When one party breaches its obligations to another, the wronged party is entitled to claim damages for that breach. There are three methods that the court can use to calculate what damages a party is entitled to:
- as compensation for losses resulting from that breach, but not for the loss of the obligation itself;
- a sum based on what reasonable people in the position of the parties would have negotiated to get rid of the obligation ('buy out damages);
- a sum based on any profit the party who breached the obligation made from the breach ('account for profits damages').
This guide considers when each measure of damages is likely to be awarded.
Measures of damages
The leading case surrounding the measure and availability of damages dates back to 1973. A property developer, Parkside Homes, built houses on its own land in breach of a freehold covenant agreement with Wrotham Park Estate. Wrotham Park sued for breach of the covenant.
Building houses on the land did not diminish the land's value. However, the judge awarded damages based on the sum that Wrotham Park might reasonably have demanded to 'buy out' the right, rather than by reference to the estate's negligible losses.
The decision came with several caveats, namely:
- damages are capped at the sum that the injured party might reasonably have demanded in return for granting the wrongdoer permission to carry out the unlawful act;
- application of the decision is restricted to cases involving property;
- the power to award damages is in lieu of an injunction – therefore, the court must also have the power to grant an injunction for the same breach. In this case, the court could have made an order to demolish the houses built.
The Wrotham Park decision has been followed in several more recent cases. In 2001 Jury's Hotel Management began to carry out works in breach of a covenant with AMEC Developments which prohibited the work. The judge held that it was necessary to consider the buy-out sum that would have been reached in negotiations between the parties if they had been making reasonable use of their respective bargaining positions. In 2006, the Court of Appeal upheld a decision to again award damages not in accordance with the usual compensatory principles, but on the basis of the buy-out amount that the parties would have agreed in a hypothetical negotiation.
In 2001 the government sought to prevent a former agent and spy, Blake, from benefiting from the sale of his autobiography. This went against the provisions of the Official Secrets Act which were incorporated into his employment contract, so the court held that he was required to account for the profits he made from the book. Despite the fact that this case was concerned with an account-for-profits award rather than a buy-out award, it has had the effect of removing the first two limitations of the Wrotham Park decision outlined above. A 2003 case involving the breach of a settlement agreement concerning commercial licensing obligations is regarded as having removed the third limitation. It suggested that damages could be awarded in addition to, and not merely in lieu of, an injunction in order to reflect any damage that occurred before the injunction was granted.
Case law indicates that judges are increasingly willing to assess damages for breaches of covenant on a buy-out basis. This is now commonly viewed as the normal method for assessing damages. It appears that, in order for damages to be awarded on an account-for-profits basis, the wronged party should have a 'legitimate interest' in preventing that unlawful profit-making activity, or that there should be a deliberate intention on the part of the offending party to profit from the breach.
If an award of buy-out damages is deemed to be appropriate, how should the court determine the amount that the offending party would have paid for the wronged party to agree to a relaxation of the covenant or waiver of the breach? In the Jury's Hotel/AMEC case, the judge considered the effect of a hypothetical negotiation and noted a number of features that seem to be of general application, as follows:
- the wronged party will want to agree to a relaxation or variation of the covenant if the offending party is willing to pay an appropriate price;
- the court must consider what sum would have been arrived at in negotiations between the parties had each been making reasonable use of their respective bargaining positions without expecting unreasonable amounts;
- the deal has to 'feel right' and be a sum that the offending party would b willing to pay in the circumstances;
- the outcome of the hypothetical negotiation must be decided with reference to the parties' knowledge at the time the negotiations would have taken place - that is, before the breach occurred;
- damages are to be assessed at the date of the breach;
- the fact that the innocent party would never have agreed to any relaxation is irrelevant as is the offending party's conduct.
A buy-out award is discretionary according to the circumstances. It should be granted when 'normal' compensatory damages would be an inadequate remedy and when the innocent party would obtain no 'just recompense' for the breach without such an award. However, the decisions give no guidance on how to apply these principles or what percentage of the anticipated profits of the offending party should be used. The amount of damages that could be awarded on this basis remains an unknown quantity.
Application to property law cases
The Wrotham Park decision on its own may have been seen as opening the door to negotiating greater damages for an innocent party. However, the way the principle has been modified by later decisions, especially in the Blake case, would seem to give lawyers greater scope for seeking to extract the entire profit of a breaching party.
One particular area where the developing case law will apply is that concerning the infringement of rights to light. In 1986 a judge held that that the Wrotham Park approach should be used where damages are awarded, in place of an injunction, for the interruption of the right to light. He therefore took account of the bargaining position of the owner, Mr Carr-Saunders, and the amount of profit the offending party Dick McNeil Associates would make in the development of its site.
If the circumstances are exceptional, a damages award on an account-for-profits basis could be awarded in a property case in the future. Such circumstances could include:
- the breaching party being in a position of trust, making the breach more serious and the offender's accountability greater - for example, if the offender is a trustee;
- the breach being of a right/obligation expressly agreed between the innocent and offending parties, as opposed to a pre-existing legal right;
- the breach being a matter of public interest or relating to issues of national security or importance rather than a private matter;
- the offending party having made a calculated attempt to profit from the breach with no thought for the innocent party's rights;
- the seriousness of the breach and the reason for the covenant in the first place;
- other remedies being unavailable or inadequate.
Conclusion and implications
The distinction between buy-out damages and the remedy of account-for-profits damages is that the former is based on what the parties would hypothetically have agreed in order for the covenant to be relaxed. The latter is based on the actual benefit that the offending party has received as a consequence of its actions. Both, however, calculate the amount of the award in relation to the benefit the offending party has obtained.
Property owners that suffer an infringement of a legal right should therefore not only look at what loss they can show. If a developer or third party will make a profit from its breach there could be the potential to claim enhanced damages regardless of whether the court could grant an injunction instead.