Corporate Law Update

Quick links

• Negotiating damages not available for breach of non-compete covenant
• QCA publishes 2018 Corporate Governance Code

Negotiating damages not available for breach of non-compete covenant

The Supreme Court has held that “negotiating damages” (previously known as “Wrotham Park damages”) were not available for breach of non-compete and non-solicitation covenants.

What happened?

In Morris-Garner and another v One Step (Support) Ltd, a Ms Morris-Garner (“Ms MG”) and a Mrs Costelloe formed a joint venture called One Step to run a youth support business that had previously been established by Ms MG.

For some years the business prospered, but eventually the working relationship between Ms MG and Mrs Costelloe broke down.

In April 2006, Ms MG emailed confidential information belonging to One Step and relating to the business to her personal email account.

In December 2006, Ms MG and Mrs Costelloe concluded an agreement under which Mrs Costelloe bought out Ms MG’s 50% stake in One Step.

In the buy-out agreement, Ms MG agreed not to compete with One Step or to solicit its clients for a period of three years. At the same time, Ms MG’s civil partner (who had been employed by One Step) resigned and gave similar covenants.

However, Ms MG and her partner had incorporated a new business in July 2006. That business began trading in August 2007 in competition with One Step (within the non-compete period).

Eventually, One Step claimed against Ms MG and her partner for breach of the non-compete and non-solicitation covenants and for breach of an equitable duty of confidence. In both cases, One Step claimed negotiating damages.

What are negotiating damages?

Normally, a claimant can recover damages only for loss he has actually suffered.

This loss is calculated differently depending on whether the claim is in tort (e.g. negligence, trespass, defamation) or for breach of contract.

For breach of contract, the loss is normally the difference between the value the claimant would have obtained if the contract had been performed properly, and the value with the breach (the “ordinary basis”). On a share sale, this is normally the drop in the value of the shares caused by the breach.

Nonetheless, in each case, the claimant must have suffered loss. If he has suffered no loss, either he will not be able to claim damages, or he will be awarded only nominal damages (e.g. £1).

However, in certain restricted cases, a claimant can instead claim “negotiating damages”. (These were previously known as “Wrotham Park damages”, after a case of the same name.) Generally speaking, negotiating damages are available when there is a breach of contract (or certain other kinds of legal obligation), but the claimant does not actually suffer any financial loss.

Even though the claimant suffers no financial loss, English law assumes that the breached obligation existed to protect the claimant, and that the breach must have caused the claimant some kind of loss.

In these cases, instead of awarding compensation based on the loss actually suffered by the claimant, the courts will award the amount a reasonable person in the claimant’s position would have been able to charge to release the obligation in question. This is sometimes called the “hypothetical fee”.

This means a claimant can recover for breach of contract, even where he has taken no immediate financial “hit”. This is also true, even if the claimant would never actually have released the obligation.

Calculating the hypothetical fee is not easy and usually involves financial experts embarking on complex hypothetical negotiations to work out how much the defendant might ultimately have paid.

What did the court say?

As noted above, One Step claimed negotiating damages for the breaches of the non-compete and non-solicitation covenants, and for the breach of confidentiality.

The Supreme Court refused to award negotiating damages for the breaches of non-compete and non-solicitation covenants.

It said the loss resulting from those breaches may have been difficult to calculate, and some elements might even have been “incapable of precise measurement”.

However, the court said that One Step’s interest in the performance of non-compete and non-solicitation covenants was purely commercial, and the breach did not result in the loss of a valuable asset protected by those covenants. It was not open to the court to decide to award negotiating damages instead, nor was One Step entitled to elect to claim negotiating damages instead of damages on the ordinary basis.

It also refused to award negotiating damages for the breach of confidentiality. It said that, although that breach might in principle qualify for negotiating damages, in reality One Step’s loss was the “cumulative result of breaches of a number of obligations”, the most significant of which were the non-compete covenants.

In essence, this eclipsed the breach of confidentiality and meant that One Step could not claim negotiating damages for that breach either.

Practical implications

A claimant will not often be able to claim negotiating damages, but it is always worth considering whether negotiating damages may be available where there is no obvious or immediate loss.

However, significantly, it seems more or less impossible to claim negotiating damages for breach of non-compete or non-solicitation covenant.

Although technically the court left the question open, the leading judge did remark that it was “difficult to see” how there could be any loss resulting from a breach of non-compete covenant that could be measured as negotiating damages.

Therefore if suing for breach of a non-compete covenant, a claimant will need to employ an expert to calculate the actual loss of profit and goodwill suffered.

The judgment also highlights the following other points:

• Although strictly speaking there is no definitive list, the court has essentially limited the kinds of breach of contract that can attract negotiating damages to breach of confidentiality, breach of restrictive covenant over land, and breach of an intellectual property agreement.
• Even if a claimant suffers a loss for which negotiating damages could be available (e.g. breach of confidentiality), negotiating damages are unlikely to be available if the breach is inextricably linked to breach of another kind of covenant that can be measured on the ordinary basis.
• A claimant cannot claim negotiating damages merely because it is difficult to calculate loss on the ordinary basis. A claim for negotiating damages cannot be used to “by-pass” the need to obtain expert financial advice on (for example) loss of profit or goodwill.
• Similarly, a claimant cannot elect to receive negotiating damages instead of damages measured on the ordinary basis. Negotiating damages are available only if the claimant has been deprived of the economic value of a contractual covenant.
• Even if a claimant can claim negotiating damages, it is still important to calculate what the loss is likely to be and whether a claim is worthwhile. In the recent case of Marathon Asset Management LLP and another v Seddon and another, for example, the High Court did grant negotiating damages for breach of a confidentiality undertaking but awarded only nominal damages (as the defendant never actually made use of the information).

Before launching a breach of contract claim, therefore, a potential claimant should:

• assess carefully what kinds of covenant have been breached and check whether the breach is one for which negotiating damages can be awarded
• ascertain how much of its loss is pecuniary loss that arises from a breach that can be measured on the ordinary basis
• engage early with financial experts to avoid launching a claim for negotiating damages that might ultimately be rejected
• remember that any award of negotiating damages may not be the same as the defendant’s profit from breaching the covenant, and possibly substantially less.

QCA publishes 2018 Corporate Governance Code

The Quoted Companies Alliance ("QCA") has published the 2018 version of its Corporate Governance Code. The Code contains recommended standards of corporate governance for small and mid-size companies.

The new Code takes on particular relevance following changes to the AIM Rules for Companies, which now require AIM companies to specify and apply a recognised corporate governance code and (from September) to explain any departures from that code.