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Court gives guidance on "Wrotham Park" damages for breach of contract

Published: 21st January 2010

When a contract is breached, the basic rule is that any damages awarded should put the innocent party in the position they would have been in had the wrongdoer not breached the contract but performed it. The damages will usually equate to the actual loss that the innocent party has suffered.

However, some years ago in the case of Wrotham Park Estate Company Ltd v Parkside Homes Ltd it was established that in certain circumstances damages for breach of contract would not necessarily be confined to actual financial loss. To ensure that the innocent party received adequate remedy for the breach, it might be more appropriate for the damages to be assessed by reference to the benefit gained by the wrongdoer rather than the loss actually suffered by the innocent party.

In Wrotham Park the defendant built houses on a plot of land without obtaining the claimant's consent. The claimant's consent was necessary because the claimant's land had the benefit of a restrictive covenant that affected the defendant's land, and so in not obtaining the claimant's consent the defendant was in breach of contract.

The claimant could not show that the defendant's development had caused any diminution in the value of the claimant's land but, nevertheless, the judge said

"In my judgment a just substitute (for an injunction) would be such a sum of money as might reasonably have been demanded by the claimant from (the defendant) as a quid pro quo for relaxing the covenant."

There have been a number of decisions since Wrotham Park, and in the recent case of Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd & others, (an appeal from the Jersey Court of Appeal to the Privy Council), the Privy Council has provided some useful guidance on what have become known as "Wrotham Park" damages. In Pell the parties entered into a joint venture agreement in the hope of securing a commercial contract, and as part of this process they also entered into confidentiality agreements. A dispute ensued and Pell brought various claims, including allegations of conspiracy and breach of contract in relation to the confidentiality agreements.

Initially, the Royal Court of Jersey rejected most of Pell's claims but did award it damages of £500,000 for breach of confidence. On appeal, the Jersey Court of Appeal agreed the lower court's award, and so Pell appealed to the Privy Council in respect of the level of the damages awarded, which it believed were too low. The Privy Council held that both of the Jersey Courts had applied the wrong principles when assessing the damages, and agreed with Pell that £500,000 was far too low for Wrotham Park damages.

The Privy Council said that the term "Wrotham Park damages" is most appropriate as a shorthand for damages awarded as a substitute for specific performance or an injunction in certain circumstances, and went on to set out 5 general principles for the award of these damages:

  1. They can be awarded for the invasion of rights to property, e.g. trespass to land or the conversion of property.
  2. They are available on a similar basis for patent infringement and breach of other intellectual property rights.
  3. They are intended to compensate where the Court decides not to grant relief such as specific performance or an injunction but where it could do so, e.g. where there is the excessive use of a right of way.
  4. They are "negotiating damages" - they represent what the claimant might reasonably have demanded from the defendant as a 'quid pro quo' for the claimant allowing the defendant to continue to breach the contract/covenant or otherwise invade the claimant's rights.
  5. Although they are awarded in lieu of an injunction, it is not necessary that an injunction is actually claimed, or, indeed, necessary that one would have been granted, on the facts, if it had been claimed.

Future events?

Recent cases have approached the assessment of Wrotham Park damages on the basis that a "hypothetical negotiation" has taken place between a willing buyer (the wrong-doer) and a willing seller (the claimant claiming damages for the release of the relevant contractual obligation).

The fact that one or both parties would not have agreed to such a deal is irrelevant for these purposes, and the question has also been raised - when assessing these damages, to what extent can the Court take account of events that occurred after the "hypothetical negotiation" is supposed to have taken place? Can the Court take account of the amount of profit that the wrong-doer actually generated from its breach of contract?

The Privy Council in Pell conceded that where there had not been any actual "negotiation" between the parties, (as there had been in Wrotham Park), it would be reasonable for the Court to look at the eventual outcome and bear that in mind when deciding what the parties might have agreed at their "hypothetical negotiation", but decided not to lay down any hard and fast rules. Each case should be assessed on its own particular facts.

In Pell, there had been actual negotiations between the parties, and these showed that the parties had expected (pre-breach) that the contract that they were seeking would have been much more profitable than it actually ultimately proved to be. So, when determining the appropriate level of damages, the Privy Council considered what the outcome would have been following a "hypothetical negotiation" between "a willing seller acting reasonably" and "willing buyers acting reasonably" and held, on the facts, that £500,000 was too low and made its own award based on the findings of fact of the Courts below.

It held that the claimant's damages should be in US dollars, as that was the currency in which all of the negotiations had been conducted, and increased Pell's award of damages from £500,000 to $2.5 million plus interest.

If this raises any questions for your organisation please contact Craig Blakemore in Liverpool: 0151 236 8989 or Graeme Jump or Josh Conroy in Manchester: 0161 214 0500