How much would you charge to let your counterparty breach the contract – Wrotham Park damages
17 May 2016
The Court of Appeal's decision in Karen Morris-Garner & Andrea Morris-Garner v OneStep (Support) Ltd  EWCA Civ 180 suggests that Wrotham Park damages may become more common as a remedy for breach of contract. These damages reflect how much the innocent party would have asked for to release the defaulting party, had it been asked, and is a useful remedy where it is difficult to show financial loss. The difficulty has been that it has not been clear when they should become available. The Court of Appeal has now clarified the issue: Wrotham Park damages will be awarded where the claimant would have very real problems in establishing financial loss and it is a "just" response to a breach of contract. The Court of Appeal rejected the notion that such damages should be restricted to exceptional circumstances.
OneStep (Support) Limited (OneStep) is a social care business. In 2002, its shares were divided equally between Karen Morris-Garner and Charmaine Costelloe and both were also directors. They had also entered into a shareholders agreement, which included certain non-compete clauses. Both Charmaine's husband, Martin Costelloe, and Karen's civil partner, Andrea, were also heavily involved in the business.
In 2004, the working relationship between the Morris-Garners and the Costelloes began to break down. In 2006, Charmaine served a "Deadlock Notice" under the shareholders agreement that required Karen to either buy Charmaine's shares or sell her own for a certain price. Karen opted to sell her shares, stepped down as a director of the company, and entered into a settlement deed which contained further non-compete clauses. Andrea entered into a similar settlement deed to terminate her employment with OneStep.
However, the month before the "Deadlock Notice" had been served, and unbeknownst to anyone at OneStep, Karen had incorporated a new company called Positive Living Limited (Positive Living). In 2007, Positive Living started marketing its business. The services it offered included those also offered by OneStep. In 2012, OneStep launched proceedings against both Karen and Andrea Morris-Garner for breach of the restrictive covenants in the shareholders agreement and the settlement deed.
At first instance, Philips J found that the Morris-Garners had breached their non-compete obligations and held that OneStep were in principle entitled to "Wrotham Park damages" to reflect the amount that might have been reasonably demanded by OneStep in 2007 for releasing the Morris-Garners from those obligations.
The Morris-Garners appealed, both in respect of the question of breach and as regards the availability of Wrotham Park damages as the remedy. This note focuses on the latter issue.
What are Wrotham Park damages?
The primary remedy for breach of contract is damages reflecting the loss suffered by the innocent party. The aim is to compensate the innocent party by putting them in the position they would have been in had the contract been fulfilled.
However, in Wrotham Park Estate Co Ltd v Parkside Homes Ltd  1 WLR 798, Brightman J awarded damages for breach of a restrictive covenant attaching to land, assessed by reference to the contract-breaker's gain from the breach, at 5% of the anticipated profit from the wrongful development. The judge considered this to be the sum that the claimant, acting reasonably, could have demanded for relaxing the restrictive covenant. Wrotham Park damages were thus born.
Wrotham Park damages have been the subject of considerable academic and judicial scrutiny. There is continuing debate as to whether the damages are an unusual form of compensatory damages (compensating for loss of an opportunity to bargain) or in fact gain-based (restitutionary) damages. On either view, however, it is accepted that such damages are unusual. The cases in which they have been given tend to fall into one of these three categories:
- breach of restrictive covenant cases (sometimes in lieu of an injunction);
- breach of confidence (in relation to both contractual and equitable duties of confidence); or
- proprietary torts (eg trespass, conversion).
However, just because there has been a breach of a restrictive covenant, or the commission of a trespass, does not mean that there is automatically a right to Wrotham Park damages. The question that therefore arises – and which was put to the Court of Appeal in this case – is when they should be available as a matter of principle.
When are Wrotham Park damages available?
The Court of Appeal approved a two-limb test:
(1) The claimant would have very real problems in establishing financial loss
In the leading judgment, Christopher Clarke LJ noted that Wrotham Park damages were a "flexible" response to the need to compensate a claimant. Denying Wrotham Park damages on the basis that, while practically difficult, it might technically be possible to prove financial loss (as the Morris-Garners had submitted) would inhibit that flexibility.
In his concurring judgment, Longmore LJ agreed, noting that Gibson LJ had held in Experience Hendrix LLC v PPX Enterprises  EWCA Civ 323 that all that was required was that "the claimant would have difficulty in establishing financial loss".
On the facts, though the trial judge had not found that OneStep was incapable of establishing identifiable loss, OneStep nonetheless met this first limb of the test. Its losses related to its goodwill and slowdown in business, and it would have "very real problems" in proving such losses.
(2) Wrotham Park damages are the just response
In identifying this as the second limb of the test, Christopher Clarke LJ rejected the Morris-Garners' submission that Wrotham Park damages should only be available where otherwise a "manifest injustice" would arise. The dicta referring to "manifest injustice" on which the Morris-Garners relied were simply "expressions of the position in relation to the facts of the particular cases" and not the formulation of some abstract test.
Christopher Clarke LJ added that "What is the just response is, quintessentially, a matter for the judge to decide" and saw no basis for disturbing his decision on the justice of the remedy that he had given. Similarly, Longmore LJ emphasised in his concurring judgment that "it is appropriate to consider the justice of the case on a broad brush basis".
The factors in this case that made an award of Wrotham Park damages "just" included that the non-compete clauses were the crucial part of the settlement agreement that had led to the Morris-Garners being paid a large sum of money to sell their shares, and the fact that their breaches of those covenants were deliberate, intended from the very start, and conducted with subterfuge and furtiveness. This last factor was particularly important to Longmore LJ because it meant that OneStep had been unable to seek an injunction to resolve the dispute at an early stage.
The availability of Wrotham Park damages is not limited to "exceptional circumstances"
The Morris-Garners submitted this additional check was necessary to stop Wrotham Park damages swallowing up the primary remedy for breach of contract, ie straightforward compensatory damages. The language of this limb suggests that they may have had in mind Lord Nicholls' remark in Attorney General v Blake  1 AC 268 that compensatory damages should be awarded save in "exceptional circumstances", which has been often cited by the courts to refuse gain-based relief.
OneStep argued that this should not form part of the test for the availability of Wrotham Park damages and Christopher Clarke LJ again agreed. The Morris-Garners were eliding the tests for the availability of account of profits for breach of contract and Wrotham Park damages.
Quantifying Wrotham Park damages
For completeness, it should be noted that this appeal was solely concerned with the availability of Wrotham Park damages. No guidance was given as to the process for quantifying such damages. However, there have been other cases where such guidance has been given. The assessment must consider what sum would have been arrived at by the parties themselves, making reasonable use of their bargaining positions, at the date that the wrong was committed. For these purposes it is irrelevant that the parties would not in reality have agreed to a deal.
A recent example of a detailed quantum assessment can be found in CF Partners v Barclays Bank  EWHC 3049 (Ch) (a breach of confidence case). There, the judge weighed up the weak negotiating position of the innocent party against the fact that the other party had deliberately breached its duties of confidence and therefore must have placed some value on the information that it used for its own purposes. As a cross check, the judge considered the overall gain made from the breach of confidence and was satisfied that the sum he had arrived at constituted a reasonable fee for unlocking that gain.
Comment: The consequence of this decision is that Wrotham Park damages may be more widely pursued as a remedy for breach of contract. However, it still remains difficult to predict exactly when they will be available. In particular, the second limb of the test set out above (ie are Wrotham Park damages the just response) is vague and uncertain.
Certainty is a prized feature of English contract law. Commercial parties often have to decide whether a breach of contract might be economically efficient, ie whether the recoverable loss suffered by the counterparty would be less than the gain received by the contract-breaker, such that, after damages have been paid, both parties would in fact end up in the same or better position than they would have been had the contract not been breached (see eg R Posner, An Economic Analysis of the Law). Not knowing the extent of their liability on breach makes such decision making much more difficult. It is to be hoped that future cases will provide more guidance.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey email@example.com, or tel +44 20 3088 3710.