Availability of negotiating damages for breach of restrictive covenant
Introduction ‘Negotiating damages’ refers to a type of remedy that, in the employment field, is most appropriate where a party has breached restrictive covenants or… Read more
‘Negotiating damages’ refers to a type of remedy that, in the employment field, is most appropriate where a party has breached restrictive covenants or confidentiality obligations, particularly on the sale of a business, but it is difficult to value the financial loss caused by the breach or show that the defendant caused the loss. Instead of compensation based on financial loss, negotiating damages would award the victim a hypothetical fee based on the amount which the parties, acting reasonably, would have negotiated for permitting the breach of covenant or other obligation.
Before this case, negotiating damages had been called ‘Wrotham Park damages’, as a result of a case involving the company Wrotham Park Estate Limited.
A business was sold on terms which imposed confidentiality, non-competition and non-solicitation obligations on the sellers. Later, they set up a new company and began trading in breach of those covenants.
The Supreme Court decided that if the victim has only an economic interest in the contract that is being performed, such as where there has been a breach of covenants on the sale of a business, then they must prove the economic loss that resulted from the breach. They cannot rely on negotiating damages if they cannot prove their financial loss.
However, the court left open an award of negotiation damages for breach of confidential information, on the basis that confidentiality is a valuable asset in itself which is lost when breached by the defendant.
It is often difficult for claimants in a restrictive covenant case to prove financial loss, particularly because it is hard to demonstrate that any downturn in business was caused by the defendant’s breach, and not for some other reason.
This case helps the sellers of businesses who may subsequently decide to set up a new operation that breaches their obligations to the buyer. For buyers who face such a breach of contract, it is now even more important that they pursue what is often the most valuable remedy available to them, an injunction against the contract breaker to put a stop to their breach.