Negotiating damages – a possible limitation on damages for breach of covenant

25 May 2018

Loss in claims involving breaches of restrictive covenants or misuse of confidential information can often be difficult to prove and are easily challenged. In a claim for breach of covenant, it may be said that clients would have left along with the defendant employee in any event; or in the case of misuse of information, the information in question could have been obtained from alternative legitimate sources (for example, from the client themselves).

Wrotham Park damages (named after the decision in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798) evolved to address this problem. Alternatively called an award of “negotiating damages” or “hypothetical bargain” or “licence fee” damages, the principal behind an award on this basis is that the claimant can recover such a sum as the defendant would have paid it had the defendant, before breaching the contract, negotiated a release of its obligations by the claimant. Where such damages can be recovered, it does not matter that the employer is unable to show that it has suffered loss, or indeed whether the parties would have agreed a deal in any event is entirely irrelevant – provided the claimant can establish that a hypothetical fee should be paid, that is enough to give rise to some remedy.

The attraction to claimants of an award of Wrotham Park damages is obvious; difficulties in identifying financial loss (because, for example, it may be difficult to establish the business had been lost because of the defendant’s actions), can be addressed simply by reference to a hypothetical scenario upon which the Court, at its sole discretion, can adjudicate upon.

In Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20, however, the Supreme Court has curtailed the circumstances in which an award of, what it prefers to call “negotiating damages” can be awarded. The Court was asked to determine: (1) where a party is in breach of contract, in what (if any) circumstances is the other party to the contract entitled to seek Wrotham Park damages; and (2) whether the Court of Appeal had been correct to uphold the trial judge’s finding that such damages were available in this case.

Dismissing the Court of Appeal’s decision that such damages were appropriate on the facts of this case, the Supreme Court held that negotiating damages can be awarded for breach of contract where the breach resulted in “the lossa valuable asset created or protected by the right which was infringed, as for example in cases concerned with the breach of a restrictive covenant over land, an intellectual property agreement or a confidentiality agreement” (the rationale being that the claimant has been deprived of an asset to which a value can and should be assigned). This would include breaches of joint ventures (where the defendant uses confidential information to its advantage) or breach of agreements not to make use of certain intellectual property. It does not, on its face, however, include breach of non-compete or non-solicitation clauses, for which loss is typically purely economic and assessable by other means.

However, despite the Supreme Court’s endeavours, there remains a degree of ambiguity as to the circumstances where negotiating damages are available. Whereas it was made clear that negotiating damages were not to be regarded as the norm, no definitive view of when they would be available was provided; the applicability of such a method of calculating loss remains largely fact dependent.

Leigh Callaway Author
Leigh Callaway
Senior Associate
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