Morris-Garner and another v One Step (Support) Ltd

Common law damages for breach of contract compensate for loss caused by non-performance. Negotiating damages are available only where that loss is appropriately measured by the economic value of the contractual right considered as an asset. This may occur where breach deprives the claimant of a valuable right controlling land, intellectual property or confidential information.

Difficulty in quantifying ordinary financial loss does not justify substituting a hypothetical release fee. Nor do deliberate breach, the defendant’s profit or the claimant’s legitimate interest make that remedy available. Where a non-compete covenant protects only commercial interests, the usual loss comprises profits or goodwill lost through competition. The court must estimate that loss as reliably as the evidence permits. A hypothetical release fee may sometimes be relevant evidence, but is not itself the measure of loss outside the asset-deprivation category.

The appellants had agreed to covenants restricting competition, solicitation and use of confidential information following a business buy-out. The respondent alleged that they established and operated a competing business in breach of those obligations. Phillips J found breaches of the non-compete and non-solicitation covenants and of duties of confidence: [2014] EWHC 2213 (QB).

The judge refused an account of profits but declared that the respondent could elect between ordinary compensatory damages and damages assessed by reference to the price reasonably payable for release from the covenants. The Court of Appeal dismissed the appeal: [2016] EWCA Civ 180; [2017] QB 1. It treated such an award as available where it was the just response, particularly because loss was difficult to quantify.

The central questions were when common law damages for breach of contract may be assessed through a hypothetical negotiation and whether that method was available for the breaches in this case.

Held, allowing the appeal unanimously: Lord Reed delivered the majority judgment, with which Lady Hale, Lord Wilson and Lord Carnwath agreed. Lord Sumption agreed in the disposition, although his reasoning differed.

1. Common law contractual damages are compensatory. They substitute for performance by placing the claimant, so far as money can, in the position which performance would have produced. The court must identify the difference between the claimant’s actual position and that counterfactual position. Loss may be economic or, where legally protected, non-economic.

2. User damages for wrongful use of property compensate for loss of the valuable right to control its use. Damages under section 2 of the Chancery Amendment Act 1858, now reflected in section 50 of the Senior Courts Act 1981, are different. They provide a monetary substitute for specific relief withheld by the court. A hypothetical release price may provide a fair valuation, but it is not the exclusive method.

3. At common law, negotiating damages may be awarded where breach causes the loss of a valuable asset created or protected by the contractual right. The loss is then the right’s economic value, and the hypothetical negotiation is merely a valuation tool. A general entitlement cannot arise from difficulty proving loss, deliberate breach, the defendant’s gain, the claimant’s legitimate interest, or a discretionary view that the award would be just. The broader reasoning in Experience Hendrix LLC v PPX Enterprises Inc was disapproved, although its result could be supported because the claimant had lost a valuable right to control use of copyright.

4. The respondent’s interest in the restrictive covenants was purely commercial. Their breach exposed its business to competition and caused the familiar forms of loss represented by reduced profits and possibly goodwill. That loss was capable of conventional estimation despite evidential difficulty. No valuable asset of the required kind had been lost. The hypothetical release fee was therefore not itself the measure of damages.

5. The quantum hearing was to proceed so that the judge could assess the respondent’s actual financial loss as accurately as the evidence permitted. Evidence concerning a hypothetical release fee could be admitted if relevant, with its weight left to the judge. Lord Sumption would have characterised such evidence more generally as a possible technique for estimating pecuniary loss. Lord Carnwath rejected that broader formulation as insufficiently principled.

1. United Kingdom Supreme Court: The appeal was allowed unanimously. The declaration permitting assessment by a hypothetical release price was displaced, and quantum was remitted for assessment of actual financial loss in accordance with [2018] UKSC 20.
2. Court of Appeal: The appeal was dismissed in [2016] EWCA Civ 180, reported at [2017] QB 1. The court upheld the judge’s conclusion that negotiating damages were available.
3. High Court: Phillips J found breaches of the restrictive covenants and duties of confidence in [2014] EWHC 2213 (QB). He declared that the claimant could choose between ordinary compensatory damages and damages assessed by a notional release price.