Knight v Gibson

Damages for breach of a restrictive covenant may be assessed by reference to a hypothetical negotiation for a notional licence. The calculation can use potential turnover and profit, attributable costs and comparable evidence, rather than the defendant’s actual accounts. The hypothetical character of the exercise does not itself require an inquiry. The choice between an immediate assessment and an inquiry is a discretionary case-management decision. The court may assess damages on limited evidence where further disclosure, expert evidence and a hearing would be disproportionate to the sums and issues involved, and where there is no sufficient prospect of a materially better result. On appeal, intervention requires an error of principle or misdirection.

The claimant and defendant owned adjoining properties subject to reciprocal covenants restricting business use. The defendant operated bed and breakfast accommodation in breach of the covenant. The County Court declared the breach, accepted an undertaking concerning future compliance and awarded damages, including £4,000 for the past breach.

The claimant appealed against the refusal to order an inquiry into damages. He argued that the damages should reflect the price of a notional licence, assessed by reference to the potential profitability of the business. The central issue was whether the judge had erred in assessing the damages herself rather than directing an inquiry.

Disposition

Lord Justice Lloyd delivered the leading judgment. Lord Justices Moses and Ward agreed. The appeal was dismissed.

1. The damages issue concerned the choice between fixing the sum immediately and directing an inquiry. That choice was a discretionary case-management decision, distinct from the assessment of damages as a discretionary remedy. Appellate intervention required proof that the judge had acted on a wrong principle or had misdirected herself.
2. In a restrictive-covenant case based on a hypothetical negotiation, the court may assess a notional licence fee by reference to potential turnover and profitability, attributable direct and indirect costs, and comparable evidence. The hypothetical calculation is not confined to the defendant’s actual profits. The defendant’s use of accommodation for family and friends did not necessarily reduce the relevant potential earning capacity.
3. The hypothetical nature of the assessment was not, by itself, a sufficient reason to refuse an inquiry. However, the court could consider whether an inquiry offered a real prospect of a substantially better result and whether that prospect justified further disclosure, expert evidence, a further hearing and additional expenditure.
4. The Deputy District Judge was entitled to take account of the litigation’s prolonged and costly history, the limited financial evidence and the proportionality requirement within the overriding objective. Even in a multi-track case, the court may prevent the parties from pursuing every point to the ultimate degree.
5. The reference to a 5 per cent calculation in Wrotham Park Estate v Parkside Homes [1974] 1 WLR 798 provided a useful cross-check, although no fixed percentage governed the assessment. On the available material, the award of £500 per year was within the judge’s discretion. The refusal to order an inquiry was therefore upheld.

• Court of Appeal (Civil Division) — appeal dismissed; the refusal to order an inquiry into damages was within the County Court judge’s case-management discretion. [2006] EWCA Civ 225
• Truro County Court — Deputy District Judge Hirst found a breach of covenant, accepted an undertaking concerning future compliance and awarded damages including £4,000 for the past breach.