Negotiating Damages for Breach of Contract

The recent decision of the United Kingdom Supreme Court in Morris-Garner[1] is one of the most significant cases on damages to emerge from an appellate court for some years.

The underlying facts were simple enough. One Step (Support) Ltd alleged that the Morris-Garners had breached certain non-compete covenants in a sale and purchase agreement between them and One Step. The trial judge found the Morris-Garners to be liable and the case proceeded through the appellate courts on the question of how damages should be quantified.

With few exceptions, damages for breach of contract are assessed on a compensatory basis. In the case of breach of non-compete covenants, the ordinary measure is the value of the business profits which the claimant would otherwise have made but which it has lost as a result of the defendant’s unlawful behaviour.

So-called Wrotham Park damages are damages calculated as an amount which would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendant from its obligation. They are also known as “negotiating damages” or “release damages”. The term arose from the decision of Brightman J in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. Since then, the concept of damages assessed on the basis of a notional release fee, has been applied in a variety of quite disparate contexts. Those cases have generally been:

• Cases in which the claimant’s rights have been infringed, but the claimant has not suffered any apparent pecuniary loss (for example, trespass, wrongful use of property, disclosure of confidential government information);
• Cases in which the claimant would ordinarily be entitled to the enforcement of its rights, but the notional release fee is the price of non-enforcement (for example, as a substitute for an injunction when an injunction is not appropriate for some reason);
• Cases where the claimant has suffered pecuniary loss, and the notional release fee is used as evidence of that loss i.e. as a surrogate for calculation of loss of profits from breach (eg patent infringement).

The Supreme Court has now clarified the theoretical basis for such awards of damages, and the circumstances in which they are available.

The Court held that negotiating damages are available in cases of breach of contract when they can be assessed by reference to the economic value of the right which has been breached, considered as an asset. They are therefore consistent with the compensatory purpose of contractual damages because the claimant has in substance been deprived of a valuable asset.

The general availability of negotiating damages has yet to be recognised in New Zealand, and following this judgment are unlikely to be, as a separate head of damages at least.  But the Supreme Court’s careful articulation of the framework within which compensatory damages are awarded will be useful in this country, especially in cases involving intellectual property rights or breach of a confidentiality agreement.

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