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

JurisdictionEngland & Wales
JudgeLord Reed,Lady Hale,Lord Wilson,Lord Carnwath,Lord Sumption
Judgment Date18 April 2018
Neutral Citation[2018] UKSC 20
Date18 April 2018
CourtSupreme Court
Morris-Garner and another
(Appellants)
and
One Step (Support) Ltd
(Respondent)

[2018] UKSC 20

before

Lady Hale, President

Lord Wilson

Lord Sumption

Lord Reed

Lord Carnwath

Easter Term

On appeal from: [2016] EWCA Civ 180

Appellants

Charles Béar QC

Ian Bergson

(Instructed by Neves Solicitors LLP Milton Keynes)

Respondent

Craig Orr QC

Mehdi Baiou

(Instructed by Pitmans LLP)

Heard on 11 and 12 October 2017

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...

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