Morris-Garner v One Step (Support) Ltd

The Supreme Court considered when damages for breach of contract may be assessed by reference to a hypothetical release fee (commonly called Wrotham Park damages, here termed negotiating damages), and clarified their limits. The court held that such negotiating damages are properly available only where the claimant's loss is appropriately measured by the economic value of a right created or protected by the contract (for example a right to control use of land, intellectual property or confidential information), so that the claimant has in substance been deprived of a valuable asset. Damages for breach of contract remain principally compensatory and are normally assessed by reference to the difference between the claimant's position with performance and without it (Robinson v Harman).

The court explained that damages in lieu of an injunction under section 2 of the Chancery Amendment Act 1858 (Lord Cairns' Act) are a distinct equitable jurisdiction and that one available method is to value the right the claimant has been deprived of by reference to the price that would have been demanded for release; but that is not a general basis for contractual damages. Where the claimant's loss is conventional economic loss (profits, goodwill etc) that loss should be quantified, allowing for imprecision where necessary, and a hypothetical release fee is not the measure of loss though it may be admissible as evidence to assist quantification.

On the facts, the court held the lower courts were wrong to treat a notional release fee as an alternative quantification as of right; the appeal was allowed in part and the case was remitted for a hearing on quantum to assess conventional compensatory loss, with any evidence about a hypothetical release fee admissible only insofar as it is relevant and helpful.

Background and facts:

• In 1999 Karen and Andrea Morris-Garner ran a support business which was sold into One Step (Support) Ltd. As part of a buy-out the sellers gave covenants of confidentiality, non-competition and non-solicitation for a limited period.
• The purchasers alleged that the Morris-Garners set up a competing business (Positive Living), used confidential market research, solicited placements and thereby breached the covenants; One Step sued in 2012.

Procedural history:

• Pleadings and expert reports followed. At first instance Phillips J ([2014] EWHC 2213 (QB)) found breaches of the non-compete, non-solicit covenants and of confidence but declined an account of profits and awarded a declaration that damages could be assessed on a Wrotham Park basis or alternatively by ordinary compensatory principles; One Step elected the Wrotham Park basis and a quantum hearing was listed. The Court of Appeal ([2016] EWCA Civ 180; reported [2017] QB 1) dismissed the defendants' appeal and upheld availability of Wrotham Park damages in this case. The case came to the Supreme Court on the proper legal test and the application of it to these facts.

Relief sought:

• The claimant sought, in respect of breach of the non-compete/non-solicit covenants, an account of profits or alternatively restitutionary (so-called Wrotham Park) damages (a hypothetical licence/release fee), or alternatively ordinary compensatory damages. For breach of confidence it sought an account of profits or damages.

Issues framed:

1. When, if at all, are negotiating damages (damages based on a hypothetical release fee) available for breach of contract?
2. Did the Court of Appeal and trial judge correctly find those damages available in this case?

Court’s reasoning and conclusions:

• The court reviewed three related strands of authority: (a) "user" damages in tort and intellectual-property cases (valuation of the right to control use), (b) common-law compensatory damages for breach of contract (Robinson v Harman principle), and (c) equitable damages in lieu of injunctions under Lord Cairns' Act (section 2 Chancery Amendment Act 1858, now section 50 Senior Courts Act 1981).
• The court concluded negotiating damages are properly awarded where the claimant's loss is the economic value of the right which was breached — typically rights to control use of land, intellectual property or confidential information — so that the claimant has been deprived of a valuable asset and its loss is measured by that asset's value. In such cases a hypothetical licence or release fee may be an appropriate measure.
• By contrast, where the claimant’s interest is purely commercial and the real loss is conventional economic loss (lost profits, loss of goodwill) the correct remedy is compensatory damages measured by the claimant’s actual loss, even if that loss is difficult to quantify; a hypothetical release fee is not the measure of loss though it may be admissible evidence to assist valuation.
• The court emphasised that an account of profits remains available only in exceptional circumstances (per Attorney General v Blake) and that negotiating damages are not a discretionary alternative to compensatory damages in ordinary contract cases.
• Applying these principles, the Supreme Court held the lower courts had erred in characterising a notional release fee as an alternative measure of loss in this commercial case. The appeal was allowed in part: the case was remitted for a proper assessment of compensatory damages at a hearing on quantum; evidence about a hypothetical release fee may be considered only insofar as it is relevant to proving compensatory loss.

Wider context: The court recognised the historical confusion surrounding Wrotham Park awards, adopted the term "negotiating damages," and emphasised the limited and principled role of such awards; it noted that damages in lieu of injunctions are a quasi-equitable jurisdiction and that resort to negotiating damages is rare and fact-specific.

Appeal allowed in part. The Supreme Court held that damages based on a hypothetical release fee ("negotiating damages") are available only where the claimant's loss is appropriately measured by the economic value of the right breached (for example rights to control land, intellectual property or confidential information). In ordinary commercial cases where the loss is conventional economic loss (lost profits, goodwill) the claimant is entitled to compensatory damages assessed by reference to loss; the trial judge and Court of Appeal were wrong to treat a notional release fee as an alternative quantification as of right. The case was remitted for a hearing on quantum to assess compensatory loss; any evidence about a hypothetical release fee may be considered only insofar as it is relevant and helpful to that assessment.

First instance: Phillips J, [2014] EWHC 2213 (QB) (liability and entitlement to remedies). Court of Appeal: [2016] EWCA Civ 180 (reported [2017] QB 1) (appeal dismissed). Supreme Court: [2018] UKSC 20 (appeal allowed in part and remitted for quantum).