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Supreme Court Limits Scope of "Wrotham Park Damages" in Landmark Breach of Covenant Case

on Friday, 27 April 2018.

The Supreme Court has allowed the defendants' appeal against the Court of Appeal's decision in respect of damages for breaches of restrictive covenant in the case of Morris-Garner v One Step.

Background

Karen Morris-Garner owned 50% of the shares in One Step Support Ltd (One Step), a company which provided support for young people leaving care.

In December 2006, Mrs Morris-Garner agreed to resign as a director of One Step and to sell her 50% shareholding. 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 against Mrs Morris-Garner and her partner.

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

Wrotham Park Damages

One Step sued for breaches of the restrictive covenants and was awarded Wrotham Park damages, which are based on the hypothetical fee the claimant would have charged the defendant to be released from the restriction, rather than the loss actually suffered as a result of the breach of the restrictive covenants.

The Court of Appeal held that such damages were merited in this case because there was a deliberate breach for its own reward, there would be difficulty in establishing financial loss and a legitimate activity in preventing the profit-making activity in breach of contract.

The Judgment

The Supreme Court has now rejected that reasoning. It said that these kind of damages should be called "negotiating damages" and that they should only be awarded in those kinds of cases where the contractual term can be regarded as an asset, which can be exploited for the claimant's economic benefit. The examples given by the Court illustrate this point. In each of the cases of contractual rights to control the use of land, intellectual property or confidential information, those rights can be used by the claimant to generate profits. If the land, IP or confidential information is exploited by a defendant in breach of such restrictions, the claimant may often find it difficult to show that there has been a financial loss and should be entitled to damages based on what they'd have reasonably charged to allow the defendant to be released from the restriction.

The Court distinguished contractual restrictive covenants (other than confidentiality) saying that the effect of their breach was to expose the claimant’s business to competition which would otherwise have been avoided, causing a loss of profits. The loss is difficult to quantify, but is a type of loss for which damages are frequently awarded.

Best Practice

It is worth bearing in mind that, although the Claimants in this case have lost on the "negotiating damages" point, what they have lost is the opportunity for their compensation to be valued at in the region of £5.6 million to £6.3 million and that the matter is being remitted to the High Court for a hearing to determine the value of damages based on financial loss where the expert evidence is that the range of loss is between £3.4 million and £4.6 million. It still therefore remains vital for employers to protect their legitimate business interests with well-drafted restrictive covenants in employment contracts, shareholder agreements and sale agreements.

It is also important to bear in mind two other points about confidentiality:

  • The Court has left open the possibility of negotiating damages for a breach of confidentiality
  • Where an employee sends themselves confidential information such as client contact details, these are likely to contain personal data, the unlawful transfer of which is likely to amount to a criminal offence by the employee.

For more information please contact Bob Fahy in our Employment law team on 01923 919 302.

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