Briefing 07 February 2017

Wrotham Park damages – more than just a pyrrhic victory for breaches of restrictive covenants

Author:

Sophie Papaevripides

Senior Associate
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Summary and implications

In Morris-Garner v One Step (Support) Limited [2016] EWCA Civ 180, the Court of Appeal, after much deliberation, upheld an award for Wrotham Park damages in a claim for breach of confidentiality, non-compete and non-solicitation covenants in the sale of a business providing supported living services for vulnerable people.

In reaching its decision, the Court of Appeal sought to clarify the circumstances in which Wrotham Park damages could be awarded and made it clear that they are not confined to property cases.

What are Wrotham Park damages?

Damages for breach of contract are ordinarily measured by reference to the financial loss suffered by an innocent party as a result of the contract breaker’s actions. The idea being to put the innocent party in the position it should have been in had the contract been properly performed. However, following the decision in Wrotham Park Estate Company Limited v Parkside Homes Limited [1974] 1 WLR 798 and subsequent case law, the court has been willing, in certain circumstances, to assess damages by reference to the amount a hypothetical covenantor (employee) would agree to pay and the conventee (employer) to accept for the release from its obligations (rather than breaching them).

The Facts

The first defendant was a former director and shareholder of the claimant, One Step (Support) Limited. The second defendant was a former employee of the claimant and the first defendant’s civil partner.

In 2006, following a shareholder dispute, the first defendant entered into a deed of compromise whereby she agreed to sell her shares in the claimant company. As part of the same transaction, the second defendant entered into a deed of compromise which terminated her employment with the claimant. Both defendants agreed to be bound for 36 months by non-compete and non-solicitation clauses on identical terms and the first defendant agreed to be bound for 36 months by confidentiality provisions. Notwithstanding the restrictive covenants, in 2007, the defendants began marketing a new and competing business which provided supported living placements.

In 2012, the claimant brought proceedings against the defendants for alleged breaches of their restrictive covenants. At first instance it was held that the defendants were in breach of their restrictive covenants. Phillips J did not consider the circumstances to be sufficiently exceptional to warrant an order for an account of profits. However, he felt the case was suited to an award for Wrotham Park damages because it would be difficult for the claimant to identify the financial loss it had suffered by reason of the defendants’ wrongful competition (not least because of the degree of secrecy in the establishment of the defendants’ competing business and the fact the defendants’ breaches were deliberate and furtive). Accordingly, Phillips J held that it would be just to give the claimant the option to elect (as it did) for Wrotham Park damages.

The defendants appealed on a number of grounds. One ground being whether Phillips J was right to award Wrotham Park damages on the basis that they can only be awarded:

  1. where the innocent party is unable to demonstrate identifiable financial loss; and
  2. where to do so is necessary to avoid manifest injustice.

The Decision

Whilst the Court of Appeal was initially attracted to the defendants’ submissions and found it difficult to decide whether the claimant was entitled to Wrotham Park damages, it ultimately concluded that the defendants’ appeal should be dismissed.

The Court of Appeal held that Wrotham Park damages are not restricted to cases where the claimant has suffered no “identifiable financial loss”. Nor must a case be “exceptional” for such an award to be made. The test is whether an award for Wrotham Park damages is a “just response” in a case. Christopher Clarke LJ, in his leading judgment, indicated that “what is a just response is, quintessentially, a matter for the judge to decide”.

In reaching his decision, Longmore LJ endorsed the following three features identified in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 as justifying Wrotham Park damages:

  1. there was a deliberate breach by the defendant of its contractual obligations for its own reward;
  2. the claimant would have difficulty in establishing financial loss from the breach; and
  3. the claimant has a legitimate interest in preventing the defendant's profit-making activity in breach of contract.

Longmore LJ added a fourth factor to justify Wrotham Park damages in a sale of business context: the result of the defendant’s breach of contract has made it doubtful that interim relief could be obtained. In adding the fourth factor, Longmore LJ made clear that its absence in any particular case will not necessarily mean that Wrotham Park damages must not be awarded. However, it is a feature which, if present, should be taken into account.

Comment

The decision has brought a degree of clarity to the principles governing when Wrotham Park damages will be awarded. Whilst the Court of Appeal appears to sanction the use of Wrotham Park damages on a wider scale, it is clear from the judgment that judicial discretion will play a significant role in deciding whether an award is granted.

Both Christopher Clarke LJ and Longmore LJ stressed that this was not a typical case of breach of restrictive covenants and emphasised the absence of the argument that the covenants were an unlawful restraint of trade and the level of secrecy and “subterfuge” involved in the defendants’ breaches.

The defendants were granted permission to appeal to the Supreme Court on 2 August 2016. It will be interesting to see whether the Supreme Court upholds the Court of Appeal's decision and whether it leads to an increase in the number of Wrotham Park damages being awarded. Until then, the decision may act as a useful tool in pre-action discussions and settlement negotiations.