One Step Too Far? Negotiating damages and Morris-Garner and another v One Step (Support) Ltd

We look at a recent Supreme Court decision that considers when ‘negotiating damages’ might be available to a claimant.

Development land is often burdened with interests that benefit other land, such as restrictive covenants or easements. These interests may hinder development. Where a development proceeds without a release from these burdens, an infringement of the proprietary interest may occur. In such circumstances, the injured landowner may:

• obtain an injunction; or
• recover damages for the loss suffered.

Where an injunction is not obtained, or no direct economic loss can be identified, the injured party may be entitled to ‘negotiating damages’.

What are negotiating damages?

The principle behind ‘negotiating damages’ is that the claimant can recover such a sum as the defendant would have paid it had the defendant, before infringing the interest, negotiated a release of its obligations with the claimant. These damages are based upon a hypothetical negotiation between the parties.

The basis upon which negotiating damages might be awarded more generally in the law of contract is a developing area and has been the subject of a recent Supreme Court decision in Morris-Garner and another v One Step. The case arose out of the sale of a business by the claimants to the defendants. The defendants had entered into various restrictive covenants (non-compete, non-solicitation and a confidentiality clause). The defendants later set up a new company which began trading in competition with the claimants, which was later sold for significant financial gain. The claimants bought proceedings for breach of the restrictive covenants.

The claimants argued that they would have real problems proving loss relating to goodwill and slowdown in business and therefore sought damages on the basis of what the parties would have agreed for the release from the restrictive covenants (i.e. negotiating damages). In the first instance, the Court found that the defendants had breached their covenants and that the claimants were entitled to negotiating damages.

The defendants appealed on the basis that negotiating damages should only be available where (a) there is no identifiable loss, (b) the award is necessary to avoid a ‘manifest injustice’ and (c) where there are exceptional circumstances.

The Court of Appeal disagreed and held that negotiating damages were not restricted to cases where the claimant had suffered no “identifiable financial loss” (such as cases of property infringement) and might be available elsewhere, such as for breach of contract, where it was “the just response”. In most breach of contract cases, a party is restricted to claiming damages for the loss it can prove and so the Court’s finding risked negotiating damages becoming more widely available e.g. such as where a developer fails to use reasonable endeavours to satisfy an obligation in an Option Agreement.

In reaching this decision the Court of Appeal indicated its willingness to award negotiating damages where it is merely difficult rather than impossible for a claimant’s loss to be calculated.

The defendants appealed to the Supreme Court. The issues to be determined were (a) where a party is in breach of contract, in what circumstances is the other party entitled to negotiating damages and (b) whether the Court of Appeal was correct to uphold the trial judge’s finding that such damages were available in this case.

The Supreme Court allowed the appeal on the basis that both the High Court and the Court of Appeal had erred in their approach to the question of damages. The Supreme Court subsequently overturned the decision of the Court of Appeal and held that negotiating damages should be reserved for exceptional circumstances and were not available to the claimants in this case.

Whilst it was difficult to quantify the claimants’ losses, it was not impossible, and the claimants’ loss could be measured by determining the economic value of the right in question. Accordingly, the matter was remitted to the High Court for assessment of the claimants’ financial loss rather than the amount that could have been awarded as negotiating damages.

Whilst negotiating damages shall remain available in the case of infringement of property rights, where the breach results in the loss of a valuable asset or right, in matters other than proprietary interests, it is the case that, generally, damages will be limited to the economic loss caused by the breach. So, whilst developers remain at risk where property rights are infringed, negotiating damages ought to not become available in the case of breach of other agreements that they commonly enter into.

This post was edited by Emma Styles.