Even if no financial loss can be shown, a contract breaker can still be held liable for “negotiating damages”. Allyson Colby explains how an aggrieved party can, in certain circumstances, recover them
Key points
- Negotiating damages were payable for breach of an overage agreement, even though sales never reached a level that triggered the payment of overage
- A Supreme Court decision on the wider availability of negotiating damages is expected shortly
A contract breaker is normally liable to pay damages to put an innocent party in the position it would have been, had the contract been performed. But what is the position if there is no identifiable financial loss at all?
In such cases, the court can award “negotiating damages”, representing the sum that the innocent party might reasonably have demanded had the contract breaker asked for permission to break its contract before doing so. The court will assess the sum that the parties would have arrived at themselves, had they made reasonable use of their respective bargaining positions and reached a negotiated settlement before any breach of contract occurred (even though they might never have reached such an agreement for themselves).
The concept was developed in Wrotham Park Estates Co v Parkside Homes Ltd [1973] 229 EG 617, where the court awarded a covenantee 5% of a developer’s anticipated profits following the construction of a housing development in breach of a restrictive covenant, and is now well established. It was used recently in Burrows Investments Ltd v Ward Homes Ltd [2017] EWCA Civ 1577; [2017] PLSCS 191.
Overage
A property company, Burrows, sold part of a development site, with the benefit of planning permission, to a residential developer. The developer, Ward, entered into overage obligations that prohibited it from disposing of the land without satisfying certain conditions (unless the disposal constituted a “permitted disposal” for the purposes of the parties’ agreement).
Following a downturn in the property market, Ward obtained a new planning permission, reducing the units in size and increasing the density of the development in the hope that this would enhance sales. In return, Ward had to enter into a section 106 agreement with the local planning authority, obliging it to transfer five new units to a social housing provider.
The original planning permission had not included any requirement for affordable housing and the parties had not specifically addressed the possibility that the position might change. After initial discussions about the terms on which Burrows might be prepared to approve the transaction, Ward abandoned the negotiations and transferred the units to a social housing provider without notifying Burrows of its intentions. It signed a certificate to enable the Land Registry to register the disposition, stating that it was a “permitted disposal” for the purposes of the overage agreement, and prepared to do legal battle with Burrows.
Had Ward flouted the restrictions on disposal? The fact the units had not been sold in the open market prevented the transaction from falling within the category of “open-market” transactions permitted under the agreement. But the agreement did also permit “the transfer/dedication/lease of land for the site of an electricity substation, gas governor kiosk, sewage pumping station and the like or for roads footpaths public open space or other social/community purposes”.
The provision of affordable housing units clearly achieved both “social” and “community” purposes. However, the Court of Appeal decided that the words had to be read in the light of the specified purposes that preceded them. The exemption, read in context and as a whole, did not cover disposals of completed units of affordable housing. Therefore, Ward should have obtained Burrows’ approval before transferring the properties so that it could complete the development in accordance with the revised planning permission.
Damages
By the time the proceedings began, it was clear that Ward would not be liable for overage because the proceeds of sale from the development were not high enough. So Burrows was unable to recover conventional damages, calculated by reference to the overage payment of which it had been wrongfully deprived, for the simple reason that it had not suffered any loss as a result of the developer’s breach of contract.
Consequently, Burrows claimed “negotiating damages” instead, based on the amount that it might reasonably have demanded for releasing Ward from the restriction on disposals that prevented it from transferring the affordable housing units to a social housing provider and completing its development.
The trial judge decided that it would not be just or appropriate to award “negotiating damages” in this case, but the Court of Appeal ruled that this conclusion was unsupportable. Ward had freely entered into a contract prohibiting certain types of disposal and had deliberately broken it, without giving Burrows a chance to seek an injunction to stop it doing so. It would be regrettable if Ward could escape scot-free, without paying anything for a release from the restrictions. Therefore, justice required an award of damages on a negotiating basis in an amount to be assessed by the trial judge, unless the parties could agree this for themselves.
Looking forwards
The availability of negotiating damages was considered by the Supreme Court in mid-October in an appeal against the Court of Appeal decision in One Step (Support) Ltd v Morris-Garner [2016] EWCA Civ 180. In that case, a claimant was awarded negotiating damages for breach of a shareholders’ agreement, even though it might, albeit with very real difficulty, have been able to establish financial losses for which it could have recovered damages on a conventional basis. The Supreme Court’s decision as to whether that was permissible is eagerly awaited.
The Court of Appeal’s decision in Burrows did not need to be delayed until the outcome of One Step is known, thanks to the absence of any identifiable financial loss in this case. Two burning questions remain. What will the negotiating damages in Burrows actually be and how far removed will they be from the nominal sum that would have been payable, but for the decision in Wrotham Park?
Allyson Colby is a property law consultant
