Morris-Garner & Anor v One Step (Support) Ltd [2018] UKSC 20

The first defendant sold her interest in a care support business and agreed to non-compete, non-solicit and confidentiality covenants, which she breached by running a rival company. The Supreme Court held negotiating damages were unavailable; ordinary compensatory damages must be assessed.

Facts

The first defendant established a business in 1999 providing support services for young people leaving care and vulnerable adults. In 2002 she sold a 50% interest to Mr and Mrs Costelloe, with One Step (Support) Ltd incorporated as the vehicle. Following a deadlock, a buy-out agreement was concluded in December 2006 under which the first defendant sold her shares for £3.15m and agreed to be bound for three years by confidentiality, non-compete and non-solicitation covenants. The second defendant, an employee, entered equivalent covenants.

In July 2006, while still a director, the first defendant had incorporated Positive Living Ltd with the second defendant. From August 2007, Positive Living traded in competition with One Step in the same geographical area. In September 2010, the defendants sold their shares in Positive Living for £12.8m. One Step issued proceedings in 2012 alleging breaches of the covenants and of an equitable duty of confidence.

At trial, Phillips J found the defendants had breached the non-compete and non-solicit covenants, and the first defendant had breached confidentiality obligations. He declared One Step entitled to damages assessed on a “Wrotham Park basis” (a hypothetical release fee) or alternatively ordinary compensatory damages, and One Step elected for the former. The Court of Appeal upheld him.

Issues

The agreed issues were: (i) in what circumstances, where a party is in breach of contract, is the other entitled to seek negotiating damages — damages assessed by reference to a hypothetical negotiation for releasing the defendant from his obligation; and (ii) whether the Court of Appeal was correct that such damages were available on the facts.

Arguments

One Step argued that negotiating damages (so-called Wrotham Park damages) were available as a just response where a claimant faced difficulty in establishing conventional financial loss, the breach was deliberate, and the claimant had a legitimate interest in preventing the defendants’ profit-making activity. It contended a hypothetical release fee was simpler to estimate than its actual losses.

The defendants contended that such damages were not available as a matter of election or discretion in a case of ordinary commercial loss capable of quantification by conventional means, and that the lower courts had misapplied the principles emerging from Attorney General v Blake and the Wrotham Park line of authority.

Judgment

The Supreme Court unanimously allowed the appeal. Lord Reed (with whom Lady Hale, Lord Wilson and Lord Carnwath agreed) gave the leading judgment; Lord Sumption gave a concurring judgment reaching broadly the same conclusion by a somewhat different route; Lord Carnwath added comments emphasising the orthodoxy of Lord Reed’s analysis.

Lord Reed’s analysis

Lord Reed preferred the term “negotiating damages” to “Wrotham Park damages”, the latter having been used loosely and contributing to confusion. He reviewed (i) user damages in tort for invasion of tangible or intellectual property rights; (ii) common law damages for breach of contract grounded in the principle in Robinson v Harman that the claimant should be placed in the position he would have been in had the contract been performed; and (iii) damages under Lord Cairns’ Act (now section 50 of the Senior Courts Act 1981) in substitution for an injunction.

He held that user damages in the property context are compensatory: the wrongdoer, by making unauthorised use of property whose use the owner had a valuable right to control, deprives the owner of the economic value of that right. Awards made in Wrotham Park, Bracewell v Appleby and Jaggard v Sawyer were properly understood as the monetary substitute for an injunction withheld, valued by reference to the economic value of the right the court declined to enforce.

Turning to breach of contract at common law, Lord Reed reaffirmed the compensatory principle and the logic of damages as a substitute for performance. He held that negotiating damages may be awarded for breach of contract where the claimant’s loss is appropriately measured by reference to the economic value of the right breached, considered as an asset — typically where the breach results in the loss of a valuable asset created or protected by the infringed right, such as a restrictive covenant over land, an intellectual property right, or a confidentiality obligation.

Critically, negotiating damages are not available simply because the breach was deliberate, because quantification of loss is difficult, because the claimant has a “legitimate interest” in preventing profit-making, or because such an award would be a “just response” in the judge’s discretion. Common law damages for breach of contract are not a matter of discretion or election.

Applying those principles, Lord Reed held that One Step’s interest was purely commercial. The breach exposed its business to wrongful competition, causing conventional loss of profits and possibly goodwill — a familiar type of loss capable of being quantified in the ordinary way, as demonstrated by the claimant’s own expert (Mr Hine). The case was not one where breach resulted in the loss of a valuable asset whose economic value equated to the loss. The judge’s order for assessment on a hypothetical release fee basis was therefore set aside, and the quantum hearing must proceed on the basis of the financial loss actually sustained.

Lord Reed’s key conclusions (summary)

Lord Reed set out twelve numbered conclusions (at paragraph 95), including that negotiating damages may be awarded for breach of contract only where the loss is appropriately measured by the economic value of the right breached as an asset; that damages cannot be awarded to deprive the defendant of profits save in the exceptional circumstances of Blake; and that common law damages are not a matter of discretion.

Lord Sumption’s concurrence

Lord Sumption agreed the appeal should be allowed. He would have permitted the notional release fee to operate as an evidential technique for estimating pecuniary loss where appropriate, but emphasised it is not itself a measure of damages and its use must turn on whether there is material to support an assessment and whether the judge finds it helpful. He grouped the cases into three categories: (i) cases where the claimant has an interest beyond financial reparation; (ii) cases where damages are awarded in lieu of an injunction; and (iii) cases where a notional release fee serves as evidence of pecuniary loss.

Lord Carnwath

Lord Carnwath agreed with Lord Reed and noted significant differences between his approach and that of Lord Sumption. He considered Lord Reed’s analysis orthodox and preferable, expressing concern that Lord Sumption’s reformulation blurred established conceptual categories and gave insufficient guidance. He also commented on parallels in the statutory compensation context (injurious affection under the Compulsory Purchase Act 1965 and modification of restrictive covenants under section 84 of the Law of Property Act 1925).

Implications

The decision clarifies and narrows the circumstances in which so-called Wrotham Park or negotiating damages are available for breach of contract. They are not a remedy available at the claimant’s election, nor a matter of judicial discretion awarded whenever it appears a just response. Nor are they triggered simply by evidential difficulties, deliberate breach, or a legitimate interest in preventing profit-making activity.

Negotiating damages for breach of contract are confined, at common law, to cases in which the breach results in the loss of a valuable asset created or protected by the right infringed — typically restrictive covenants over land, intellectual property rights, or confidentiality agreements — where the claimant’s loss can properly be measured by the economic value of the right as an asset. The rationale is that the defendant has taken something for nothing which the claimant was entitled to require payment for.

In ordinary commercial cases involving breach of a non-compete covenant, loss is to be measured conventionally (lost profits, lost goodwill), even where measurement is difficult. Courts may use imaginary negotiations or release fees as evidential tools in some contexts, but such figures are not themselves the measure of loss in cases of the present type.

The judgment is of considerable practical significance for commercial practitioners advising on restrictive covenants in business sales, employment contexts, joint ventures and confidentiality arrangements. Claimants can no longer rely on the prospect of a generously assessed hypothetical release fee as a fall-back where proof of pecuniary loss is awkward; they must plead and prove conventional loss. The decision also disciplines the use of expert accountancy evidence constructing elaborate hypothetical negotiations, which Lord Reed observed can produce only an appearance of precision.

The Court expressly left some matters open, including the date at which a hypothetical release fee (where relevant) is to be assessed, and the precise scope of the account of profits remedy recognised in Attorney General v Blake, which was not in issue. The broader debate about the theoretical basis of negotiating damages under Lord Cairns’ Act has been significantly clarified, albeit with differences in reasoning between Lord Reed and Lord Sumption that future courts may have to navigate.

Verdict: Appeal allowed. The declaration that the claimant was entitled to damages assessed on a Wrotham Park (hypothetical release fee) basis was set aside. The quantum hearing is to proceed on the basis of assessing, as accurately as the evidence permits, the financial loss actually sustained by the claimant as a result of the breaches of contract.

Source: Morris-Garner & Anor v One Step (Support) Ltd [2018] UKSC 20