Home > Wrotham Park Damages: An Update

Wrotham Park Damages: An Update

24th November 2016

Wrotham Park Damages: An Update

The broad subject of Wrotham Park damages in this talk is divided into three parts, namely: Part A which covers ‘what are Wrotham Park damages’; Part B which discusses how such damages have been construed and applied by the courts; and Part C which discusses the often-revered expansion of the permissibility of such a class of damages in the Court of Appeal decision in Morris-Garner and another v One Step (Support) Ltd [2016] EWCA Civ 180.

What are Wrotham Park damages?

An injunction is a form of relief that is highly typical in employment disputes in situations where, for example, a team of employees from X have improperly moved to Y in breach of enforceable post termination restrictive covenants. However such relief requires a degree of proactivity, knowledge and, in some instances, luck in order to obtain the assistance of the courts as to what those hypothetical employees can achieve at Y in the future.

So, what of the situation whereby our hypothetical client, X, is not concerned with forward looking loss and damage (for whatever reason) but instead is vexed by the past breaches that it can establish but where X likely cannot establish to the required standard of proof that it has caused X to sustain identifiable losses?

Damages for breach of contract would be the ordinary relief granted by the courts against the group of aforementioned employees for proved breaches and whilst nominal damages and a position of possible strength in an argument over costs might be achievable even if no causal link is established; no sensible client is ever likely to incur five or six figures in legal fees if that is to be their only financial receipt at the end of it.

It is against that background that the Prayer of many a statement of case includes, without much in the way of particulars before it, a claim for Wrotham Park Damages. What I hope to achieve in this talk is to explain the proper basis for such a claim and how it might be most appropriately used in light of recent case law. But beforehand; the all important background.

We as lawyers are often accused of becoming terribly excited about minutiae and the pronunciation of Wrotham Park is absolutely no exception. For those who don’t already know, Wrotham Park itself is a 2,500 acre estate situated near to the M25/A1 junction built for the admiral who never got to live in, Admiral John Byng, after his execution for negligence, which famously gave rise to Voltaire’s quip: “it pays to kill an admiral from time to time in order to encourage the others”.

Whilst it has been unsurprisingly hard to get hold of Robert Byng, the now owner, in order to ask him how his forefathers may have pronounced the estate’s name (and this might be because of his business ventures for the estate such as hiring it out to Simon Cowell for a £1M 50th birthday party in 2009!), the universally accepted approach to pronunciation as far as I could find it was ‘Roo-Tum Park’.

So, important background matters which ensure your apparent standing and confidence on the topic in court now dealt with; what are Wrotham Park damages? A Wrotham Park award is sometimes referred to as “negotiating damages” or “hypothetical bargain damages” because the principle behind them is that a claimant can recover such sum as the defendant would have paid the claimant if the defendant had first negotiated a release of its obligations without having, at that stage, breached them.

Wrotham Park is a property law case decided in 1974 but in light of McGregor on Damages describing it as one of the three key cases of awards for guidance as to the scope and ambit contractual restitutionary damages, it is plainly relevant in an employment sense as well. In Wrotham Park the Earl of Stafford sold part of the estate to a developer. The developer covenanted with the seller and his assigns that he and his successors in title would observe and perform certain covenants, restricting the buyer’s right to develop the land for building purposes other than in strict accordance with a lay-out approved by the seller. The defendants, who were successors in title to the buyer, built houses on the purchased land in breach of this restrictive covenant. The claimants who were by that stage the owners of land retained by the seller for the benefit of which the restrictive covenant had been taken, sued for a mandatory injunction seeking demolition of the houses erected, and for damages.

The injunction was refused because removal of the houses was said to constitute an ‘unpardonable economic waste’ and the question then arose as to whether the award of damages should only be nominal, as the defendants contended, because the value of the land was not reduced in value by the erection of the houses. Indeed the claimant conceded that the value of the land for whose benefit the covenant had originally been put in place was ‘not reduced by one farthing’.

Brightman J. regarded this contention by the defendant in that case for nominal damages as leading to a result of questionable fairness. He asked rhetorically whether “it was just that the [claimants] should receive no compensation and that the [defendants] should be left in undisturbed possession of the fruits of their wrongdoing” and proceeded to award as damages in lieu of a mandatory injunction of “such a sum of money as might reasonably have been demanded … as a quid pro quo for relaxing the covenant”.

Despite the claimant saying that no such agreement to relax the covenants would ever have been reached (a recurring, but plainly surmountable, theme in this area you will all note – and indeed may have experienced in practice) Brightman J. awarded five per cent. of the reasonably anticipated profits of the first defendants, who were the developers, in that case.

Given that this related to the construction of 14 detached houses that was a not inconsiderable sum albeit that it is important to remember that Brightman J. considered in reaching such a figure that because the claimants were aware of the facts of the case before the land was sold for development but said nothing, he should act with “great moderation”. It seems then that two points probably arise from a consideration of this particular point:

  1. Knowingly permitting a breach to continue and then suing for these kinds of damages afterwards appears to support a contention that the percentage award should be commensurately reduced; and,
  2. 5% of profits should perhaps be considered an exceptionally low figure and maybe even one which delineates the lower boundary of this type of award in cases with that sort of factual matrix.

How have Wrotham Park damages been applied?

In the now infamous decision of the spy case in Attorney General v Blake [2001] 1 AC 268 which concerned what Longmore LJ later referred to as a ‘traitor, seeking to profit from his treachery by making a self-justificatory book about it’, the House of Lords considered the remedy of an account of profits (following a most interesting judicial route of seemingly persuading the claimant to bring such an action). In the course of his speech Lord Nicholls referred to Wrotham Park with approval and said:

‘The case, therefore, still shines, rather as a solitary beacon, showing that in contract as well as tort, damages are not always narrowly confined to recoupment of financial loss. In a suitable case damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained.’

Lord Nicholls’ speech in Blake therefore showed that cases in which the defendant who has wrongfully used the claimant’s property is required to pay a reasonable price for the right of use are an exception to the general rule and do not conform to the strictly compensatory measure of damages for the claimant’s loss. It is perhaps of note to us employment lawyers (subject to One Step), depending upon which side of the pre-action correspondence that you find yourself, that Lord Nicholls referred to such a remedy as being ‘exceptional’ no less than three times in his speech.

A further important case in which Wrotham Park was pertinently considered was that of Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 and in that case it was recognised that this entire area was a new doctrine of law that was still in development and, in some instances, inordinate uncertainty. Indeed as Mance L.J. said: “Blake leaves future courts with the task of “hammering out on the anvil of decided cases”.

In Experience Hendrix the company which owned the rights to the recordings of Jimmy Hendrix reached an agreement, by way of settlement of a dispute, with PPX, a licensee, by which PPX agreed that it would not exploit certain master recordings of another musician where Hendrix, not yet a star, had then only been a sideman. In fact PPX, in breach of that agreement, then did so.

Not only was this a case where there was no evidence as to the losses sustained by the Claimant but it was also a yet further case where it was averred by the claimant that it would not have entered into any bargain which would have relaxed the restrictions so as to permit the defendant to act in the manner that it in fact then did.

Lord Justice Gibson said that it was a case which was suitable to award damages measured by benefits gained by the wrongdoer because of the following three criteria:

  1. there had been a deliberate breach by PPX of its contractual obligations for its own reward,
  2. the claimant would have difficulty in establishing financial loss therefrom; and
  3. the claimant has a legitimate interest in preventing PPX’s profit-making activity carried out in breach of PPX’s contractual obligations

Thereafter in World Wide Fund for Nature v World Wrestling Federation Inc [2008] 1 WLR 445 it was necessary for the Court of Appeal, for the purposes of a res judicata/abuse of process argument, to decide whether the contention that the remedy then sought by the Fund, namely Wrotham Park damages, was ‘a juridically highly similar remedy to the relief’, namely an account of profits, that it had previously sought in the action.

Chadwick LJ rejected the contention that an award of Wrotham Park damages was a gains-based remedy and not an award of compensatory damages, holding that it was the latter. He observed that to label an award of Wrotham Park damages as a ‘compensatory remedy’ and an account of profits as ‘gains based’ did not assist an understanding of the principles on which the court acts. The two remedies should be seen as (and I think this is a very useful phrase when challenged in pre-action correspondence about the threat that your client may seek such a remedy) a flexible response to the need to compensate the claimant for the wrong that had been done to him. It was for that reason that the remedies were considered by Chadwick LJ to be juridically highly similar.

For my part I consider that the labelling exercise was clearly unhelpful and one which it would have been better to abandon at that stage. In striving to determine whether Wrotham Park damages were or were not juridically similar to an account of profits the Court of Appeal found that it was a compensatory type of award but I cannot see (and given that I have McGregor for support, I feel able to say so here) that the relief of removing some of the benefits gained by the wrongdoer is anything other than a restitutionary approach.

Furthermore it was in Lunn Polly & another v Liverpool & Lancashire Properties Ltd and another [2006] EWCA Civ 430 that Neuberger LJ (as he then was) also tried to square that same hole by holding that they were compensatory damages, ‘but not of the ordinary type’.

But, interesting (/otiose) cerebral discussion(s) aside, what Lunn Polly did helpfully provide guidance upon was in holding that although “negotiating damages” are normally to be assessed at the date of breach, where there are good reasons for doing so, the court may select a different valuation date or direct that a specific post-valuation date event be taken into account. Clearly this is something to be born in mind if the market has inordinately grown since the date of the breach and where the contract breakers would arguably have even secured a windfall if they had paid for a release from covenant at the proper time.

Despite my observations as to the unnecessary concentration upon the classification of Wrotham Park damages in WWF, the principal reason why I consider this case to be so important is because it was here that Lord Justice Chadwick also held that the court could award damages on the Wrotham Park basis even if there was no claim for an injunction and where there could be none. So in our case where the team of employees have left X to go Y and X belatedly instructs you to help them make an example of the team for acts which have already taken place but where no provable loss was suffered, this case is critical in that it permits such a claim for relief to be maintained where you are simply unable to plead injunctive relief in the first place.

Morris-Garner and another v One Step (Support) Ltd [2016] EWCA Civ 180

The claimant company (One Step) provided supported living services to vulnerable people. The first defendant was a former director and shareholder of One Step. The second defendant (D2) was a former employee of One Step and D1’s civil partner.

In 2002, D1 sold her own supported living business to One Step, a newly incorporated company in which she was a 50% shareholder. The other 50% of One Step’s shares were purchased by M and his wife.

In 2004, the working relationship between D1 and M broke down and in July 2006 the defendants secretly incorporated a new company. In December 2006, pursuant to a deed of compromise between D1, One Step, M and his wife, D1 entered into a sale agreement under which she agreed to resign as a director of One Step and sell her 50% interest to a company owned by M. The financial benefit as a result of this transaction was something in the order of £3M.

In the Deed of Compromise, D1 gave 36-month confidentiality, non-compete and non-solicitation covenants in favour of One Step, with D2 voluntarily entering into restrictions as well.

The new company owned by D1 and D2 started marketing its new business in spring 2007 and started accepting supported living placements in August 2007 which was in competition with One Step.

In 2012 One Step brought proceedings against the defendants for alleged breaches of the restrictive covenants.

Phillips J found that both defendants had breached their non-compete and non-solicitation covenants. In addition, D1 had breached her confidentiality covenant, having emailed to herself a large quantity of One Step’s confidential information while she was still working at One Step. The judge was satisfied that D1 took the information for subsequent wrongful use and that she had wrongfully used the material.

One Step adduced an accountant’s report computing a “shortfall” in One Step’s profits from the time that Newco started trading, until the date in September 2010 when D1 sold the Newco. However, the report did not cover ongoing loss, nor quantify loss of market share nor general reputational damage. One Step contended that damages would be very difficult to prove and would not, for that reason, be an adequate remedy. One Step sought either an account of profits or Wrotham Park damages.

Phillips J did not regard the circumstances as sufficiently exceptional to warrant an account of profits. However, he accepted that it would be difficult for One Step to identify its financial loss, bearing in mind the degree of secrecy in the establishment of the Newco. He therefore considered it just to give One Step the option to elect for Wrotham Park damages, not least because the covenants provided that the restraint was subject to consent, not to be unreasonably withheld. The defendants appealed.

The issues on appeal were threefold but in this talk we are only concerned with one of them:

Whether the judge was right to give One Step the option to elect (as it did) for Wrotham Park damages, and in particular, whether such damages could be awarded only where:
a) the injured party was unable to demonstrate identifiable financial loss,

b) awarding them was necessary to avoid manifest injustice, and

c) there were special or exceptional circumstances.
Christopher Clarke LJ gave the leading judgment with which Lady Justice King Agreed.

Can Wrotham Park damages be awarded only where the claimant has suffered no loss?

Christopher Clarke LJ thought that the answer to this was ‘no’. He considered WWF and noted that Chadwick LJ had made reference to a need to compensate where a claimant cannot demonstrate identifiable financial loss as an underlying feature of the claim. However Christopher Clarke LJ noted that this was as a result of Chadwick LJ enquiring as to whether an account of profits and Wrotham Park damages were juridicially similar. He went on to say that it was not necessary for Chadwick LJ to decide, nor should he be taken as having decided, that Wrotham Park damages should only be available where it was impossible for the claimant to identify any financial loss.

Christopher Clarke LJ added that the flexibility of the approach required in assessing Wrotham Park damages meant that they may be awarded where it would be very difficult for the claimant to establish “ordinary” compensatory damages albeit that Philips J at first instance in that case only described such an exercise as being ‘difficult’.

The level of ‘difficulty’ is likely to be central to all dispute on such relief going forwards and it is therefore likely also pertinent that Longmore LJ approved the three steps expounded by Gibson LJ in Experience Hendrix where ‘difficulty’ rather than ‘very difficult’ was referred to. The questions are:

  1. Must such damages be ‘necessary’ to avoid such loss? And,
  2. Does the case have to be considered ‘exceptional’?

There is a succinct and instructive summary of the approach to damages contained within Devenish Nutrition Ltd v Sanofi-Aventis SA [2007] EWHC 2394 (Ch) which is encapsulated in One Step and which I commend to anyone in order to properly understand how courts are expected to approach an assessment of damages. The phrase which is most apt for this topic is the use of a “broad axe” which, in essence, means that there is no absolute requirement that the court can only make an award of damages if it can be precise.

It was contended on behalf of the appellants that to permit an award of Wrotham Park damages would make them the norm rather than the exception because all defendants would they pray that damages which are difficult to assess should give rise to an award of Wrotham Park damages. They submitted in short therefore that the broad-axe tool would do.

Christopher Clarke LJ however decided that whether or not a case was ‘exceptional’ (which he rightly considered the facts in One Step to be) or whether such damages were ‘necessary’ was not the true test; which was, in fact ‘what does justice require’.

One of the further grounds of objection to such relief by the appellants was that Wrotham Park damages may over-compensate.  However whilst agreeing that this may well be correct (in that the contract breaker may end up paying more than the true financial loss to the innocent party) Christopher Clarke LJ was unpersuaded that this was a basis upon which such relief should be refused, instead deciding that the courts are well placed to achieved as just a result as might be required in any particular instance.

What role does the ‘justice’ in the case have to play?

The short answer to this point for those in pursuit of illusive jurisprudential prescription is ‘a central one’ since this relief is about achieving what might be considered a fair result as opposed to the strict application of the measure of damages for a breach of contract.

Longmore LJ had ‘little difficulty’ in reaching the same conclusion as the trial judge on the basis that it was appropriate to consider the justice of the case on a broad brush basis. And Christopher Clarke LJ said:

“In Wrotham Park itself Brightman J held that without such an award justice would ‘manifestly not have been done’. In Experience Hendrix Mance LJ concluded that ‘any reasonable observer’ would think that a Wrotham Park award should be made as a matter of practical justice.”

Summary

So in summary we can take the following principles from the Court of Appeal decision here:

  1. No claim (actual or possible) for an injunction is required since that would exclude cases such as One Step where the secrecy meant that an injunction would have been pointless.
  2. Trying to categorise the measure of Wrotham Park damages as being a ‘gains based remedy’ or ‘compensatory damages’ is not helpful. The court has the power to make an award which would deprive the wrongdoer of (some of) his profit and it does not matter that this may be more than the wrongdoer would have paid in order to relax the covenant in the first instance.
  3. Whilst difficulty in proving loss is a requirement in order to be able to seek Wrotham Park damages, and whilst a (possibly negligent) failure to provide such information will not permit such a door to relief to be flung open, there is no (emphasis added) absolute requirement that it is impossible to prove loss and damage.
  4. ‘Manifest injustice’ or ‘exceptionality’ are no longer required, but such relief must be considered by trial judge as the ‘just response’ which as anyone in this room knows, whilst potentially opening up the scope of the doctrine, at the same time dramatically increases the uncertainty of it.

Appeal

When writing this essay I could find no reference to the pursuit of the appeal in this matter, permission for which was, perhaps unsurprisingly, granted on 2nd August 2016. However I have spoken with the solicitor representing one of the parties who has confirmed that this is now listed in the Supreme Court for 11th and 12th October 2017 and that a resolution before that hearing is probably unlikely.

So in all likelihood we will benefit from this doctrine being traversed by the Supreme Court who could: treat it akin to the way they treated the rule in Hastings Bass with a substantial rein-back, endorse the court of appeal’s expansion; or even expand it yet further by, for example, deciding that where there is ‘some’ difficulty in calculation of loss in these types of cases the claimant would get the right to elect.

In any event I am sure that we would all agree that an increase in the certainty of application of the doctrine would be of benefit for all concerned since One Step has done little to reduce it. What ‘justice requires’ being ‘quintessentially’ a matter for each judge is an admirable position but one which frequently creates commercially unacceptable imponderables in the real world.

The last point that is worth mentioning here is the effect of this expansion on applications for interim injunctions. What of the position whereby an application for interim relief is predicated upon a (seemingly common) plea that the measure of loss would be impossible, or at least very difficult, to calculate? Does the express removal in One Step of any need for an ‘impossibility’ of calculation mean that such applications will now be defeated by the possibility of such relief at trial? At the moment it seems that the answer is probably ‘no’ for three reasons:

  1. Christopher Clarke LJ sought to head this off in his judgment at paragraph 133; but with reasoning that is not at all easy to follow. He stressed the importance of focusing (presumably in an application for an interim injunction) upon whether ‘ordinary damages’ would be an adequate remedy but has not stated any support for such regard at an interim stage nor any reasoning as to why, for example, Wrotham Park relief should be ignored as a final remedy even if the applicant has already included it in their draft statement of case.
  2. It seems that having regard to the expressly recognised possibility that this would potentially compensate a claimant in a greater amount than if they were required to prove their loss, it may be tactically unwise, or even negligent, to place undue reliance upon such a ground of relief at an interim stage.
  3. The level of uncertainty that shrouds the application of a ‘just’ result will likely require a forensic examination of the totality of the evidence such that at an interim stage a court would be reluctant to accede to a submission that because such relief may be available at trial this necessarily militates against the granting of an interim injunction.

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

Contact

Please note that we do not give legal advice on individual cases which may relate to this content other than by way of formal instruction of a member of Hardwicke.  However if you have any other queries about this content please contact:

Sally Wollaston
Sally Wollaston
Business Development and Marketing Director
Menu