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Negotiating Damages in the Supreme Court - David Stockill

Morris-Garner v One Step (Support) Limited [2018] UKSC 20

A couple of weeks ago (18 April 2018) the Supreme Court decided a landmark case on damages.  It was unusual in that it appears a unanimousdecision in the result, but Lord Sumption dissented from the majority in the reasoning.  Lord Reed gave the majority judgment with which Lord Carnworth agreed, but then he went in to explain the differences between the two judgments.

It concerns the recoverability of "negotiating damages", the expression settled upon by the Supreme Court, and therefore one which now seems to be established in our law. 

Legal Background to the Decision

Negotiating damages have been around quite some time, particularly given prominence after the judgment of Brightman J in Wrotham Park Estate v Parkside Homesin 1974[1].  The original evolution from Wrotham Parkconcentrated on damages in lieu of an injunction, sometimes referred to as damages under Lord Cairns' Act[2].  There then followed a line of cases where damages were given in place of an injunction, if it would otherwise have been appropriate to grant an injunction so long as one had been claimed or where otherwise the claimant had not debarred himself from obtaining it[3]. These tended to be property cases, predominately cases where there had been breach of a restrictive covenant and the court had refused to order the taking down of much-needed housing stock built in breach.  In these cases, the court would award a sum of money which it thought would represent the amount willing parties would have negotiated for the buying off, or release, of the right.  The classic subsequent example is Jaggard v Sawyer[4]and the much respected judgment of Millett LJ (as he then was). In Jaggard damages in lieu were calculated in the sum of £694 being one ninth share of £6250, the price the defendants might reasonably have had to pay to the nine inhabitants of the cul-de-sac having the benefit of the breached covenant. In Barnes v Severn Trent[5]the much larger damages awarded at first instance for trespass were reduced in the Court of Appeal to a sum (£110) based on that which the water company would have had to pay had it used the statutory machinery for laying new water mains (it did not know of the claimant’s interest in the land at the time it laid the main over his land).  The possibility of service of a notice, and ultimately the possibility of determining the sum under the relevant statute, would have featured in the theoretical negotiations between the landowner and the water company.  This would be the maximum the landowner could have achieved had things been done properly, although the court also allowed an additional sum of £500 to take account of the possibility negotiations would probably have produced more for the landowner than the statutory amount. 

Things started to go in a different direction consequent on the House of Lords opinions in the well-known case of Attorney General v Blake[6].  Blake was a former member of the British security services and a Soviet spy.  He wrote and published his autobiography.  The UK government sought damages from Blake for his breach of contract in disclosing official secrets.  The court held that in an exceptional case, and this was one, an order for an account of profits could be granted following the breach of contract.

Thus started, was a line of discussion in cases (as well as academic debate) concerning monetary awards for breach of contract which did not relate to the actual provable and proved losses incurred, but which sought to deprive the contract-breaker the fruits of his wrongdoing.  These included Vercoe v Rutland Fund Management[7]which involved the breach of a joint venture agreement.  It had been agreed that damages should be assessed on the basis of a hypothetical release fee.  The Supreme Court in Morris Garner reconciled the case as one where actual loss had been calculated for loss of the opportunity to control confidential information. Another case was Experience Hendrix LLC v PPX Enterprises[8] and its interpretation in World Wide Fund for Nature v WorldWrestling Federation[9].  These were cases where the Supreme Court had difficulty reconciling the reasoning (where in effect gains-based damages were awarded) but the result was again justified on conventional principles as damages for lossof a (property) right, which could be calculated on a release fee basis. 

What appeared to be forming was the more expansive view that, at least where proprietary rights are concerned, andwhere damages were difficult to prove, hypothetical release fee/ negotiating damages could be awarded.

It is now time to return to the instant case.  

The case before the Supreme Court

Facts 

The claimant, One Step, had been owned and controlled by the Morris-Garners (civil partners) as to 50%; and a Mr and Mrs Costello as to the other 50%.   The working relationship broke down and the Morris-Garners left and sold their shares to the Costellos with non-compete and non-solicitation covenants.  They set up another company substantially trading in the same area.  The claimant company, One Step, sued the Morris-Garner's for breach of these covenants and a confidentiality covenant, and breach of equitable duties of confidence.  The High Court and then the Court of Appeal held that the company was entitled to Wrotham Parkdamages on the basis that the Morris Garner's had breached straightforward governance in circumstances where it would be difficult for the company to identify the financial loss it had suffered by reason of the wrongful competition (the indications were that these were greater than losses – which were still substantial – on a conventional, actual, loss basis[10]).  The Court of Appeal held that the test for awarding (as it described them) Wrotham Parkdamages was not whether the case was exceptional but what justice required.

Conventional principles return

The Supreme Court allowed the appeal and scotched any suggestion that, save in a truly exceptional case, damages for breach of contract or covenant could be based on the hypothetical sum which could be negotiated ("negotiating damages").

The majority reasoning reasserted conventional principles thus[11]:

  1. the general principle is that damages are compensatory [25].  In tort damages are generally intended to place the claimant has nearly as possible in the same position he would have been in if the tort had not been committed [31].
  2. In contract, damages are intended, so far as money can do it, to place the claimant in the same situation as if the contract had been performed [32].
  3. However, in the case of tort "user damages" can be awarded.  For example, where real property has been taken, or damaged, by a trespasser.  In these cases, the courts had treated user damages as providing compensation for loss, albeit not loss of a conventional (actually occurring) kind [30].  It is no answer for the wrongdoer to show that the property owner would probably not have used the property himself had the wrongdoer not done so.
  4. User damages are also available for patent infringement and breaches of other intellectual property rights [26].
  5. In contract the obligation to pay damages is secondary (the primary obligation being to perform the contract) as a substitute for performance.  The court will notaward damages designed to deprive the contract breaker of any profit he may have made a consequence of his failure to perform [35] except, according to the decision in Attorney General v Blaketo the discretion to order an account of profits in exceptionalcircumstances [35].
  6. Separate to the concept of compensatory loss and or damages under the user principle are those which the Court of Chancery historically awarded under Lord Cairns Act. As Lord Reid explained, such damages are equitable in nature [46].  He rationalised that there were two phases in the development of these damages – the first phase, following from the Wrotham Park decision itself, where release fee damages had been awarded; and the second phase defined by the Attorney General v Blakedecision.
  7. The second phase was where matters started to go wrong; unless the hypothetical release fee resulted in an identifiable loss equivalent to the economic value of a proprietary right taken by the defendant.  Other than such cases, where the loss suffered is appropriately measured by reference to the economic value of the right which had been breached or infringed, there could be no damages for depriving the defendant of profits made as a result of the breach.
  8. In other words, the hypothetical release fee can be used as a tool for calculating the value of an asset lost, but it was notto be used as a matter of discretion to determine the measure or basis of damages.
  9. As Lord Reid concludes, common law damages for breach of contract are not a matter of discretion.  They are claimed as of right, and they are awarded or refused on the basis of legal principle.  [91] – [95]
Application to the facts of that case

Lord Reid held that the case before him was not one where the breach of contract had resulted in a loss of a valuable asset.  In reality, the claimant's losses were the cumulative result of breaches of a number of obligations, the most significance of which were the non-compete and non-solicitation covenants.  The decisions of the lower courts had to be overturned, and the case remitted for determination of what actual losses the claimant had suffered.

The reasoning of Lord Sumption

As stated earlier, Lord Sumption's reasons diverged from his brethren.  Lord Carnforth sought to explain the differences, describing Lord Reid's (and the majority's) analysis as entirely orthodox.  Lord Sumption's approach was, he said, more radical. Essentially, Lord Sumption was seeking to include cases where a notional release fee could be used as an evidential technique for estimating the claimant's loss [131] [124], and that this technique should be available to the judge.  Lord Carnforth disagreed with that approach, as it conflicted with the previous development of the law; it was not supported by the cases Lord Sumption used; and the approach gave no clear indication of the circumstances when such technique could be employed [136].

Conclusion

In conclusion, the conventional approach means losses must be proved.  There may be evidential difficulties in calculating such losses, but a way to so so has to be found.  The court should not shy away from making appropriate assessments and judgments even when the material before it only indirectly assists.  There is no place for an account of profit in the law of damages.  Damages in equity, under Lord Cairns Act of course survive but they are restricted to traditional categories where, principally, there is loss of a property right which is not remedied by specific equitable relief.  Attorney General v Blakemeans there is an exception to the prohibition on account of profits as a basis of damages, but this is confined to truly exceptional cases.  It is interesting to note that their Lordships did not identify any other single case where it was considered appropriate. Perhaps, Attorney General v Blakewill stand alone, for ever; or until the next spy tries to profit from his treason.



[1][1974] 1 WLR 798

[2]section 2 Chancery Amendment Act 1858

[3]Examples include Bracewell v Appleby [1975] Ch 408; Amec Developments v Jury’s Hotel (2001) 82 P&CR 22; Lunn Poly v Liverpool & Lancashire Properties [2006] EWCA Civ 430.  In some cases, no such damages were given; and actual loss was assessed as nominal (Stoke on Trent v Wass [1988] 1 WLR 1406, Surrey CC v Bredero Homes [1993] 1 WLR 1361).  The reasoning in these decisions is not easy to reconcile but it is to be noted in the first one an injunction was granted; in the second one no injunction was claimed (and in each compensatory damages, based on actual loss was nil or nominal). 

[4][1995] 1 WLR 267

[5][2004] EWCA Civ 570

[6][2001] 1 AC 268

[7][2010] EWHC 424 Ch

[8][2003] EWCA Civ 323

[9][2007] EWCA Civ 286

[10]The case had not been completed – liability had been determined but damages were still to be assessed. 

[11]Square brackets designate reference to paragraph numbers of the judgments

15/05/2018
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