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Pour encourager les autres – when can your damages exceed your loss?

Richard Farnhill

In Morris-Garner v One Step, the Supreme Court has, for the first time, considered so-called Wrotham Park damages.

Damages are there to compensate loss. Normally. In some cases, however, the courts go further and reverse, in whole or in part, the defendant’s gain flowing from its breach, regardless of whether the claimant suffered any loss. The claimant gets what looks like a windfall. One route by which this is said to be achieved – sometimes referred to as Wrotham Park damages, after the 1974 decision of the same name – bases compensation on a theoretical licence fee: what would a reasonable party in the claimant’s position have charged a reasonable party in the defendant’s position to release its contractual rights. The approach has always been somewhat controversial and the rules around it unclear.

The facts of Morris-Garner are straightforward enough. The claimant, One Step, was a joint venture. Ms Morris-Garner was one of its shareholders. As is common, the shareholders agreement contained certain confidentiality obligations. By early 2006 the relationship had started to break down and in April 2006 Ms Morris-Garner, in breach of the confidentiality agreement, appropriated confidential material. In December 2006 Ms Morris-Garner sold her shares in the joint venture company to the other shareholders. As part of the transaction, Ms Morris-Garner agreed to a three year non-compete with the claimant.

In August 2007 Ms Morris-Garner’s new vehicle, Positive Living, started competing with the claimant in breach of its obligations. However, the claimant only started proceedings in July 2012, long after the expiry of the non-compete (and so well after any claim for an injunction could have succeeded). In the interim, the Morris-Garners had sold their shares in Positive Living. At first instance issues of liability and quantum were split. It was found that the Morris-Garners were liable on a Wrotham Park basis, with the precise amount to be determined. The Court of Appeal upheld the decision. The question for the Supreme Court was when damages based on a hypothetical negotiation for the release of the Morris-Garners’ obligations were available.

The first point that the Supreme Court made was one of nomenclature: it did not like the term Wrotham Park damages, which had come to be used “rather loosely in the authorities” and so could have a variety of meanings. Wrotham Park itself fared little better: “it is a source of potential confusion because of the opacity of its reasoning, and it can now be regarded as being of little more than historical interest.” Their Lordships preferred the term “negotiating damages”. When would such damages be available for breach of contract?

After a thorough yet succinct summary of the historic case-law Lord Reed, giving the decision of the majority, set out, at paragraph 95, his conclusions. The key ones are:

  1. Where damages are awarded in lieu of specific performance or an injunction, it is for the court to determine what method of quantification will give a fair equivalent for what is lost by the refusal of the injunction. Negotiation damages are one possible method, but by no means is it the only method.
  2. Common law damages for breach of contract compensate the claimant for loss or damage resulting from non-performance of the obligation in question. It is for the claimant to show that a loss has been suffered, in the sense that his position is less favourable either economically or in some other way than it would have been had the contract been performed.
  3. The law is tolerant of imprecision where the loss is incapable of precise measurement. There are also various legal principles that can assist a claimant where there is a paucity of evidence.
  4. Negotiating damages are not available in all cases of breach of contract. The claimant must show that he has been deprived of a valuable asset: the defendant has taken something for nothing, for which the claimant was entitled to require payment.
  5. If the claimant’s only interest in the performance of the contract is economic and the claimant cannot show an economic loss the normal inference will be that he has not suffered any loss and so cannot be awarded more than nominal damages.
  6. It is not for a claimant to elect between different bases of quantifying damages for loss of bargain. Common law damages are not a matter of discretion; they are claimed as of right and are awarded or refused on the basis of legal principle.

One Step’s only interest in the Morris-Garners’ performance of their obligations was commercial. Indeed, in the case of the restrictive covenant that was by definition the case, because a restrictive covenant that goes beyond what was reasonably necessary for the protection of a party’s commercial interests is unenforceable. The claim was for economic loss; it was for the claimant to show what that loss was. Negotiation damages were not available.

Before its foray into the legal limelight Wrotham Park had a somewhat more dubious claim to fame. It was built for Admiral John Byng, the last British admiral to be executed. That event is satirised in Voltaire’s Candide. Questioning the purpose of the execution, Candide is told, “Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres.”: in this country, it is good to kill an admiral from time to time, to encourage the others. The same, it seems, is true of precedents in the law of damages.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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