26 July 2018

Morris-Garner & Anor v One Step (Support) Ltd [2018] UKSC 20

In Morris-Garner & Anor v One Step (Support) Ltd (“One Step”), the UK Supreme Court laid down several seminal holdings on the availability and applicability of Wrotham Park damages.

Wrotham Park damages were first awarded in the English High Court decision of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. In that case, a landowner sued a developer who had breached a restrictive covenant by building houses on the land. The English High Court awarded damages to the landowner, calculated by reference to “such a sum of money as might reasonably have been demanded by the plaintiffs from (the defendant) as a quid pro quo for relaxing the (restrictive) covenant”. In essence, this involved calculating damages based on a hypothetical bargain for a release fee between parties, instead of the usual method of quantifying the plaintiff’s actual loss.

This novel method of calculating damages was affirmed and adopted by the English and Singapore courts in subsequent cases. However, the categories of cases to which Wrotham Park damages may apply, and the judicial principles underpinning the same, continue to be subject to extensive discussions. The case of One Step is the latest in a series of cases on the applicability of Wrotham Park damages.

Facts

In One Step, the first defendant was a former shareholder and director of the plaintiff. The second defendant was a former employee of the plaintiff. Pursuant to a buy-out agreement, the first defendant sold her shares in the plaintiff, and both defendants resigned from the plaintiff. The defendants were also subject to covenants restricting them from competing with the plaintiff or soliciting its clients for a period of three years.

Subsequently, the plaintiff sued the defendants for, among other things, breaches of the non-competition and non-solicitation covenants.

At trial, the Judge found that the plaintiff was successful in establishing liability. The Judge considered this a “prime example of a case in which Wrotham Park damages should be and were made available” because, inter alia, it was very difficult for the plaintiff to identify its actual financial loss. The Judge therefore awarded Wrotham Park damages. The English Court of Appeal dismissed the appeal, taking into account the difficulties which the plaintiff would have in establishing damages on the ordinary basis.

The defendants appealed to the UK Supreme Court, including over the question as to whether Wrotham Park damages should be awarded.

Majority view in One Step

Lord Reed, in the majority, first analysed the various authorities in which Wrotham Park damages were applied. From his analysis, Lord Reed drew the following conclusions: 

  • Wrotham Park damages are awarded when the breach of contract results in the loss of a valuable asset created or protected by the contractual right which was infringed.
  • 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.

Lord Reed made it clear that Wrotham Park damages are only available for certain contractual rights whose breach can result in an identifiable loss equivalent to the economic value of the right, even if the claimant did not suffer any pecuniary loss at all. Lord Reed identified classes of such assets: rights over land, intellectual property rights and rights over confidential information.

It is noteworthy that Lord Reed expressly excluded rights under non-compete agreements from such assets. In his Lordship’s view, “the breach of a non-compete obligation may cause the claimant to suffer pecuniary loss resulting from the wrongful competition, such as a loss of profits and goodwill, which is measurable by conventional means, but in the absence of such loss, it is difficult to see how there could be any other loss.”

Lord Reed went on to state that the effect of a breach of a non-compete agreement:

“was to expose the claimant’s business to competition which would otherwise have been avoided. The natural result of that competition was a loss of profits and possibly of goodwill. The loss is difficult to quantify, and some elements of it may be inherently incapable of precise measurement. Nevertheless, it is a familiar type of loss, for which damages are frequently awarded. It is possible to quantify it in a conventional manner … The case is not one where the breach of contract has resulted in the loss of a valuable asset created or protected by the right which was infringed.”

Minority view in One Step

Lord Sumption wrote a separate judgment and took a different view. Lord Sumption doubted whether the characterisation of a contractual right as an “asset” (in Lord Reed’s sense) “contributes anything to the argument”. In one sense, almost any legal right can be described as a right of property, including business and goodwill which has been appropriated by a breach of a non-compete covenant.

In fact, Lord Sumption suggested that goodwill was closely analogous to a species of property. The defendants who had entered into a non-compete agreement with the claimants had done so to procure a sale of the defendants’ business to the claimants. The value of the business sold by the defendant to the claimant included the business’s goodwill. By breaching the non-compete, the defendants had appropriated the goodwill of the business which they themselves had sold to the claimants.

Hence, in Lord Sumption’s view, the use of the “notional release fee” technique in Wrotham Park damages was simply an evidential tool for assessing a party’s loss in appropriate cases. There was no need to expressly exclude its application in the present case (which involved a non-compete agreement).

Current legal position in Singapore

Unlike in the UK, Singapore does not currently exclude Wrotham Park damages for breaches of non-compete agreements.

It remains to be seen whether the Singapore courts will follow the approach of the majority or minority in One Step.

 

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