Morris-Garner v One Step Ltd - 'In what circumstances can damages for breach of contract be assessed by reference to a hypothetical release fee?'

BACKGROUND FACTS

• An award of damages for breach of contract measured to a 'hypothetical fee', previously described as 'Wrotham Park damages' (Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974]) is now known as 'negotiating damages' which was introduced by Neuberger LJ (Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006]).

• This remedy for breach of contract is only available where the breach has resulted in the loss of a valuable asset created or protected by the right which was infringed (Lord Reed [99]).

CASE FACTS

1. 1999: First defendant started a business, providing support for young people leaving care.

   
   

2. 2002: She agreed to sell 50% of the business to Mr and Mrs Costelloe, forming One Step (Support) Ltd. First defendant and Mrs Costelloe each owned half the shares and were both directors.

   
   

3. They had a shareholders’ agreement which included a deadlock clause – allowing one to buy or sell shares at a stated price.

   
   

4. The business ‘comprised the provision of rented accommodated and support services to enable vulnerable individuals referred by local authorities, such as children and young people leaving care, and adults with mental health and learning disabilities, to live as independent lives as possible in the community’ (Lord Reed [7]).

   
   

5. The relationship between the first defendant and Mrs Costelloe deteriorated. April 2006: First defendant emailed confidential market research to her personal email.

   
   

6. July 2026: First defendant set up a new company, Positive Living Ltd with the second defendant as co-owner.

   
   

7. August 2026: Mrs Costelloe triggered the deadlock clause, offering to buy or sell shares for £3.15 million. December 2006: First defendant chose to sell her shares to a company owned by Mrs Costelloe, Community Support Project Ltd for £3.15 million.

   
   

8. Part of the sale included a three-year restrictive covenants (i) keeping information concerning its business transactions confidential (ii) prohibiting her from engaging in a business that was in competition with it or soliciting its clients.

   
   

9. August 2007: Positive Living began trading in competition with One Step. 2008: One Step’s profits declined, solicitors writing on the claimant’s behalf threatened legal action for breach of covenant.

   
   

10. Restrictive covenants expired in December 2009. September 2010: Defendants sold Positive Living for £12.8 million.

KEY ISSUES

1.     Negotiating damages apply only when the breached right is an asset

‘Asset’:  Something that can be bought, sold or licensed. E.g., using somebody’s land without permission.

2.     Negotiating damages are compensatory, not restitutionary

Contractual damages at common law are designed to put the injured party, so far as money can do it, in the same situation as if the contract had been performed.

Damages are not meant to be restitutionary in nature.

3.     Non-compete and non-solicitation clauses are not ‘assets’

The injured party must prove actual financial loss.

WHAT NOW?

The Supreme Court's decision leaves uncertainties for claimants seeking negotiating damages. The test may be argued as being 'too narrow', meaning that many claimants will have to rely on the ordinary compensatory damages instead.

A key issue with this is the "fictional negotiation".

What happens if no reasonable person in the claimant's position would ever have agreed to release the defendant from the restriction? In that particular situation, the entire premise of valuing a 'hypothetical release fee' becomes increasingly strained.

Another issue relates to the defendant's potential argument - What if the claimant did not object early on? Surely, the defendant would simply change their behaviour to avoid breaching the right at all. Although a limited defence, it certainly highlights how timing in the claimant's enforcement may influence the measure of damages.

Ultimately, the focus remains on this question:

WHAT WOULD A REASONABLE PERSON IN THE CLAIMANT'S POSITION HAVE ACCEPTED AS THE PRICE FOR RELEASING THE RESTRICTION?