Damages: Get what you would have bargained for?

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

Summary

Quite often in property cases, parties will make a claim for "Wrotham Park" damages. Essentially, these are damages which represent a sum of money which might reasonably have been demanded by the party whose right has been infringed, if the point had been negotiated on a commercial basis. This basis of damages can be controversial, as quite often the sums involved can exceed the actual losses that the claimant suffers. This measure of damage has, in the past, been extended to non-property cases. This Supreme Court decision has clarified the circumstances in which such damages may be available.

The facts

This was not a property dispute. It was, in fact, a claim for damages arising from a corporate transaction concerning the sale of shares. The parties had once carried on business together, but after falling out, a buy-out agreement was entered into. This provided for the sale of one party's shares to the other for the sum of £3.15 million. In order to protect the ongoing business, the buyer required the seller to enter into various covenants relating to confidentiality and which also prohibited the seller from competing with the business or soliciting its clients.

In breach of those covenants, the seller began trading in competition and the buyer's business suffered as a result. There was first a trial on liability and the Judge found that the seller had, in fact, breached the various covenants and was liable in damages. As the first trial was only on the question of liability, damages were not assessed, but the Judge did indicate that this was a prime example of where Wrotham Park damages might be payable.

The Judge reached this conclusion as he considered it difficult for the buyer to precisely identify the financial loss it had suffered and, for that reason, it was only fair that it should recover damages equivalent to what it might have negotiated for releasing the seller from its covenants. Consequently, the Judge made an order indicating that the Claimant was entitled to judgment for damages to be assessed on the Wrotham Park basis or, alternatively, based on the ordinary compensatory basis.

The expert evidence suggested that the Wrotham Park damages were in the region of £5.6m to £6.3m whereas the compensatory basis would amount to between £3.4m and £4.6m.

Unsurprisingly, the buyer chose to seek damages on the Wrotham Park basis. However, the seller did not agree that Wrotham Park damages were available and it is this point which reached the Supreme Court.

Before reaching the Supreme Court, the matter was considered by the Court of Appeal, which unanimously decided that the Wrotham Park basis was the appropriate basis for damages. In the main, they considered that it was difficult to identify the actual loss and, therefore, this was the correct way forward. The Court of Appeal also observed that the sum arising from such calculation may represent more than the Claimant's actual loss, but that the Court could exercise their discretion and adjust the amount having regard to other factors.

The matter then reached the Supreme Court. Practitioners were watching the case closely given its importance in real estate circles, where restrictive covenants are very common.

Supreme Court decision

Wrotham Park itself was a case about a restrictive covenant which had been breached. The beneficiaries of the covenant did not object until after the development had been constructed and could not really demonstrate any financial loss. It was for that reason that the Court awarded damages on the basis of what the parties might have negotiated for a release of the restrictive covenant, which it assessed at around 5% of the anticipated development profit.

The Supreme Court carefully analysed the historic cases that were decided after Wrotham Park and then sought to clarify the law as it stands today. Essentially, the conclusion was that if damages were capable of being quantified and that was the proper measure for loss, then the Wrotham Park basis or the "negotiating damages" basis had no role to play. In this case, it was capable of quantifying the loss of profits by means of expert evidence and, for that reason, the Wrotham Park basis was not appropriate. The Supreme Court also discouraged the use of the term of "Wrotham Park damages" and preferred instead the term "negotiating damages" which we should expect now to be adopted by claimants.

It should be noted that one member of the Supreme Court panel, Lord Sumption, did not agree and considered that it was a question for the trial Judge to decide. Nevertheless, the decision stands by way of a majority decision and a trial Judge must now consider the quantum of damages, having regard only to the evidence on loss of profits.

Our comments

Although this decision may be disappointing for those in a commercial arena, it is comforting that the negotiating damages basis remains a proper basis for damages in real estate related disputes. It is, of course, still difficult to properly estimate what a reasonable party might have negotiated and so there will still be risks in pursuing such claims. Nevertheless, in some cases this may be the only remedy available.

Saleem Fazal