Bringing claims against ex-employees who have done the dirty on their former employer by cosying up to the competition has always been fraught with difficulty. There are notorious problems with trying to enforce covenants, and even if you have enforceable covenants, what do you do in cases where it is difficult to prove your loss? This is a frequent feature of employee competition cases, where the very fact that the employee has behaved secretively may make quantifying loss difficult or impossible. The Court of Appeal appears to have thrown a bone to employers who are in this very position.
It has long been established that in circumstances where it is impossible to demonstrate loss for a breach of covenant, “Wrotham Park” damages could be awarded. “Wrotham Park” damages derive from a property case of the same name, where a party breached a covenant but the claimant could not show financial loss (usually an essential element of a breach of contract claim). Rather than allowing the claimant to go entirely without redress - and the breaching party to go unpunished - the court established a new form of damages: the sum that the court considered the parties might have agreed to release the breaching party from its covenant. This is sometimes known as “hypothetical bargain” damages, as it relies on the notion of the bargain the parties might have made (in a parallel reality) to agree to remove the covenant.
Whilst the original case related to a property dispute, the concept has been applied more widely, including in breach of employment covenant cases where loss cannot be quantified.
Now this concept has been further extended in the employment context. In Morris-Garner and another v One Step, the Court of Appeal has held that even if an employer knows or can guess what its losses are or would be but where they are nevertheless difficult to quantify, it can seek Wrotham Park damages.
In this case, two defendants, who cumulatively owned 50% of a business providing assisted living to vulnerable adults, sold their shareholdings in their business to their co-owners when the relationship broke down. The sale documentation and settlement agreements entered into by the defendants contained certain confidentiality and restrictive covenants on the defendants in favour of the continuing owners of the business. However, prior to the sale, and in breach of the covenants, the defendants set up a competing business and took certain confidential information with them. As a result the competing business was a success, and the original business apparently less successful than it might have been. The continuing owners of the business sued for breach of covenant and confidentiality obligations and were awarded Wrotham Park damages. The court confirmed that a case does not need to be exceptional for Wrotham Park damages to be awarded, and nor does loss need to be entirely unquantifiable. It is sufficient that this is a "just" remedy, and that there be some difficulty in quantifying damages, such that this remedy is justified instead of ordinary contractual damages.
What does this mean for employers?
This case is helpful to employers who find an employee in apparent breach of covenant: it appears to broaden the circumstances in which Wrotham Park damages can be sought, adding another string to the employer’s bow of remedies to seek or to threaten. For a new employer taking on an employee subject to covenants, it is another reason to be wary, and to seek advice if it appears that an employee may be in breach.
However, quantifying Wrotham Park damages remains something of “a finger in the air” exercise. Certainly, they are less than an account of profits, which is a remedy available only in exceptional cases. Given that calculating these damages relies on constructing a “hypothetical bargain" in circumstances which never in fact arose, there will usually be no obviously correct figure. Instead there is likely to be a wide-range of damages a court could conceivably award depending on each party's evidence as to what might have occurred. This introduces considerable uncertainty as to the value of such disputes - and ultimately a remedy which may appear somewhat arbitrary.
On a related note, the government has announced plans to examine whether restrictive covenants are stifling innovation in the UK, so this area looks ripe for continued change [Post-termination-covenants-is-reform-in-the-air].