‘Negotiating damages’ following One Step (Support) Ltd v Morris-Garner

You act for a claimant who has the benefit of a restrictive covenant prohibiting the development of more than one house on a plot land adjacent to his. The adjacent owner sells to a developer who puts in a planning application to demolish the existing house and build six flats. If the development goes ahead your house and garden will be overlooked and will lose some of its peace and tranquillity. Your client opposes the planning action but, fearful of the risks giving an undertaking in damages, does not seek an interim injunction and the development is built out. Only at that point do you issue a claim for damages. What is the basis of the claim and how will any damages payable to your client be assessed?

Section 50 of the Senior Courts Act 1981 gives the Court power to award damages in addition to, or in substitution for an injunction or specific performance. The power is available where there is jurisdiction to entertain an application for an injunction even if the remedy is not actually sought.

Damages are traditionally awarded as a means of compensating a claimant for his loss – to put the claimant in the position he would have been in had the wrong not been committed – Livingstone v Rawyards Coal Co (1880) 5 App Cas 25. This principle can be readily applied when some tangible loss has been sustained, for example where property has been damaged by a trespasser. Its application is more difficult when there has been no pecuniary loss or physical damage to the property in question.

In a case such as this the Court will look at the position from the other end of the telescope – what is the benefit that the defendant has obtained by breaching the covenant?

Traditionally these were known as Wrotham Park damages after the 1974 case of the same name – Wrotham Park Estate Co v Parkside Homes [1974] 1 WLR 798. In that case land was developed in breach of a covenant that a central area would be free of buildings; the underdeveloped area was later offered for sale as building land for houses and the sale was not objected to by the plaintiffs; the plaintiffs brought proceedings for an injunction but did not seek interim relief; the new houses were built out, sold and occupied. At trial Brightman J refused to grant an injunction requiring the removal of the houses. He considered that the development had caused the plaintiffs no financial damage but held that to award nominal damages would be unfair to the plaintiffs. He concluded that damages would be awarded on the basis of “such sum of money as might reasonably have been demanded by the plaintiffs from the developers as a quid pro quo for relaxing the covenant.” His decision was that 5% of the anticipated profits would be a fair result.

The Wrotham Park principle was re-appraised by the Supreme Court in One Step (Support) Ltd v Morris Garner [2018] UKSC 20. This was not a property case but a case against defendants who were in breach of covenants not to compete with the claimant or use confidential information. It was difficult for the claimants to quantify the loss they had suffered but possible to assess the benefit that the defendants had obtained.

The phrase “negotiating damages” had been introduced in an earlier decision, that of Neuberger LJ in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] 2 EGLR 29. In One Step the Supreme Court brought that principle centre stage.

The Court hypothesise a negotiation where a reasonable person in the claimant’s position would have been willing to release the defendant in return for a fee – that fee is known as “negotiating damages”. The logic is that the claimant’s rights are a valuable economic asset which he can agree to release, or the defendant to purchase, for a fee.

The position is summarised at paragraph 95(10) of the judgment of Lord Reed:

“Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.”

Thus in our hypothetical case our client might have agreed to receive a sum equivalent to 20% of the NDV of the new development as a fee for releasing his covenant. This is of course is a matter of evidence, but it is important to note that there is no principle of law, as is sometimes thought, that the claimant is entitled to one-third of the defendant’s profit; indeed it’s notable in Wrotham Park that the plaintiffs only received 5%.

Whilst “negotiating damages” may be the best and fairest – or perhaps only – way of compensating a claimant whose intangible property rights have been infringed, it is open to criticism and challenge.

The Court acknowledged that the exercise is artificial – what if in reality the claimant might have been unwilling to release the defendant from the obligation? That objection can be overcome if the exercise is seen to be an objective one. But the premise of the hypothetical negotiation – that a reasonable person in the claimant’s position would have been willing to release the defendant in return for a fee – breaks down in a situation where any reasonable person would have been unwilling to grant a release. How then is the claimant to be compensated?

The converse is also true; what if the defendant plays his ‘trump card’: had you objected to my development I would have re-planned it to avoid infringing your legal rights? This defence would only run of course if the claimant failed to assert his property rights at the commencement of the development.

But for the time being, what we should be thinking about if we are claiming damages in lieu of an injunction for breach of an intangible property right such as a restrictive covenant is what a reasonable person in our client’s position would have taken to release the defendant from the restriction: that is the “negotiating” measure of damages.