One Step (Support) Ltd v Morris-Garner

Easter Term

[2018] UKSC 20

On appeal from: [2016] EWCA Civ 180

Morris-Garner and another (Appellants) v One Step (Support) Ltd (Respondent)

before

Lady Hale, President

JUDGMENT GIVEN ON

18 April 2018

Heard on 11 and 12 October 2017

Appellants

Respondent

Charles Béar QC

Craig Orr QC

Ian Bergson

Mehdi Baiou

(Instructed by Neves	(Instructed by Pitmans
Solicitors LLP Milton	LLP)

Keynes)

LORD REED: (with whom Lady Hale, Lord Wilson and Lord Carnwath agree)

1. This appeal raises an important question in relation to the law of damages: in what circumstances can damages for breach of contract be assessed by reference to the sum that the claimant could hypothetically have received in return for releasing the defendant from the obligation which he failed to perform? Damages assessed on this basis, sometimes described as Wrotham Park damages, after the case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, have attracted considerable debate, both judicial and academic. That debate, and the confused state of the authorities, have reflected a lack of clarity as to the theoretical underpinning of such awards, and consequent uncertainty as to when they are available. This is the first occasion on which the issue has come before the highest court for decision, although there was some discussion of Wrotham Park in Attorney General v Blake [2001] 1 AC 268. In engaging with this issue, the court has had the assistance of strongly argued submissions by counsel, supported by extensive citation of case law and academic scholarship.

2.         It is necessary to recognise at the outset that the term “Wrotham Park

damages” has been used rather loosely in the authorities, as Lord Walker of

Gestingthorpe observed in Pell Frischmann Ltd v Bow Valley Iran Ltd [2009] UKPC 45; [2011] 1 WLR 2370, para 46. He referred in particular to the failure to distinguish clearly between its use, on the one hand, to describe every type of compensatory damages which exceed the actual financial loss to the claimant, and, on the other hand, damages awarded in lieu of specific performance or an injunction under the jurisdiction created by section 2 of the Chancery Amendment Act 1858

(“Lord Cairns’ Act”); and, in the latter context, between non-proprietary breaches

of contract, and those involving the invasion of a property right.

3.         This judgment will abjure the use of the term “Wrotham Park damages”.

Although it will be necessary to consider the case of Wrotham Park, it is a source of potential confusion because of the opacity of its reasoning, and it can now be regarded as being of little more than historical interest. Instead, this judgment will

use the expression “negotiating damages”, introduced by Neuberger LJ in Lunn Poly

Ltd v Liverpool & Lancashire Properties Ltd [2006] EWCA Civ 430; [2006] 2
EGLR 29, para 22.

4. In Pell Frischmann, Lord Walker listed what he regarded as “the most illuminating” of the judgments on this subject since Wrotham Park itself. He

extracted from them the following general principles, at para 48:

“(1) Damages (often termed ‘user damage’) are readily

awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or

trespass) …

(2) Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights

of a proprietary character …

(3) Damages under Lord Cairns’s Act are intended to provide compensation for the court’s decision not to grant

equitable relief in the form of an order for specific performance or an injunction in cases where the court has jurisdiction to

entertain an application for such relief …

(4) Damages under this head (termed ‘negotiating damages’ by Neuberger LJ in Lunn Poly at para 22) represent ‘such a sum

of money as might reasonably have been demanded by [the claimant] from [the defendant] as a quid pro quo for [permitting the continuation of the breach of covenant or other invasion of right]’: Lunn Poly at para 25.

(5) Although damages under Lord Cairns’s Act are awarded

in lieu of an injunction it is not necessary that an injunction should actually have been claimed in the proceedings, or that there should have been any prospect, on the facts, of it being

granted …”

In Pell Frischmann it was unnecessary to consider the wider issues raised by the present appeal. For reasons which will be explained, it will be necessary to qualify principles (4) and (5) to some extent, and to add a number of others.

5. It is convenient to preface the discussion with an explanation of the context

in which the question arises in the present case, by summarising the facts of the case
and the history of the proceedings.

The facts

6. The relevant events can be summarised as follows. In 1999 the first defendant established a business providing support for young people leaving care. In 2002 she agreed to sell a 50% interest to a Mr and Mrs Costelloe. The claimant company, One

Step (Support) Ltd (“One Step”), was incorporated as a vehicle for the transaction.

The first defendant and Mrs Costelloe each subscribed for 50% of its issued share

capital and were appointed as its directors. They entered into a shareholders’

agreement which included provision for dealing with a deadlock between the directors by enabling each of them to serve a notice requiring the other director either to buy the shares of the director serving the notice at a specified price, or to sell her own shares to that director at the same price.

7. The first defendant and Mr Costelloe then ran the business, and the second defendant performed a managerial role. The business comprised the provision of rented accommodation and support services to enable vulnerable individuals referred by local authorities, such as children and young people leaving care, and adults with mental health and learning disabilities, to live as independent lives as possible in the community. The services were provided to local authorities in West London and the Thames Valley.

8. The business prospered for some years, but over time the working relationship between the first defendant and Mr Costelloe deteriorated. In April 2006, the first defendant emailed to her personal email account confidential market research information held by the claimant. In May 2006, Mrs Costelloe gave notice of her intention to serve a deadlock notice. In July 2006, the first defendant incorporated another company, Positive Living Ltd. She and the second defendant were its sole shareholders. In August 2006 Mrs Costelloe served a deadlock notice, offering either to sell her shareholding to the first defendant, or to buy the first

defendant’s shareholding, for £3.15m. The first defendant elected to require Mrs

Costelloe to buy her shares.

9.         In December 2006 a buy-out agreement was entered into. The first defendant

sold her shares to Community Support Project Ltd (“CSPL”), a vehicle company

incorporated and owned by Mr Costelloe, for £3.15m, and agreed to resign as a director of the claimant. She also agreed with the claimant to be bound for a period of three years by covenants requiring her to keep information concerning its business transactions confidential, and prohibiting her from engaging in a business that was in competition with it or soliciting its clients, without its consent, such consent not to be unreasonably withheld. As part of the same transaction, the second defendant terminated her employment with the claimant and agreed to be bound by similar covenants against competition and solicitation.

10.       In August 2007, Positive Living began trading in West London and the

Thames Valley in competition with the claimant. By early 2008, the claimant’s

business had experienced a significant downturn. In February 2008, solicitors acting on its behalf wrote to the first defendant, threatening to bring proceedings for an injunction. Following an exchange of correspondence, the matter was not pursued further at that time. In December 2009, the three year period of restraint specified in the covenants expired. In September 2010, after further correspondence had passed

between the defendants’ solicitors and solicitors acting for the claimant, the

defendants sold their shares in Positive Living for £12.8m.

11. In July 2012, the claimant issued the present proceedings, alleging that the defendants had acted in breach of the covenants and in breach of an equitable duty of confidence, had induced each other to breach the covenants, and had conspired with each other to injure it by unlawful means. In relation to remedies, in respect of the breach of the non-compete and non-solicit covenants it sought an account of profits, or alternatively what were described as restitutionary damages, in such sum as it might reasonably have demanded as a quid pro quo for releasing the defendants from those covenants, or, in a further alternative, what were described as

compensatory damages for the loss it had suffered by reason of the defendants’

breach of those covenants. In respect of the breach of confidence, it sought an
account of profits, or alternatively damages.

12. For the purposes of the proceedings, the claimant produced reports by forensic accountants quantifying the loss which it had allegedly suffered in

consequence of the defendants’ alleged breach of the covenants, the benefits

obtained by the defendants, and the hypothetical release fee.

13. Mr Christopher Hine estimated the loss that the claimant had suffered at between £3.4m and £4.6m, depending on the gross profit margin on sales which was assumed. Put shortly, he estimated the sales which the claimant would have made in the absence of competition from Positive Living during the period when the defendants were in breach of contract, compared those with the sales actually made, and applied a profit margin to the shortfall. He based his estimate of the sales which would have been made in the absence of competition from Positive Living on the

trend of sales during the period after the defendants’ departure from the business

and before the breach of contract commenced, on a forecast of profits which had been independently prepared for the claimant in September 2006, and on a market

analysis establishing the extent to which Positive Living’s sales were achieved at

the expense of the claimant. He added a further sum in respect of an additional loss of profits after the restrictive covenants expired, again based on a comparison between projected sales in the absence of competition from Positive Living and actual sales. He added that loss of goodwill was not within his expertise.

14. Mr Andrew Grantham estimated the hypothetical licence fee at between £5.6m and £6.3m. He did so by estimating what a reasonable person in the position of the claimant would have agreed to accept in return for releasing the defendants from the covenants, and what a reasonable person in the position of the defendants would have agreed to pay for that release, and then identifying the area of overlap. The hypothetical negotiation which he envisaged was highly complex and cannot be easily summarised. In simplified terms, the reasonable person in the position of the claimant was envisaged as seeking the payment of an initial release fee and the grant

of an option entitling it to acquire the defendants’ competing business at a discount

to its market value, while the reasonable person in the position of the defendants was envisaged as being unwilling to pay more than the discounted value of an

accelerated sale of Positive Living’s business, plus the amount obtained on the first

defendant’s sale of her shares in the claimant, to the extent that it was invested in

activities on the part of Positive Living which were not in competition with the

claimant. One notable feature is that the starting point, on the claimant’s side of the hypothetical negotiation, was an estimate of the claimant’s cash flows and profits in

the absence of competition from Positive Living, the equivalent figures in the presence of such competition, and an assumed profit margin. These estimates were

taken from Mr Hine’s report.

15. Since damages have not yet been assessed, it is appropriate for this court to be circumspect in its comments on the reports. One observation can however be made. Much has been made in the judgments below, and in the submissions on behalf of the claimant, of the difficulty of estimating the loss which it suffered, and the comparative simplicity of estimating the hypothetical release fee. So far as appears from the reports, the proposition that estimating the hypothetical release fee is simpler in this case than estimating the loss suffered does not hold water.

The proceedings below

16.       The trial judge, Phillips J, ordered that the issues of liability, and the

claimant’s entitlement to the remedies sought, should be tried first. Following trial,

he found ([2014] EWHC 2213 (QB)) that the defendants had acted in breach of contract by breaching the non-compete covenants (although less extensively than had been assumed in the expert reports) between August 2007 and 20 December 2009, that they had also breached the non-solicit covenants between 20 December 2006 and 20 December 2009 by soliciting business from seven local authorities, and that the first defendant had also acted in breach of the contractual confidentiality clause and an equitable duty of confidence by appropriating the market research information in April 2006 and subsequently using it to set up Positive Living. He did not find it necessary to determine the claims in tort.

17.       In relation to remedies, the judge did not make any separate order in respect

of the first defendant’s breach of her contractual and equitable duties of confidence.

He also declined to order an account of profits in respect of any of the breaches of duty. Implicitly, he appears to have proceeded on the basis that no separate award for the breach of confidence was necessary, since the harm which it caused would be reflected in an award in respect of the breach of the non-compete and non-solicit covenants. No appeal has been taken against these aspects of his decision.

18.       He concluded that this was a prime example of a case in which Wrotham Park

damages (as he described them) should be and were available. It would, he said, be difficult for the claimant to identify the financial loss it had suffered by reason of

the defendants’ wrongful competition, not least because there was a degree of

secrecy in the establishment of Positive Living’s business which had not been fully

reversed by the disclosure process. In his judgment it would be just for the claimant to have the option of recovering damages in the amount which might reasonably have been demanded in 2007 for releasing the defendants from their covenants, not least because the covenants provided that the restraint was subject to consent, not to be unreasonably withheld.

19.       He accordingly granted a declaration that the claimant was “entitled to

judgment for damages to be assessed on a Wrotham Park basis (for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from their obligations) or alternatively ordinary

compensatory damages”. The claimant then elected for damages on the so-called

Wrotham Park basis, and a hearing on quantum was fixed. It has not yet been held.

20. An appeal was dismissed. Christopher Clarke LJ, with whom King LJ agreed ([2017] QB 1), considered that the test was whether an award of damages on the Wrotham Park basis was the just response in the particular case. That was a matter for the judge to decide on a broad brush basis. He was entitled to take into account the difficulties which the claimant would have in establishing damages on the ordinary basis. There would be very real problems in showing what placements the claimant lost because of the appearance of Positive Living on the scene, and in addition any loss of goodwill was inherently difficult to measure.

21. Christopher Clarke LJ observed that the amount taken as the reasonable sum for the relaxation of restrictive covenants might represent more, perhaps far more, than the loss realistically to be regarded as, in the event, suffered by their breach. So a Wrotham Park award could bear no relationship to the practical effect of any competition from Positive Living. Further, the assessment of a reasonable price might involve consideration of several imponderables, such as the likely effect of future competition, which would also arise in any assessment of general damages. Nevertheless, Christopher Clarke LJ did not regard these considerations as justifying a denial of Wrotham Park damages. First, the price that might reasonably be demanded for the relaxation of a covenant might necessarily exceed the loss that would have been suffered by the actual breach, since the price reflected the risk that breach of the covenant might result in a greater risk than had in fact occurred (something which, it might be thought, was a reason for declining to award damages on the Wrotham Park basis, rather than the reverse). Secondly, in deciding on the

appropriate price the court must “exercise a robust judgment” (para 131) which took

account of the likely extent and effect of any competition. Further, justice might require the court to take into account facts and events after the date of the hypothetical negotiation, or to take a post-breach valuation date.

22. Longmore LJ gave a concurring judgment, in which he confessed to having found the question more difficult. As he put it, “judges like to act in accordance with

accepted principle and it is not easy to set out the principles by which it is possible

to decide that Wrotham Park damages … should be awarded” (para 143). He treated

an award of Wrotham Park damages as being justified where three factors, identified by Peter Gibson LJ in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323; [2003] 1 All ER (Comm) 830, para 58, were present: (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 therefrom; and

(3) the claimant had a “legitimate interest” in preventing the defendant’s profit-

making activity in breach of contract. On the facts, all three factors were considered
to be present.

23. The issues in the present appeal are agreed by the parties to be, first, where a party is in breach of contract, in what if any circumstances is the other party to the contract entitled to seek negotiating damages, ie damages assessed by reference to a hypothetical negotiation between the parties, for such amount as might reasonably have been demanded by the claimant for releasing the defendants from their obligations; and secondly, whether the Court of Appeal was correct to uphold the

judge’s finding that such damages are available in this case.

First principles

24.       The award of negotiating damages under Lord Cairns’ Act, and also at

common law, has been influenced by the award of “user damages” at common law

for the tortious invasion of rights to tangible property, and the award of damages on a similar basis for infringements of intellectual property rights. Before considering the circumstances in which negotiating damages may be available at common law for breach of contract, it is necessary to consider (i) the award of user damages in tort, and also to remind oneself of some general principles governing (ii) common law damages for breach of contract, and (iii) the jurisdiction to award damages under

Lord Cairns’ Act.

(i)        User damages in tort

25. In tort, although damages may in some circumstances be awarded for punitive purposes, the general principle is that damages are compensatory. As Lord Blackburn said in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39; (1880) 7R (HL) 1, 7:

“I do not think there is any difference of opinion as to its being

a general rule that, where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is

now getting his compensation or reparation.”

26.       Lord Blackburn’s principle can readily be applied in situations where some

tangible loss has been sustained: for example, where real property has been damaged or taken by a trespasser (as in the Livingstone case itself), or where goods have been converted. Its application is less obvious in situations where there has been an invasion of rights to tangible moveable or immoveable property, but there has been no pecuniary loss or physical damage to the property in question. Nevertheless,

where a trespasser has made valuable use of someone else’s land, without causing

any diminution in its value, the landowner has been held to be entitled to damages measured as what a reasonable person would have paid for the right of user: see, for example, Whitwham v Westminster Brymbo Coal and Coke Co [1896] 2 Ch 538. A similar approach has been adopted in cases of detinue, such as Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246. Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights.

27. The basis of the award of damages in cases of this kind was considered by Lord Shaw of Dunfermline in Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson 1914 SC (HL) 18; (1914) 31 RPC 104. The case concerned the sale of

machines which infringed the pursuers’ patent. The issue in dispute was whether the

pursuers were entitled to recover damages for sales which had been made by the defenders in a territory where the pursuers could not themselves have traded, and which, moreover, the defenders would have made even if the machines had not incorporated the infringing part. It was held that they were so entitled. Lord Shaw

contrasted the principle underlying the assessment of “damages in general”, whether

in contract or in tort, which he described as the principle of “restoration” as he defined it, with a second principle of “price or hire”, applicable not only to patent

cases but “whenever an abstraction or invasion of property has occurred” (pp 29-

31). As he explained, this distinction was relevant to the case before him, since the restoration principle could not support a claim by a patentee relating to a section of

trade in which, it was argued, “he can have sustained no damage, because he would

never have sold his patented articles within that section” (p 30).

28. Lord Shaw described the second principle as follows, in a passage at p 31 subsequently quoted by Brightman J in Wrotham Park:

“It is at this stage of the case, however, that a second principle

comes into play. It is not exactly the principle of restoration, either directly or expressed through compensation, but it is the principle underlying price or hire. It plainly extends - and I am inclined to think not infrequently extends - to patent cases. But, indeed, it is not confined to them. For wherever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as

I say, either of price or of hire.”

He illustrated this by the example of the liveryman’s horse, also at p 31:

“If A, being a liveryman, keeps his horse standing idle in the

stable, and B, against his wish or without his knowledge, rides

or drives it out, it is no answer to A for B to say: ‘Against what

loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is the better for the

exercise.’”

Lord Shaw also endorsed the view expressed by Fletcher Moulton LJ in Meters Ltd v Metropolitan Gas Meters Ltd (1911) 28 RPC 157, 165 that, even if it was not the

claimant’s practice to grant licences, “it would be right for the court to consider what

would have been the price at which - although no price was actually quoted - could have reasonably been charged for that permission, and estimate the damage in that

way”.

29. The approach adopted in these cases was described by Nicholls LJ in Stoke- on-Trent City Council v W & J Wass Ltd [1988] 1 WLR 1406 as the “user principle”.

He summarised it as follows, at p 1416:

“It is an established principle concerning the assessment of

damages that a person who has wrongfully used another’s

property without causing the latter any pecuniary loss may still be liable to that other for more than nominal damages. In general, he is liable to pay, as damages, a reasonable sum for

the wrongful use he has made of the other’s property. The law

has reached this conclusion by giving to the concept of loss or damage in such a case a wider meaning than merely financial

loss calculated by comparing the property owner’s financial

position after the wrongdoing with what it would have been had the wrongdoing never occurred. Furthermore, in such a case it is no answer for the wrongdoer to show that the property owner would probably not have used the property himself had the wrongdoer not done so. In The Mediana [1900] AC 113, 117, Earl of Halsbury LC made the famous observation that a defendant who had deprived the plaintiff of one of the chairs in his room for 12 months could not diminish the damages by showing that the plaintiff did not usually sit upon that chair or

that there were plenty of other chairs in the room.”

30. In these cases, the courts have treated user damages as providing compensation for loss, albeit not loss of a conventional kind. Where property is damaged, the loss suffered can be measured in terms of the cost of repair or the diminution in value, and damages can be assessed accordingly. Where on the other hand an unlawful use is made of property, and the right to control such use is a valuable asset, the owner suffers a loss of a different kind, which calls for a different method of assessing damages. In such circumstances, the person who makes wrongful use of the property prevents the owner from exercising his right to obtain the economic value of the use in question, and should therefore compensate him for the consequent loss. Put shortly, he takes something for nothing, for which the owner was entitled to require payment.

(ii)       Common law damages for breach of contract

31. It is necessary next to consider some basic principles of the law relating to damages for breach of contract: principles which it will be necessary to bear in mind at a later stage of this judgment, when considering the case of Attorney General v Blake and its aftermath. Damages in contract serve a different remedial purpose from damages in tort, reflecting the different nature of the obligation breached by the wrongdoer in each case. The law of tort is concerned with civil wrongs, that is to say with breaches of duties imposed by the law, sometimes generally and sometimes on those who are party to particular relationships or have assumed particular responsibilities, which protect the interests of others in respect of such matters as their bodily integrity, their liberty, their property, their privacy and their reputation. Damages in tort are generally intended to place the claimant as nearly as possible in the same position as he would have been in if the tort had not been committed. The law of contract, on the other hand, gives effect to consensual agreements entered into by particular individuals in their own interests. Remedies granted by the courts are designed to give effect to what was voluntarily undertaken by the parties. Damages in contract are therefore intended to place the claimant in the same position as he would have been in if the contract had been performed.

32.       In Robinson v Harman (1848) 1 Exch 850, Parke B said:

“The rule of the common law is, that where a party sustains a

loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to

damages, as if the contract had been performed.”

That statement has been endorsed on many occasions at the highest level, most recently in Bunge SA v Nidera NV (formerly Nidera Handelscompagnie BV) [2015]

UKSC 43; [2015] Bus LR 987, para 14, where it was described as the “fundamental principle of the common law of damages”. It has also been described as the “ruling principle” (Wertheim v Chicoutimi Pulp Co [1911] AC 301, 307), the “fundamental

basis” for assessing damages (British Westinghouse Electric and Manufacturing Co

Ltd v Underground Electric Railways Co of London Ltd (No 2) [1912] AC 673,

689), and the “lodestar” (Golden Strait Corpn v Nippon Yusen Kubishika Kaisha

(The Golden Victory) [2007] UKHL 12; [2007] 2 AC 353, para 36).

33. That is not to say that damages in contract will always be different from damages in tort. For example, the damages awarded in cases of medical negligence do not normally depend on whether the claimant was a private patient: the substance of the obligation breached, and the recoverable harm caused, are normally the same whether the cause of action is framed in contract or in tort. Equally, the user principle derived from the property cases discussed earlier is of potential relevance whether the wrongful use of property arises in a contractual or tortious context.

34. The compensatory nature of damages for breach of contract, and the nature of the loss for which they are designed to compensate, were explained by Lord Diplock in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 848- 849. As his Lordship stated, a contract is the source of primary legal obligations upon each party to it to procure that whatever he has promised will be done is done. Leaving aside the comparatively rare cases in which the court is able to enforce a primary obligation by decreeing specific performance of it, breaches of primary

obligations give rise to “substituted or secondary obligations” on the part of the party

in default. Those secondary obligations of the contract breaker arise by implication
of law:

“The contract, however, is just as much the source of secondary

obligations as it is of primary obligations ... Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained

by him in consequence of the breach ...” (p 849)

35. Damages for breach of contract are in that sense a substitute for performance. That is why they are generally regarded as an adequate remedy. The courts will not prevent self-interested breaches of contract where the interests of the innocent party can be adequately protected by an award of damages. Nor will the courts award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance. Their function is confined to

enforcing either the primary obligation to perform, or the contract breaker’s

secondary obligation to pay damages as a substitute for performance (subject, according to the decision in Attorney General v Blake, to a discretion to order an account of profits in exceptional circumstances where the other remedies are inadequate). The damages awarded cannot therefore be affected by whether the breach was deliberate or self-interested.

36. It follows from the principle in Robinson v Harman that the language of election is not appropriate in a discussion of the quantification of damages for breach of contract. The objective of compensating the claimant for the loss sustained as a result of non-performance (an expression used here in a broad sense, so as to encompass delayed performance and defective performance) makes it necessary to quantify the loss which he sustained as accurately as the circumstances permit. What

is crucial is first to identify the loss: the difference between the claimant’s actual

situation and the situation in which he would have been if the primary contractual obligation had been performed. Once the loss has been identified, the court then has to quantify it in monetary terms.

37. The quantification of economic loss is often relatively straightforward. There are, however, cases in which its precise measurement is inherently impossible. As Toulson LJ observed in Parabola Investments Ltd v Browallia Cal Ltd (formerly Union Cal Ltd) [2010] EWCA Civ 486; [2011] QB 477, para 22:

“Some claims for consequential loss are capable of being

established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the

defendant’s wrongful conduct, as distinct from things which

have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the

balance of probability test to the measurement of the loss.”

An example relevant to the present case is the situation where a breach of contract affects the operation of a business. The court will have to select the method of measuring the loss which is the most apt in the circumstances to secure that the claimant is compensated for the loss which it has sustained. It may, for example, estimate the effect of the breach on the value of the business, or the effect on its profits, or the resultant management costs, or the loss of goodwill: see Chitty on Contracts, 32nd ed (2015), paras 26-172 - 26-174. The assessment of damages in such circumstances often involves what Lord Shaw described in Watson, Laidlaw at

pp 29-30 as “the exercise of a sound imagination and the practice of the broad axe”.

38. Evidential difficulties in establishing the measure of loss are reflected in the degree of certainty with which the law requires damages to be proved. As is stated

in Chitty, para 26-015, “[w]here it is clear that the claimant has suffered substantial

loss, but the evidence does not enable it to be precisely quantified, the court will

assess damages as best it can on the available evidence”. In so far as the defendant

may have destroyed or wrongfully prevented or impeded the claimant from adducing relevant evidence, the court can make presumptions in favour of the claimant. The point is illustrated by the case of Armory v Delamirie (1721) 1 Str 505, where a

chimney sweep’s boy found a jewel and took it to the defendant’s shop to find out

what it was. The defendant returned only the empty socket, and was held liable to pay damages to the boy. Experts gave evidence about the value of the jewel which

the socket could have accommodated, and Pratt CJ directed the jury “that, unless the

defendant did produce the jewel, and shew it not to be of the finest water, they should presume the strongest against him, and make the value of the best jewels the measure

of their damages: which they accordingly did”.

39. There are also many breaches of contract where the loss suffered by the claimant is not economic. At one time, this was thought to present a problem for the award of damages, unless it was possible to identify some form of physical detriment, on the view that placing a person in the same situation, so far as money can do it, as if the contract had been performed meant placing him in as good a situation financially. A wider view was however taken by the Court of Appeal in Jarvis v Swan Tours Ltd [1973] QB 233, and was confirmed by the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, where the

plaintiff’s loss was the difference to him, in terms of satisfaction and pleasure,

between the swimming pool for which he had contracted and the one which he received, and it was therefore necessary to place a reasonable monetary value on that difference. Lord Mustill stated at pp 360-361:

“… the law must cater for those occasions where the value of

the promise to the promisee exceeds the financial enhancement of his position which full performance will secure. This excess

… is usually incapable of precise valuation in terms of money,

exactly because it represents a personal, subjective and non- monetary gain. Nevertheless where it exists the law should recognise it and compensate the promisee if the

misperformance takes it away … [I]n several fields the judges

are well accustomed to putting figures to intangibles, and I see no reason why the imprecision of the exercise should be a

barrier, if that is what fairness demands.”

40. That approach is consistent with the logic of damages for breach of contract: they are a substitute for the end-result of performance, not for the economic end- result of performance. It is therefore necessary in cases of non-economic loss, as in

cases of economic loss, to identify the difference in the claimant’s situation resulting

from the non-performance of the obligation in question, and then to place a reasonable monetary value on that difference, provided that the loss or damage in question is of a kind for which the law provides monetary compensation.

(iii)      Damages in equity under Lord Cairns’ Act

41. Historically, the Court of Chancery could provide remedies in aid of equitable rights, including restitution if the right was violated. It could also provide remedies which were not available at common law, such as an injunction or specific performance, in aid of common law rights. Its jurisdiction was wider than that of the common law courts, for it could give relief where there was no cause of action at common law, for example by granting an injunction to prevent a threatened wrong. However, one form of relief which it could not grant (except, according to some authorities, where it was granted in addition to specific performance) was damages, ie monetary relief for the breach of a common law obligation. If the plaintiff wished to claim damages in addition to equitable relief, it was normally necessary to apply to the common law courts. The damages which could then be claimed were restricted to compensation for loss in respect of which there was a cause of action at common law.

42.       That inconvenience was addressed by section 2 of the Chancery Amendment

Act 1858, commonly known as Lord Cairns’ Act. The section provided:

“In all cases in which the Court of Chancery has jurisdiction to

entertain an application for an injunction against a breach of any covenant, contract, or agreement, or against the commission or continuance of any wrongful act, or for the specific performance of any covenant, contract, or agreement, it shall be lawful for the same court, if it shall think fit, to award damages to the party injured, either in addition to or in substitution for such injunction or specific performance, and such damages may be assessed in such manner as the court

shall direct.”

Equivalent provision is now contained in section 50 of the Senior Courts Act 1981.

43. Lord Cairns’ Act enabled the Court of Chancery to award damages in the circumstances specified “in addition to” an injunction. That power enabled the Court

of Chancery to award damages which could otherwise have been awarded by the common law courts, and has lost its significance since the fusion of the administration of law and equity. The Act also enabled the Court of Chancery to

award damages “in substitution for” an injunction: a statutory power to award

damages in circumstances in which they could not be awarded at common law. As

Millett LJ explained in Jaggard v Sawyer [1995] 1 WLR 269, 284:

“Damages at common law are recoverable only in respect of

causes of action which are complete at the date of the writ; damages for future or repeated wrongs must be made the subject of fresh proceedings. Damages in substitution for an injunction, however, relate to the future, not the past. They inevitably extend beyond the damages to which the plaintiff may be entitled at law. In Leeds Industrial Co-operative Society Ltd v Slack [1924] AC 851 the House of Lords confirmed the jurisdiction of the courts to award damages under the Act in respect of an injury which was threatened but had not yet occurred. No such damages could have been

awarded at common law.”

44. Damages awarded in substitution for an injunction are, as one might expect, a monetary substitute for an injunction. As Viscount Finlay stated in Leeds

Industrial Co-operative Society Ltd v Slack [1924] AC 851, p 859, “the power to

give damages in lieu of an injunction must in all reason import the power to give an

equivalent for what is lost by the refusal of the injunction”. Where it is likely that

the refusal of an injunction will result in the claimant’s sustaining loss and damage

as a consequence of the tort, breach of contract or other wrongful act which the court has declined to prevent, the damages should provide compensation for that loss and damage, as Sir Thomas Bingham MR and Millett LJ explained in Jaggard v Sawyer at pp 276-277 and 286 respectively.

45.       The power to award damages in substitution for an injunction is dependent

on the court’s having jurisdiction to grant an injunction, determined as at the

commencement of the proceedings. The provision that damages can be awarded “in

substitution for such injunction” might be thought to imply that the court must also

have before it an application for an injunction, which it has decided to withhold. The point does not arise for decision in these proceedings, but I would be inclined for

that reason to hesitate before endorsing the first part of Lord Walker’s principle (5),

set out in para 4 above.

46. Like the jurisdiction to grant an injunction, the jurisdiction to grant damages in lieu is equitable in nature, as Millett LJ explained in Jaggard v Sawyer at p 287:

“When the plaintiff claims an injunction and the defendant asks

the court to award damages instead, the proper approach for the court to adopt cannot be in doubt. Clearly the plaintiff must first establish a case for equitable relief, not only by proving his legal right and an actual or threatened infringement by the defendant, but also by overcoming all equitable defences such

as laches, acquiescence or estoppel.”

47.       It follows that it is necessary to treat with care Lord Wilberforce’s remark in

Johnson v Agnew [1980] AC 367, 400 that he found in Lord Cairns’ Act “no warrant for the court awarding damages differently from common law damages”. As Millett

LJ explained in Jaggard v Sawyer at pp 290-291, all that Johnson v Agnew decided was that damages, whether at common law or under the Act, are not invariably to be

measured by reference to “the value of the land ascertained at the date of the breach

of contract”. Lord Wilberforce’s words should not be read out of context and taken

to imply that damages awarded in substitution for an injunction must necessarily be measured in the same way as damages recoverable at common law. That is hardly to be expected, given that the damages are available on a different basis, in different circumstances, and in respect of different types of wrong (past, on the one hand, and future or continuing, on the other).

Negotiating damages

48. It is necessary to turn next to the most important of the Wrotham Park line of cases. These can be divided into two phases: an initial period in which awards based on a hypothetical release fee were made in the exercise of the jurisdiction under Lord

Cairns’ Act in substitution for injunctions to prevent interferences with property

rights and breaches of restrictive covenants over land, and a later period in which awards calculated in a similar way were made at common law on a wider and less certain basis. The two phases are divided by the case of Attorney General v Blake, in which the wider availability of such awards was signalled, but the seeds of uncertainty were sown.

(i)        The first phase

49. The first phase began with the case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd. It concerned land originally forming part of an estate, which had been conveyed by its owners to developers, subject to a restrictive covenant that the land would not be developed except in accordance with plans approved by the estate owners. The land was then developed as housing, the plans being approved by the estate owners on the basis that a central area would remain free of buildings. The undeveloped area was later offered for sale as building land for houses, and acquired by developers at a price which reflected its development value. The plaintiffs, who were the current owners of the estate, were aware of the basis on which the land was being sold, but did not inform either the sellers or the developers that they objected to its development. The developers then began to develop it as

housing without seeking the plaintiffs’ approval. The plaintiffs brought proceedings

against the developers for an injunction before any substantial construction took place, but did not apply for interim relief. The houses were built, and purchasers moved in. They were made additional defendants.

50. Brightman J decided that the plaintiffs had a prima facie entitlement to a mandatory injunction requiring the removal of the houses, but that such relief should be refused as a matter of discretion. The question which then arose was what

damages ought to be awarded in substitution for such an injunction. Brightman J’s

starting point was to consider the effect of the breach of covenant on the value of the estate. That measure would however result in nil or purely nominal damages, as the breach caused the plaintiffs no financial damage, nor any other form of loss. That

would be “a result of questionable fairness on the facts of this case” (p 812). In that

regard, he emphasised that it was only because the breach of covenant took the form of a housing development that an injunction was being refused: had it been the erection of an advertising hoarding, for example, an injunction would been granted. If, for social and economic reasons, the court did not see fit in the exercise of its discretion to order the demolition of the houses, was it just, he asked, that the plaintiffs should receive no compensation and that the defendants should be left in undisturbed possession of the fruits of their wrongdoing?

51. In addressing that question, Brightman J referred to the trespass and detinue cases discussed earlier, where damages were assessed according to the value of the

use which the defendants had unlawfully obtained, and to Lord Shaw’s statement of

the principle of price or hire in Watson, Laidlaw. Citing Lord Sumner’s observation

in the Leeds Industrial Co-operative Society case at p 870 that damages awarded

under Lord Cairns’ Act in substitution for an injunction should be “designed to be a preferable equivalent for an injunction and therefore an adequate substitute for it”,

he noted that the defendants could have carried out the development lawfully if they had obtained a relaxation of the covenant. He concluded that a just substitute for an

injunction would be “such a sum of money as might reasonably have been demanded

by the plaintiffs from [the developers] as a quid pro quo for relaxing the covenant”

(Wrotham Park, p 815). That measure was appropriate notwithstanding that the plaintiffs would not have been willing to bargain for the relaxation of the covenant.

52. There was evidence that landowners whose property stood in the way of a development commonly demanded a half or a third of development value. The judge did not however agree with that approach. He noted that the plaintiffs had made no protest when the land was sold as housing land, and the developers had paid for it

on that basis. Observing that “damages must be assessed in such a case on a basis which is fair” (p 816), he concluded that 5% of the anticipated profits from the

development (which were taken to be the same as the actual profits) was “the most

that is fair”.

53. This case is unlikely to have been regarded at the time as having the significance which was later ascribed to it. The reasoning is less elaborate than the subsequent exegesis, and is not altogether clear. In particular, the relevance of the discussion of user damages to the award actually made was not clearly explained. A restrictive covenant over land is enforceable in contract only as between the original parties, but it is enforceable in equity as between their successors in title to the land in question. Its effect is to create an equitable obligation whose benefit and burden run indefinitely with the ownership of each parcel of land, rather like a negative easement. It is for that reason that the benefit of a restrictive covenant is recognised

as “a new kind of property right created by equity”: Megarry & Wade, The Law of

Real Property, 8th ed (2012), para 5-026.

54. Wrotham Park resembled the earlier cases in which user damages were awarded, in that the use to which the defendants wrongfully put their property infringed a valuable right held by the plaintiffs to control such use. That justified an

award of damages under Lord Cairns’ Act based on the value of the right infringed,

since the refusal of an injunction effectively deprived the plaintiffs of the benefit of their right, and therefore of its value. An appropriate sum could be determined by considering what the plaintiffs could fairly and reasonably have charged for relinquishing the right voluntarily. Thus, as Mance LJ noted in Experience Hendrix at para 45, the right was treated as an asset with a commercial value.

55.       Another notable aspect of Brightman J’s reasoning is that he took account of

other circumstances besides the economic value of the plaintiffs’ covenant: in

particular, the fact that an injunction had been refused only because of the particular

form of the defendants’ infringement (ie a housing development), and the plaintiffs’

failure to inform the defendants in advance that consent would not be forthcoming. Much ink has been spilled on attempts to reconcile the latter aspect of the judgment with orthodox reasoning in relation to common law damages. Unrealistic

suggestions have been made that the judge was taking account of the plaintiffs’

failure to mitigate their loss, or of contributory negligence. It was also suggested by Millett LJ in Jaggard v Sawyer at p 291 that delay in seeking an injunction diminished the prospects of obtaining one, and therefore also diminished the value of the covenant. If the delay was such that it was no longer possible for the plaintiff

to obtain an injunction, then the plaintiff’s bargaining position was destroyed. One

difficulty with that suggestion is that the assessment of damages in Wrotham Park was concerned with the value of the covenant at the time of the breach, rather than at the time of the trial. As Anthony Mann QC (sitting as a deputy High Court judge)

said in Amec Developments Ltd v Jury’s Hotel Management (UK) Ltd (2001) 82 P

& CR 286, para 31, “the non-availability of an injunction when the trial takes place is the reason for awarding damages, not a bar on awarding them”. A more

convincing explanation is that the judge was influenced by considerations of fairness, as his language repeatedly indicated, underlining the fact that the award was made in the exercise of an equitable jurisdiction.

56. A further issue which arises from Wrotham Park concerns the date, and hence the knowledge and other circumstances, by reference to which the hypothetical price is to be assessed. This issue has been discussed in the authorities (such as Lunn Poly and Pell Frischmann), but does not arise for decision in the present appeal, and has not been the subject of argument. In those circumstances, although I am inclined to

agree with para 159 of Lord Carnwath’s judgment, I prefer not to express a

concluded view. All that need be said is that, since the damages are awarded in the

exercise of an equitable jurisdiction, and the court’s objective is, in Viscount

Finlay’s words, to give an equivalent for what is lost by the refusal of an injunction,

it follows that the approach adopted should reflect those characteristics. It also follows that the approach which is appropriate when assessing common law damages is not necessarily the same.

57. Wrotham Park was followed in Bracewell v Appleby [1975] Ch 408, where a house was built that could only be accessed by trespassing on land belonging to the plaintiffs. Proceedings for an injunction were brought after building operations began. Graham J decided to award damages in substitution for an injunction under

Lord Cairns’ Act. He awarded “an amount of damages which in so far as it can be

estimated is equivalent to a proper and fair price which would be payable for the

acquisition of the right of way in question” (p 419). The amount awarded took

account of the fact that the plaintiffs had delayed before bringing proceedings.

58. The Court of Appeal considered Wrotham Park in Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361. The case was one in which the court had

no jurisdiction to award damages under Lord Cairns’ Act (as Millett LJ explained in

Jaggard v Sawyer at p 290), and damages were not sought on that basis. It is

necessary to refer to the case in the present context only because of Steyn LJ’s

comment that Wrotham Park was only defensible on the basis of restitutionary principles: the object of the award was to deprive the defendants of an unjustly acquired gain.

59. That analysis was rejected in Jaggard v Sawyer. Sir Thomas Bingham MR, with whose judgment Kennedy LJ agreed, stated at [1995] 1 WLR 269, 281-282:

“I cannot, however, accept that Brightman J’s assessment of

damages in the Wrotham Park case was based on other than compensatory principles. The defendants had committed a breach of covenant, the effects of which continued. The judge was not willing to order the defendants to undo the continuing effects of that breach. He had therefore to assess the damages necessary to compensate the plaintiffs for this continuing invasion of their right. He paid attention to the profits earned by the defendants, as it seems to me, not in order to strip the defendants of their unjust gains, but because of the obvious relationship between the profits earned by the defendants and the sum which the defendants would reasonably have been

willing to pay to secure release from the covenant.”

He continued, in a passage of wider significance to the issues in the present case, by citing with approval a passage in the judgment of Sir Robert Megarry V-C in Tito v Waddell (No 2) [1977] Ch 106, 335, when he said, in relation to Wrotham Park:

“If the plaintiff has the right to prevent some act being done

without his consent, and the defendant does the act without seeking that consent, the plaintiff has suffered a loss in that C the defendant has taken without paying for it something for which the plaintiff could have required payment, namely, the right to do the act. The court therefore makes the defendant pay what he ought to have paid the plaintiff, for that is what the

plaintiff has lost.”

60.       Millett LJ commented at p 291:

“It is plain from his judgment in the Wrotham Park case that

Brightman J’s approach was compensatory, not restitutionary.

He sought to measure the damages by reference to what the plaintiff had lost, not by reference to what the defendant had gained. He did not award the plaintiff the profit which the defendant had made by the breach, but the amount which he judged the plaintiff might have obtained as the price of giving its consent. The amount of the profit which the defendant expected to make was a relevant factor in that assessment, but

that was all.”

61. Jaggard v Sawyer itself concerned trespass and breach of covenant, on similar facts to Bracewell v Appleby. The plaintiff brought proceedings for an injunction to prevent the continuing wrongs. The judge refused to grant an

injunction, but awarded damages in lieu under Lord Cairns’ Act, based on the

amount which the defendants might reasonably have paid for a right of way and the release of the covenant. That award was upheld. The case is notable for the analysis of damages under Lord Cairns’ Act generally, and of the Wrotham Park line of cases

in particular, in the judgments of Sir Thomas Bingham MR and Millett LJ, from
which extensive citation has already been made.

62. The awards made in Wrotham Park itself, and in the cases in which it was followed during the next quarter-century, were made in the exercise of a unique statutory jurisdiction: the award of damages in lieu of an injunction. The purpose of the awards was to provide the claimant with an appropriate monetary substitute for an injunction in the circumstances of the particular case. Every reported case appears to have concerned either a tortious interference with property rights, or the breach of a restrictive covenant over land. Damages were assessed according to the amount which might fairly have been charged for the voluntary relinquishment of the right which the court had declined to enforce, subject to downward adjustment for reasons of fairness.

63. That measure reflected the fact that the refusal of an injunction had the effect of depriving the claimant of an asset which had an economic value. But the cases

did not purport to lay down a general rule as to how damages under Lord Cairns’

Act should be quantified, regardless of the circumstances. It is for the court to judge what method of quantification, in the particular circumstances of the case before it,

will “give an equivalent for what is lost by the refusal of the injunction”. Lord

Walker’s principle (4), set out in para 4 above, should not therefore be understood

as laying down a general rule.

(ii)       Attorney General v Blake

64. Attorney General v Blake concerned a different issue. The question was whether the notorious traitor George Blake, living in exile in Moscow following his escape from Wormwood Scrubs, could be deprived of the profits earned from a book which he had published about his life and work as a spy. Since, as Lord Nicholls of

Birkenhead stated at p 275, “the information in the book was no longer confidential,

nor was its disclosure damaging to the public interest”, the only peg on which to

hang such a deprivation was breach of contract: the book was written in breach of a contractual undertaking, given at the beginning of his service with the intelligence services, that he would not divulge official information gained as a result of his employment. The House of Lords, by a majority, granted a declaration that the Crown was entitled to be paid a sum equal to whatever amount was due and owing to Blake from his publisher. Lord Nicholls, with whose speech the rest of the majority agreed, emphasised that such an order was available as a remedy for breach of contract only in exceptional cases, where other remedies were inadequate, and at the discretion of the court. A useful guide was said to be whether the plaintiff had a

(“quasi-equitable”) nature of the jurisdiction, but (as Lord Reed explains: para 47)

the different bases of the awards: “past, on the one hand, and future or continuing,

on the other”. Where the causes of the claimant’s loss are not limited to past

breaches, but include the judge’s refusal of an injunction to restrain future breaches,

there is no reason in principle to exclude information available to the parties up to

the time of the judge’s decision.