Breach of covenant – Negotiating damages – Appellant selling shares in company subject to restrictive covenants preventing competition with respondent or soliciting clients – Respondent claiming damages for breach of covenants – High Court holding respondent entitled to damages in amount notionally agreed between parties for release of obligations (negotiating damages) – Court of Appeal upholding decision – Appellant appealing – Whether respondent entitled to negotiating damages – Appeal allowed
In 1999, the first appellant established a business providing support for young people leaving care. In 2002, she sold a 50% interest to C through the respondent company, incorporated as the vehicle for that transaction. In 2004, relations began to deteriorate between the first appellant and C. In August 2006, C served a “deadlock notice” under the shareholders’ agreement, requiring the first appellant either to buy her shares or to sell her own for a certain price. The first appellant opted to sell her shares in the respondent to C for £3.15 million. Both appellants agreed to be bound for three years by restrictive covenants prohibiting them from competing with the respondent or from soliciting its clients.
In 2004, without the C’s knowledge, the appellants had incorporated a new company which began trading, in competition with the respondent. In 2010, the appellants sold their shares in the new company for £12.8 million. In 2012, the respondent issued proceedings for breaches of the restrictive covenants. The High Court found that the appellants had breached the restrictive covenants and that the respondent was entitled to damages to be assessed on a Wrotham Park basis (negotiating damages) (Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798; [1973] 229 EG 617) for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the appellants from their obligations or, alternatively, ordinary compensatory damages. Negotiating damages referred to the sum that the respondent could hypothetically have received in return for releasing the appellants from the obligation which they failed to perform. The Court of Appeal upheld that decision. The appellants appealed to the Supreme Court on the question of damages.
Held: The appeal was allowed.
(1) The court would abjure the use of the term “Wrotham Park damages”. Although it was necessary to consider the case of Wrotham Park, it was a source of potential confusion because of the opacity of its reasoning, and it could now be regarded as being of little more than historical interest. Instead, the court would use the expression “negotiating damages”, introduced by Neuberger LJ in Lunn Poly v Liverpool & Lancashire Properties Ltd [2006] EWCA Civ 430; [2006] 2 EGLR 29.
(2) Common law damages for breach of contract were intended to compensate the claimant for loss or damage resulting from the non-performance of the obligation in question and were normally based on the difference between the effect of performance and non-performance on the claimant’s situation. Where the breach had caused the claimant to suffer economic loss, it should be measured or estimated as accurately and reliably as possible, but the law was tolerant of imprecision where the loss was incapable of precise measurement. There were also a variety of legal principles which could assist the claimant in cases where there was a paucity of evidence. Negotiating damages could be awarded for breach of contract where the loss suffered by the claimant was appropriately measured by reference to the economic value of the right which had been breached, considered as an asset. The imaginary negotiation was merely a tool for arriving at that value. That value might be the measure of loss where the breach of contract resulted in the loss of a valuable asset created or protected by the right which was infringed, as in the case of the breach of a restrictive covenant or an intellectual property agreement. The defendant had taken something for nothing, for which the claimant was entitled to require payment. Common law damages for breach of contract could not be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances. They were claimed as of right and awarded or refused on the basis of legal principle: Attorney-General v Blake [2001] 1 AC 268 followed.
(3) In the present case, both the trial judge and the Court of Appeal had adopted a mistaken approach. The effect of the breach was to expose the respondent’s business to competition that it would otherwise have avoided. The substance of the respondent’s case was that it suffered financial loss in the form of lost profits and goodwill. Though difficult to quantify, that was a familiar type of loss, which could be quantified in a conventional manner. The idea that damages based on a hypothetical release fee were available whenever that was a just response, that being a matter to be decided by the judge on a broad-brush basis, was also mistaken. The basis on which damages were awarded could not be a matter for the discretion of the primary judge. The respondent did not suffer the loss of a valuable asset created or protected by the right which was infringed. Accordingly, the case should be remitted for the judge to measure the financial loss which the respondent had actually sustained. If evidence was led in relation to a hypothetical release fee, it was for the judge to determine its relevance and weight, if any. However, such a fee was not itself the measure of the respondent’s loss in a case of the present kind.
Charles Bear QC and Ian Bergson (instructed by Neves Solicitors LLP, of Milton Keynes) appeared for the appellant; Craig Orr QC and Mehdi Baiou (instructed by Pitmans LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Morris-Garner and another v One Step (Support) Ltd
