In a decision which looks set to be the first port of call for the principles of common law damages for many years to come, the Supreme Court has unanimously overturned the lower courts and radically restricted so-called Wrotham Park damages for breach of contract. The Supreme Court’s decision reverses the trend of two decades of appellate authority and involves fundamental assessment of the principles of compensation in a variety of common law contexts. Charles Béar QC and Ian Bergson acted for the appellants in One Step (Support) Ltd v Morris-Garner [2018] UKSC 20.

Supreme Court President, Baroness Hale, described the case at the close of argument as raising a “wonderful basic law of contract problem”. Lord Reed in handing down the decision referred to “the considerable practical importance” of the decision and the Court’s consideration of “basic principles” in different areas of law.

The appellants had sold a business and entered into non-compete covenants in favour of the buyer, which Phillips J. held had been breached. Taking the view that assessment of the buyer’s loss would be difficult, Phillips J. awarded the buyer the option – which it duly took up – to have its damages assessed by reference to the price of a hypothetical reasonable bargain for release of the sellers from their covenants. Christopher Clarke and Longmore LJJ in the Court of Appeal ([2017] QB 1) held that judges had the power to award such damages when they considered it just to do so.

All five judges of the Supreme Court held that the lower courts were wrong. Damages are awarded on the basis of principle and cannot be made the subject of judicial discretion or the claimant’s election. The majority judgment of Lord Reed sets out clear rules which can be expected to be referred to as the starting-point for the law of damages for future courts. In contract cases, damages can generally be assessed only by reference to financial loss actually suffered: loss means “a less favourable situation…than [the claimant] would have been in had the contract been performed”. Accordingly, “[w]here the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss. In that event, he cannot be awarded more than nominal damages.” Difficulty in assessing loss does not justify a different measure of damages.

The earlier cases of Wrotham Park itself, Attorney General v Blake, Experience Hendrix and Pell Frischmann are all subjected to critical analysis. The result of One Step is that only when the contract creates or protects an asset equivalent to a property right can damages be awarded on a basis similar to so-called “user damages” in tort cases, which the Supreme Court explains as compensation for the asset-owner’s loss of control, assessed by reference to the economic value of the asset. In normal cases, of which One Step itself is held to be an example, the promise obtains simply commercial rights and is entitled only to compensation for its financial losses. Evidence of a hypothetical release fee will not itself quantify the loss. It would be admissible, if at all, only because it shed light on actual financial loss: an example would be if the parties had actually engaged in negotiations.

A copy of the judgment is available here and a copy of the Supreme Court’s press summary is available here.