EMPLOYEE COMPETITION
BULLETIN
DAMAGES FOR BREACH OF RESTRICTIVE COVENANTS
Morris-Garner v One Step (Support) Ltd
[2016] EWCA Civ 180
The Court of Appeal has confirmed the availability of Wrotham Park damages for breach
of a restrictive covenant, and stated that a claim for Wrotham Park damages should not be
a ground for refusing an interim injunction that would otherwise be granted.
Different measures of damages
There are three conventional measures of damages for breach of contract: (1) Ordinary
compensatory damages, where the innocent party has to prove that he has suffered loss, that
it has been caused by the wrongdoer’s breach, and is not too remote. This can be difficult,
and sometimes - though not always – impossible, in restrictive covenant cases. (2) Gainbased damages where the wrongdoer must disgorge the gains derived from the breach. This
is akin to an account of profits for equitable wrongs, and is an exceptional remedy only
rarely awarded for breach of contract. (3) Wrotham Park damages, sometimes referred to as
“negotiating” damages. Here the sum is what the court considers it would have been
reasonable for the covenantor (the employee) to pay and the covenantee (the employer) to
accept for the hypothetical release of the covenant. It is so named after the case of Wrotham
Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (which was not an employment
case).
The availability of gain-based and Wrotham Park damages has been considered in a series of
recent cases including Attorney General v Blake [2001] 1 AC 268; Experience Hendrix v PPX
Enterprises [2003] EWCA Civ 323; World Wide Fund for Nature v World Wrestling Federation Inc
[2008] 1 WLR 445; and BGC Capital Markets (Switzerland) LLC v Rees [2011] EWHC 2009 (QB).
The decision in One Step is likely to give Wrotham Park damages a new lease of life.
The facts in One Step
Karen Morris-Garner (“KMG”) set up a business providing supported living services (“One
Step”) in 1999. She sold 50% of the business in 2002 and subsequently fell out with her
fellow shareholder. This resulted in KMG selling her shareholding to her fellow shareholder
for £3.15m, and entering into a 3-year non-compete covenant, in December 2006. Unknown
to anyone else at One Step, in July 2006 KMG and her civil partner (also employed by One
Step) incorporated Positive Living Ltd through which they operated a competing business
within the 3-year restricted period, before selling it in 2010 for £12.8m.
By early 2008, One Step’s business suffered a downturn which it attributed to competition
from Positive Living. In 2012, One Step commenced proceedings alleging breach of KMG’s
restrictive covenants.
www.blackstonechambers.com
The decision in One Step
The central issue on appeal was whether the judge was correct to award Wrotham Park
damages. The Court of Appeal held that he was.
Christopher Clarke LJ stated that the correct test was whether an award of damages on the
Wrotham Park basis was the just response in the case. What is the just response is,
quintessentially, a matter for the judge to decide. In particular, the judge was entitled to take
into account the difficulties which One Step would have in establishing damages on the
ordinary basis. Whilst there may not be insuperable difficulties in putting forward some sort
of case, there would seem to be very real problems in showing what business One Step lost
or might have lost because of the appearance of Positive Living on the scene. In addition any
loss of goodwill is inherently difficult to measure: [119]-[122].
It was argued that one consequence of the availability of Wrotham Park damages for breach
of restrictive covenants was that damages could be said to be an adequate remedy thereby
defeating an application for interim injunctive relief. Christopher Clarke LJ disagreed. In
considering whether damages are an adequate remedy the primary focus must be on
whether damages, assessed in the ordinary way, will be an adequate remedy. The fact that,
in a case such as the present, where no injunction was sought, a Wrotham Park award was
made, should not be a ground for refusing relief that would otherwise be granted: [133].
Having described KMG’s behaviour, Longmore LJ remarked that if, in these circumstances,
the reasonable observer of the situation were to ask himself whether as a matter of practical
justice KMG should make, at the least, reasonable payment for competing in breach of the
covenants, the most likely answer would be “Yes”: [139].
The Court was clearly influenced by the fact that the establishment of the competing
business had been furtive. This effectively deprived One Step of the opportunity to obtain
interim relief. For this reason, Longmore LJ added a fourth feature to the three identified in
Experience Hendrix as justifying a Wrotham Park award: (i) there was a deliberate breach by
the defendant of its contractual obligations for its own reward; (ii) the claimant would have
difficulty in establishing financial loss therefrom; (iii) the claimant has a legitimate interest
in preventing the defendant’s profit-making activity in breach of contract; and (iv) the result
of the defendant’s breach of contract has been that it is doubtful that interim relief could be
obtained. In adding (iv), Longmore LJ made clear that its absence in any particular will not
necessarily mean that Wrotham Park damages must not be awarded. But it is a feature which,
if it is present, can be taken into account: [147]-[151].
The full judgment can be read here:
http://www.bailii.org/ew/cases/EWCA/Civ/2016/180.html
Paul Goulding QC
http://www.blackstonechambers.com/people/barristers/paul_goulding_qc.html
April 2016
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