JHA | Wrotham Park after the Supreme Court - what is the measure of damages?

Wrotham Park after the Supreme Court- what is the measure of damages?

April 30, 2018

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(A)  The issue

The defendant sold her 50% shareholding in the claimant company, One Step. The sale, to which the company was a contracting party, included covenants undertaking not to solicit business from certain third parties, protecting confidential information of the company, and restricting competition with the company. The defendant was in breach of all the covenants, and the company claimed damages. How should the damages be assessed for the breaches of contract?

(B)  The decisions in the Commercial Court and the Court of Appeal under appeal

The commercial judge ordered an assessment ‘on the basis of the amount which would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from the restrictions’. The judge thought that the claimant company had ‘a right to elect how its damages should be assessed’. The company could choose between damages assessed for the business lost by it, or on the basis set out in his order. Prior to the decision of the Supreme Court, this basis might have been referred to as ‘Wrotham Park Damages’, a label derived from Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, where this formula was used to award damages for breach of a restrictive covenant concerning land. It is now called ‘Negotiating Damages’ (a term coined by Neuberger LJ in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] 2 EGLR 29).

The Court of Appeal decided that it was within the discretion of the commercial judge to decide the basis on which damages were to be awarded, taking into account that the breaches had been deliberate. It was said that there would be difficulty in establishing precisely the loss to the claimant’s business and that the discretion was to be exercised on ‘a broad brush basis’. This can be contrasted with the principle that damages are to compensate for the loss caused by the breach.

(C)  The decision and reasons in the Supreme Court

The judgment agreed to by four of the five judges was given by Lord Reed. The ratio of that judgment is binding precedent. It decides that the sole measure of damages was the loss caused to the claimant’s business, including its loss of profits. The order made by the judge, which had been upheld by the Court of Appeal, was set aside. The judge assessing damages might or might not have regard to evidence as to what a reasonable release fee would have been but the hypothetical release fee would not itself be awarded as a measure of the loss.

Lord Sumption reached the same conclusion, stating that he took ‘broadly the same view as Lord Reed, although for reasons which I would express more simply’, and considered that ‘… the notional price of a release may … be relevant, not as an alternative measure of damages but as an evidential technique of what the claimant can reasonable be supposed to have lost’. Lord Carnwath agreed with the reasons given by Lord Reed, and added some observations about compensation to be awarded under certain statutory provisions. He considered that there were ‘significant differences’ between Lord Reed and Lord Sumption. Lord Carnwath described Lord Reed’s analysis as ‘an entirely orthodox approach’, declined to accept Lord Sumption’s ‘reformulation as a helpful guide in the general run of cases’, and was ‘unpersuaded that it is necessary or helpful to redefine, or break down the barriers between, the established categories; [or] that to do so [would offer] any improvement in the coherence of the law.’

Lord Reed decided that ‘Negotiating Damages’ can be awarded for breach of contract in certain cases concerning ‘assets’. Thus damages for breach of a restrictive covenant on land are given for invasion of a property right (the restrictive covenant) which qualifies as an ‘asset’. Breach of the covenant damages the asset. A price or reasonable hypothetical release fee compensates for the damage to the asset. ‘Negotiating Damages’ are available at common law in cases where there is to be compensation for the damage to an ‘asset’. These include infringement of patent rights, misuse of tangible property (e.g. taking someone else’s horse or car without permission), use of someone else’s land without permission, trespass on land, and use of intangible property without permission (e.g. a trademark). Damages for passing off or misuse of confidential information may be awarded on this basis, by analogy. In contrast, there are many negative covenants breach of which only attracts compensation for the loss caused by the wrong, and where ‘Negotiating Damages’ have no part to play. An example might be a contractual promise not to order a ship to an unsafe port. The damages would not be assessed on the basis of what would have been the price for a licence to do so. Lord Reed decided that One Step was not an ‘asset’ case, and so, ‘Negotiating Damages’ were not available. Breach of a restrictive covenant protecting land and breach of a restrictive covenant protecting the value of shares which have been sold do not attract the same measure of damages because whilst the former involves invasion of a right of property, the latter does not. Goodwill can be regarded as a capital asset in company accounts. Lord Reed considered that damage caused by the breaches of contract to the goodwill of the claimant’s business did not suffice to bring the case within the damage to an ‘asset’ category. This is because the damage to the goodwill did not constitute taking or misusing the company’s ‘asset’, or infringing its property rights in that ‘asset’. Likewise the covenant protecting the ship from damage at an unsafe port is a covenant given to protect an asset, but the contractual promise does not qualify as an ‘asset’ for this purpose.

(D)  Damages under Lord Cairns’ Act and Section 50 Senior Courts Act 1981

The judgments touch upon the damages jurisdiction under Lord Cairns’ Act, section 2 of the Chancery Amendment Act 1858, and discuss some of the case law. That jurisdiction, which survived repeal of the section many years ago, is the subject of extensive case law. Section 50 of the Senior Courts Act 1981 which now continues the jurisdiction, provides:

50. Power to award damages as well as, or in substitution for, injunction or specific performance.

Where the Court of Appeal or the High Court has jurisdiction to entertain an application for an injunction or specific performance, it may award damages in addition to, or in substitution for, an injunction or specific performance.’

This includes the jurisdiction originally conferred by section 2 of the 1858 Act, which was confined to where the court ‘has jurisdiction to entertain an application for an injunction against a breach of any covenant, contract, or agreement, or against the commission or continuance of any wrongful act, or for the specific performance of any covenant, contract, or agreement’. Section 50 is not limited to these categories of case. The boundaries of section 50 are considered in Gee on Commercial Injunctions (6th edition) at paragraphs 2-047 to 2-048, and 14-049 to 14-052.

The 1858 Act empowered the old High Court of Chancery to award damages in cases within section 2, thus avoiding the need for damages to be dealt with in the courts of common law. It also had substantive consequences. It enabled compensation to be awarded for loss not yet sustained, and also allowed a measure of damages to be awarded which could include ‘Negotiating Damages’. The damages to be awarded were in substitution for, or in addition to, a decree of specific performance or the granting of an injunction. If an injunction were granted, the defendant caught in the grip of the order could purchase his release by negotiating with the plaintiff and arriving at a monetary solution. If an injunction were refused, and damages were to be awarded, then the plaintiff should be in the same position, and so permitted to obtain a reasonable fee for releasing his rights.

Claimants often do not commence proceedings until long after the breaches of contract have occurred and the losses have been sustained. In One Step, the covenants lasted for three years from December 2006. The breaches and the losses were sustained long before commencement of the court proceedings in July 2012. The claim appears to have been advanced without seeking damages under section 50. In contrast, in Pell Frischmann Ltd v Bow Valley Iran Ltd [2011] 1 WLR 2370, it was common ground before the Privy Council that damages could be awarded under Lord Cairns’ Act (‘presumably by analogy’) in proceedings in Jersey, when those proceedings were commenced long after the breaches and the losses had taken place.

Lord Reed, at [95] subparagraph (3), stated that ‘Damages can be awarded under Lord Cairns’ Act in substitution for specific performance or an injunction, where the court had jurisdiction to entertain an application for such relief at the time when the proceedings were commenced. Such damages are a monetary substitute for what is lost by the withholding of such relief’. Proceedings seeking an injunction are often issued after breaches of contract have taken place, losses have been sustained, and there is a threat of further breaches and further losses. The wording of section 50 is not confined to awarding damages for loss sustained after action brought. Provided that the proceedings commenced are within the section, there is a discretion to award the statutory damages. That these can include past losses sustained prior to action brought, is supported by Mance LJ in Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830 at [34] to [35]. The example was of a pop concert which started when a person entitled to enforce a restrictive covenant, was away on holiday and brought proceedings to stop the concert when he returned home. The claimant could get damages under the Act, including the loss caused while he was abroad, unable to commence the proceedings. These are “in addition to” the granting of the injunction.

What principles apply and what measures of damages are available is governed by the section. This depends upon its interpretation. The words of section 50 allow damages ‘in addition to’, as well as ‘in substitution for’, the injunction. Where there is a continuing course of conduct both prior to and continuing after commencement of the proceedings in respect of which there is jurisdiction to grant an injunction, one would expect all the losses to be covered by section 50. This view avoids different methods of assessment of damages for the period prior to commencement of proceedings and that afterwards. It avoids different measures of damages being available for the period before, and the period after. It is to be expected that Parliament intended that there could be a single award of damages under section 50 in respect of the entire course of conduct. This is because this avoids complexity, provides a just remedy, and is supported by its wording.

Lord Reed says ‘such damages are a monetary substitute for what is lost by the withholding of such relief.’ If this were the limit of the jurisdiction, the damages would only be available in substitution for the granting of the injunction. The words ‘in addition to’ in section 50, go further. They are not limited to a substitute for the injunction. Nor are the words limited to covering the case where an injunction is granted, but still, losses will be sustained because of the limited wording of the injunction or because the injunction is not granted immediately. Where an injunction is sought ‘quia timet’ (literally ‘since he fears’ [the commission of a wrong]), no loss would have been suffered prior to the commencement of the proceedings and damages would be confined to compensating for the refusal of the injunction. In that situation, the words of Lord Reed apply because the damages would be a substitute for the injunction. However, there can be cases where losses start before the commencement of the proceedings, and part of the overall losses would not be avoided even were an injunction to be granted which prevented any further wrong. The wording of section 50 appears to be sufficiently wide to allow an award of damages under the section in respect of the entire loss caused by the wrongful course of conduct. Lord Reed was not asked to consider such a case. As a result, there may well be cases which remain well outside of the zone of impact of the decision in One Step.

(E)  What does the future hold?

  • Where there are breaches of restrictive covenants which might be enforced by injunction, it would be wise to consider commencing proceedings earlier rather than later. For damages under section 50, it does not have to be shown that an injunction would, or should, have been granted. Damages can be awarded under section 50 when no court would have contemplated granting an injunction, provided that there was jurisdiction to grant one in the proceedings. If proceedings are issued early whilst breaches are still going on and are inflicting loss, it seems that the damages can include losses both before and after the commencement of the proceedings. It is more difficult to justify as a matter of discretion, and as a matter of jurisdiction, any award of damages under section 50, when all the breaches and all the losses have been sustained years earlier, and there is no possibility of the granting of an injunction. Paragraph [95] subparagraph (3) supports this analysis.
  • The Supreme Court decision shows that ‘Negotiating Damages’ are not available in every case of breach of contract. Yet depending on the facts, they may provide a much more attractive result for a claimant than could be achieved by a claim for loss caused by the breach. Claimants considering seeking damages where there has been breach of contract, need to formulate what measure or measures of damages they wish to seek and why, as early as possible.
  • Section 50 is not constrained by the ‘asset’ analysis applicable to the measure of damages at common law for breach of contract. As long as there is jurisdiction to grant the injunction, this suffices. On the facts of One Step, had proceedings been commenced seeking an injunction when the breaches started, a court might well have granted an injunction enforcing the covenants. In principle, damages would have been available under section 50 regardless of whether an injunction was granted, and there could have been an award of ‘Negotiating Damages’. It was the delay in commencing proceedings which was the context for damages being sought at common law, under which no such award could be made.
  • ‘Negotiating Damages’ are compensatory. Ideally, the defendant would have asked for permission before embarking on the breaches. If that had been done, the claimant could have stipulated a price for a release of the covenants. He has lost that opportunity. ‘Negotiating Damages’ compensate him for that lost opportunity. However, restrictive covenants do not promise the claimant that opportunity. In consequence, placing the claimant in the position he would have been in had the contract been performed, would have placed him in the position that he would have been in had there been no breaches of contract. In One Step, the claimant company could claim the profits lost to its business because that loss was caused by the breach of the restrictive covenants. It could not claim for the loss of opportunity to negotiate a reasonable fee because that is not what it had been promised.
  • A different result might have been reached had the covenants included an extra covenant which promised that before acting inconsistently with the restrictive covenants the defendant would ask for a release and offer a reasonable sum in return for a release. The claimant would also have the option to accept or decline the offer. The failure to make the offer would have deprived the claimant of the option and damages could be awarded for the loss of the option. This is a point which has to be carefully considered at the time of negotiating and drafting the contract.

Morris-Garner v One Step (Support) Ltd[2018] UKSC 20, 18 April 2018