Monday, May 14, 2012

Wrotham Park and the scope of the "hypothetical negotiation" measure of damages

Perhaps the most obvious instance of the sophistication of English commercial law is the range of remedies it has, depending on the precise nature of and tailored to each cause of action. The most common remedy is, of course, compensation for loss, which attempts to place the claimant in the position in which he would have been had the term (in the case of contract) not been breached; an award of restitution for unjust enrichment is also well-known, with the difference that this “disgorges” the defendant’s gain, as opposed to compensate the claimant’s loss. The English courts have also made an award of restitution (ie stripping the defendant’s gains) for wrongs.
An award that does not easily fit these categories is what is known as the Wrotham Park award of damages. The remedy was devised to deal with a problem that, if not well-known, is by no means uncommon: a defendant breaches a right a claimant has and derives substantial profit, without, however, causing any financial loss to the claimant. An action for compensation for breach of contract would ordinarily only lead to nominal damages; an action for restitution for unjust enrichment would ordinarily fail because the enrichment, if any, would not be “at the expense” of the claimant. In those cases, which most often arise in relation to trespass of rights in land, the English courts have held that the claimant is entitled to the price a reasonable man would have paid him for authorising what the defendant in fact did. This means, effectively, that the court awards the claimant what he would have received in the “hypothetical negotiation” between the parties before the trespass began. In this negotiation, it is not open to the defendant to plead that he would not have entered into the agreement (for the object is to ascertain the value of the right he breached), but it is open to the defendant to show that he had a “trump card” – ie, an alternative means of doing what he did, which would naturally reduce the amount he would have paid the claimant for obtaining permission.  
As the name suggests, this award acquires its name from the well-known decision of Brightman J. in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. In that case, the claimant was the beneficiary of a covenant in respect of certain land that prohibited any buyer from undertaking any development work without its permission. This covenant was for the benefit of the adjoining estate owned by the claimant and it was not disputed that it ran with the land. Parkside Homes, a developer, began to construct homes on the land despite a warning from Wrotham Park that it was the beneficiary of the covenant. Wrotham Park brought proceedings for an injunction, but did not seek interlocutory relief because it did not wish to give a cross-undertaking in damages. The suit was finally decided in its favour, Brightman J. holding that what Parkside did constituted a breach of covenant. Since, as Brightman J. held, a mandatory injunction would have been inappropriate because it would have led to the demolition of a number of homes, it was necessary to consider what damages could be awarded in substitution of the injunction. Brightman J. referred to a number of cases in which such an award had been made, of Watson, Laidlow & Co. Ltd. v Pott, Cassels and Williamson (1914) 31 RPC 104, is especially instructive. In that case, a patentee brought a suit for infringement in respect of territory in which it was shown that he could not have effectively competed. To the argument that the patentee could therefore not have an award of damages, Lord Shaw said this:
…wherever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as I say, either of price or of hire. If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish or without his knowledge, rides or drives it out, it is no answer to A for B to say: ‘Against what loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is the better for the exercise.’ I confess to your Lordships that this seems to me to be precisely in principle the kind of question and retort which underlay the argument of the learned counsel for the appellants about the Java trade.… in such cases it appears to me that the correct and full measure is only reached by adding that a patentee is also entitled, on the principle of price or hire, to a royalty for the unauthorised sale or use of every one of the infringing machines in a market which the infringer, if left to himself, might not have reached
Readers will notice that this award requires the court to construct a “hypothetical negotiation” between the parties, and for that purpose, a difficult question that had arisen was the scope of the “trump card” rule. The “trump card” rule reflects common sense – the amount a defendant with no alternative but to trespass would pay is higher than the amount a defendant with several other means of achieving his object would pay. But is it open to a defendant to say that he could have achieved the same object without infringing the claimant’s right, and therefore that only nominal damages can be awarded? At first instance, Judge Seymour recently said yes. Reversing, the Court of Appeal has explained the scope of the rule, in London Borough of Enfield v Outdoor Plus Limited.
This case is of particular interest because of the somewhat peculiar facts at play. Simplifying it for the purpose of analysis, Outdoor entered into an agreement with a Mr Shah to erect an advertising hoarding on his premises. Inadvertently, the concrete support for the hoarding (though not the hoarding itself) was erected on adjoining land which belonged to the London Borough of Enfield, the claimant. This went on for more than ten years and Outdoor made significant profit by entering into agreements with third parties to display advertisements. Once this was discovered, the Borough brought an action for an award of the reasonable licence fee Outdoor would have had to pay the Borough had the use of its land for erecting the support for the hoarding been authorised. At first instance, Judge Seymour accepted the defendant’s case that it would have paid nothing because it could have erected the support on Mr Shah’s land. At first sight, this seems analogous (and perhaps is) to the reasoning of Patten J. in Sinclair v Gavaghan [2007] EWHC 2256, and a straightforward application of the trump card. But what the defendant was really saying was that it would not have trespassed – which it is not open to it to say. Henderson J., with whom Mummery and Tomlinson, JJ., concurred, says this:
I fully accept that any ability on the part of a trespasser to achieve the object of the trespass by alternative means is a factor which must be taken into account in the hypothetical negotiation. The alternative must, however, be one which is consistent with the trespass and which can co-exist with it.  An alternative cannot be taken into account if it would eliminate the trespass itself, because that would again negate the very basis of the exercise. In Sinclair v Gavaghan there was no conceptual difficulty about taking into account the alternative means of access to the Yellow Land which were available to the defendants, because they were true alternatives to the more convenient route through the Red Triangle, and the defendants could therefore pray them in aid when notionally negotiating a fee for use of the Red Triangle access.  By contrast, what the defendants wish to do in the present case is to rely on the possibility of placing the hoarding entirely within No. 67, not as an alternative to the admitted trespass, but as a means of eliminating it.  Such a procedure cannot be legitimate, because it would subvert the basis of the negotiation.
In short, the alternative is relevant to the question of valuation, but is not a tool by which the defendant can argue (in effect) that it would have chosen not to trespass – the object of the exercise is not to determine if the defendant would have trespassed (for it did), but the reasonable value it would have had to pay the claimant had it chosen to do what it did, with prior authorisation.


Renganath said...

Wouldnt any such "alternative present"/trump card argument, by definition, ELIMINATE the breach? So is there a real difference between 'alternative' and 'elimination' ? The point that this can't justify nominal damages is of course well taken, for else the judicial exercise would be self-defeating.

V. Niranjan said...

Exactly. That is the point that the Court of Appeal makes - that the trump card is relevant only if it is consistent with the fact of the breach.

S. said...

Very interesting Niranjan, thanks for sharing.

A similar nature of analysis has perhaps also been undertaken in the context of PE attribution in tax cases i.e. when you determine the value that has been contributed to an offshore entity by activities onshore, do you measure it as being relative to the cost or impact actually suffered by the onshore entity or do you adopt a hazy "other standard" that ties in to the "value" derived by the offshore entity. Both are valid methods, though of course, the criteria you employ for choice of one against the other would differ depending on whether you're looking at a contract or tax context. I wonder if someone's done a law and economics analysis of this.