One step forwards…
A decision by the Supreme Court has clarified the approach to awards of damages against parties who deliberately breach contractual obligations – including restrictive covenants - but where it is difficult to calculate the losses caused as a result.
In its judgment in Morris-Garner v One Step (Support) Ltd, the Supreme Court makes it clear that “release fee” or “negotiating” damages for breach of contract should be reserved for exceptional circumstances. Where a complainant’s interest in the performance of a contract is purely economic but no economic loss resulting from the breach can be established, then the normal inference will be that the complainant has not suffered loss and cannot be awarded more than nominal damages.
However, the Court has also confirmed that damages based on a hypothetical negotiation between the parties - for the release of the contractual obligation or restriction - can still be awarded in circumstances where it is appropriate to measure the loss suffered by a party according to the economic value of the breached right. Developers in particular may be less than pleased to see that breaches of restrictive covenants are referred to as one of the potentially relevant scenarios where such damages might apply.
History of release fee damages
Over the years, courts dealing with breach of contract cases have taken differing approaches as to whether release fee damages should be a remedy reserved for exceptional cases. Previously, the courts required there to be exceptional circumstances before awarding damages based on a hypothetical assessment of what the parties might have negotiated between themselves for the release of the contractual obligation or restriction. These so-called “release fee damages” – often called Wrotham Park damages – have usually been reserved for cases where it is impossible to show financial loss arising from the breach.
However, since the Court of Appeal’s decision in One Step in 2016, developers and others have expressed concern at the potentially increased availability of this type damages. In particular, the Court of Appeal had indicated its willingness to award these damages where it is merely difficult – rather than impossible - for a complainant’s financial loss to be identified or calculated.
Facts
In One Step, a former director and 50% shareholder of the company sold her shareholding for £3.15m, resigned as a director and accepted various “non compete” restrictions for a three year period. In fact, the trial judge found that she and her fellow defendant had already set up a company which offered some similar services, in breach of the restrictions agreed with One Step. The new company was later sold for over £12m.
One Step argued that it would have had “very real problems” proving losses relating to the company’s goodwill and slowdown in business and therefore sought damages on the basis of what the parties would have agreed for the release of the “non compete” restrictions. The Court of Appeal found that the circumstances of the case were suitable for an award of “release fee” damages in favour of the claimant company, even though the trial judge had not found that One Step was incapable of establishing identifiable loss.
Decision & comment
The judgment from the Supreme Court in One Step makes it clear that release fee damages in breach of contract claims should be reserved for exceptional circumstances. It emphasises that, in such cases, the approach of calculating a negotiated release fee is only a tool for arriving at the value of a right. Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. The claimant’s loss can be measured by determining the economic value of the right in question.
However, in One Step, whilst the company’s losses were difficult to quantify, they could be quantified in a conventional manner. The Court noted that the company “did not suffer the loss of a valuable asset created or protected by the right which was infringed” and so the case has been referred back to the trial judge to assess the financial loss actually sustained. Despite the outcome for One Step, potential complainants will be pleased to see the Court’s confirmation that damages based on a hypothetical negotiation between the parties can still be appropriate where a defendant has taken something for nothing, for which the complainant was entitled to require payment.
The decision has brought some much-needed clarity to an area where case-law has been at best unclear and at worst confused. There may be disappointment that the decision in One Step does not set out any strict “tick box” approach to either the availability of release fee damages or how to calculate them. This means that a strong element of discretion will remain with trial judges when it comes to deciding on whether to award release fee damages and, if so, how much. No doubt, the courts will continue to develop the revised principles which have been set out by the Supreme Court in One Step and so it may be some time before developers and others have a clearer picture as to the courts’ likely approach to release fee damages.
Cases affecting developers will often involve claims based on real property rights rather than contract and, for that category, negotiated release fee damages will continue to be available in appropriate cases - particularly concerning restrictive covenants and where damages are awarded instead of an injunction.
Lord Carnwath also commented on the potential impact of the One Step decision when it comes to calculating damages for modifying or releasing a restrictive covenant under section 84 of the Law of Property Act 1925. This has been a favoured tool for developers in recent years to overcome barriers to development. Lord Carnwath noted that a variety of approaches have been adopted by the tribunals and courts where it has been considered appropriate to award a share of development value, with shares varying between 5-50%. However, Lord Carnwath felt that consistency in this area had improved and that any change of approach to the calculation should be a matter for Parliament rather than the courts.
This article was written by Emma Humphreys. For more information please contact Emma on +44 (0)20 7203 5326 or emma.humphreys@crsblaw.com.
