Court of Appeal Widens Scope for Damages in Restrictive Covenant Claims

The Facts

Karen Morris-Garner set up a business, One Step At A Time (OSAAT), which provided support for young people leaving care, and ran it with her civil partner, Andrea. The business expanded rapidly and in 2002 was sold to One Step Support Ltd (One Step), in which Mrs Morris-Garner owned 50% of the shares and the other 50% was owned by a Mrs Costelloe. The business continued to grow, but eventually the Morris-Garners' working relationship with Mrs Costelloe and her husband broke down.

In December 2006, Mrs Morris-Garner agreed to resign as a director of One Step and to sell her remaining 50% interest in One Step. The arrangement was recorded in a sale agreement, which contained confidentiality, non-compete and non-solicitation covenants lasting 36 months from the date of the Agreement. Andrea also entered into a Deed of Compromise with identical restrictive covenants.

Unknown to the Costelloes, the Morris-Garners had incorporated a new company, Positive Living Ltd, in July 2006 and had emailed to Mrs Morris-Garner's personal email address a large quantity of One Step's confidential client information. They then emailed a number of local authorities offering care services and built a successful business, which they eventually sold for approximately £12.8 million.

The Claim

One Step sued for breaches of the restrictive covenants in relation to material competition, solicitation and the use of confidential information. Its claim was successful and it was awarded Wrotham Park damages.

Wrotham Park Damages

Wrotham Park damages originated in Wrotham Park Estate Co Ltd v Parkside Homes Ltd and are an unusual class of damages based on the notional amount the defendant would have paid to negotiate a release of its restrictions. Before this case, it was generally thought that they would only be awarded where it was impossible for a claimant to demonstrate identifiable financial loss.

The Appeal

The Morris-Garners appealed the decision, but their appeal was unsuccessful. In upholding the original decision, the Court of Appeal clarified that Wrotham Park damages are justified where:

• there was a deliberate breach by the defendant of its contractual obligations for its own reward
• the claimant would have difficulty in establishing financial loss
• the claimant has a legitimate interest in preventing the defendant's profit-making activity in breach of contract

Another factor in this case (although not a condition for such an award) was that the Morris-Garner's clandestine actions meant that they were able to damage One Step's business before it was aware of the unlawful competition, which made it doubtful that interim relief could be obtained.

Conclusion

This decision provides a potentially useful remedy for a business that discovers unlawful competition too late for an injunction to be worth pursuing. If there are practical difficulties in establishing financial loss (for instance, because it is difficult to quantify the business that would have come its way without that competition), there may still be a viable remedy.

For more information, please contact Bob Fahy in our Employment Law team on 01923 690 021.