Global menu

Our global pages

Close

Wrotham Park revisited: Supreme Court

  • United Kingdom
  • Employment law - HR E-Brief

19-04-2018

The Supreme Court has ruled in Morris-Garner v One Step [2018] UKSC 20 (a claim concerning breach of restrictive covenants in a sale agreement) that Wrotham Park damages could not be claimed on the facts in this case.

This is the first time that Wrotham Park damages have been considered by the Supreme Court and the decision provides some clarity as to the circumstances in which damages for breach of contract can be assessed by reference to the sum that a claimant could hypothetically have received in return for releasing the defendant from an obligation that they failed to perform. It also narrows down the cases in which such damages may be claimed and arguably limits substantially the possibility of Wrotham Park damages being awarded in cases concerning breaches of restrictive covenants in an employment context.

The Supreme Court refers to Wrotham Park damages as ‘negotiating damages’ to avoid any confusion caused by the case of Wrotham Park.

What are Wrotham Park or negotiating damages?

Wrotham Park (or negotiating) damages have also sometimes been referred to as ‘hypothetical bargain damages’ as they are calculated on the hypothetical basis of what sum would have been required by the party seeking damages from the other party in the event they had negotiated a release of the other party’s obligations.

In Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] damages were awarded for breach of a covenant in the sale of land providing that the land should not be developed for building purposes except in accordance with a layout plan and approved first in writing by the vendor. Wrotham Park Estate (the Estate) conceded that the development of 14 houses by Parkside in breach of the covenant did not diminish the value of the retained land ‘by one farthing’ but the court took the view that it would be unjust that the Estate should receive no compensation. The court held that if Parkside were merely given a nominal or no sum in substitution for an injunction justice would ‘manifestly not have been done’ so a just substitute for a mandatory injunction would be such sum of money ‘as might reasonably have been demanded by the Plaintiffs as a quid pro quo for relaxing the covenant’.

Wrotham Park was followed in a line of subsequent cases which extended its reach and seemed to widen the category of cases in which such damages might be claimed.

Morris-Garner: the facts

In this case, Karen Morris-Gardner (KMG) set up a business for young people leaving care. Her civil partner Andrea Morris-Gardner (AMG) also worked for the business, which was sold in 2002 to One Step Ltd (owned by Martin (MC) and Charmaine Costelloe). KMG and MC became One Step’s shareholders, each owning 50% of the capital. On the same day, each signed a shareholders’ agreement which included restrictive covenants providing that any shareholder could not, during the course of the agreement and for three years thereafter, engage in a business which was in material competition with One Step or solicit One Step’s significant clients.

The working relationship between KMG and MC thereafter deteriorated. In July 2006 KMG and AMG secretly incorporated Positive Living Ltd. On 12 April 2006 KMG (still at One Step) emailed to her personal email address a large quantity of One Step’s confidential market research and contacts. On 20 December 2006 KMG entered into a sale agreement for her 50% share in One Step to the Costelloes. On the same day the parties entered into a Deed of Compromise under which KMG agreed to be bound by restrictive covenants in largely the same form as under the shareholders’ agreement for a period of 36 months. In late 2007 KC heard that Positive Living had set up in competition with One Step; Positive Living denied this. By early 2008 One Step’s business had suffered a significant downturn, which it attributed to competition from Positive Living and it issued proceedings for breach of the restrictive covenants in relation to material competition, solicitation and the use of confidential information.

High Court

The trial judge noted that at the time the covenants were entered into, KMG’s competitive business would have been very damaging to One Step not simply in terms of loss of business but also in terms of client perception. The High Court was ‘entirely satisfied’ that KMG and AMG were in breach of the non-compete covenants

On remedies, One Step had contended that damages would be very difficult to prove and would not be an adequate remedy for the breaches. It sought either an account of profits or Wrotham Park damages, being the amount which notionally would have been agreed between the parties, acting reasonably, as the price for releasing KMG/AMG from the restrictions. The trial judge did not regard the circumstances as sufficiently exceptional to make an account of profits an appropriate remedy. The trial judge however concluded that this case was a prime example of negotiating damages and ruled that it would be difficult for One Step to identify the financial loss it had suffered by reason of KMG and AMG’s wrongful competition, not least because of the degree of secrecy in the establishment of Positive Living’s business. Accordingly it would be just for One Step to have the option of recovering damages in the amount which might reasonably have been demanded in 2007 for releasing defendants from their covenants.

Court of Appeal

KMG and AMG appealed on the basis that the High Court was wrong to give One Step the option to elect for Wrotham Park damages, which (they argued) should only be awarded (a) where the injured party is unable to demonstrate identifiable financial loss and (b) only where to do so is necessary to avoid manifest injustice. They also argued that there needed to be some special circumstance to justify the award; otherwise the exception would swallow up the primary rule.

The Court of Appeal dismissed the appeal.

Giving the leading judgement in the Court of Appeal, Christopher Clarke LJ held that it was not only where there was a need to compensate a claimant where they could not demonstrate identifiable financial loss that a Wrotham Park damages award could be made. The issue was one of practical justice. The judge was entitled to take into account the difficulties One Step would have in establishing damages on the ordinary basis; there were very real problems in showing what placements One Step lost.

Supreme Court

The agreed issues in this appeal were: first, where a party is in breach of contract, in what if any circumstances is the other party to the contract entitled to seek negotiating damages?; and secondly, whether the Court of Appeal was correct to uphold the judge’s finding that such damages were available in this case.

Before considering negotiating damages for breach of contract, Lord Reed, giving the lead judgement, first considered general principles relating to user damages in tort, damages in equity and damages for breach of contract. With regard to breach of contract, Lord Reed noted that damages for breach of contract are in a sense a substitute for performance. That is why they are generally regarded as an adequate remedy. The function of damages is confined to either enforcing the primary obligation to perform or the contract breaker’s secondary obligation to pay damages as a substitute for performance. The damages cannot be affected by whether the breach was deliberate or self-interested.

The awards made in Wrotham Park itself, and in the cases in which it was followed during the next quarter-century, were made in the exercise of a unique statutory jurisdiction: the award of damages in lieu of an injunction. The purpose of the awards was to provide the claimant with an appropriate monetary substitute for an injunction in the circumstances of the particular case. Every reported case appears to have concerned either a tortious interference with property rights, or the breach of a restrictive covenant over land. Damages were assessed according to the amount which might fairly have been charged for the voluntary relinquishment of the right which the court had declined to enforce, subject to downward adjustment for reasons of fairness.

The use of an imaginary negotiation can give the impression that negotiation damages are fundamentally incompatible with the compensatory purpose of an award of contractual damages. Damages for breach of contract depend on considering the outcome if the contract had been performed, whereas an award based on a hypothetical release fee depends on considering the outcome if the contract had not been performed but had been replaced by a different contract. That impression of fundamental incompatibility is, however, potentially misleading. There are certain circumstances in which the loss for which compensation is due is the economic value of the right which has been breached, considered as an asset. The imaginary negotiation is merely a tool for arriving at that value. The real question is as to the circumstances in which that value constitutes the measure of the claimant’s loss.

Such circumstances can exist where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed (e.g. in the case of a breach of a restrictive covenant or intellectual property agreement).

Applying this rationale, the Supreme Court held that the trial judge and Court of Appeal erred since One Step did not suffer the loss of a valuable asset created or protected by the right which was infringed. One Step claimed that it suffered financial loss in the form of lost profits and goodwill; though difficult to quantify, this could and should be quantified conventionally. The case would be remitted for the judge to measure the financial loss which One Step had actually sustained.

View the judgment

For more information contact

< Go back

Print Friendly and PDF
Subscribe to e-briefings