The disavowal of “Wrotham Park” damages

– Case note: Morris-Garner & Anor v One Step (Support) Ltd [2018] UKSC 20

by Jay Tseng [1]

The UK Supreme Court has recently handed down its exegesis on the law of damages in Morris-Garner & Anor v One Step (Support) Ltd (Morris-Garner), [2] dealing with what have historically been described as “Wrotham Park” damages. More recently this class of damages was described by Neuberger LJ (as his Lordship then was) as “negotiating damages”, [3] and at least in Morris-Garner, Lord Reed made clear at the outset of his judgment that his judgment would “abjure the use of the term ‘Wrotham Park damages’”. [4] This is unsurprising given the loose treatment of the term. [5]

The UK Supreme Court’s decision in Morris-Garner demonstrates an orthodox and principled approach to ascertaining the circumstances where damages for breach of contract could be assessed by reference to the sum which a claimant could hypothetically have received in return for releasing a defendant from the obligation which they have failed to perform.

The term “Wrotham Park” damages originates from the award of damages by Brightman J in Wrotham Park Estate Co Ltd v Parkside Homes Ltd. [6] In Wrotham Park, the plaintiffs owned an estate. Developers subsequently developed the land on the estate in breach of a restrictive covenant which required that the land would not be developed without the estate owners’ permission. The plaintiffs then commenced proceedings against the developers of the land seeking a mandatory injunction to demolish the houses built by the developer. Brightman J held that while the plaintiffs were prima facie entitled to an injunction, a just substitute for an injunction would be “such a sum of money as might reasonably have been demanded by the plaintiffs from [the developers] as a quid pro quo for relaxing the covenant”.

Facts in Morris-Garner

The First Appellant, Morris-Garner, established a business of providing support for young people leaving care in 1999. In 2002, a 50 per cent interest was sold to Mr and Mrs Costelloe. The Respondent, One Step (Support) Ltd was incorporated as a vehicle for the transaction. Following a breakdown in the relationship between the First Appellant and the Costelloes, the First Appellant was served with a deadlock notice under the shareholders agreement. As a result, the First Appellant sold her shares to the Respondent and agreed to a restrictive covenant which prevented her from competing with the Respondent. The First Appellant subsequently emailed confidential research information held by One Step to her personal email account. The First Appellant then incorporated a company called Positive Living which traded in competition with the Respondent.

The Respondent commenced proceedings against the Appellants for breaches of the restrictive covenants. The trial judge, Phillips J, held that the Appellants had breached the restrictive covenants and damages were to be assessed on a Wrotham Park basis, that is, the amount which would have notionally been agreed between the parties, acting reasonably, as a price for releasing the Appellants from their obligations. The Court of Appeal dismissed the appeal and upheld the order of the trial judge. The Appellants then appealed to the UK Supreme Court on the question of damages.

Judgment of the UKSC

The UK Supreme Court allowed the appeal. The lead judgment was delivered by Lord Reed (with Lady Hale, Lords Wilson and Carnwath agreeing). Lord Reed set out the following principles following his exposition on the law of damages: [7]

1. Damages assessed by reference to the value of the use wrongfully made of property are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property.
2. Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights.
3. Damages can be awarded under Lord Cairns’ Act in substitution for specific performance or an injunction.
4. Damages under Lord Cairns’ Act can be quantified on the basis of the economic value of the right which the court has declined to enforce, and which it has consequently rendered worthless. Such a valuation can be arrived at by reference to the amount which the claimant might reasonably have demanded as a quid pro quo for the relaxation of the obligation in question. The rationale is that, since the withholding of specific relief has the same practical effect as requiring the claimant to permit the infringement of his rights, his loss can be measured by reference to the economic value of such permission.
5. It is for the court to judge what method of quantification, in the circumstances of the case before it, will give a fair equivalent for what is lost by the refusal of the injunction.
6. Common law damages for breach of contract are intended to compensate the claimant for loss or damage resulting from the non-performance of the obligation in question.
7. Where damages are sought at common law for breach of contract, a claimant is required to show they have suffered loss as a result of the breach.
8. Where the breach of a contractual obligation has caused the claimant to suffer economic loss, that loss should be measured or estimated as accurately and reliably as the nature of the case permits. The law is tolerant of imprecision where the loss is incapable of precise measurement, and there are also a variety of legal principles which can assist the claimant in cases where there is a paucity of evidence.
9. Where the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss. In that event, he cannot be awarded more than nominal damages.
10. Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.
11. Common law damages for breach of contract cannot be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances, following Attorney General v Blake. [8] 
12. 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.

In Lord Sumption’s analysis, his Lordship sought to recast the body of rules relating to damages which he regarded as problematic and economically unsound. [9] Ultimately Lord Sumption’s conclusions are similar to those reached by Lord Reed. Lord Carnwath wrote a judgment separately, whilst in agreement with Lord Reed’s judgment, also identified the differences between Lord Reed and Lord Sumption’s judgment and included further observations of his own. [10]

Conclusion

Judicial consideration of negotiating damages has received little attention in Australia, the topic having only received judicial consideration in eight cases to the date of this case note. [11] The Australian cases largely deal with orthodox scenarios of claimants seeking negotiating damages where there has been an invasion of property or analogous rights (including breaches of restrictive covenants) or trespass.

The exception was in Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874, where Einstein J addressed the issue of awarding negotiating damages in a breach of management contract. However, his Honour was largely concerned with a submission by the plaintiff seeking an account of profits. Ultimately, his Honour thought compensatory damages were the more appropriate remedy in that case and his discussion on the Wrotham Park line of cases was brief.

To the extent that negotiating damages might be awarded for breach of contract, or damages might be awarded by an Australian court in lieu or in addition to an injunction under Lord Cairns’ Act, [12] Lord Reed’s judgment in Morris-Garner is a welcome development and of relevance to these issues under Australian law. Lord Reed demonstrates that despite the obscure nature of certain “classes” of damages, [13] they are capable of being analysed, explained and supported by basic principles of law.

[1] Solicitor, HopgoodGanim, LLB QUT, LLM UCL.

[2] [2018] 2 WLR 1353.

[3] Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] 2 EGLR 9, [22].

[4] [2018] [2018] 2 WLR 1353, [3].

[5] Pell Frischmann Ltd v Bow Valley Iran Ltd [2011] 1 WLR 2370, 46 (per Lord Walker).

[6] [1974] 2 All ER 321.

[7] [2018] 2 WLR 1353, [95].

[8] [2001] 1 AC 268.

[9] [2018] 2 WLR 1353, [109]-[123].

[10] [2018] 2 WLR 1351, [127]ff.

[11] Manderson v Wright (No 2) [2018] VSC 162; Break Fast Investments Pty Ltd v PCH Melbourne Pty Ltd (2007) 20 VR 311; Bunnings Group Ltd v CHEP Australia (2011) 82 NSWLR 420; Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874;Longtom Pty Ltd v Oberon Shire Council (1996) 7 BPR 97,599; Llavero v Shearer [2014] NSWSC 1336; Goodwin v Western Australian Sports Centre Trust [2014] WASC 138; Immer (No 155) Pty Ltd v Houghton (unreported, judgment of the New South Wales Supreme Court, 13 November 1996).

[12] At this point, the relevance of the Supreme Court of Judicature Act 1873 (UK) should be noted. C.f. the “fusion fallacy” which is argued in J Heydon, M Leeming and P Turner, ‘Meagher, Gummow and Lehane’s Equity, Doctrines, and Remedies’ (LexisNexis, 5th edition, 2015).

[13] For example, Vindicatory Damages – see R (on the application of Lumba (Congo) v Secretary of State for the Home Department [2012] 1 AC 245. For an interesting paper on this topic, see Edelman, J “Vindacatory Damages” (TC Beirne School of Law conference ‘Private Law in the 21st century’).