Summary: The Supreme Court explores in detail when it is appropriate to award what is often called “Wrotham Park damages”. The Supreme Court provides welcome guidance on when a party is entitled to seek negotiating damages, i.e. damages assessed by reference to the hypothetical release fee a claimant could have demanded in return for releasing the defendant from its obligations (often known as Wrotham Park damages).
The parties had entered into an agreement with non-solicitation and non-competition covenants. The lower courts found a breach of these covenants and decided that Wrotham Park damages were available. The availability of such damages was appealed to the Supreme Court.
To start with, the Supreme Court rejected the term “Wrotham Park damages”, instead preferring “negotiating damages”. Its namesake case was relegated to that of “little more than historical interest”.
The core of the test proposed by the court when determining whether negotiating damages are available, was that where the breach “results in the loss of a valuable asset created or protected by the right which was infringed”, then negotiating damages may be appropriate. This “valuable asset” test shifts the focus away from an artificial distinction between property rights and contractual rights (with a breach of the former traditionally more readily awarded negotiating damages).
The Court gave examples of rights which might satisfy the test including the following:
- Breach of confidentiality;
- Breach of restrictive covenants over land;
- Breach of an intellectual property agreement.
In this case, the court found that the losses alleged by the claimants (loss of profits and goodwill) were not in the nature of the loss of a valuable proprietary asset, created or protected by the right which was infringed. Although difficult to quantify, the losses could be proven in a conventional manner with the usual evidential assistance the law gives to claimants in such situations.
With that out of the way, the Supreme Court outlined some useful guiding principles when considering negotiating damages:
- The Supreme Court reaffirmed the general principle that damages (including “negotiating” damages) are compensatory in nature, not restitutionary. In particular they suggested that damages cannot be awarded merely in order to deprive the party in breach of the profits resulting from a breach, save in exceptional circumstances.
- Damages awarded in lieu of an injunction are a monetary substitute for what is lost by withholding the relief. One way of quantifying the loss is to look at the economic value of the right that the court has declined to enforce. Such a valuation can be calculated by the amount that a claimant might reasonably have demanded in return for relaxing the obligation in question. However, that is not the only approach; it is for the court to decide what method of quantification will give a fair equivalent for what is lost by refusing the injunction.
- Common law damages for breach of contract are intended to compensate loss. It is for the claimant to establish that loss, which should be estimated as accurately and reliably as possible, even where there is a lack of evidence.
- The deliberate nature of the breach, the difficulty in quantifying the financial loss, or the claimant’s legitimate interest in preventing the defendant’s breach, do not justify the award of a monetary remedy that is not compensatory.
- Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. The defendant has taken something for nothing, for which the claimant is entitled to require payment.
- It is a mistake to award negotiating damages whenever that is a just response, to be decided by the judge on a broad brush basis. Common law damages for breach of contract are not a matter of discretion for the judge. They are claimed as of right and they are awarded or refused on the basis of legal principle. The claimant is not entitled to elect how its damages should be assessed.
In this case, the Supreme Court held that the lower courts had not applied the right approach and allowed the appeal noting that the hypothetical release fee is not itself the measure of the claimant’s loss in this case. The true question is “what is the value of the asset that has been taken”? One method of assessing that value is by reference to profit share but that need not always be appropriate.
Although the Supreme Court have rebranded the name, Wrotham Park damages/negotiating damages are here to stay. However, in the future, the courts are likely to take a more cautious approach to awarding them and it will not be the “go to” basis of assessment.