Chapter 13 Updates to the Law

Damages
Untitled Document

Chapter 13: Damages

13.5.2.1 Remoteness of Loss 

p. 519 on SAAMCO
The principle in SAAMCOwas clarified in Hughes-Holland v BPE Solicitors [2017] UKSC 21, [34]-[36], [38]. It has nothing to do with causation of loss/limit upon damages otherwise recoverable. Where the defendant’s contribution is to supply information, which the client will take into account in making ‘his own decision on the basis of a broader assessment of the risks’, the defendant has ‘no legal responsibility for the decision’. The scope/nature of the duty is the critical factor determining the extent of liability.

  • A party provides advice: where he considers what matters should be taken into account in deciding whether to enter into the transaction; the adviser has the duty to consider all relevant matters with the result that if these matters are misjudged or negligently ignored, the client is in principle entitled to recover all loss flowing from the transaction. [40]
  • A party provides information: where he contributes limited part of material on which his client will rely in deciding whether to enter into a prospective transaction, but identifying other relevant considerations and overall assessment are exclusively matters for the client or other advisors such that the adviser is liable only for financial consequence of information being wrong but for the claimant entering into transaction (if greater).

Here, G had agreed to lend £200,000 to a friend (L), mistakenly assuming that he would use it to redevelop a disused tower at a substantial profit. The tower was owned by L's operating company subject to a charge securing a £150,000 bank loan. L intended to use G's money to buy the tower through a special purpose vehicle and to discharge the bank loan and other debts. Unaware of that, G instructed his solicitors to draw up a loan facility agreement and charge. In doing so, the solicitors mistakenly inserted terms which indicated that the loan was to be used to fund the development, thereby confirming G's erroneous assumption. Ultimately, G lost his money. G sued his solicitors in negligence.
The Supreme Court held:

  • The defendant did not assume responsibility for decision to lend money: he was merely instructed to draw up documents and not know anything of the arrangement between the friends.
  • No loss could be attributable to assumption being wrong: if it had been right would still have lost money as the expenditure would not have enhanced the value of the property; none of the loss was loss against which BPE was bound to take reasonable care to protect him from.

 

 

P529, add to the end of section on time limit, new section

13.2.5.7 Legal policy

This is an additional factor limiting the protection of the performance interest. In ARB v IVF Hammersmith [2018] EWCA Civ 2803, the claimant ARB and his former partner (M) had fertility treatment at the defendant clinic. Following the birth of their first child, five embryos made with their gametes were frozen. The contract with the clinic stated both parties must give written consent before any embryos are thawed and placed. The Court of Appeal interpreted this as an absolute restriction; liability is strict. Several months after the couple separated, M attended the clinic alone and informed staff that they had decided to have another child. Under the clinic's standard operating procedure, the consent form was to be signed by both partners and witnessed by staff, if both partners were present. But, if one partner was absent, the consent form was to be given to the person present and they were to return it at the first scan appointment. Accordingly, M took the form away and forged ARB’s signature. The Court found the clinic’s practice to be neither reasonable nor responsible.  M underwent treatment and gave birth to a healthy daughter E. The Family Court confirmed parental responsibility and shared residence in respect of both children.

ARB claimed for damages for the pecuniary losses relating to E's upbringing (past and future) incurred as a result of the clinic's breach of contract. This was denied. The Court of Appeal held that while there was undoubted breach, that caused the loss, which was not too remote, the same legal policy that barred tort cases on unlawful births applies equally to contractual claims founded on a strict obligation. Lady Justice Nicola Davies DBE explained:

[33] At the core of the legal policy which prevented recoverability of the identified loss in Rees and McFarlane was the impossibility of calculating the same loss given the benefits and burdens of bringing up a healthy child…. Added to this is the sense, … that it is morally unacceptable to regard a child as a financial liability.

[34] …the same legal policy applies to thwart ARB's claim. The measure of damages is the same; the test for remoteness does not turn on any distinction pertaining to the nature of the underlying obligation; and, most particularly, there is no material difference for the purposes of this legal policy between contractual duties of these two types…"

[36] The breach of contract arises in the absence of a liquidated damages clause in the contract. The obligation to pay damages which results is a secondary obligation arising by implication of the common law. There is nothing in this contract which modifies the approach of the common law which must include legal policy. It follows that there is no legal basis upon which to differ in terms of the recovery of the claimed loss as between contract and tort.

Pause for reflection:

  • The suggestion that the parties may circumvent the legal policy by agreeing damages is a troubling one.
  • Perhaps ARB should have claimed non-pecuniary loss.
  • In the Singapore case ABC v Thomson Medical [2017] SGCA 20 a couple had in-vitro fertilization treatment resulting in the birth of a daughter. However, the mother’s ovum was mistakenly fertilized by a third party’s sperm. The mother was denied: pecuniary loss for the child’s upbringing. The Court of Appeal discussed damages for loss of autonomy but denied it because:(a) the concept of “autonomy” is too nebulous and contested a concept to ground a claim; (b) the notion of a loss of autonomy does not cohere with the existing law on “damage” in the tort of negligence; and (c) recognition of such a head of damage would undermine existing legal doctrines designed to keep the boundaries of liability within limits. Instead, what is required is a more developed, substantive and nuanced notion of “autonomy” that takes into account existing family building practices, kinship arrangements, and the socially-constituted value of genetic relatedness. The Court recognises that the Appellant’s desire to have a child of her own, with her Husband, is a desire that is a basic human impulse, and its loss is keenly and deeply felt. The ordinary human experience is that parents and children are bound by ties of blood and this fact of biological experience – heredity – carries deep socio-cultural significance. Persons (such as the Appellant) who consciously choose to undergo IVF do so because of a deep desire to experience, as far as it is possible, the ordinary experience and incidents of parenthood. And when, as in the present case, a person has been denied this experience due to the negligence of others then she has lost something of profound significance and has suffered a serious wrong. This loss of “affinity” can also result in social stigma and embarrassment arising out of the misperceptions of others, as was the case here. The Court concludes that the Appellant’s loss of “genetic affinity” should be a recognisable head of loss, to be set at 30% of the financial costs of raising the child.

 

pp534-38; 13.5.1- 13.5.7, replace with following:

13.5 Account of profits
13.5.1 The general rule and two exceptions

The orthodox position is that damages for breach of contract cannot be measured by:

  • the defendant’s gains (eg by making a larger profit from transferring her performance to a third party, see Teacher v Calder (1899)); or
  • the defendant’s savings (eg by incomplete or defective performance, see Tito v Waddell (No 2) (1977)).

This is subject to two exceptions. The defendant must account for all of her profits to the claimant where a breach of contract also involves: (i) a breach of confidence or (ii) a breach of fiduciary duty.
13.5.2 Attorney-General v Blake: account of profits
In Attorney-General v Blake, a double secret agent made profits from publishing his autobiography in breach of his contract of secrecy with the British Crown and in breach of the criminal law. He had already been paid £60,000. The action was to prevent him getting the £90,000 he was still owed by the publishers.
The House of Lords awarded the Crown an account of profits for breach of contract to meet the demands of ‘practical justice’ in the ‘exceptional circumstances’ of the case. However, only the vaguest guidance was given on when this remedy is available. Lord Nicholls said:
‘An account of profits will be appropriate only in exceptional circumstances. Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to a breach of contract. It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought. A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit.
It would be difficult, and unwise, to attempt to be more specific …’

Their Lordships said that settled expectations in the commercial or consumer world would be undisturbed and that the majority of cases would remain unaffected.

Relevant factors in determining the availability of account of profits:

  • Blameworthiness of the breach: The House of Lords said that it is not enough for the claimant to show:
  • that the defendant’s breach was cynical or deliberate; or
  • that the breach enabled the defendant to enter into a more profitable contract.

But, the Court implies that these contribute to the cumulative weight in favour of the remedy. The blameworthiness of the breach is relevant to the overall assessment (Experience Hendrix LLC v PPX Enterprises (2003)).

  • Whether the claimant “had a legitimate interest in preventing the defendant’s profit-making activity”. In Blake, it was held that the Crown had a legitimate interest in protecting the operation of the secret services (ie to prevent its security and intelligence employees from profiting by disclosing information that they would not have obtained except by undertaking secrecy). The double agent had to account for the full profits he made to the Crown.

Pause for reflection
In Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis (2015) the Supreme Court held that liquidated damages do not have to be genuine pre-estimates of the likely loss but may be designed to deter breach if C has a legitimate interest in securing performance rather than damages. On the facts the latter was the case.

  • Would Cavendish be a situation where an account of profits may be awarded?
  • Is Blake the sort of case where the State would have a legitimate interest in securing performance rather than damages such as to justify enforcement of an agreed damages clause that exceeds a genuine pre-estimate of the likely loss?
  • The analogy with fiduciary obligations. An account of profits is available for breach of a fiduciary obligation: although Blake was not a fiduciary, their Lordships said that his obligation was “closely akin to a fiduciary obligation”.

This is obviously unsatisfactory being uncertain and so unpredictable.

Aside from Blake, an account of profits has been awarded only in one case at first instance, surprisingly, a purely commercial case. In Esso Petroleum Co Ltd v Niad Ltd (2001), although its facts do not appear exceptional. N breached its agreement with E not to sell E’s petrol above a set price. E was unable to show what loss was caused, but it was held that E had a strong interest in performance and was entitled to N’s full profits from breach.

In Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2018] 2 WLR 1353(noted by Burrows (2018) 134 LQR 515) Lord Reed stated that ‘common law damages for breach of contract cannot be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances, following Attorney-General v Blake.’ (at [35]). The recognition seems grudging since Lord Reed gave no further indication of when a case would be treated as exceptional. Future courts are unlikely to require a defendant to account for the profit made from a breach of a commercial contract.

    • Negotiating Damages

Damages of this types has been called, variously,

  • Wrotham Park damages”,
  • “hypothetical bargain” damages,
  • “hypothetical release damages” or
  • the “value of a bargaining opportunity”.

In Morris-Garner v One Step, at [3] Lord Reed preferred the term “negotiating damages” introduced by Neuberger L.J. in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd (2006).

      • Orthodox position

 

  • When the defendant has interfered with the claimant’s proprietary rights (e.g. detinue, trespass, wrongful detention of goods), the defendant must pay a reasonable user fee, even if no loss is caused to claimant’s property, eg I hire car from you, return late, but you would not have hired to anyone else.
  • Damages in lieu of specific performance or injunction under (“Lord Cairns’ Act”) now section 50 Senior Courts Act 1981. This is commonly referred to as "equitable damages" in contrast to standard common law damages. In Wrotham Park Estate v. Parkside Homes Ltd [1974] 1 WLR 798, W sold land to P developers who made additional profits by building in excess of the restrictive covenant contained in the contract. W’s application for an injunction to undo the breach was denied for social and economic reasons (avoidance of waste), but damages were awarded in lieu (Lord Cairn’s Act) could include a share of the profit D had made by breaking the contract- assessed at 5% of P’s estimated profits.

 

Subsequently the House of Lords in Johnson v Agnew [1980] AC 367, 400 said that the assessment of damages was governed by the same principles whether the damages were awarded under the Act or at common law. Lord Reed in One Step recognizes that this is incorrect. Since the objective of damages under Lord Cairn’s Act is to compensate for the court’s refusal of an injunction, it cannot be the same as assessing common law damages ([56]).

      • Blake widened the availability of negotiating damages

 

Lord Nicholls treated the Wrotham Park case as one of simple breach of contract, and suggested that negotiating damages are not restricted to the invasion of a property interest or to Lord Cairns’ Act cases. He said:
“In a suitable case damages for breach of contract may be measured by the benefit gained by the wrong-doer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained.”

Lord Nicholls referred to the authority of Wrotham Park as a ‘shining beacon’. 
In contrast, in One Step Lord Reed said that the Wrotham Park decision:
“is a source of potential confusion because of the opacity of its reasoning, and it can now be regarded as being of little more than historical interest.”

After Blake, the court was sometimes willing to award negotiating damages where there was only a breach of contract and no infringement of property rights or breach of confidence, if there were special circumstances to justify it. For example, in Experience Hendrix LLC v PPX Enterprises Inc (2003), PPX had breached a settlement agreement under which it agreed not to release further recordings from master tapes that it had. The Court of Appeal awarded damages based on a percentage of PPX’s profit even though the claimants could not show any loss because PPX knowingly “did do the very thing it had contracted not to do”; it was a “deliberate breach”, a “flagrant contravention” of PPX’s obligation. The Court also said that the circumstances for awarding negotiating damages need not be as exceptional as for an account of profits to be ordered.

      • One Step narrowed the availability of negotiating damages

In One Step, Lord Reed (with whom Lady Hale, Lord Wilson and Lord Carnwath agreed) noted that in Blake ‘the wider availability of such awards was signalled, but the seeds of uncertainty were sown" (at [48]). His Lordship held that:
“At common law, as opposed to under Lord Cairns’ Act, negotiating damages cannot be awarded for breach of contract that do not involve the infringement of a proprietary interest or the like, even if the breach was deliberate or the loss was hard to assess.”

 “[95] (12) Common law damages for breach of contract are not a matter of discretion. They are claimed as of right, and they are awarded or refused on the basis of legal principle.”

The point is pressed that negotiating damages is not a sort of discretionary jackpot that claimants can choose in most breach of contract cases

After the Supreme Court’s decision, negotiating damages are available:

  • In lieu of specific performance or injunction: when at the time of the hearing a claimant could have been awarded specific performance or an injunction but, as a matter of discretion, the court refuses to make such an order and instead awards damages under Lord Cairns’ Act. This is:
  • the price for the infringement of the claimant’s right; or
  • the amount that the claimant could reasonably have demanded as the price for allowing the defendant’s breach.
  • For the “use value” of the property concerned where the breach of contract involved the infringement of a proprietary right of the claimant.
  • Breach of contract that are analogous to proprietary rights, where:

"the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed" (at [92]);
"the contractual right is of such a kind that its breach can result in an identifiable loss equivalent to the economic value of the right, considered as an asset, even in the absence of any pecuniary losses which are measurable in the ordinary way" (at [93]).

Pause for reflection

  • In respect of (i) and (ii) Lord Reed seems to turn the clock largely back to the position prior to Blake
  • In respect of (i) the question is why confine negotiating damages to this situation when all breaches of contract amount to infringement of the right?
  • In respect of (i), must the claimant have applied for and court have jurisdiction to grant specific performance or an injunction? In Pell Frishmann Lord Walker said, at [48]: 

“… it is not necessary that an injunction should actually have been claimed in the proceedings, or that there should have been any prospect, on the facts, of it being granted’
This was doubted by Lord Reed in One Step, at [45]:
“The power to award damages in substitution for an injunction is dependent on the court’s having jurisdiction to grant an injunction, determined as at the commencement of the proceedings. This …might be thought to imply that the court must also have before it an application for an injunction, which it has decided to withhold.”

  • Category (iii) is the most controversial. It suggests that there is a category of contractually created asset or proprietary right that is distinct from the contractual right itself but, how do we justify or make this distinction? T the Supreme Court put forward two examples of category (iii). In Experience Hendrix the defendant in breach of contract, had licensed the use of certain master tapes of Jimi Hendrix which were in its possession. In Pell Frischmann Engineering Ltd v Bow Valley and PT Bakrie Interinvestindo (2009) the contractual right in a joint venture agreement—failing to afford the claimant the right to participate in a business opportunity—was "treated … as a commercially valuable asset, of which the claimant was effectively deprived".

P and BV entered into confidentiality agreements to work in a consortium to undertake a project with N. In breach of contract, BV entered a contract with N without P’s consent. The Privy Council awarded P $US2.5 million as negotiating damages, although the defendants’ actual profit was much less (between $1 million and $1.8 million) because the parties’ negotiations prior to its breakdown showed that they had expected the contract with N to be much more profitable than it turned out to be.

  • In One Step, Lord Sumption put forward a wider scope for negotiating damages. In addition to the traditional two categories:

 

  • Where C has an interest in contractual performance extending beyond financial reparation: Lord Sumption cites AG v Blake as example.

Lord Sumption’s reasoning here is difficult, he seems to suggest that it’s enough that damages could not put the government in the same position as it would have been in but for the wrong. This would suggest that this category as expansive. It is not clear how Lord Sumption intends this category to be confined.

  • The notional release fee as an evidential technique for estimating C’s loss. Here, the negotiated release fee is a surrogate for the loss of profit arising from breach. The awards in Pell Frischmann, Vercoe and Experience Hendrix can be explained on this basis.

Lord Sumption suggests that the notional release fee will be relevant whenever (i) there is material on which the notional release fee can be assessed; and (ii) the trial judge finds it helpful. [19]
This is another difficult category. Again, it is not clear how Lord Sumption intends to confine this category (if at all).

  • A point not explicitly addressed One Step is whether negotiating damages can be awarded with other damages. It is submitted that:
  • It should be where compensation for other loss can be proved: eg
  • where the other loss occurred before the claimant sought but was refused an injunction, or
  • the other loss is of a different kind, eg when property is not only used without permission but is returned damaged.
  • But there should be no double recovery; eg not both negotiating damages and loss of the chance to make use of a property right.

 

 

In One Step, OS was in the business of providing support for young people leaving care. MG had 50% shareholding and was a director. MG sold their shares to OS and agreed a 3-year non-compete agreement with OS.  But MG had already set up a rival competing company (Positive Living Ltd) and started operating immediately. Positive Living was very successful and they sold it after three years for £12.8 million. OS, meanwhile, suffered a significant downturn in its business. OS claimed negotiating damages of between £5.6 million and £6.3 million.

  • The Court of Appeal held that Wrotham Park damages can be awarded when it will be very difficult to prove the loss that has been caused by the breach; the question is whether an award would be a just response.
  • This was reversed by the Supreme Court. The decision was that OS’s only interest in MG’s performance of their obligations under the no compete clause was commercial, and its loss was financial. OS did not have a right to elect how the damages should be assessed. There should be a new hearing on quantum of C’s financial loss. It’s for the judge to consider relevance of any evidence of a hypothetical release fee.’

 

Pause for reflection
By analogy to Pell Frischmann, why not say that the purpose of the non-competition clause was

  • to protect the claimant against the loss of business profit and hence to protect against "the loss of a valuable asset … protected by the right which was infringed?"
  • a "contractual right of such a kind that its breach could result in identifiable loss equivalent to the economic value of the right"?

Why could it not have focused on the economic value of the non-competition right, considered as an asset, and fixed by negotiating damages?

 

    • Measure of negotiating damages:

In general, Lord Reed held that: 
“It is for the court to judge what method of quantification, in the particular circumstances of the case before it, will ‘give an equivalent for what is lost by the refusal of the injunction’. The court should adopt the most appropriate method of assessment.

  • Where property rights are infringed: In One Step, Lord Reed said at [30]: 

“In these cases, the courts have treated user damages as providing compensation for loss, albeit not loss of a conventional kind.

  • Where property is damaged, the loss suffered can be measured in terms of the cost of repair or the diminution in value, and damages can be assessed accordingly.
  • Where on the other hand an unlawful use is made of property, and the right to control such use is a valuable asset, the owner suffers a loss of a different kind, which calls for a different method of assessing damages. In such circumstances, the person who makes wrongful use of the property prevents the owner from exercising his right to obtain the economic value of the use in question, and should therefore compensate him for the consequent loss. Put shortly, he takes something for nothing, for which the owner was entitled to require payment.”
  • Likewise, the measure of awards in lieu of an injunction under Lord Cairns’ Act reflect [63]: 

“… the fact that the refusal of an injunction had the effect of depriving the claimant of an asset which had an economic value.”

  • In Vercoe v Rutland Management Ltd (2010), at [292], Sales J. said the factors to be taken into account in assessing the damages include: 

“(i) the likely parameters given by ordinary commercial considerations bearing on each of the parties …
(ii) any additional factors particularly affecting the just balance to be struck between the competing interests of the parties … and
(iii) the court’s overriding obligation to ensure that an award …does not provide relief out of proportion to the real extent of the claimant’s interest in proper performance judged on an objective basis by reference to the situation which presents itself to the court.”
(iv) In the Pell Frishmann case, Lord Walker said that the court should consider a hypothetical negotiation between a willing buyer (the contract-breaker) and a willing seller (the party claiming damages); both parties to be assumed to act reasonably, so that the fact that one or other would have refused to make a deal is to be ignored.
This seems less a protection of the claimant’s right to performance than a forced sale of that right.

In any case, Lord Reed regarded the price the claimant might have obtained for releasing the defendant from its obligations as only evidence of the claimant’s loss. Lord Reed said [94]: 
“…It would be a matter for the judge to decide whether… evidence of a hypothetical release fee was relevant and, if so, what weight to place upon it. However, the hypothetical release fee would not itself be a quantification of the loss caused by a breach of contract, other than [where the breach results in the loss of a valuable asset created or protected by the right which was infringed].”

(v) Events subsequent to the hypothetical bargain?
In One Step, Lord Carnwath said that “there is no reason in principle to exclude information available to the parties up to the time of the judge’s decision”. Lord Reed was inclined to agree but preferred not to express a concluded view.
It is logical to take account of events after breach if we are measuring actual loss, but, it is hard to see how future events can be relevant to damages assessed on a “negotiating damages” basis.

 

 

McFarlane v Tayside Heralth Board [2000] 2 AC 59 where damages for negligent advice was denied for the cost of the upbringing of a healthy child. Likewise the same loss was denied in Rees v Darlington Memorial Hospital NHS Trust [2004] 1 AC 309, in respect of the negligent sterilization of a woman with severe visual impairment.