Following the Supreme Court’s decision in Morris-Garner, an award of damages for breach of contract measured by reference to the hypothetical fee that the claimant could have charged the defendant to release it from the obligation breached (formerly referred to as “Wrotham Park damages”) is now to be referred to as “negotiating damages”.

In a comprehensive review of the leading authorities the Supreme Court clarified that this remedy for breach of contract is only available “where the breach of contract has resulted in the loss of a valuable asset created or protected by the right which was infringed” (Lord Reed para 99). Negotiating damages are not discretionary. They are not to be awarded just because the claimant has difficulty proving expectation damages and they are not restitutionary in nature (ie they are not designed to deprive a defendant of its ill-gotten gains). To that extent, the decision has mapped out the narrower circumstances in which such damages might be awarded and brought greater clarity to a previously confused range of authorities. Unfortunately, the Supreme Court’s judgment still leaves significant areas of uncertainty for claimants seeking negotiating damages.

The facts

In 2002, Mrs Morris-Garner and Mrs Costelloe set up One Step (Support) Limited (“One Step”). The business did well but the relationship deteriorated and in December 2006 Mrs Morris-Garner sold her 50% share for £3.15m to a company owned by Mrs Costelloe. As part of the deal Mrs Morris-Garner agreed with One Step to be bound for three years by covenants requiring her to keep certain information confidential and prohibiting her from engaging competing with One Step or soliciting its clients.

In 2007, Mrs Morris-Garner started a company, Positive Living, in competition with One Step, and One Step suffered a significant downturn in business. In 2010, Mrs Morris-Garner and her husband sold Positive Living for £12.8m. In 2012, One Step commenced proceedings against Mrs and Mr Morris-Garner for (i) breach of the non-competition and non-solicitation clauses and seeking an account of profits, or restitutionary damages (a release fee), or compensatory damages (for the profits One Step would have made but for the breaches), and (ii) for breach of confidence (contractual and equitable) seeking an account of profits or damages.

First instance (2014)

Mr Justice Phillips found the Morris-Garners liable on all counts but did not award an account of profits for any of the breaches. Nor did he make separate orders for the breach of confidence claims (contractual or equitable). The judge appears implicitly to have proceeded on the basis that any harm caused by breach of confidence would be reflected in damages awarded for breach of non-compete and non-solicitation. Mr Justice Philips concluded that this was a prime example of a case in which Wrotham Park damages were available because it was difficult for the claimant to identify the financial loss actually caused by the defendant’s breaches (ie the profits that One Step would have made but for the Morris-Garners’ breaches).

Court of Appeal (2016)

The Court of Appeal dismissed the Morris-Garners’ appeal. For Lord Justices Clarke and King, the touchstone was whether an award of Wrotham Park damages was the just response; and the court was entitled to take into account One Step’s evidential difficulties in proving expectation loss.

Lord Justice Longmore preferred the three factors test identified by Lord Justice Gibson in Experience Hendrix LLC v PPX Enterprises, namely: (i) a deliberate breach of contractual obligations by the defendant for its own reward, (ii) difficult for the claimant to establish financial loss; and (iii) the claimant has a “legitimate interest” in preventing the defendant’s profit-making activity in breach of contract.

The Court of Appeal concluded that the claimant was entitled to Wrotham Park damages or alternatively ordinary compensatory damages, at its election. The claimant elected for Wrotham Park damages.

Supreme Court (2018)

The Supreme Court allowed the Morris-Garners’ appeal. The majority judgment was given by Lord Reed, who began by establishing the new terminology: “This judgment will abjure the use of the term ‘Wrotham Park damages’. Although it will be necessary to consider the case of Wrotham Park, 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. Instead, this judgment will use the expression ‘negotiating damages’, introduced by Neuberger LJ in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] EWCA Civ 430; [2006] 2 EGLR 29 , para 22.”

The key problem identified by the Supreme Court is the ill-defined catch-all nature of Wrotham Park damages which, in the authorities, had been used to describe widely varying types of damages, namely, every type of compensatory damage that exceeds the actual financial loss suffered, and damages in lieu of an injunction under the Chancery Amendment Act 1858 (“Lord Cairns Act”). In that context, it also failed to distinguish between non-proprietary breaches of contract and those involving the invasion of a property right.

The availability of “user damages” at common law for the tortious invasion of property rights (tangible and intellectual) (eg for conversion, trespass, breach of intellectual property rights) is well-established. “In such circumstances, the person who makes wrongful use of the property prevents the owner from exercising his right to obtain the economic value of the use in question, and should therefore compensate him for the consequent loss. Put shortly, he takes something for nothing, for which the owner was entitled to require payment.”(Lord Reed, para 30)

In contrast, contractual damages at common law are designed to put the injured party, so far as money can do it, in the same situation as if the contract had been performed. Under English law contracts give rise to a primary obligation (performance) and a secondary obligation (payment of damages). Paying damages arises from the contract just as much as performance, and a party is generally free not to perform and to pay damages instead. “The courts will not prevent self-interested breaches of contract where the interests of the innocent party can be adequately protected by an award of damages. Nor will the courts award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance. Their function is confined to enforcing either the primary obligation to perform, or the contract breaker’s secondary obligation to pay damages as a substitute for performance.”  (Lord Reed, para 35). (In this context, the Supreme Court stated that English courts have a discretion to order an account of profits but only in exceptional circumstances where other remedies are inadequate.  Lord Reed noted that the “soundness of that decision [Attorney General v Blake] is not an issue in this appeal” but given the criticism levelled against it in the Supreme Court’s judgment, one might expect that if it were to be reconsidered by the Supreme Court  it may well be overturned).

So how do negotiating damages fit in as a common law remedy for breach of contract? According to the Supreme Court: “What is crucial is first to identify the loss: the difference between the claimant’s actual situation and the situation in which he would have been if the defendant had been performed. Once the loss has been identified, the court then has to quantify it in monetary terms … The court will have to select the method of measuring the loss which is the most apt in the circumstances to secure that the claimant is compensated for the loss which it has sustained.” (Lord Reed para 36)

Two points are important to note. First, negotiating damages are simply a different measure of loss (not a separate remedy altogether, ie they are not restitution). Second, and flowing from that, claimants cannot elect for negotiating damages. It is the court that must decide upon the appropriate measure of loss. A claimant cannot opt for negotiating damages just because proving expectation loss is difficult.

The Supreme Court also made clear that factors which earlier authorities had taken to be relevant to an award of negotiating damages – such as whether the breach was deliberate, whether the claimant had a legitimate interest in performance that went beyond any economic loss suffered, or whether proving expectation loss was difficult – are not relevant considerations in deciding whether negotiating damages should be awarded.

Next, it is well-established that damages for breach of contract can be awarded as compensation where the loss suffered is not economic (e.g. Jarvis v Swan Tours [1973] QB 233; Ruxley Electronics v Forsyth [1996] AC 344). The exercise may be difficult but the court must identify the difference in the claimant’s situation resulting from the non-performance of the obligation in question, and then place a reasonable monetary value on that difference.  Negotiating damages is just one measure of loss that the court can use to ensure a claimant is properly compensated.

When will negotiating damages be awarded? Anticipating that any contractual right could potentially be described as a valuable asset, Lord Reed states that, to be eligible for negotiating damages, the right infringed must be of a kind that “its breach can result in an identifiable loss equivalent to the economic value of the right, considered as an asset, even in the absence of any pecuniary losses which are measurable in the ordinary way.” (Lord Reed, para 93) This is where the scope of negotiating damages becomes less clear.

As examples of such rights Lord Reed lists rights to control the use of land, intellectual property and confidential information. (Note that the land, property or information need not belong to the claimant. The land involved in Wrotham Park itself did not belong to the claimant, who simply had the benefit of a restrictive covenant over the land.) For these types of claims, claimants can be certain that negotiating damages are in principle available: but only if the court decides that is the appropriate measure of loss.

The decision leaves a number of unresolved issues or uncertainties.

1. The Supreme Court does not address the scope of damages in lieu of an injunction (available under s.50 of the Senior Courts Act 1981) and how, if at all, it differs from an award of negotiating damages at common law. According to Chitty: “Since claims for specific performance (or injunction) can, by virtue of s.49 of [the Senior Courts Act 1981], be combined with claims for damages, it is normally unnecessary to resort to the special power to award damages in lieu of those remedies. But it may still sometimes be to the claimant’s advantage to invoke that jurisdiction, and its exercise has also given rise to certain special problems with regard to the assessment of damages.” While this uncertainty remains seeking both remedies in the alternative may be the safest course.
2. How do principles of remoteness, causation and mitigation that apply to expectation damages, apply to negotiating damages? For example, when assessing expectation loss, it is conceptually easy to consider what steps the claimant might have taken to prevent the loss that was actually caused by the defendant’s breach. But where no assessment of the loss actually caused is made, and instead loss is measured by reference to a hypothetical release fee, how should one assess the claimant’s conduct in the context of mitigation? These issues are not addressed in the Supreme Court’s decision.
3. In contrast to the types of rights which do qualify for negotiating damages, Lord Reed gives non-compete clauses as an example of a right where it is difficult to see how there can be any loss apart from the loss of profits caused by the breach. But hasn’t such a claimant lost the right to bargain for the release of that right just as much as the claimant who sues for breach of confidence? The problem is that the Supreme Court’s judgment does not contain any clear or convincing explanation as to why property-related rights of the type identified by Lord Reed deserve the protection of negotiating damages.
4. Equally, breach of a “user value” right (eg confidentiality) could give rise to either expectation loss or negotiating damages. So how does the court decide which one to award? In the Court of Appeal, Lord Justice Clarke noted that the hypothetical price which might be demanded might greatly exceed the actual expectation loss since the hypothetical price reflected the risk that breach of the covenant might result in greater risk than actually occurred. Lord Reed noted that this was “something which, it might be thought, was a reason for declining to award damages on the Wrotham Park basis, rather than the reverse.” But if a breach of confidence does result in an identifiable loss equivalent to the economic value of the right, why should the expectation loss matter at all? The Supreme Court expressly recognised that the hypothetical bargain calculation might be relevant to the assessment of expectation loss, but given the problem of hindsight, it is hard to see why the opposite should be permissible.
5. Does it make any difference if the claimant’s only interest in the defendant’s performance of its obligations is commercial? Lord Reed described One Step in these terms. Set this alongside one of the concluding points in the judgment: that a claimant with a purely economic interest in performance who cannot show any economic loss caused by the breach has not suffered loss and should be awarded nominal damages. When will the interest of a commercial claimant, whether in relation to a non-compete clause or a confidentiality clause or intellectual property, ever be anything other than purely economic?
6. Finally, One Step claimed for breach of non-compete and confidentiality clauses, so why wasn’t it awarded negotiating damages for the latter breach? Lord Reed explained: “The case is not one where the breach of contract has resulted in the loss of a valuable asset created or protected by the right which was infringed. Considered in isolation, the first defendant’s breach of the confidentiality covenant might have been considered to be of that character, but in reality the claimant’s loss is the cumulative result of breaches of a number of obligations, of which the non-compete and non-solicitation covenants have been treated as the most significant.” So, it appears that even where a qualifying property-related right has been breached, the ability to obtain negotiating damages might be lost if made alongside other non-qualifying claims.

Conclusion

The Supreme Court has clarified that the scope for awarding negotiating damage is far more limited than previously thought. But claimants whose claims fall within the new limits still face significant uncertainty as to whether negotiating damages will be awarded in any particular case. Given that both the Court of Appeal and the Supreme Court appear to have agreed on at least one thing – the possibility that damages assessed on the negotiating damages measure could in some cases greatly exceed damages assessed on the “expectation loss” measure – claimants who primarily seek negotiating damages will need to exercise a good deal of caution in framing their claims to ensure that they do not fall foul of the various unresolved issues in the Supreme Court’s decision.

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