Negotiating Damages

In some cases, it may be clear that, applying orthodox principles, the claimant has not suffered any loss. Yet an award of only nominal damages might be regarded as an unsatisfactory response to the defendant’s legal wrong: for instance, the defendant may have secured a substantial benefit from the breach of contract.

The Scottish case of Teacher v Calder illustrates the general principle that the claimant’s damages are to be measured by the loss which it has suffered and not the gain which the defendant has made from the breach.

Nevertheless, it is clear that the court may sometimes assess the amount of compensatory damages by reference to the gain made by the defendant. Identifying when it will do so, and what the outcome will be, is far from straightforward.

Wrotham Park Estate Co v Parkside Homes Ltd [1974] 1 WLR 798

D had acquired land subject to a restrictive covenant in favour of C’s adjoining estate. In breach of the covenant D built 14 houses on the land. The development did not adversely affect the value of C’s estate. C sought an injunction requiring demolition of the houses. Oliver J refused to grant an injunction as demolition would represent an unpardonable waste of much-needed housing. Instead, Oliver J awarded C damages under Lord Cairns’ Act equal to 5% of D’s anticipated profits on selling the houses.

For many years damages measured in this way were often called, unsurprisingly, Wrotham Park damages. Alternative descriptions included release fee damages and gain-based damages. Now, the preferred label is negotiating damages.

The extent to which such damages are best viewed as compensatory has been much discussed.

Wrotham Park damages may be said to have come of age following Lord Nicholls’ judgment in Attorney General v Blake (see below under Account of Profits). Important examples include:

Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323

By way of a settlement agreement made in 1973 D was given the right to exploit certain Jimi Hendrix master recordings. Subsequently, D exploited numerous other master recordings in violation of the agreement. At first instance, Buckley J. dismissed C’s claim for damages, which was framed as coming within the Wrotham Park principle, on the basis that C would never had done a deal with D to license what were poor quality recordings which did not feature Jimi Hendrix and which might have confused the buying public.

The Court of Appeal allowed C’s appeal in respect of its damages claim. D would be ordered to pay a reasonable sum in respect of the use it had made of recordings in breach of the agreement.

World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286

In 1994 the parties had entered an agreement to compromise on-going litigation between them and to regulate future use of the ‘WWF’ initials. In 2000 C sought an injunction to enforce the agreement and damages for its breach. At a hearing in 2001 C was refused permission to amend its claim so as to claim an account of profits. In 2004 C served a pleading in which it sought damages on the Wrotham Park basis. D claimed that C was not entitled to damages on this basis.

The CA held that in principle the court might award damages in respect of past breaches of covenant notwithstanding that the claimant could not prove consequential financial loss; that such damages could be based on the reasonable sum which the claimant might have demanded from the defendant as a release fee from the relevant covenants; and that such damages could be categorized as compensatory. On the facts, however, the CA held that C should not be permitted to pursue a claim for such damages as its failure to bring a claim for such damages in 2001 meant that it would be an abuse of process for such a claim to be brought in 2004.

Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45

PFE entered a joint venture with the Ds with a view to securing a contract with T for the development of an oil field. The Ds each entered into confidentiality agreements with PFE under which each undertook to work on the project exclusively with PFE and not to work on the project on its own or with any other party. However, the Ds subsequently entered into a contract with T without involving PFE. The Royal Court of Jersey found the Ds liable for breach of confidence and awarded PFE $500,000 in damages. The Jersey Court of Appeal held that the Ds’ actions amounted to breaches of contract as well as breaches of confidence and upheld the award of $500,000, which it described as Wrotham Park damages. The Privy Council increased the damages award to $2.5m.

Giedo Van Der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB)

C2 wanted to become a Formula One racing driver. C1 was a company set up to manage C2’s interests. The Cs entered into a contract with D by which D agreed, inter alia, to provide C2 with 6,000 km of Formula One driving experience over a 12-month period. The Cs brought claims against D on the ground that D had only provided C2 with 2,004 km of driving experience.

Stadlen J held, inter alia, that the Cs could recover $1.865m as damages for the loss of value of the benefits due under the contract and that, alternatively, the Cs could recover the same amount as Wrotham Park damages.

The leading authority on negotiating damages is now the Supreme Court’s decision in the One Step case.

One Step (Support) Ltd v Morris-Garner [2018] UKSC 20

Karen M-G, D1, was a director and owner of a half-share in the capital of C. D2, Andrea M-G, the civil partner of KMG, was an employee of C. In April 2006 D1 e-mailed to her personal email account a large quantity of confidential information belonging to C. In July 2006 the Ds set up a company, Newco. In December 2006, D1 sold her shareholding in C for around £3m to T and resigned as a director of C. D2 resigned as an employee. Both Ds gave undertakings as to non-competition, non-solicitation and non-disclosure of confidential information. Subsequently C’s business suffered due to competition from Newco. In 2010 the Ds sold their shares in Newco for around £13m. In 2012 C brought claims against the Ds alleging breach of the various restrictive covenants. The judge, having found that the Ds had acted in breach of the covenants, held that C could claim Wrotham Park damages. The CA upheld the judge’s decision, but the Supreme Court allowed the Ds’ appeal: a claimant does not have a right to elect to recover negotiating damages. Further, this was not a case where negotiating damages were available.

Lord Reed (with whom Baroness Hale, Lord Wilson and Lord Carnwath agreed) at [95]:

‘(8) Where the breach of a contractual obligation has caused the claimant to suffer economic loss, that loss should be measured or estimated as accurately and reliably as the nature of the case permits. The law is tolerant of imprecision where the loss is incapable of precise measurement, and there are also a variety of legal principles which can assist the claimant in cases where there is a paucity of evidence.

(9) Where the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss. In that event, he cannot be awarded more than nominal damages.

(10) 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. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.

(11) Common law damages for breach of contract cannot be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances, following Attorney General v Blake.

(12) Common law damages for breach of contract are not a matter of discretion. They are claimed as of right, and they are awarded or refused on the basis of legal principle.’

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