What implications does a recent Supreme Court ruling, restricting the payment of negotiating damages, have for real property?
“Negotiating damages” represent the sum that a contract breaker would have had to pay for the relaxation or release of a contractual obligation. The concept was developed in Wrotham Park Estates Co v Parkside Homes Ltd [1973] 229 EG 617 (where the court awarded a covenantee a percentage of the profits that a developer anticipated making by constructing houses in breach of a restrictive covenant) and can have a substantial impact on the damages payable. In Wrotham Park the value of the land benefiting from the covenant was unaffected by the breach.
Negotiating damages have since been awarded in various cases, prompting the question: when is it actually appropriate to quantify damages on this basis? In One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, the claimant had been awarded negotiating damages for breach of a non-competition covenant in a business sale agreement – even though it might, with difficulty, have been able to quantify its losses on a conventional basis. But the Supreme Court ruled that negotiating damages were not appropriate and that the claimant’s damages were to be measured by reference to its lost profits and any loss of goodwill.
Lord Reid, who delivered the leading judgment, set out the law on damages in different areas. He explained that damages for breach of contract depend on considering the outcome, had the contract been performed. The claimant must show that he has suffered a loss as a result of non-performance, which must then be measured, or estimated, as accurately as possible. Damages should not be awarded to strip contract breakers of their profits, except in exceptional circumstances. And, where a claimant’s interest in the performance of a contract is purely economic, and he cannot establish any loss, the normal inference is that he has lost nothing at all.
“Negotiating damages” represent the sum that a contract breaker would have had to pay for the relaxation or release of a contractual obligation. The concept was developed in Wrotham Park Estates Co v Parkside Homes Ltd [1973] 229 EG 617 (where the court awarded a covenantee a percentage of the profits that a developer anticipated making by constructing houses in breach of a restrictive covenant) and can have a substantial impact on the damages payable. In Wrotham Park the value of the land benefiting from the covenant was unaffected by the breach.
Negotiating damages have since been awarded in various cases, prompting the question: when is it actually appropriate to quantify damages on this basis? In One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, the claimant had been awarded negotiating damages for breach of a non-competition covenant in a business sale agreement – even though it might, with difficulty, have been able to quantify its losses on a conventional basis. But the Supreme Court ruled that negotiating damages were not appropriate and that the claimant’s damages were to be measured by reference to its lost profits and any loss of goodwill.
Lord Reid, who delivered the leading judgment, set out the law on damages in different areas. He explained that damages for breach of contract depend on considering the outcome, had the contract been performed. The claimant must show that he has suffered a loss as a result of non-performance, which must then be measured, or estimated, as accurately as possible. Damages should not be awarded to strip contract breakers of their profits, except in exceptional circumstances. And, where a claimant’s interest in the performance of a contract is purely economic, and he cannot establish any loss, the normal inference is that he has lost nothing at all.
Negotiating damages depend on considering the outcome on the basis that one contract has been replaced by another. They may be awarded where a contractual right, for example, the right to control the use of land, is of such a kind that its breach results in an identifiable loss equivalent to the economic value of the right, considered as an asset, even in the absence of any pecuniary losses that are measurable in the ordinary way. The wrongdoer has taken something for nothing, for which the claimant is entitled to be paid. Such damages are payable for breaches of restrictive covenants over land and, for example, for breach of a confidentiality agreement.
Damages in equity in lieu of specific performance or an injunction can also be awarded on the basis of the economic value of a right, by reference to the amount that the claimant might reasonably have demanded as compensation for loss of that right. But this is not the only approach to assessing damages in such cases and the court must decide, in the circumstances of each particular case, how to quantify the loss fairly.
Does the decision affect the compensation payable for the modification or release of restrictive covenants under section 84 of the Law of Property Act 1925? Lord Carnwarth accepted that current law represents an uneasy compromise between the competing concepts of “loss of amenity” and “loss of opportunity to extract a share of released development value”, and that there might be a case for a more generous basis for awards in some cases. But, in his view, this was a matter for Parliament, and not the courts.
Allyson Colby is a property law consultant
