Direct link Share on

The Supreme Court has unanimously decided that negotiating damages are not available for breach of restrictive covenants.

Background

In a previous Bulletin (April 2016), I discussed the decision of the Court of Appeal in Morris-Garner v One Step [2016] EWCA Civ 180. The Court upheld the trial judge’s decision that, where the seller of a business had breached non-compete and non-solicit covenants, the purchasers were entitled to judgment for damages to be assessed on a Wrotham Park basis, ie for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the sellers from their obligations. The Court of Appeal considered that the test was whether an award of damages on the Wrotham Park basis was the just response in the particular case. That was a matter for the judge to decide on a broad brush basis. The Supreme Court has now decided that the approach of both the trial judge and of the Court of Appeal was incorrect.

The facts

Karen Morris-Garner (KMG) established a business providing support for young people leaving care. She agreed to sell a 50% interest to Mr and Mrs Costelloe, One Step (Support) Ltd being incorporated as a vehicle for the transaction. Over time the working relationship between KMG and Mr Costelloe (who jointly ran the business) deteriorated. KMG incorporated another company, Positive Living Ltd. KMG sold her shares in One Step to another company, owned by Mr Costelloe, for £3.15m. She agreed with One Step to be bound for three years by confidentiality, non-compete and non-solicit covenants. In breach of those covenants, Positive Living traded in competition with One Step. KMG and her partner subsequently sold their shares in Positive Living for £12.8m. One Step commenced proceedings against KMG for damages for breach of covenants (and against KMG’s partner who had entered similar covenants).

 An overview of the decision of the Supreme Court

The Supreme Court unanimously allows the appeal. In doing so, it has handed down a landmark decision on the law of damages. By way of overview:

(1)   The Supreme Court eschews the language of “Wrotham Park damages” and (as they are sometimes called) “licence fee damages”. Instead, it adopts the term “negotiating damages”.

(2)   The judgments run to 58 pages. They are not a light read, and are likely to be analysed and their effect debated in future cases.

(3)   The lead judgment is given by Lord Reed (with whom Lady Hale, and Lords Wilson and Carnwath agree). Lord Sumption also delivers a judgment allowing the appeal. He concludes, “My reasons are not in all respects the same as Lord Reed’s, but our conclusions appear to me to be closely aligned” [126]). Lord Carnwath also delivers a judgment in which he agrees with Lord Reed’s analysis and takes issue with certain aspects of Lord Sumption’s analysis.

(4)   Therefore, what Lord Reed says in his judgment represents the view of a majority of the court.

Key points in the Supreme Court’s decision

Whilst the judgments will repay careful and detailed reading, key points include the following:

(1)   Lord Reed discusses “First principles”, including (i) user damages in tort, (ii) common law damages for breach of contract, and (iii) damages in equity under Lord Cairns’ Act: [24]-[47]. 

(2)   He divides the cases on negotiating damages into two phases, separated by Attorney-General v Blake: [48]-[90]. He makes passing reference to Marathon v Seddon at [75], the subject of another previous Bulletin, without detailed discussion.

(3)   Lord Reed sets out 12 conclusions at [95]. His conclusions include the following:

  • 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: [95(9)].
  • 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: [95(10)].

(4)  Applying his conclusions to the present case and explaining why negotiating damages are unavailable for breach of restrictive covenants in this context, Lord Reed says [98]: 

“This is a case brought by a commercial entity whose only interest in the defendants’ performance of their obligations under the covenants was commercial. Indeed, a restrictive covenant which went beyond what was necessary for the reasonable protection of the claimant’s commercial interests would have been unenforceable. The substance of the claimant’s case is that it suffered financial loss as a result of the defendants’ breach of contract. The effect of the breach of contract was to expose the claimant’s business to competition which would otherwise have been avoided. The natural result of that competition was a loss of profits and possibly of goodwill. The loss is difficult to quantify, and some elements of it may be inherently incapable of precise measurement. Nevertheless, it is a familiar type of loss, for which damages are frequently awarded.”

(5)   There are two important qualifications to this general conclusion: (i) negotiating damages might be available for breach of confidentiality: [92], [93], [99]; and (ii) evidence of a hypothetical release fee might be relevant to the assessment of damages for breach of restrictive covenants, but such a fee is not itself the measure of the claimant’s loss in a case of the present kind: [100].

The full judgment can be read here.

Clerks

Staff