Under English law, a claimant seeking damages for breach of contract must generally show it has suffered a loss. In a recent case, however, the Court of Appeal held that a party breaching a restrictive covenant may be liable to pay damages to its counterparty, despite such counter-party not being able to show that the breach caused any loss.

Parties who may previously have elected to breach a restrictive covenant in the belief that no loss to their counter-party meant they faced no liability for damages should now think again.

In a case that drew relatively little attention, but which may have ramifications far beyond the world of intellectual property with which it was concerned, the Court of Appeal unanimously found in WWF World Wide Fund For Nature & Anor V World Wrestling Federation Entertainment Inc (2007) (2 April 2007) that the claimant’s loss in such a case is essentially the defendant’s unjustly acquired gain. Had the defendant sought a waiver or release of the restrictive covenant in question, instead of breaching it, the claimant could properly have required payment to agree to this. The defendant should, therefore, make a reasonable payment for the benefit it gained by breaching the covenant, assessed by reference to a theoretical waiver or release fee.

The facts

In January 1994 the World Wide Fund for Nature and World Wildlife Fund Inc (“Fund”) and the World Wrestling Federation Entertainment Inc (“Federation”) agreed to settle a long-running dispute over the use of the initials “WWF”. Their agreement included a restrictive covenant limiting the Federation’s use of the WWF initials, but fell short of giving the Fund exclusive rights over the initials.

Some years later the Fund sued the Federation when they realised that the Federation had been using the WWF initials in breach of the covenant in their agreement. At first instance the Fund obtained summary judgment and an injunction against the Federation, restraining further breaches. The Fund failed in a belated attempt to claim an account of profits, i.e. an investigation into the profits made by the Federation as a result of its breach (as a precursor to requiring such profits to be handed over), but an inquiry into damages payable to the Fund was ordered in 2001.

The Fund did not appeal the refusal of an account of profits, but in 2004 it did successfully apply to amend its claim to seek damages based on what the Federation could reasonably have been required to pay as a quid pro quo for the Fund’s agreement to relax its rights under the settlement agreement.

The amendment included the submission that if a covenantor breaches a restrictive covenant, the covenantee is entitled to claim damages equivalent to a reasonable payment for the hypothetical release of the covenant.

In 2005, the High Court ordered a preliminary hearing to determine how to assess damages. That hearing confirmed that the Fund was legally entitled to seek reasonable payment for a hypothetical release of the covenant which the Federation had breached. However, only an inquiry into damages could decide whether the Fund was so entitled on the facts. The Federation appealed.

Decision

The Court of Appeal unanimously confirmed that a monetary remedy is required for a covenantee who suffers a breach of restrictive covenant but which breach does not produce any quantifiable loss. That remedy is to award a sum in damages which the court considers reasonable for the covenantor to pay and the covenantee to accept as a quid pro quo for the covenantee’s hypothetical release of the covenant immediately before the covenantor’s breach.

The Court also confirmed that a covenantee could successfully seek both an injunction to restrain further breaches and damages for past breaches against a covenantor, notwithstanding the covenantee showing no actual loss.

The Court of Appeal directed that sums awarded for such past breaches should be assessed on the basis that the hypothetical waiver or release takes effect from the day before the covenantor’s initial breach and ends on the day when the injunction takes effect, taking account of the following:

1. The parties’ actual knowledge at the time their hypothetical negotiations would have taken place;

2. Disregard the covenantor’s conduct or the possibility that the covenantee might have refused to grant a waiver or release;

3. This is a discretionary award, such discretion being exercised only where conventional damages would be an inadequate remedy leaving the wronged party without recompense;

4. When considering whether to exercise this discretion, any delay by the claimant in intimating a claim should be taken into account; and

5. Any award is compensatory and not punitive or gains-based (i.e. no account of profits).

The Court of Appeal also found that such a remedy may be granted even if a restraining injunction was not available to the claimant. In conclusion, in certain circumstances damages may be granted for past breaches of a restrictive covenant, with or without the granting of injunctive relief, despite no actual financial loss being incurred by the non-breaching party.

Where covenantors might previously have taken a calculated risk and breached a restrictive covenant, assuming that their counter-party would have no claim if it suffered no financial loss, they should now think again, while innocent victims of such breaches may wish to consider a possible claim for damages.