Damages – "negotiating damages" for breach of contract

In what circumstances are "negotiating" (ie Wrotham Park) damages available?

The background

The first defendant sold to Mr and Mrs Costelloe 50% of her business which provided support for young people leaving care.  One Step was the vehicle company for the transaction.  The first defendant had (without the Costelloe's knowledge) incorporated a new company which began competing with One Step.

As part of the transaction, the defendants agreed to be bound for three years by confidentiality, non-compete and non-solicitation covenants in favour of the claimant.  Consequently, the claimant brought proceedings against the defendants for alleged breaches of the restrictive covenants.  The claimant sought either an account of profits or Wrotham Park damages.

The defendants appealed to the Supreme Court.  The issues for determination were:

• Where a party is in breach of contract, in what (if any) circumstances is the other party to the contract entitled to seek Wrotham Park damages (ie the amount that the parties may have agreed to be paid for the relevant restriction/obligation to be released)?
  
  
• Whether the Court of Appeal had been correct to uphold the trial judge's finding that such damages were available in this case.

The decision

The Supreme Court overturned the decision of the Court of Appeal and held that "negotiating damages" (the term the majority preferred to use for Wrotham Park damages) were not available to the claimant.  The case was remitted back to the High Court for the assessment of the claimant's actual financial loss.

This judgment rejects the proposition that Wrotham Park damages are generally available as a type of fall-back claim simply because it provides a fairer outcome and also considers the types of case in which “negotiating damages” damages have been awarded.

The judgment identified that negotiating damages could be awarded in the following types of case:

• invasion of rights to tangible movable or immovable property;
  
  
• infringement of intellectual property rights;
  
  
• damages in substitution for an injunction based on the economic value of the right which the court has refused to enforce; and
  
  
• contract cases, but only where the loss suffered is represented by the value of an asset of which the claimant has been deprived, such as the right to control the use of land or intellectual property, or a confidentiality agreement.Lord Reed rejected the proposition that all contractual rights should be regarded as assets.He said instead that this would only be the case where:

“the contractual right is of such a kind that its breach can result in an identifiable loss equivalent to the economic value of the right, considered as an asset”

Why is this important?

By overturning the decision of the Court of Appeal, this decision limits the scope of Wrotham Park or negotiating damages in the context of a breach of contract claim, particularly in respect of non-compete or non-solicitation covenants.

Any practical tips?

Although the availability of "negotiating damages" in the context of breach of contract cases is now limited, such damages are available in intellectual property claims, confidential information cases and other disputes involving property.  It is important they are considered when assessing potential damages in these scenarios.