The Supreme Court has recently considered the circumstances in which courts should make an award of ‘negotiating damages’, or ‘Wrotham Park’ damages as they were known before its recent decision in Morris-Garner and another -v- One Step (Support) Ltd  UKSC 20.
‘Negotiating damages’ are an award, calculated on a hypothetical basis, to reflect the sum which a defendant would have been prepared to pay in order to secure a release from its obligations to a claimant before breaching a contract. They are usually awarded as damages in lieu of an injunction. Understanding what ‘negotiating damages’ are is the easy bit; trying to establish the type of cases where they will be awarded by the courts moving forwards is trickier, even in light of the decision in One Step.
The One Step case involved the sale of a business. The first defendant sold to a Mr and Mrs Costelloe 50% of her business which offered support services to young people leaving care. One Step was the vehicle which was incorporated to effect the transaction. Following a breakdown in the relationship between the parties, the first defendant set up another business, Positive Living Ltd, resigned as a director of One Step and sold her 50% shareholding in One Step. On exiting One Step, the first defendant and the second defendant, who resigned from his managerial role in One Step, agreed to be bound by various non-compete and non-solicitation covenants for the benefit of One Step. The defendants proceeded to compete with One Step through Positive Living Limited. One Step then brought proceedings against the defendants for alleged breaches of restrictive covenant. Amongst other things One Step claimed an account of profits from the defendants or, in the alternative, ‘negotiating damages’.
That the defendants were in breach of the restrictive covenants was not in issue; what the Supreme Court had to consider was whether ‘negotiating damages’ should be awarded to One Step. The Supreme Court essentially determined that One Step could be adequately compensated by way of damages assessed on the usual basis i.e. by putting One Step in the position it would have been in if the defendants had observed their restrictive covenants. Although the Supreme Court recognised that it may be difficult to carry out an analysis of loss alleged to have been suffered in a case such as One Step, it nevertheless confirmed that courts were adequately equipped to do so.
This then begs the question as to when ‘negotiating damages’ are likely to be awarded by a court. The core test which seems to have been espoused by the Supreme Court is: has there been “a breach of contract (which) results in the loss of a valuable asset created or protected by the right which was infringed”? If so then ‘negotiating damages’ will be available, with damages measured by reference to the "economic value of the right which has been breached, considered as an asset” even in the absence of any pecuniary loss measurable on the usual damages basis. In practice this would appear to mean that, in claims concerning breaches of use of copyright, restrictive covenants over land, an intellectual property agreement or a confidentiality agreement, then a claimant will be able to recover ‘negotiating damages’. However in cases such as One Step, which concerned alleged breaches of non-compete or non-solicitation clauses, it seems that the remedy is unlikely to be available.
There is undoubtedly some residual uncertainty as to the scope of ‘negotiating damages’ following this recent decision, and I think it is fair to say that although it takes us one step forwards it perhaps takes us half a step back.
Case: Morris-Garner and another -v- One Step (Support) Ltd  UKSC 20.
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