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Petitioner: MORRIS-GARNER and another VS Respondent: ONE STEP (SUPPORT) LTD
Court Name: Supreme Court of United Kingdom Judge(s): Lord Reed, Lady Hale, Lord Wilson, Lord Carnwath, Lord Sumption, President Title: MORRIS-GARNER and another vs ONE STEP (SUPPORT) LTD Case No.: On appeal from [2016] EWCA Civ 180 Date of Judgment:2018-04-18 Reported As: 2018 SCMR 1057 Result: Appeal allowed
JUDGMENT
JUDGMENT LORD REED: (with whom Lady Hale Lord Wilson and Lord Carnwath agree) 1. This appeal raises an important question in relation to the law of damages: in what circumstances can damages for breach of contract be assessed by reference to the sum that the claimant could hypothetically have received in return for releasing the defendant from the obligation which he failed to perform? Damages assessed on this basis, sometimes described as Wrotham Park damages, after the case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, have attracted considerable debate, both judicial and academic. That debate, and the confused state of the authorities, have reflected a lack of clarity as to the theoretical underpinning of such awards, and consequent uncertainty as .to when they are available. This is the first occasion on which the issue has come before the highest court for decision, although there was some discussion of Wrotham Park in Attorney General v Blake [2001] 1 AC 268. In engaging with this issue, the court has had the assistance of strongly argued submissions by counsel, supported by extensive citation of case law and academic scholarship. 2. It is necessary to recognise at the outset that the term "Wrotham Park damages" has been used rather loosely in the authorities, as Lord Walker of Gestingthorpe observed in Pell Frischmann Ltd v Bow Valley Iran Ltd [2009] UKPC 45; [2011] 1 WLR 2370, para 46. He referred in particular to the failure to distinguish clearly between its use, on the one hand, to describe every type of compensatory damages which exceed the actual financial loss to the claimant, and, on the other hand, damages awarded in lieu of specific performance or an injunction under the jurisdiction created by section 2 of the Chancery Amendment Act 1858 ("Lord Cairns' Act"); and, in the latter context, between non- proprietary breaches of contract, and those involving the invasion of a property right.
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3. 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. 4. In Pell Frischmann, Lord Walker listed what he regarded as "the most illuminating" of the judgments on this subject since Wrotham Park itself. He extracted from them the following general principles, at para 48: "(1) Damages (often termed 'user damage') are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or trespass) ... (2) Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights of a proprietary character ... (3) Damages under Lord Cairns's Act are intended to provide compensation for the court's decision not to grant equitable relief in the form of an order for specific performance or an injunction in cases where the court has jurisdiction to entertain an application for such relief ... (4) Damages under this head (termed 'negotiating damages' by Neuberger LJ in Lunn Poly at para 22) represent 'such a sum of money as might reasonably have been demanded by [the claimant] from [the defendant] as a quid pro quo for [permitting the continuation of the breach of covenant or other invasion of right]': Lunn Poly at para 25. (5) Although damages under Lord Cairns's Act are awarded in lieu of an injunction it is not necessary that an injunction should actually have been claimed in the proceedings, or that there should have been any prospect, on the facts, of it being granted ..." In Pell Frischmann it was unnecessary to consider the wider issues raised by the present appeal. For reasons which will be explained, it will be necessary to qualify principles (4) and (5) to some extent, and to add a number of others. 5. It is convenient to preface the discussion with an explanation of the context in which the question arises in the present case, by summarising the facts of the case and the history of the proceedings. The facts 6. The relevant events can be summarised as follows. In 1999 the first defendant established a business providing support for young people leaving care. In 2002 she agreed to sell a 50% interest to a Mr and Mrs Costelloe. The claimant company, One Step (Support) Ltd ("One Step"), was incorporated as a vehicle for the transaction. The first defendant and Mrs Costelloe each subscribed for 50% of its issued share capital and were appointed as its directors. They entered into a shareholders' agreement which included provision for dealing with a deadlock between the directors by enabling each of them to serve a notice requiring the other director either to buy the glares of the director serving the notice at a specified price, or to sell her own shares to that director at the same price. 7. The first defendant and Mr Costelloe then ran the business, and the second defendant performed a managerial role. The business comprised the provision of rented accommodation and support services to enable vulnerable individuals referred by local authorities, such as children and young people leaving care, and adults with mental health and learning disabilities, to live as independent lives as possible in the community. The services were provided to local authorities in West London and the Thames Valley. 8. The business prospered for some years, but over time the working relationship between the first defendant and Mr Costelloe deteriorated. In April 2006, the first defendant emailed to her personal email account confidential market research information held by the claimant. In May 2006, Mrs Costelloe gave notice of her intention to serve a deadlock notice. In July 2006, the first defendant
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incorporated another company, Positive Living Ltd. She and the second defendant were its sole shareholders. In August 2006 Mrs Costelloe served a deadlock notice, offering either to sell her shareholding to the first defendant, or to buy the first defendant's shareholding, for 3.15m. The first defendant elected to require Mrs Costelloe to buy her shares. 9. In December 2006 a buy-out agreement was entered into. The first defendant sold her, shares to Community Support Project Ltd ("CSPL"), a vehicle company incorporated and owned by Mr Costelloe, for 3.15m, and agreed to resign as a director of the claimant. She also agreed with the claimant to be bound for a period of three years by covenants requiring her to keep information concerning its business transactions confidential, and prohibiting her from engaging in a business that was in competition with it or soliciting its clients, without its consent, such consent not to be unreasonably withheld. As part of the same transaction, the second defendant terminated her employment with the claimant and agreed to be bound by similar covenants against competition and solicitation. 10. In August 2007, Positive Living began trading in West London and the Thames Valley in competition with the claimant. By early 2008, the claimant's business had experienced a significant downturn. In February 2008, solicitors acting on its behalf wrote to the first defendant, threatening to bring proceedings for an injunction. Following an exchange of correspondence, the matter was not pursued further at that time. In December 2009, the three year period of restraint specified in the covenants expired. In September 2010, after further correspondence had passed between the defendants' solicitors and solicitors acting for the claimant, the defendants sold their shares in Positive Living for 12.8m. 11. In July 2012, the claimant issued the present proceedings, alleging that the defendants had acted in breach of the covenants and in breach of an equitable duty of confidence, had induced each other to breach the covenants, and had conspired with each other to injure it by unlawful means. In relation to remedies, in respect of the breach of the non-compete and non-solicit covenants it sought an account of profits, or alternatively what were described as restitutionary damages, in such sum as it might reasonably have demanded as a quid pro quo for releasing the defendants from those covenants, or, in a further alternative, what were described as compensatory damages for the loss it had suffered by reason of the defendants' breach of those covenants. In respect of the breach of confidence, it sought an account of profits, or alternatively damages. 12. For the purposes of the proceedings, the claimant produced reports by forensic accountants quantifying the loss which it had allegedly suffered in consequence of the defendants' alleged breach of the covenants, the benefits obtained by the defendants, and the hypothetical release fee. 13. Mr Christopher Hine estimated the loss that the claimant had suffered at between 3.4m and 4.6m, depending on the gross profit margin on sales which was assumed. Put shortly, he estimated the sales which the claimant would have made in the absence of competition from Positive Living during the period when the defendants were in breach of contract, compared those with the sales actually made, and applied a profit margin to the shortfall. He based his estimate of the sales which would have been made in the absence of competition from Positive Living on the trend of sales during the period after the defendants' departure from the business and before the breach of contract commenced, on a forecast of profits which had been independently prepared for the claimant in September 2006, and on a market analysis establishing the extent to which Positive Living's sales were achieved at the expense of the claimant. He added a further sum in respect of an additional loss of profits after the restrictive covenants expired, again based on a comparison between projected sales in the absence of competition from Positive Living and actual sales. He added that loss of goodwill was not within his expertise.
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14. Mr Andrew Grantham estimated the hypothetical licence fee at between 5.6m and 6.3m. He did so by estimating what a reasonable person in the position of the claimant would have agreed to accept in return for releasing the defendants from the covenants, and what a reasonable person in the position of the defendants would have agreed to pay for that release, and then identifying the area of overlap. The hypothetical negotiation which he envisaged was highly complex and cannot be easily summarised. In simplified terms, the reasonable person in the position of the claimant was envisaged as seeking the payment of an initial release fee and the grant of an option entitling it to acquire the defendants' competing business at a discount to its market value, while the reasonable person in the position of the defendants was envisaged as being unwilling to pay more than the discounted value of an accelerated sale of Positive Living's business, plus the amount obtained on the first defendant's sale of her shares in the claimant, to the extent that it was invested in activities on the part of Positive Living which were not in competition with the claimant. One notable feature is that the starting point, on the claimant's side of the hypothetical negotiation, was an estimate of the claimant's cash flows and profits in the absence of competition from Positive Living, the equivalent figures in the presence of such competition, and an assumed profit margin. These estimates were taken from Mr Hine's report. 15. Since damages have not yet been assessed, it is appropriate for this court to be circumspect in its comments on the reports. One observation can however be made. Much has been made in the judgments below, and in the submissions on behalf of the claimant, of the difficulty of estimating the loss which it suffered, and the comparative simplicity of estimating the hypothetical release fee. So far as appears from the reports, the proposition that estimating the hypothetical release fee is simpler in this case than estimating the loss suffered does not hold water. The proceedings below 16. The trial judge, Phillips J, ordered that the issues of liability, and the claimant's entitlement to the remedies sought, should be tried first. Following trial, he found ([2014] EWHC 2213 (QB)) that the defendants had acted in breach of contract by breaching the non-compete Covenants (although less extensively than had been assumed in the expert reports) between August 2007 and 20 December 2009, that they had also breached the non-solicit covenants between 20 December 2006 and 20 December 2009 by soliciting business from seven local authorities, and that the first defendant had also acted in breach of the contractual confidentiality clause and an equitable duty of confidence by appropriating the market research information in April 2006 and subsequently using it to set up Positive Living. He did not find it necessary to determine the claims in tort. 17. In relation to remedies, the judge did not make any separate order in respect of the first defendant's breach of her contractual and equitable duties of confidence. He also declined to order an account of profits in respect of any of the breaches of duty. Implicitly, he appears to have proceeded on the basis that no separate award for the breach of confidence was necessary, since the harm which it caused would be reflected in an award in respect of the breach of the non- compete and non-solicit covenants. No appeal has been taken against these aspects of his decision. 18. He concluded that this was a prime example of a case in which Wrotham Park damages (as he described them) should be and were available. It would, he said, be difficult for the claimant to identify the financial loss it had suffered by reason of the defendants' wrongful competition, not least because there was a degree of secrecy in the establishment of Positive Living's business which had not been fully reversed by the disclosure process. In his judgment it would be just for the claimant to have the option of recovering damages in the amount which might reasonably have been demanded in 2007 for releasing the defendants from their covenants, not least because the covenants provided that the restraint was subject to consent, not to be unreasonably withheld.
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19. He accordingly granted a declaration that the claimant was "entitled to judgment for damages to be assessed on a Wrotham Park basis (for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from their obligations) or alternatively ordinary compensatory damages". The claimant then elected for damages on the so-called Wrotham Park basis, and a hearing on quantum was fixed. It has not yet been held. 20. An appeal was dismissed. Christopher Clarke LJ, with whom King LJ agreed ([2017] QB 1), considered that the test was whether an award of damages on the Wrotham Park basis was the just response in the particular case. That was a matter for the judge to decide on a broad brush basis. He was entitled to take into account the difficulties which the claimant would have in establishing damages on the ordinary basis. There would be very real problems in showing what placements the claimant lost because of the appearance of Positive Living on the scene, and in addition any loss of goodwill was inherently difficult to measure. 21. Christopher Clarke LJ observed that the amount taken as the reasonable sum for the relaxation of restrictive covenants might represent more, perhaps far more, than the loss realistically to be regarded as, in the event, suffered by their breach. So a Wrotham Park award could bear no relationship to the practical effect of any competition from Positive Living. Further, the assessment of a reasonable price might involve consideration of several imponderables, such as the likely effect of future competition, which would also arise in any assessment of general damages. Nevertheless, Christopher Clarke LJ did not regard these considerations as justifying a denial of Wrotham Park damages. First, the price that might reasonably be demanded for the relaxation of a covenant might necessarily exceed the loss that would have been suffered by the actual breach, since the price reflected the risk that breach of the covenant might result in a greater risk than had in fact occurred (something which, it might be thought, was a reason for declining to award damages on the Wrotham Park basis, rather than the reverse). Secondly, in deciding on the appropriate price the court must "exercise a robust judgment" (para 131) which took account of the likely extent and effect of any competition. Further, justice might require the court to take into account facts and events after the date of the hypothetical negotiation, or to take a post-breach valuation date. 22. Longmore LJ gave a concurring judgment, in which he confessed to having found the question more difficult. As he put it, "judges like to act in accordance with accepted principle and it is not easy to set out the principles by which it is possible to decide that Wrotham Park damages ... should be awarded" (para 143). He treated an award of Wrotham Park damages as being justified where three factors, identified by Peter Gibson LJ in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323; [2003] 1 All ER (Comm) 830, para 58, were present: (1) there was a deliberate breach by the defendant of its contractual obligations for its own reward; (2) the claimant would have difficulty in establishing financial loss therefrom; and (3) the claimant had a "legitimate interest" in preventing the defendant's profit-making activity in breach of contract. On the facts, all three factors were considered to be present. 23.The issues in the present appeal are agreed by the parties to be, first, where a party is in breach of contract, in what if any circumstances is the other party to the contract entitled to seek negotiating damages, i.e. damages assessed by reference to a hypothetical negotiation between the parties, for such amount as might reasonably have been demanded by the claimant for releasing the defendants from their obligations; and secondly, whether the Court of Appeal was correct to uphold the judge's finding that such damages are available in this case. First principles 24. The award of negotiating damages under Lord Cairns' Act, and also at common law, has been influenced by the award of "user damages" at common law for the tortious invasion of rights to
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tangible property, and the award of damages on a similar basis for infringements of intellectual property rights. Before considering the circumstances in which negotiating damages may be available at common law for breach of contract, it is necessary to consider (i) the award of user damages in tort, and also to remind oneself of some general principles governing (ii) common law damages for breach of contract, and (iii) the jurisdiction to award damages under Lord Cairns' Act. (i) User damages in tort 25. In tort, although damages may in some circumstances be awarded for punitive purposes, the general principle is that damages are compensatory. As Lord Blackburn said in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39; (1880) 7R (HL) 1, 7: "I do not think there is any difference of opinion as to its being a general rule that, where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation." 26. Lord Blackburn's principle can readily be applied in situations where some tangible loss has been sustained: for example, where real property has been damaged or taken by a trespasser (as in the Livingstone case itself), or where goods have been converted. Its application is less obvious in situations where there has been an invasion of rights to tangible moveable or immoveable property, but there has been no pecuniary loss or physical damage to the property in question. Nevertheless, where a trespasser has made valuable use of someone else's land, without causing any diminution in its value, the landowner has been held to be entitled to damages measured as what a reasonable person would have paid for the right of user: see, for example, Whitwham v Westminster Brymbo Coal and Coke Co [1896] 2 Ch 538. A similar approach has been adopted in cases of detinue, such as Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246. Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights. 27.The basis of the award of damages in cases of this kind was considered by Lord Shaw of Dunfermline in Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson 1914 SC (HL) 18; (1914) 31 RPC 104. The case concerned the sale of machines which infringed the pursuers' patent. The issue in dispute was whether the pursuers were entitled to recover damages for sales which had been made by the defenders in a territory where the pursuers could not themselves have traded, and which, moreover, the defenders would have made even if the machines had not incorporated the infringing part. It was held that they were so entitled. Lord Shaw contrasted the principle underlying the assessm ent of "damages in general", whether in contract or in tort, which he described as the principle of "restoration" as he defined it, with a second principle of "price or hire", applicable not only to patent cases but "whenever an abstraction or invasion of property has occurred" (pp 29- 31). As he explained, this distinction was relevant to the case before him, since the restoration principle could not support a claim by a patentee relating to a section of trade in which, it was argued, "he can have sustained no damage, because he would never have sold his patented articles within that section" (p 30). 28. Lord Shaw described the second principle as follows, in a passage at p 31 subsequently quoted by Brightman J in Wrotham Park: "It is at this stage of the case, however, that a second principle comes into play. It is not exactly the principle of restoration, either directly or expressed through compensation, but it is the principle underlying price or hire. It plainly extends - and I am inclined to think not infrequently extends - to patent cases. But, indeed, it is not confined to them. For wherever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as I say, either of price or of hire."
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He illustrated this by the example of the liveryman's horse, also at p 31: "If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish or without his knowledge, rides or drives it out, it is no answer to A for B to say: 'Against what loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is the better for the exercise.'" Lord Shaw also endorsed the view expressed by Fletcher Moulton LJ in Meters Ltd v Metropolitan Gas Meters Ltd (1911) 28 RPC 157, 165 that, even if it was not the claimant's practice to grant licences, "it would be right for the court to consider what would have been the price at which - although no price was actually quoted - could have reasonably been charged for that permission, and estimate the damage in that way". 29. The approach adopted in these cases was described by Nicholls LJ in Stoke-on-Trent City Council v W & J Wass Ltd [1988] 1 WLR 1406 as the "user principle" He summarised it as follows, at p 1416: "It is an established principle concerning the assessment of damages that a person who has wrongfully used another's property without causing the latter any pecuniary loss may still be liable to that other for more than nominal damages. In general, he is liable to pay, as damages, a reasonable sum for the wrongful use he has made of the other's…
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