The importance of establishing loss and damage for a breach of contract claim

Published: 4/7/2017

Will Foster discusses the recent developments in relation to the award of damages under English Law.

Introduction

The general rule in English law is that an award of damages is to compensate the injured party for loss rather than to punish the wrongdoer.  So, generally speaking if a claimant who sues upon a breach of contract cannot establish and demonstrate what financial loss they have suffered, they will be unsuccessful in a claim for damages. 

Wrotham Park damages

There are, however, limited exceptions to this general rule.  The most notable is the principle of Wrotham Park damages (from the 1974 case of Wrotham Park Estate Ltd v Parkside Homes Ltd) which established the principle that a separate type of award (often called an award of a “hypothetical bargain” or “negotiating” damages) may be available where the claimant cannot demonstrate any identifiable financial loss, but should be entitled to recover such a sum as the defendant would have paid had the defendant, before breaching the contract, negotiated a release of its obligations by the claimant.

When assessing the measure of damages, the court will look at what, in a hypothetical negotiation before the breach had occurred, would have been the claimant’s price for releasing the defendant from his obligation and thereby permitting the breach.  The sum will often be determined by reference to the gain made by the defendant from the breach and what percentage of the profits it would be fair to award to the claimant in the circumstances.  The remedy appears similar to an account of profits (an equitable remedy awarded by the courts in certain limited circumstances such as a breach of duty owed by a fiduciary) although it is emphasized by the courts that the remedy is compensatory in nature. 

When can they be sought?

The cases in which Wrotham Park damages have been awarded generally involve negative or restrictive covenants in the context of real estate (e.g. not to build on neighbouring land) where damages are awarded in lieu of an injunction, as well as breach of confidence claims. 

They have also been awarded in respect of purely contractual cases.  The first such case was Attorney-General v Blake in 2001 when in fact the court did make an order for an account of profits by the defendant, made by him in breach of his contractual obligations to the claimant, where the claimant itself had suffered no loss as a result of the breach.  That rather striking remedy reflected the fact that the case was exceptional and unique.  Subsequent cases, whilst recognizing the availability of Wrotham Park damages in commercial cases, have been reticent in ordering a full account of the defendant’s profits where the claimant has itself suffered no demonstrable financial loss; rather they have awarded damages on the more limited “hypothetical bargain” or “negotiating” basis.

Judges have struggled in recent cases and a number of different commercial scenarios to (consistently) balance the competing propositions that: (a) a defendant wrongdoer should not be allowed to profit from his wrong (i.e. breach of contract); and (b) compensating a claimant who has in fact suffered no demonstrable financial loss.  After all, and as noted above, English law is concerned with compensating the victim rather than punishing the wrongdoer.  It is perhaps that underlying concept which has meant that even where a court does make an award of Wrotham Park damages, the amount of damages is often significantly lower than what is sought by the claimant.

Considerations and recent developments

Two further considerations have been addressed in recent cases:

  1. Is the inability to demonstrate identifiable financial loss a pre-condition to an award of Wrotham Park damages?  The Court of Appeal in the recent case of Morris-Garner and another v One Step (Support) Limited [2016] EWCA 180 has confirmed that Wrotham Park damages are not restricted to “exceptional” cases or cases where the claimant has suffered no “identifiable financial loss”; rather the test is whether in any particular case, that form of remedy is the “just response”.  This apparent sanctioning of the award on a wider scale than was previously considered has caused concern that what was previously the exception may now become the rule.  The Supreme Court has granted permission to appeal in this case, so further clarification in this regard can hopefully be expected. 

  2. Even if the claimant suffers no loss, must the defendant make a gain? In the case of Marathon Asset Management LLP v Seddon [2017] EWHC 300 the High Court has drawn some restrictions around the circumstances in which Wrotham Park damages will be awarded.  The court in that case rejected a claim for Wrotham Park damages where, although the defendants had breached their contractual and common law duties of confidence by taking the claimant’s confidential documents, they had not actually used those documents and/or the confidential information contained therein.  Furthermore, because the documents were electronic, the claimants had not been prevented from using (their own copies of) them.  Accordingly, the misuse of the confidential information did not cause the claimant to suffer any loss, or conversely, result in the defendants making any financial gain.  The court concluded that there was no reasonable party who would have negotiated a “licence fee” to permit the defendants to do what they had done.  The court also rejected the suggestion that compensation should be awarded on the basis that the defendants had exposed the claimant to the risk of loss.  The case again underscores the principle of English law that the court’s role is to recognize and compensate for loss rather than to punish a wrongdoer or compensate for exposure to risk of injury.
Conclusion

The availability of Wrotham Park damages is important to claimants in circumstances where they are unable to establish loss according to conventional principles.  However, the scope of an award is fact-specific and subject to a fair degree of judicial discretion and interpretation leading to a potential lack of uncertainty.  It must also not be forgotten that a “gain-based” remedy such as this will only be a just response where ordinary compensatory damages are an inherently inadequate remedy because they would not represent adequate redress for the wrong done to the claimant.  Claimants must also be realistic regarding the level of damages which they can expect to achieve through this route.

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