Wrotham Park damages for breach of restrictive covenants and illegitimate competition? The Court says yes in One Step (Support) Ltd –v- Morris-Gardner & Anor [2014] EWHC 2213

July 15th, 2014 by Simon Devonshire QC

In Wrotham Park v Parkside Homes [1974] 1 WLR 798, the Court declined to order a land-owner to destroy a property he had built on his land in breach of a covenant in favour of his neighbour.  Instead, it awarded the neighbour damages in lieu of an injunction under Lord Cairns’ Act, in such sum “as might reasonably have been demanded by the [covenantee] … as the quid pro quo for relaxing the covenant” (815).  The Court assessed the damages as a modest percentage of the profit anticipated (“with the benefit of foresight”) by the contract breaker.

Employment lawyers have sought to exploit Wrotham Park for some time now, particularly following the seminal judgments of the House of Lords in AG v Blake [2001] 1 AC 268, where it was held that in exceptional circumstances (where conventional remedies had no value) the contract breacher could be required to account for the fruits of his breach of contract.  The implications of both decisions were considered in WWF-World Wide Fund for Nature v World Wrestling Federation [2007] EWCA Civ 286, a claim by the Fund that the Federation had breached contractual restrictions agreed between them on the use the Federation could make of the WWF initials.  The Court held that in light of the judgment in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830, it had to be regarded as settled that, on a claim by a covenantee for an injunction and damages against a covenantor who had acted in breach of a restrictive covenant, the Court might, in addition to granting an injunction to restrain further breaches, award damages in respect of past breaches notwithstanding that the covenantee could not establish actual financial loss (para 48), in the sum it would have been reasonable for the covenantor to pay and the covenantee to accept for the hypothetical release of the covenant. 

Much of the debate in the WWF case focused on the power to award damages in lieu of an injunction under Lord Cairns’ Act, and the cases decided under that jurisdiction (and in particular Wrotham Park).  However, the Court accepted (obiter) that such damages were available at common law (whether or not an injunction was sought).  As Chadwick LJ put it at para 54 “the power to award damages on the basis of what it would have been reasonable for the covenantor to pay for a hypothetical release does not depend on the covenantee establishing (as a factual premise) that, absent a release, the covenant could have been enforced by injunction …”.    The Court also said that it was wrong to regard this as a “gain-based” remedy.  Rather (para 55) “… that formula … was informed by the view … that the circumstances led inexorably to the conclusion that – had there been any negotiated release from the restrictions imposed by the settlement agreement – it would have been ‘on terms requiring payment of a royalty’.  The formula reflected the Court’s view as to the basis upon which the hypothetical bargain between the parties, acting reasonably, would have been made.”

Up to now attempts to apply that reasoning to breaches of post-termination employment covenants have met with resistance.    Conventional wisdom leant against the award of such damages in the paradigm employee defection case.  Wrotham Park damages are not available to the victim of a (contractual) breach as of right.  They “are available in broadly two situations: … where it is impossible to compute the loss or where compensatory damages would be inadequate”; Lighthouse Carrwood Ltd v Luckett [2007] EWHC 2866 at para 58.  The modern judicial development of Wrotham Park springs out of the House of Lords’ judgment in AG v Blake [2001] 1 AC 268, and the development of remedies “for innocent parties who will suffer loss from breaches of contract which are not adequately remediable by an award of damages” (per Lord Nicholls).  They will only be awarded where the Court is satisfied that they are “a just response to circumstances in which the compensation which is the Claimant’s due cannot be measured (or measured solely) by reference to identifiable financial loss”; per Chadwick LJ in World Wide Fund for Nature v World Wrestling Foundation Inc [2008] 1 WLR 455.  On even the more expansionist views of the availability of such damages, the Court has to proceed cautiously and incrementally, so as not to subvert the ordinary (expectation loss) principles governing the assessment of damages; van der Gaarde v Force India [2010] EWHC 2373 (QB) esp at paras 503, 505, 507 and 538.  It must be “manifestly unjust” to leave the Claimant with no award (para 538).  Such damages will not be appropriate at all where they provide relief “out of proportion to the real extent of the Claimant’s interest in proper performance”.

In BGC –v- Rees & Anor [2011] EWHC 2009 (QB) Jack J gave short shrift to a claim for Wrotham Park or transfer fee damages for the alleged breaches by individual brokers of their notice periods and PTRCs.  The claims posited a hypothetical negotiation between the recruiter and the employer from whom the employee had been (allegedly) poached. Tullett Prebon (i) argued that Wrotham Park could not be used as a panacea where the loss could be conventionally assessed, but where the alleged breach had not in fact harmed the victim’s economic interest, and (ii) pointed to the fact that there was no decided case where such damages had been awarded for breach of an employment contract.  Jack J. agreed (at para 97): “I have concluded that in the present situation release payment damages are not  available …  In English law three cases are of particular relevance: AG v Blake [2001] 1 AC 268, World Wide Fund for Nature v World Wrestling Foundation [2008] 1 WLR 455 and van der Gaarde v Force India [2010] EWHC 2373 QB.  The situation in the present case is one in which the court will ordinarily assess the loss of profit as best it may and award a figure.  The assessment may be difficult depending on the evidence which is available.  But the court is used to that, and can arrive at a figure just as it can, for example, in the difficult situation where it has to assess the loss of future earnings of a seriously injured teenager.  The intended function of the claim here is to avoid BGC’s problem that it cannot show that it has suffered any loss because it has not in fact done so.  In my judgment the award of release payment damages is not available as a substitute for conventional damages to compensate a claimant for damage he has not suffered.  Nor should it be used to award a larger sum than a conventional calculation of loss provides. [Emphasis Supplied]

There were signs in subsequent cases that other decisions of the High Court might take a less restrictive approach.  An attempt was made to claim Wrotham Park damages for breach of a confidentiality agreement in Jones –v- IOS (RUK) Ltd & Anor [2012] EWHC 348 (Ch).   Whilst the Judge found that (on the facts) a hypothetical negotiation would have yielded no (or at most a nominal) licence release fee, he did not suggests that this sort of case was per se inappropriate for such an approach to the assessment of loss.   On the contrary, he regarded it as “now well established that in an appropriate case damages for breach of contract may be measured by the benefit gained by the contract breaker from the breach … the court may award damages to the claimant to represent the price he could reasonably have extracted for requiring a licence payment in return for permitting the defendant to do what he has done” (para 97).  However, the consideration of the hypothetical negotiation had to be “founded upon the underlying realities of the situation against which it falls to be undertaken” (para 108) and would only be appropriate where it was manifestly unjust to leave the claimant with no award (para 109).    More recently, in Force India –v- I Malaysia Racing Team & Ors [2012] EWHC 616 (Ch) Arnold J concluded that what he called “negotiating damages” were available for breaches of both contractual and equitable obligations of confidence, although only where the claimant could not prove that he had suffered loss in any of the more conventional ways (para 424).

Which brings us to One Step (Support) Ltd –v- Morris-Gardner & Anor[2014] EWHC 2213.    The claimant (a company providing supported living services to children leaving care and to vulnerable adults) alleged that the defendants (a former director and manager) had breached non-compete covenants and obligations of confidentiality by setting up and operating a rival business.   The Court found the claim well founded.   It declined a claim for an account of profits for breach of contract (on the basis that such a remedy was only available exceptionally following AG –v- Blake, and on the facts the breaches were relatively straightforward and unremarkable).   However, the Court concluded that there was no need to find “exceptional circumstances for there to be an award of Wrotham Park damages, which might be considered to be simply one form of compensatory damages” (para 104), and that this was “a prime example” of a case in which such damages should be available – “[t[he defendants have breached straightforward restrictive covenants in circumstances where it will be difficult for One Step to identify the financial loss it has suffered by reason of the … wrongful competition, not least because there was a degree of secrecy in the establishment of [the defendant’s] business which has not been fully reversed by the disclosure process” (para 106).   The Judge buttressed the conclusion that negotiating damages were available because “the covenants provided that the restraint was subject to consent, not to be unreasonably withheld”.    He awarded Wrotham Park or ordinary damages, at the Claimant’s election (para 108) 

This judgment (if followed) seems to show a significant relaxation of the circumstances in which Wrotham Park damages might be appropriate.    Indeed, the judgment doesn’t recognise any of the notes of caution or restriction sounded in earlier cases (perhaps because they weren’t cited or relied upon), and suggests that such damages are available on an either/or basis at the claimant’s election (presumably depending upon the option that yields the greatest return).    There was indeed nothing unusual about the facts of One Step – where ex-employees set up a competing business, their actions are almost always secretive and surreptitious.    Even where a covenant does not recite that it may be relaxed by agreement, this is always possible by negotiation and it is hard to see this as a potent independent justification for the Court’s order.   Will One Step be regarded as a case on its own facts?   Alternatively, if the approach on One Step takes firmer root, will parties start seeking to resist interim injunction applications on the basis that damages are (now) an adequate remedy for the employer?     This judgment gives food for thought on many different levels.

Simon Devonshire QC