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Non-competes: following the Voodoo Chile

After the delightfully named Experience Hendrix case in 2003, the more recent case of Morris-Garner and Another v One Step (Support) Limited is likely to make damages for breaches of non-competes, non-disclosure agreements (NDAs) and exclusivity agreements, more likely in the context of a sale of a business or of a company. Corporate solicitor Andrew Stilton analyses the case and its consequences in this Keynote article.

In this particular instance (which resulted primarily from an apparently deliberate breach of a set of non-compete agreements) the court awarded what has become well-known as Wrotham Park damages (from the case ofWrotham Park Estate Company Limited v Parkside Homes Limited [1974] 1WLR 798) Wrotham Park damages may be awarded in certain limited cases, usually where negative obligations have been breached.

The case of Wrotham Park concerned a breach of a restrictive covenant, where the defendant built houses on a plot of land without obtaining consent from the plaintiff. There was no measurable reduction in the value of the land with the benefit of the covenant but, rather than require the houses be demolished, the court awarded damages representing “such a sum of money as might reasonably have been demanded by the plaintiffs from [the defendant] as a quid pro quo for relaxing the covenant.

An award of Wrotham Park damages involves the court conducting a hypothetical negotiation between the parties over a price for the release of the relevant contractual obligation. The court will then award damages against the party in breach equivalent to the sum it believes the other party would have accepted to give up its rights.

For the purposes of this negotiation, we will assume that both parties will act reasonably, and the fact that, in reality, one or both parties would have refused to make a deal is irrelevant.

Let us also consider the extent to which it should take account of events that occurred after the hypothetical negotiation would have taken place: for example, how profitable the outcome has proved for the contract breaker.

It could be tempting to think that customers might not remain loyal to a business under a new ownership and that the buyer will not suffer any financial loss as a result of the seller’s breach of the non-competes. But the Morris-Garner case suggests that those who deliberately choose to ignore non-competes and NDAs run the risk of claims for substantial damages, even where it may be difficult for the other party to prove financial loss.

A similar conclusion was reached in the 2010 Pell Frischmann case, where one party had granted exclusivity to another, with a view to a joint venture between them.

Negotiations broke down to an extent where the parties seem to have positively loathed each other and so the party who had originally granted exclusivity went off and negotiated a deal with somebody else.

Although, in this case, it was inconceivable that the parties would have agreed terms for a joint venture between them and the “innocent” party appeared to have suffered no financial loss, the court awarded Wrotham Park damages based on what the other party might have expected to have paid in order to buy its way out of the exclusivity it had granted.

The moral of this story then is that, like non-competes and NDAs, exclusivity agreements may have more teeth than you might think!

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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