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Farrer & Co | Damages for breach of restrictive covenant

Background

In Wrotham Park Estate v Parkside Homes, the defendant built a housing development in breach of a restrictive covenant. The claimant was awarded damages based on the hypothetical sum it could have charged to release the covenants, calculated as a share of the defendant's profits.

This category of damages has subsequently been relied upon in a series of cases involving breaches of restrictive covenants (in various types of contract). In these cases, the Courts have sought to quantify a sum that might reasonably have been negotiated between the parties for the release of the covenants in question.

In the recent case of Morris-Garner and another v One Step (Support) Limited, the Supreme Court reconsidered the applicability of Wrotham Park damages and, in doing so, provided clarification on when they can be awarded.

The Facts

Ms Morris-Garner ("MG") formed a joint venture with Ms Costelloe ("MC"), called One Step, which provided rented accommodation and support services to vulnerable individuals referred by local authorities. The business prospered but in time the parties' working relationship deteriorated. MG transferred her 50% shareholding to MC for £3.15 million and was made subject to confidentiality, non-solicitation and non-competition covenants for a period of three years. Within that period MG founded and operated a business in competition with One Step, having first emailed confidential information to her personal email account.

The Supreme Court

One Step claimed Wrotham Park damages for MG's breaches of the restrictive covenants arguing that it would be difficult to quantify losses in the conventional way. At first instance, the Court ordered an assessment of the hypothetical fee that would have been agreed for a release from those covenants on a Wrotham Park basis. The Supreme Court rejected this approach on the basis that where the breach of a contractual obligation has caused economic loss (such as loss of profit or good will), that loss should be measured as accurately or reliably as the evidence allows.

"Negotiating damages" (the term preferred by the Supreme Court), it was held, are not discretionary and not a way of avoiding the standard approach for determining a claimant's losses. Accordingly, negotiating damages will not normally be available for breaches of non-competition clauses or non-solicitation clauses; a claimant must prove losses of the conventional kind or its claim will likely fail. They can still be awarded where the loss suffered is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset.

Comment

For developers, cases will often involve real property rights, rather than breaches of contract. For those types of cases negotiating damages will continue to be available where appropriate.

However, where there is breach of a restrictive covenant, the outcome of Morris-Garner suggests that the Courts may be less likely to assess damages by reference to a percentage of a developer's profit. The emphasis may be on an assessment of the claimant's actual losses rather than a hypothetical negotiation. Accordingly, where a development does not cause any tangible loss to neighbouring property, the scope for opportunistic claimants to assert unquantified negotiating damages is likely to be reduced.

If you require further information, please contact Graham Anderson, or your usual contact at the firm on +44 (0) 20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2018

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