statements to the contrary since Wrotham Park, damages on this basis are compensatory, and not restitutionary or an account of profits. They are a monetary substitute for an injunction.
The Supreme Court has also made it clear that the cases do not lay down a general rule as to how damages in lieu of an injunction should be assessed regardless of the circumstances. Different approaches may be relevant depending on the nature of the claim. Damages can be awarded in substitution for specific performance or an injunction, where the court had jurisdiction to entertain an application for such relief at the time when proceedings were commenced. This means that the claimant must establish a case for equitable relief by proving his legal right and an actual or threatened infringement by the defendant. In addition, he must overcome defences such as laches, acquiescence or estoppel.
Quantifying the damages
One possible method of quantifying the damages under this head is by reference to negotiating damages or the amount that the claimant might reasonably have demanded as a quid pro quo for the relaxation of the restrictive covenant. However, that is not the only approach to assessing damages. It is for the court to judge what method of quantification, in the particular circumstances, will give a fair equivalent for what is lost by the refusal of an injunction.
Profits may be relevant, not to strip the developer of its unjust gains but because there may be, and often is, a relationship between the profits earned by the developer and the sum it would reasonably have been willing to pay to secure the release of the covenant.
If profit is relevant, it is still unclear whether the court will consider only anticipated profit, or actual profit at the date of the hearing. The majority in the Supreme Court did not express a concluded view on the date on which the hypothetical price should be assessed. The date is important because this will dictate the knowledge and other circumstances (including what is known about profits) to be taken into account in the hypothetical negotiation.
Although this was not conclusively decided because it did not arise on the facts of the case, there is an indication that it may be permissible to take into account information available up to the time of the judge’s decision. It may therefore be possible to take into account actual profits at that date in arriving at the amount which would reasonably be demanded for the release.
Common law damages for breach of contract are a right, not a discretion and are intended to compensate for loss or damage resulting from the non-performance of the obligation in question. They cannot be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances, such as those in Blake.
A difficult and uncertain exercise
The court also confirmed what those practising in this area know: “the assessment of a hypothetical release fee is itself a difficult and uncertain exercise”, with the imaginary negotiations having become increasingly elaborate. A variety of questions can emerge as to the basis on which the negotiation should be hypothesised. These will continue to provide a fertile source for disputes, and each case will depend on its own facts.
Consequently you will need to evaluate the nature of the loss you have sustained as a result of the developer’s breach. Is it a wrongful use of your property which may entitle you to user damages? Would you be entitled in principle to an injunction to restrain the breach? If so, you may be entitled to damages by way of a monetary substitute. Can your loss be measured by reference to the economic value of the grant of permission to the developer to relax the restrictive covenant? In such circumstances you may be entitled to negotiating damages. Ultimately it will be for the court to decide what method is fair.
Zia Bhaloo QC is a barrister at Landmark Chambers. Louise Clark is a partner at Charles Russell Speechlys LLP
