The Court of Appeal has upheld an award of “Wrotham Park damages” in a business sale for breach of confidentiality, non-compete and non-solicitation covenants.

The relevant principles have been clarified in Morris-Garner v One Step (Support) Ltd [2016] EWCA Civ 180.[1]

What are “Wrotham Park damages”?

In a suitable case, damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. A Wrotham Park award is sometimes called “hypothetical bargain damages” or “negotiating damages”. The principle behind the award is so that the Claimant can recover whatever the Defendant would have paid it, if Defendant had negotiated a release of its obligations (rather than breaching them). Wrotham Park damages originated in a property case,[2] but they are available in contract claims more generally, in breach of confidence cases, and in proceedings for breach of intellectual property rights.

Background

The Claimant Company provided supported living services to vulnerable people. The Defendants were a former director and shareholder, and a former employee of the Claimant Company. Following a dispute regarding transfer of ownership and setting up of a competing company, a settlement was agreed between the parties. This included confidentiality, non-compete and non-solicitation covenants from the Defendants.

However, further problems arose. The Claimant Company issued proceedings against the Defendants for alleged breaches of the restrictive covenants. Phillips J found that both Defendants had breached their non-compete and non-solicitation covenants. In addition, the first Defendant had breached her confidentiality covenant. She had emailed to herself and wrongfully used a large quantity of confidential market research and sales leads while still working for the Claimant.

An accountant’s report showed the Claimant suffered a “shortfall” in profits. However, the report did not cover ongoing loss, nor quantify loss of market share or general reputational damage. The Claimant said its losses would be very difficult to prove. An award of provable damages would be inadequate. The Claimant asked the Court to award either an account of profits or Wrotham Park damages. This would represent the amount which would have theoretically been agreed between the parties acting reasonably, before the breaches occurred, as the price for releasing the Defendants from the restrictive covenants.

Phillips J did not regard the circumstances as sufficiently exceptional to justify an account of profits. However, he accepted that it would be difficult for The Claimant to identify its financial loss, bearing in mind the degree of secrecy in the establishment of the business. He therefore considered it just to give the Claimant the option to elect for Wrotham Park damages, not least because the covenants provided that the restraint was subject to consent, not to be unreasonably withheld.

The Defendants appealed and the Court of Appeal considered the circumstances in which Wrotham Park damages could be awarded.

Decision

The Court of Appeal upheld the Wrotham Park damages award. It clarified that this remedy is not restricted to cases where the Claimant has suffered no “identifiable financial loss”. Nor must the case be “exceptional”. The test is whether an award on the Wrotham Park basis would be“the just response”.

Longmore LJ expressly approved the three features identified in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323[3] as justifying Wrotham Park damages:

  1. The Defendant’s deliberate breach of its contractual obligations for its own reward.
  2. The Claimant’s difficulty in establishing resultant financial loss.
  3. The Claimant’s legitimate interest in preventing the Defendant’s profit-making activity in breach of contract.

Comment

This decision explains the principles governing the award of Wrotham Park damages, although clearly each case will continue to depend on its individual circumstances.

The Court of Appeal has confirmed that Wrotham Park damages are not restricted to cases where the Claimant has suffered no “identifiable financial loss”, nor is the case required to be “exceptional”, before the award can be granted. Instead, the test is whether, in the particular case, Wrotham Park damages are “the just response”. The factors in Experience Hendrix justifying a Wrotham Park award have been approved.

The implications for future cases remain to be seen. The Defendants argued that, by upholding a Wrotham Park award in this case, the Court of Appeal might be allowing the exception to become the norm, especially in employment and sale of business cases. The Court appears to have approved Wrotham Park awards to a wider degree. However, it was emphasised that this was not a typical case e.g. the Defendants’ acceptance that the covenants were not an unlawful restraint of trade, and the Defendants’ “subterfuge and furtiveness” in their breaches.

Longmore LJ suggested additional factors in a sale of business case, for example where the Defendant’s breach of contract makes it unlikely that any interim injunction would be relevant. Whilst the Court of Appeal has confirmed that a case need not be “exceptional” to justify a Wrotham Park award, generally the Court may still require unusual or aggravating factors.

Time will tell whether the decision results in more Wrotham Park awards being made by the Courts. However, offenders will need to be doubly aware of the risks and likelihood that such misconduct will be compensated. Any aggrieved party will certainly want to rely on this case where a dispute arises and financial loss is difficult to identify.

For further information on the issues raised within this article please contact Simon Lockley.


[1] http://www.bailii.org/ew/cases/EWCA/Civ/2016/180.html

[2] Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798

[3] http://www.bailii.org/ew/cases/EWCA/Civ/2003/323.html

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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