Supreme Court rows back on Wrotham Park damages

17th May 2018

Walker Morris’ Head of Commercial Dispute Resolution Gwendoline Davies explains new Supreme Court authority on claiming gain-based ‘negotiating’ or ‘Wrotham Park’ damages against a party in deliberate breach.

What’s the damage[s]?

The majority of commercial dispute resolution involves a claimant’s pursuit of standard, ‘loss-based’ damages. In contract, that means expectation or reliance loss, where the innocent party is put in the position it would have been in if the contract had been properly performed.  In tort, it means restorative loss where the innocent party is put back in the position it was before the tort occurred.  In certain types of cases (such as claims against fiduciaries, claims for breach of confidence, unjust enrichment claims, and the like) defendants can be ordered to surrender profits (or to ‘account’) where they have profited from a wrongdoing at the expense of another.  In the recent case of Morris-Garner & Anor v One Step (Support) Ltd [1] (a case dealing with a defendant’s breach of restrictive covenants), the Supreme Court has addressed the circumstances in which an alternative ‘gain-based’ type of damages might be available.

The to-ing and fro-ing of ‘negotiating damages’

Case law surrounding the availability of gain-based damages has been unclear, and even contradictory, going back to the 1974 first instance property law decision in the Wrotham Park [2] case.  A property developer had developed land in breach of a restrictive covenant and although the development had not diminished the value of the claimant’s estate “by one farthing”, the court considered that it would be unjust for the claimant not to be compensated at all.  The court awarded damages in lieu of an injunction and the amount was such as the claimant might reasonably have demanded as a quid pro quo for relaxing the covenant which had been breached.  The underlying principle was that the claimant can recover such sum as the defendant would have paid to release the relevant obligations – the defendant has received a gain from its breach and the innocent party has lost a sum which it could otherwise have gained from a commercial negotiation.

This type of damages is interchangeably referred to as a Wrotham Park award, hypothetical bargain damages, negotiating damages or release-fee damages.

In 2001 [3] the House of Lords decided that this type of damages should only be available for breach of contract claims exceptionally, but in 2016 [4] (in the decision which was the subject of the instant appeal), the Court of Appeal suggested that negotiating damages could be available where that provided a just result, and that there was no need to establish exceptionality.  That decision appeared to mean that negotiating damages would be available to claimants more readily than ever before.

Supreme Court decision

In a judgment that represents a significant ‘rowing back’ from that position, the Supreme Court has confirmed:

• The award of damages can only be based on legal principle. Judges have no discretion as to, nor can claimants choose, the basis on which damages can be awarded.
• Common law damages for breach of contract are intended to compensate the claimant for loss or damage resulting from the non-performance of the contractual obligation in question. It is therefore for the claimant to establish that a loss has occurred (or that it is in a less favourable position than it would have been had the contract been properly performed). If no loss can be established, then the claimant cannot be awarded more than mere nominal damages.
• Mere difficulty in quantifying loss does not justify an award of damages on anything other than the loss-based, standard basis.
• Similarly, an award of damages on anything other than the loss-based, standard basis is not justified simply because the breach was deliberate nor to deprive the defendant of profits derived from his breach.
• Negotiating damages can, however, be awarded for breach of contract where the defendant has effectively taken something for nothing, for which the claimant would have been entitled to require payment. The rationale is that the claimant has been deprived of a valuable asset and determining the value of that asset is an appropriate means of quantifying loss.

WM Comment

In practice, negotiating damages may well be available in cases involving the breach of a restrictive covenant over land, an intellectual property or confidentiality agreement, for example, whereby detriment suffered by the claimant is not purely economic. Otherwise, however, gain-based damages for breach of contract are likely to be available only exceptionally after all.  (There is currently no real authority for whether claim gain-based/negotiating-style damages can be claimed in tort, although there is academic support for the principle that a similar rationale will apply in tort as in contract.)

While the Supreme Court has clarified that gain-based damages will be available less readily than the Court of Appeal had previously suggested, it has nevertheless stopped short of providing a straightforward, easily applicable test. Exactly what is the appropriate measure of damages will therefore fall to be decided according to the facts on a case-by-case.  Perhaps somewhat paradoxically, that uncertainty may lead to many claimants continuing to plead for negotiating damages wherever the question is arguable at all, even if only to establish a negotiating position!

____________________

[1] [2018] UKSC 20
[2] [1974] 1 WLR 798
[3] Attorney General v Blake [2001] 1 AC 268
[4] [2016] EWCA Civ 180