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Damages in Lieu of Injunction: Privy Council guidance on "Wrotham Park damages"

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In the 2009 case of Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd, the Privy Council shed some light on the meaning of "Wrotham Park damages".

In this article (first appearing in FM World), we discuss the court's jurisdiction to award damages in lieu of an injunction in light of this case.

When one party is wronged by another e.g. for breach of contract or tort, there are a range of legal remedies it can invite a court to award. The most common remedy is damages. In other words the wronged party asks the court to award it a sum of money that will compensate it for the breach. However, in some circumstances, a wronged party does not (just) want money compensation. Instead, it wants a court to order that the other party take certain action or to change its behaviour so as to stop infringing the first party's legal rights.

Take for example the case of someone who lives next to a noisy motor racing circuit: the wronged party might ask a court to grant an injunction preventing the owners of the circuit from carrying on their trade on the basis that it has the legal right not to have to endure a nuisance inflicted on it by a neighbour. But can the court decide not to grant the injunction and award damages instead? The answer is yes, but not in every case.

So when can a court award damages in lieu of an injunction? When considering this question, a court will look at all the circumstances of the case: it cannot take the decision to deprive a party of its legal rights lightly and must do so only in "exceptional circumstances". It can take into account certain factors such as the extent of the injury to the applicant's legal rights, whether the applicant has indicated that a money payment would compensate it for the breach of its rights, whether there is anything in the way the claimant has behaved that would justify the refusal of an injunction or whether there is any other factor that would make it oppressive to grant the injunction.

Another case in which an injunction was applied for, but refused, was Wrotham Park Estate Company Limited v Parkside Homes Limited [1974] 1 WLR 798 , a case which lent its name to the term "Wrotham Park damages".

The claimant in that case owned land which had the benefit of a restrictive covenant preventing building upon it. In breach of that covenant, the land was built on. The claimant asked the court for an injunction ordering the demolition of the buildings built. The court would not grant the injunction to order the demolition of the buildings unlawfully built on its land, on the basis that to do so would be unfair to the inhabitants of the houses. Instead, the court decided to award damages to represent the amount that the claimant might have accepted in exchange for the release of the restrictive covenant (even though the claimant would never have agreed to this at any price). The amount payable was 5% of the developer's profits and was shared between the developer and the inhabitants.

The principle of Wrotham Park damages has been recently re-considered in the case of Pell Frischmann Engineering Limited v Bow Valley Iran Limited & Others [2009] UKPC 45 Privy Council Appeal No 0020 of 2009 . In that case the Privy Council laid down clear guidance on how Wrotham Park damages would be assessed and awarded (see below). The case involved a dispute between parties whose negotiations to agree a joint venture to develop an offshore oilfield broke down and resulted in various claims including breach of confidentiality agreements, on which a damages award under the principle of Wrotham Park damages was eventually based.

What has the Privy Council said about "Wrotham Park damages"?

(1) Damages awarded are intended to compensate the claimant for the court's decision not to grant relief in the form of an order for specific performance or an injunction.

(2) The court will award an amount of damages which represents the sum that the claimant might reasonably have demanded from the defendant as compensation for allowing it to breach the relevant contractual provision. The court assesses this by reference to a "hypothetical negotiation" carried out between the parties at the date of breach.

(3) At the "hypothetical negotiation" both parties are assumed to act reasonably and the fact that the parties would never have reached a deal in reality is irrelevant.

(4) Although these damages are awarded in place of relief e.g. an injunction, it is not a prerequisite to their being awarded that either (i) the claimant applied for the injunction in the case or (ii) there was any prospect of such application succeeding.

In the Pell Frischmann case, point (3) was relevant because the claimant's chairman was described as "a very determined (even a recklessly determined) negotiator". Point (4) was relevant because the claimant had waited until 2004 before issuing proceedings, a delay that was described as "extraordinary and unexplained". Even though this would ordinarily have meant that the claimant had no prospect of obtaining an in junction, this did not mean that an award of Wrotham Park damages was beyond reach (although it would be a reason for "moderation" in assessing the damages, the court said).

The case is a useful reminder of the court's jurisdiction to award damages instead of an injunction, and that the suffering of financial loss is not necessarily a prerequisite to an award of damages. Even if you don't think that a counterparty has suffered much actual loss from your breach, be warned, the court might choose a higher price.