The claimant company provided supported living care for vulnerable children and adults. The defendants, who were a former director and shareholder, and a manager, respectively, of the claimant, set up a business which also engaged in supported living services in the same areas as those where the claimant operated. The claimant brought a claim against the defendants alleging breach of restrictive covenants not to compete with the claimant, solicit its clients or use its confidential information, and produced forensic account reports quantifying the loss which it had allegedly suffered in consequence of the defendants’ breaches, the benefits obtained by the defendants and a hypothetical fee for releasing the defendants from the restrictions. The judge found that the defendants were in breach of the competition and solicitation covenants and held that, since it would be difficult for the claimant to identify the financial loss which it had suffered by reason of the defendants’ wrongful competition, it would be just for the claimant to have the option of recovering damages for such amount as would notionally have been agreed between the parties, acting reasonably, as the price for releasing the defendants from their obligations, or alternatively ordinary compensatory damages. The claimant elected for damages on the former basis and a hearing on quantum was fixed. Before that hearing could be held the defendants appealed. The Court of Appeal dismissed the appeal, holding that damages based on a hypothetical release fee were available whenever that was a just response, and that that was a matter for the judge to decide on a broad brush basis, taking into account, if he wished, the difficulties which the claimant would have in establishing damages on the ordinary basis.
On the defendants’ appeal—
Held, allowing the appeal, that there were circumstances in which the loss for which compensation was due was the economic value of the right which had been breached, considered as an asset; that the imaginary negotiation involved in calculating such “negotiating damages” was merely a tool for arriving at that value and did not in itself make them fundamentally incompatible with the compensatory purpose of an award of contractual damages; that the real question was as to the circumstances in which that value constituted the measure of the claimant’s loss; that, in the present context, such negotiating damages could be awarded for the breach of contract which had resulted in an identifiable loss equivalent to the economic value of the right which had been breached, considered as an asset, even in the absence of any pecuniary losses which were measurable in the ordinary way, since the claimant had in substance been deprived of a valuable asset, and the defendant had taken something for nothing, for which the claimant was entitled to require payment; that the judge had been mistaken in considering that the claimant had a right to elect how its damages should be assessed, and in supposing that the difficulty of quantifying its financial loss justified the abandonment of any attempt to quantify it, and the Court of Appeal had been wrong in treating, inter alia, the difficulty of establishing precisely the claimant’s financial loss as justifying an award of a monetary remedy which was not compensatory; that the basis on which damages were awarded could not be a matter for the discretion of the primary judge; that, although the loss in the present case was difficult to quantify, it was a familiar type of loss for which damages were frequently awarded and it was possible to quantify it in a conventional manner; that, accordingly, the hearing on quantum ordered by the judge should proceed, not for an assessment of the amount which would notionally have been agreed between the parties as the price for releasing the defendants from their obligations, but for the judge to measure, as accurately as possible, the financial loss which the claimant had actually sustained; that the issue of how that assessment was best carried out was for the judge to consider; and that, if evidence were led in relation to a hypothetical release fee, it was for the judge to determine its relevance and weight, if any, although such a fee was not itself the measure of the claimant’s loss in a case of the present kind (paras 3, 91–93, 95, 96–98, 100, 102, 106, 109, 123, 127).
Per Baroness Hale of Richmond PSC, Lord Wilson, Lord Reed and Lord Carnwath LJJ. Although it is not easy to see how, in circumstances other than those described, a hypothetical release fee might be the measure of the claimant’s loss, it would be going too far to say that it is only in those circumstances that evidence of a hypothetical such a fee can be relevant to the assessment of damages. If, for example, in other circumstances, the parties had been negotiating the release of an obligation prior to its breach, the valuations which the parties had placed on the release fee, adjusted if need be to reflect any changes in circumstances, might be relevant to support, or to undermine, a subsequent quantification of the losses claimed to have resulted from the breach. It would be a matter for the judge to decide whether evidence of a hypothetical release fee is relevant and, if so, what weight to place upon it. However, in that instance, the hypothetical release fee would not itself be a quantification of the loss caused by a breach of contract (para 94).
Guidance on the circumstances in which damages for breach of contract can be assessed by reference to the sum which the claimant could hypothetically have received in return for releasing the defendant from the obligation which he failed to perform (para 95).
Charles Béar QC and Ian Bergson (instructed by Neves Solicitors llp, Milton Keynes) for the defendants.
Craig Orr QC and Mehdi Baiou (instructed by Pitmans llp, Reading) for the claimant.