Case alert - UK Supreme Court discusses "negotiating damages"

"Negotiating damages", and their relationship with the "user principle" were analysed in detail by the Supreme Court (UK) in One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [2018] 2 WLR 1353, [2018] 3 All ER 659.  All five judges held that, in appropriate cases, damages could be awarded for breach of contract by reference to the economic value of the right which had been breached, considered as an asset.

Lord Reed delivered the majority judgment.  His conclusions are summarised in paragraph [95], including the following:

  • Damages assessed by reference to the value of the use wrongfully made of property (sometimes termed “user damages”) are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or trespass).  The rationale of such awards is that the person who makes wrongful use of property, where its use is commercially valuable, prevents the owner from exercising a valuable right to control its use, and should therefore compensate him for the loss of the value of the exercise of that right.  He takes something for nothing, for which the owner was entitled to require payment.
  • Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights.
  • Common law damages for breach of contract are intended to compensate the claimant for loss or damage resulting from the non-performance of the obligation in question.  They are therefore normally based on the difference between the effect of performance and non-performance upon the claimant’s situation.
  • Where damages are sought at common law for breach of contract, it is for the claimant to establish that a loss has been incurred, in the sense that he is in a less favourable situation, either economically or in some other respect, than he would have been in if the contract had been performed.
  • Where the breach of a contractual obligation has caused the claimant to suffer economic loss, that loss should be measured or estimated as accurately and reliably as the nature of the case permits. The law is tolerant of imprecision where the loss is incapable of precise measurement, and there are also a variety of legal principles which can assist the claimant in cases where there is a paucity of evidence.
  • Where the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach, the normal inference is that he has not suffered any loss. In that event, he cannot be awarded more than nominal damages.
  • Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed.  The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset.  The defendant has taken something for nothing, for which the claimant was entitled to require payment.

Lord Sumption also allowed the appeal, based on conclusions that were “closely aligned” with Lord Reed’s [126]. However, Lord Sumption analysed the cases in a different way, re-categorising them under three heads, and suggesting that the law should develop coherently across the different categories [109]:

  • Category 1: Cases in which damages are not limited to pecuniary loss, because the claimant has an interest in the observance of his rights which extends beyond financial reparation. The invasion of property rights was “the classic” case in this category.
  • Category 2: Cases in which the claimant would be entitled to the specific enforcement of his right, and the notional release fee is the price of non-enforcement; and
  • Category 3: Cases in which the claimant has suffered (or may be assumed to have suffered) pecuniary loss, and the notional release fee is treated as evidence of that loss.  The paradigm case in this category was the award of damages for patent infringement, which could properly be measured by the notional royalty that would have been agreed as between a willing patentee and licensee, arrived at through the application of the principles in General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd[1975] 2 All ER 173 at 178, [1975] 1 WLR 819 at 825.

Lord Carnwath agreed with the reasons given by Lord Reed, rather than Lord Sumption’s “more radical” approach of re-categorisation [129].  He disagreed with Lord Sumption carving out the patent infringement cases (traditionally associated with the “user principle”) and placing them in a third category [133].  He preferred maintaining the established categories as analysed by Lord Reed, which were already well-recognised.