The Court of Appeal has upheld an award of Wrotham Park damages in a claim for breach of confidentiality, non-compete and non-solicitation covenants in a business sale context in Morris-Garner v One Step (Support) Ltd [2016] EWCA Civ 180. In doing so it has clarified, to an extent, the principles governing the award of such damages which were until now unclear.

WROTHAM PARK DAMAGES – AN EXPLANATION

Wrotham Park damages (named after Wrotham Park Estate Co v Parkside Homes) have often been called “hypothetical bargain” or “negotiating” damages on the basis that such an award enables a claimant to recover such sums as the defendant would have paid to him, had the defendant negotiated a release of its obligations rather than breaching them. This is contrary to the normal rule for calculating damages which involves quantifying how much the aggrieved party has lost or how much the wrongdoer has gained. As such, a Wrotham Park damages award has historically been considered as an ‘exception’ to the norm when awarding damages.

BACKGROUND

The Claimant Company, One-Step (Support) Limited, provided supported living services to vulnerable people. In 2006, following a shareholder dispute, a Deed of Compromise was entered into by the shareholders of the Claimant Company, together with the second defendant, under which the first defendant entered into a sale agreement to sell her 50% interest in the Claimant Company and both Defendants agreed to be bound by confidentiality, non-compete and non-solicitation covenants.

In 2007, the defendants started marketing their new business (which they had incorporated in 2006 unbeknown to anyone at the Claimant Company) and began accepting supported living placements. In 2012, proceedings were brought by the Claimant Company against the defendants for alleged breaches of the restrictive covenants contained in the Deed of Compromise. On account of these alleged breaches, the claimants were seeking either an account of profits or Wrotham Park damages.

Phillips J did not consider the circumstances as sufficiently exceptional to warrant an account of profits. However, he accepted that it would be difficult for the claimant to identify its financial loss, bearing in mind the Defendants’ secrecy in setting up their new business, and considered it just to give the Claimant Company the option to elect for Wrotham Park damages (which it did).

The defendants appealed on three grounds; the third ground being whether the judge was correct to have awarded the Claimant Company with an option to elect for Wrotham Parkdamages.

COURT OF APPEAL DECISION

The Court of Appeal dismissed the appeal and upheld the Wrotham Park damages award. In doing so, Longmore LJ approved the “3 important features which justified a Wrotham Park award” set out by Peter Gibson LJ in Experience Hendrix LLC v PPX Enterprises Inc, which are as follows:

  • there was a deliberate breach by the defendant of its contractual obligations for its own reward;
  • the claimant would have difficulty in establishing financial loss therefrom; and
  • the claimant has a legitimate interest in preventing the defendant’s profit-making activity in breach of contract.

Longmore LJ also noted a “fourth factor” which he considered to apply to “cases of sales of a business”:

  • the result of the defendant’s breach of contract has been that it is doubtful that interim relief could be obtained.

He confirmed, however, that the absence of this fourth limb does not preclude an award of Wrotham Park damages but it can merely “be taken into account” if present.

In addition to approving the above principles, the Court of Appeal provided the following further guidance and clarity on the governance behind the award of such a remedy, namely: 

  • the test to apply is whether Wrotham Park damages would be “the just response”, which is “quintessentially, a matter for the judge to decide”;
  • it is not necessary for the financial loss suffered to be “impossible to identify”; and
  • it is not a question of whether the case is “exceptional” but “what does justice require”.

COMMENT

This decision has, for some, helpfully brought a degree of clarity to the previously murky area of law surrounding the award of Wrotham Park damages. For concerned others, however, it has to an extent normalised a previously considered ‘highly exceptional’ remedy, awarded only in circumstances when, without such an award, justice would “manifestly not have been done”. It will remain to be seen, therefore, whether this more liberal approach to Wrotham Park damages will have an effect on the number of claimants seeking such an award going forward.