March 23rd, 2012 by Simon Devonshire QC

As Julian Wilson’s earlier post on  Force India F1 Team -v- 1 Malaysia F1 Team [2012] EWHC 616 mentioned, in this case Arnold J had to consider the correct approach to the computation of damages (or equitable compensation) in cases of breach of contractual (or equitable) obligations of confidence.     His judgment gives some encouragement to employment lawyers seeking to use Wrotham Park (and similar cases) to recover what Arnold J chose to style as “negotiating damages”.  After an extensive review of the authorities, he concluded that such damages were available for breaches of both contractual and equitable obligations of confidence.   He summarised the availability for damages or equitable compensation for breaches of obligations of confidence in terms as follows (para 424):-

 “Where the claimant exploits confidential information by manufacturing and selling product for profit, and his profits have been diminished as a result of the breach, then he can recover his loss of profit.   Where the claimant exploits his confidential information by granting licences to others, and his licence revenues have been diminished as a result of the breach, he can recover his lost revenue.   Where the claimant would have ‘sold’ the confidential information but for the breach, he can recover the market value of the information as between a willing seller and a willing buyer.   Where the claimant cannot  prove he has suffered financial loss in any of these ways, he can recover such sum as would be negotiated  between a willing licensor and a willing licensee acting reasonably as at the date of the breach for permission to use the confidential information in the manner in which the defendant has used it [Emphasis Supplied]”.

The Judge also made some general observations about the basis of assessment.   He said that (i) the assessment should be made as at the date of the breach, (ii) where nothing like a negotiation had taken place between the parties, it was reasonable to look at the eventual outcome and to consider whether or not that was a useful guide to what the parties might have thought at the time of their hypothetical negotiation, and (iii) the court could take into account delay by the claimant in asserting his rights (para 386).   Moreover, in assessing the licence fee, “the availability or otherwise of the information from an alternative, lawful source was a highly material consideration … The more inaccessible the information, and thus more difficult it would have been for the defendant to obtain it by lawful means, then the higher the fee that will be payable, other things being equal” (para 426 & 427).

Arguably, this shows a more permissive approach to the availability of such damages that taken in the QBD in conventional post termination restrictive covenants cases (see, e.g., Jack J’s judgment in BGC –v- Rees), and accords with the approach taken in Jones –v- Ricoh (another recent Chancery Division case).   Both these cases are considered in earlier posts.   Given that Arnold J applied his analysis to contractual and equitable obligations of confidence without distinction, it is hard to see why (in principle) it should not be adapted to (say) breach of a conventional non-compete clause designed to protect confidential information or police observance of obligations of confidentiality.

It seems to remain the position, however, that even where Wrotham Park or “negotiating” damages are awarded, they are likely to be conservatively assessed.   In Vercoe -v – Rutland Fund Management Ltd [2010] EWHC 424 (Ch) Sales J had said (at para 292) that what was required from the Court was an assessment of a fair price for the release or relaxation of a contractual restriction, having regard to (i) the likely parameters given by ordinary commercial considerations bearing on each of the parties; (ii) any additional factors affecting the just balance to be struck between the competing position of the parties; and (iii) “the Court’s overriding obligation to ensure that an award of damages for breach of contract … does not provide relief out of proportion to the real extent of the Claimant’s interest in proper performance judged on an objective basis by reference to the situation which presents itself to the Court …”.   In Force India –v- I Malaysia, the claim was that Lotus had misused some of Force India’s confidential information in the development of its car.    The negotiating damages were said to run into millions.   The Court awarded Euros 25,000.

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