Supreme Court returns to a restrictive approach to "hypothetical negotiation" damages

The Supreme Court has overturned an earlier decision by the Court of Appeal that made it easier for claimants to obtain damages based on the fee they could hypothetically have charged to give permission to a defendant for something that would otherwise infringe the claimants’ rights.

In Morris-Garner & Another v One Step (Support) Ltd [2018] UKSC 20, the claimant was a provider of supported living services to vulnerable people. One of its former directors secretly set up a competing business with one of its former employees, and the claimant successfully sued them for breach of restrictive covenants in relation to material competition, solicitation and use of confidential information. Partly due to the secrecy surrounding the new company, the claimant had difficulty in quantifying the damage to its profits, market share and reputation that it suffered as a result of the breaches.

At first instance and in the Court of Appeal, the claimant was therefore awarded damages by reference to the price that the claimant could have demanded in order to release the covenants following a hypothetical reasonable negotiation. This form of damages is often referred to as “negotiating damages”, “hypothetical bargain damages”, or “Wrotham Park damages” (after a line of cases beginning with Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 in which such damages were awarded).

Prior to the decision of the Court of Appeal, negotiation damages were considered to be an exceptional remedy, but the circumstances in which they would be awarded remained unclear. The judgment of the Court of Appeal set out a number of principles to be applied when a claimant sought such damages. Significantly, these included that:

• the case need not be exceptional; and
• the claimant did not have to show that it would be impossible to quantify its actual financial loss; it was sufficient to show that it would be “very difficult” to do so.

The Supreme Court has now rejected this more flexible approach in robust terms. Lord Reed in the leading judgment observed that the Wrotham Park judgment was a source of confusion because its reasoning was unclear as to its theoretical underpinning, and suggested that it should now be treated as “of little more than historical interest”. Indeed, he went as far as to say that he “abjured” the phrase “Wrotham Park damages”, and he instead referred to the remedy as “negotiating damages” throughout his judgment. He gave the following guidance as to when such damages should be awarded:

1. Damages for breach of contract can only be awarded or refused on the basis of legal principle. Judges have no discretion as to the basis on which they are awarded, nor can claimants elect which measure of damages will be used.
2. Common law damages for breach of contract are not to be awarded merely in order to deprive the defendant of profits made as the result of a breach, except in exceptional circumstances. An example of such circumstances is the case of Attorney General v Blake [2001] 1 AC 268, in which the Crown was awarded damages in order to deprive the notorious spy George Blake of profits made by writing a book that breached his agreement with the intelligence services.
3. Loss of profits and goodwill due to a business being exposed to competition is a familiar type of damage for which the courts regularly award compensation. It should be quantified in a conventional manner, even if to do so is difficult. Such difficulties are recognised by the courts and can be reflected in the degree of certainty to which the court requires the claimant to prove the quantum.
4. An award that is not based on quantifying the claimant’s loss cannot be justified simply because:
   1. the breach was deliberate;
   2. it is difficult to establish the financial loss with precision;
   3. the claimant has an interest in preventing the defendant from profiting from its breach; or
   4. it appears to the judge to be the most just outcome.
5. Negotiation damages are to be awarded where they represent the most appropriate measure of the loss suffered, not as a substitute for measuring it. This may be the case where the defendant has taken something for nothing for which the claimant had a right to require payment, effectively depriving him of that right. The underlying rationale is that determining the economic value of the right to require payment is an appropriate means of quantifying the loss.

Lord Reed held that the fact pattern in this case could not be categorised as deprivation of a right to require payment; it was more complex and involved a series of cumulative breaches of different rights.

Although Lords Sumption and Carnwath added comments of their own in light of the perceived importance of this case, they agreed with Lord Reed in substance, as did Lady Hale and Lord Wilson. Accordingly, the Supreme Court decided that negotiation damages were not available to the claimant. The matter was remitted to the judge at first instance for a determination of the actual financial loss. Lord Reed noted that the judge would be entitled to weigh evidence as to the amount of a hypothetical release fee as one factor in determining the actual loss, but no more than that.

Comment

Although the clarity of the earlier judgment in the Court of Appeal had been welcomed, it also raised concerns that:

• what was originally intended as an exceptional remedy could become the norm, allowing claimants to avoid going to the effort of properly quantifying their claim and, in some circumstances, to obtain an unjustified windfall; and/or
• the wider availability of negotiation damages could lead to courts becoming more reluctant to grant injunctions, which are ordinarily awarded only where damages would not provide an adequate remedy.

The judgment of the Supreme Court seems likely to forestall any developments along either of these lines. In particular, the guidance set out by Lord Reed suggests it will be challenging for parties to obtain an award for negotiation damages in all but the most exceptional circumstances. Whether negotiation damages are available is likely to depend on the relevant facts of each case. For the time being, it seems one step further away.

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