A Walk in the (Wrotham) Park
Wednesday, June 27, 2018
Should you get damages if no loss has been suffered? The Supreme Court decided that Spring 2018 was the right time to return to this thorny question, known as Wrotham Park damages.
Should you get damages if no loss has been suffered?
The Supreme Court decided that Spring 2018 was the right time to return to this thorny question, known as Wrotham Park damages.
The idea of Wrotham Park damages is to address the situation where an employee breaches their restrictive covenants, but the employer suffers no loss because of this.
The typical example is where the employee has a loyal client base that only gives their work to the employer because the employee works there, and it’s recognised that the employer will lose those customers once the employee leaves.
If the employee tries to continue working with those customers once they’ve left their employment, it’s difficult for the employer to say that they’ve lost work because of the actions of the employee. So no loss flows from the breach.
In Wrotham Park, the principle of a "hypothetical bargain" or "licence fee" damages was introduced, by which the courts awarded damages based on the price the employee would have negotiated to be released from their restrictions. This asks the court to determine a highly unrealistic and hypothetical situation after the event.
It is an idea which we, as lawyers, have struggled to deploy, because it was untested. It made commercial sense, but seemed to break the fundamental rule that a loss had to be suffered before damages could be awarded.
The Supreme Court, having reviewed this carefully, came to the same conclusion and have said that, generally, an employer can only claim for their financial loss. The Supreme Court wasn’t prepared to move away from the idea that identifying the value of the loss is essential to an award of damages in contract. However, it went on to say that if the breach by the employee can be shown to damage a valuable asset, or if a protected right is infringed, then "negotiating damages" can be used. This is probably going to be limited, and will relate to cases where protected rights related to intellectual property or confidentiality have been infringed by the departing employee.
This means that the hapless employer will either have to show loss of business or goodwill (which may be impossible), or seek damages based on the gain made by the departing employee (restitutionary damages). Although restitutionary damages sound like a good idea, the Supreme Court has also pointed out that, as the law currently stands, they are only available in exceptional cases, and there is little likelihood of this changing.
So for the moment, an employee with a very loyal personal following might be able to breach their restrictions and can still come out of the situation smelling of roses. The solution for the employer is commercial rather than legal: never allow any one person in your organisation to own the client or customer - companies must ensure that key customers are looked after by a team of staff interacting with the customer at various levels within the organisation.
This publication is for general information only and is not intended to provide legal advice.