In a landmark decision, Morris-Garner and another v One Step (Support) Ltd, the Supreme Court has clarified the approach to awards of damages against parties who deliberately breach contractual obligations, including restrictive covenants, but it is difficult to calculate the losses caused. This is the first time that the Supreme Court has considered “Wrotham Park damages” in future to be known as “negotiating damages”. These damages are calculated on the hypothetical amount the parties might have negotiated between themselves on an arm’s length basis, acting reasonably, for the release of the contractual obligation or restriction.
One Step – the facts
Karen Morris-Garner was a director and 50% shareholder of One Step (Support) Ltd. In 2009 she resigned her directorship and sold her shareholding for £3.15m and accepted various “non-compete” restrictions for a three year period. However, she had already secretly set up a company providing similar services to One Step in breach of the restrictions. She sold that company three years later for over £12m.
One Step argued that it would have “very real problems” proving losses relating to goodwill and slowdown in business and therefore sought damages on the basis of what the parties would have agreed for the release of the “non-compete” restrictions. The Court of Appeal found that the circumstances of the case were suitable for an award of negotiating damages, even though the High Court had not found that One Step was incapable of establishing identifiable loss.
The Supreme Court judgment
The Supreme Court held that negotiating damages in breach of contract claims should be reserved for exceptional circumstances where the breach had resulted in the loss of a valuable asset created or protected by the right infringed. In those cases the claimant’s loss can be measured by determining the economic value of the right in question. Examples of this were where the contractual right itself could be described as an asset or property such as an intellectual property agreement, a restrictive covenant over land or a confidentiality agreement. Breaches of other contractual rights that could not be considered assets, such as the breach of a non-compete obligation, may cause the claimant loss such as a loss of profits or good will from the wrongful competition, but in the absence of that loss, it would be difficult to see how there could be any other loss. Therefore, in the case of a breach of a non-competition covenant or a non-solicitation covenant the claimant would have to prove loss in the conventional way.
In One Step, whilst the company’s losses were difficult to quantify, these consisted of loss of profits and good will and could be assessed in the conventional manner. The Supreme Court referred the case back to the High Court to assess the financial loss actually sustained.
Restrictions in employment cases
In future the only circumstances in which negotiating damages are likely to be available in an employment context are where there has been a breach of confidentiality where confidential information can be regarded as a valuable asset. However, even where there has been such a breach it is likely to be compounded by other breaches. In One Step Ms Morris-Garner was in breach of the confidentiality covenant which might have come within the scope of a negotiating damages award but the Court found the claimant’s loss was the cumulative result of breaches of a number of restrictions, with non-compete and non-solicitation being the most significant. Therefore, damages would be assessed based on the loss of profit and good will suffered by the claimant.
This decision has brought much needed clarity and in future it seems unlikely we will see employers pursuing this as a remedy or courts awarding damages on this basis. This takes us back to the pre-One Step position where the assessment of damages in breach of restrictive covenant cases will be based on the loss arising as a result of the breach measured by the position the claimant would have been in had the contract been performed and the position the claimant is actually in.
In employee competition cases the focus for employers will be on seeking injunctions to prevent breaches of restrictions and establishing evidence of loss of profits and goodwill. If the employer cannot prove economic loss, then according to the Supreme Court, the implication is that they have not suffered loss and will only be entitled to nominal damages.