Please see the judgment

It is often very difficult in cases involving breaches of restrictive covenants and misuse of confidential information to recover damages. It can be hard to prove loss. Employees may adduce evidence to show, for example, that customers would have ceased to deal with the claimant employer as a result of the mere fact of the employee’s departure such that the employee’s breach of a non-solicitation covenant has not caused loss. In cases about misuse of confidential information, the employee may be able to show that information wrongly removed could easily have been obtained from legitimate sources such that no loss flows from the misuse.

A means of addressing this problem has been to seek to recover so-called Wrotham Park damages, following Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. These are, in outline, damages assessed by reference to the sum that the defendant would hypothetically have paid, by way of a fee that could have been negotiated, in order to act as it did. Where such damages can be recovered, it does not matter that the employer is unable to show that it has suffered loss. As long as the employer can establish that the hypothetical fee should be paid, that is enough to give rise to some remedy. There are obvious attractions in this remedy for a claimant.

There have been examples in the case law. Thus in One Step (Support) v Morris-Garner [2014] EWHC 2213 (QB), [2015] IRLR 215, employees acted in breach of post-termination restraints. The claimant recognised that contractual damages should be the normal remedy but said that it would be very difficult to establish that any particular business had been lost because of the defendants’ activities. It therefore sought an award of Wrotham Park damages. The judge held that that was a

prime example of a case in which Wrotham Park damages should be and are available

because of the difficulty of identifying financial loss. That was upheld by the Court of Appeal [2016] EWCA Civ 180, [2016] IRLR 435 which said that the right question was whether such an award of damages was the “just response”. It had been in that case because the defendants were in deliberate breach of their obligations for their own reward; the claimant would have difficulty showing the financial loss which resulted; and the claimant had a legitimate interest in preventing the defendants’ profit-making activity in breach of contract.

An application for similar relief was made in Marathon Asset Management v Seddon [2017] EWHC 300 (Comm), [2017] ICR 791. That failed because the judge found on the facts that the value of the hypothetical fee was nil.

Morris-Garner was appealed to the Supreme Court. Its decision is of great significance for the law of damages not just in relation to unlawful competition claims but also generally. The effect of the Supreme Court’s decision is materially to limit the circumstances in which a claimant can claim Wrotham Park damages.

The main judgment was given by Lord Reed. Lady Hale, Lord Wilson and Lord Carnwath agreed. Lord Sumption gave a judgment which concurred in the result but by adopting a different route. Lord Carnwath gave his own judgment, drawing attention to the differences in approach between Lords Reed and Sumption and emphasising that the former’s judgment represented the ratio of the Court’s decision.

Lord Reed’s judgment is a thorough and learned analysis of the law which rejects the proposition that Wrotham Park damages are generally available as some type of fall-back claim simply because it is a just response. Instead Lord Reed’s analysis starts by considering the types of case in which what he described as “negotiating damages” damages have been awarded and confines such damages to those cases.

One class of case is that of tortious claims for making valuable use of another’s land or goods such as by trespass or conversion. In those cases a reasonable fee to commit the tort is a form of compensation for loss where the loss in question is the claimant’s inability to control the use of property and where that power to control is itself a valuable asset.

Another type of case in which negotiating damages have been awarded is compensation under Lord Cairns’ Act which permitted equitable courts to award damages in lieu of an injunction. In that case, the damages award is in substitution for an injunction and may reflect the economic value of the right not enforced. That could be measured by reference to the fee which could have been demanded for the relaxation of the right. The award made in Wrotham Park was under Lord Cairns’ Act. The claimant sought an injunction requiring houses that had been built in breach of covenant to be torn down. That was refused and damages were awarded instead. The damages were calculated in the basis of the fee the developer would have had to pay to build on the land.

Cases subsequent to Wrotham Park all concerned tortious interference with land or breach of a covenant affecting land. However, after Attorney-General v Blake [2001] 1 AC 268 the number of cases applying Wrotham Park increased but “on a wider and less certain basis”.

The question was whether Wrotham Park justified negotiating damages awards in breach of contract cases.

Lord Reed said that contract damages were a substitute for performance and that is why such damages are usually an adequate remedy. The law makes provision to assist in cases where proof is difficult and to enable damages to be paid for non-economic loss. But the aim is to establish the loss which flows from the defendant’s failure properly to perform.

The question was whether negotiating damages reflected the claimant’s loss. Lord Reed’s answer was that in general, they would not. The position would be otherwise only where the breach of contract deprived the claimant of a valuable asset such as a right over land or intellectual property or confidential information. Loss can then be measured by determining the economic value of the asset in question:

The defendant has taken something for nothing, for which the claimant is entitled to require payment.”

These principles meant that negotiating damages could be awarded in the following types of case:

  • invasion of rights to tangible movable or immovable property
  • infringement of intellectual property rights
  • damages in substitution for an injunction based on the economic value of the right which the court has refused to enforce
  • contract cases but only where the loss suffered is represented by the value of an asset of which the claimant has been deprived such as the right to control the use of land or intellectual property or a confidentiality agreement. Lord Reed rejected the proposition that all contractual rights should be regarded as assets. He said instead that this would only be the case where:

“the contractual right is of such a kind that its breach can result in an identifiable loss equivalent to the economic value of the right, considered as an asset”

Outside that case, a hypothetical release fee would not be the measure of the claimant’s loss.

In most contract cases, damages are awarded on the basis of the claimant demonstrating financial loss. A claimant who cannot do that will recover only nominal damages.

Wrotham Park was becoming the last refuge of the claimant who struggled to prove loss as a result of breach of contract. Morris-Garner substantially limits its scope.