Damages control

The courts have been busy rooting out the ambiguity surrounding damages for breach of contract claims. Marion Smith examines the most recent takes on these restitutionary dilemmas

All commercial clients, ­making or facing a breach of contract claim, want to know what remedy they can expect a court to award. They used to be told there were three available remedies – damages, specific performance and ­injunction – and the damages represent ­compensation measured by the claimant’s loss, not the defendant’s gain. This advice has had to be modified in the past decade to include references to the possibility of an account or restitutionary damages, and even exemplary damages.

However, it has been difficult to be certain when these remedies would be available. Two recent decisions ­provide a useful summary of the stage that has been reached in the process of fashioning this flexible response: Parabola Investments v Browallia CAL (2009) and Vercoe v ­Rutland Fund Management (2010).

Vercoe v Rutland

The power to order an account of profit for breach of contract came to the fore in ­Attorney General v Blake (2001). The case involved ’a notorious, self-confessed traitor’ who gave a confidentiality undertaking to the UK intelligence service. He escaped from prison and fled to Moscow, where he wrote his autobiography, covering his activities as a secret intelligence officer. By the time of publication the information was not confidential and its disclosure did not damage the public interest. The Crown suffered no measurable loss and did not recover damages. However, an account of Blake’s profit was ordered.

The main argument against the availability of such a remedy for breach of contract was uncertainty – when would it be granted? It was said, with some force, that this would have an unsettling effect on commercial ­contracts. Lord Nicholls recognised that the usual remedies, plus the characterisation of some contractual obligations as fiduciary, normally provided an adequate response, but in “exceptional cases” an account of ­profit could be ordered. The court would have regard to all circumstances before making such an order. Two features provided guidance as to the appropriateness of such relief: did the claimant have a legitimate interest in preventing the defendant’s profit-making activity; and was the undertaking breached closely akin to a fiduciary obligation. ­However, no fixed rules were established.

Subsequent cases tried to identify what constitutes ’exceptional circumstances’. The claims for an account usually failed, but the courts demonstrated willingness to award so-called restitutionary damages, building on Wrotham Park Estate Co v Parkside Homes (1974). In Wrotham the claimant sold land to the defendant subject to a term ­barring development, which was breached. The claimant accepted that the value of its estate had not been diminished and it would not have agreed to relax the term if it had been asked to consent. Nevertheless, the defendant had to pay as damages “such sum as might reasonably have been demanded by the plaintiffs… as a quid pro quo for relaxing the covenant”. The sum awarded was equal to 5 per cent of the defendant’s anticipated ­profit. This approach was developed in Experience Hendrix v PPX Enterprises (2003). In Hendrix the breach of contract was not exceptional. The claimant admitted it could not acquire evidence to quantify any financial loss. However, the defendant had to pay damages representing the amount the claimant could reasonably have demanded for a ­relaxation of the relevant contractual rights.

Mr Justice Sales in Vercoe reviewed the authorities and summarised the underlying principles governing the court’s choices:
#Where the claimant’s rights are of a ­particularly powerful kind and its interest in full performance is recognised as being ­particularly strong, there may well be a ­tendency to recognise that the claimant should be entitled to a choice of remedy.

#This choice was between damages and an account of profit, and also possibly between different bases of calculation of damages, such as loss actually suffered, or to a ­notional reasonable agreement to buy the necessary release.

#This choice may more readily be found to be appropriate in cases involving ­infringement of property rights.

#It may be more appropriate to award an account of profit where the right in question is of a kind where it would never be reasonable to expect that it could be bought out for some reasonable fee, so that it is deserving of a particularly high level of protection. This was illustrated by the promise to keep state secrets in Blake and rights to protection under established fiduciary relationships, where trust between the parties rather than a purely commercial relationship is central.

#Where the court is not dealing with infringement of a right that is clearly proprietary in nature, and there is nothing exceptional to indicate that the defendant should never have been entitled to adopt a commercial approach in deciding how to behave in relation to that right, the appropriate ­remedy is likely to be an award of damages assessed by reference to a reasonable buyout fee rather than an account of profit.

#The law will control the choice between these remedies, having regard to the need to strike a fair balance between the interests of the parties at the remedial stage, rather than leaving it to the claimant’s discretion.

Parabola v Browallia CAL

Exemplary damages are discretionary and awarded in very special circumstances so as “… to uphold and vindicate the rule of law because it makes clear that the courts will not tolerate such conduct”. An award of ­exemplary damages can only be made in three categories of case, one of which can apply to commercial disputes: “… the defendant’s ­conduct has been calculated by him to make a profit for himself, which may well exceed the compensation payable to the plaintiff.” Recently there has been a renewed interest in claiming these damages, but no real ­enthusiasm in the High Court to award them. Mr Justice Flaux in Parobola said he had ­considerable sympathy with the view that exemplary damages are anomalous and should be abolished. The common law now provides much more appropriate remedies: restitutionary damages or compound interest or indemnity costs. The claim in front of him was in deceit and against a defendant liable only on the basis of vicarious liability. He had “serious doubts” as to the appropriateness of an exemplary damages award in such a case. Moreover, exemplary damages are normally limited to between £10,000 and £15,000 and it was “faintly absurd” to suggest, in a case where the claimant would recover substantial compensatory damages, that the additional award of £15,000 would express the court’s outrage and displeasure at the perpetrated fraud. He refused to make any order.

As both cases demonstrate, the process of establishing the underlying principles in this area is ongoing, although there is a marked lack of enthusiasm at first instance for awarding exemplary damages.

Marion Smith is a barrister at 39 Essex Street