Infringement could prove to be costly by sdfsb346f

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									PRACTICE&LAW                Article co-written by Matthew Baker and Keith Shaw of Pinsent Masons reprinted with permission of Estates Gazette




                                  Infringement
                                  could prove
                                  to be costly
                                  Damages can sometimes be based upon the
                                  wrongdoer’s consequent profit from a breach,
                                  in which case, as Matthew Baker and Keith Shaw
                                  explain, the costs could potentially be high

                                  Should damages be assessed on a common             Measures of damages
                                  law basis according to a claimant’s loss           In Wrotham Park, the offending party
                                  or with regard either to a defendant’s gain or     developed land in breach of a freehold
                                  the sum that a claimant would have accepted        covenant. Brightman J upheld the validity of
                                  to waive the breach of covenant?                   the restrictive covenant, and ordered the
                                     In Lunn Poly Ltd v Liverpool & Lancashire       developer to pay damages not by reference
                                  Properties Ltd [2006] EWCA Civ 430;                to the injured party’s negligible loss but
                                  [2006] 25 EG 210, Neuberger LJ confirmed           with regard to the sum that the injured
                                  that damages for breach of covenant can            party might reasonably have demanded for
                                  be awarded in one of three ways, namely:           relaxing the covenant, namely to “buy out”
                                  (i) as compensation for losses resulting           the right.
                                  from the breach but not for the loss of the          In AMEC Developments Ltd v Jury’s Hotel
                                  covenant; (ii) buy-out damages – a sum             Management (UK) Ltd [2001] 07 EG 163, the
                                  based upon what reasonable people in the           offending party began works in breach of a
                                  position of the parties would have negotiat-       covenant prohibiting development. Mann J
                                  ed for a release of the right (that is, for loss   followed Wrotham Park, holding that it was
                                  of the covenant); or (iii) account-for-profits     necessary to consider the sum that would
                                  damages – a sum based upon an account              have been reached in negotiations between
                                  of the defendant’s profit arising from
                                  the breach.
                                     In “The appropriate circumstances” (EG          ORIGINAL WROTHAM PARK
                                  12 August, p77), Alison Rivers discussed           LIMITATIONS
                                  how Wrotham Park Estate Co Ltd v Parkside           Damages are capped at the sum that
                                  Homes Ltd (1973) 229 EG 617 has been               the injured party might reasonably
                                  applied and extended and how, in excep-            have demanded in return for granting
                                  tional circumstances, an account-for-profits       the wrongdoer permission to carry out
                                  measure of damages could be obtained.              the unlawful act
ILLUSTRATIONS: SIMON PEMBERTON




                                     This article questions when each measure         Application of the decision is restricted
                                  of damages is likely to be awarded and asks:       to cases involving property
                                  should the party in breach concentrate less         Power to award damages is in lieu of an
                                  upon what damage it will cause to the in-          injunction and the breach must therefore
                                  jured party and more upon what (financial)         be capable of injunctive relief
                                  damage it may cause to itself?


                                 170 | Estates Gazette 28 October 2006
Development 174
Pathfinder 176
Agricultural tenancy 177
Case summaries 178
Law report 180




         28 October 2006 Estates Gazette | 171
PRACTICE & LAW




 the parties had they been making reasonable                                                       discretionary according to the circumstances.
 use of their respective bargaining positions.     COMMON GUIDELINES                               He further noted that the decision should be
    In Lunn Poly, the Court of Appeal upheld a      The injured party will want to agree to       taken when common law damages would be
 first instance decision awarding damages,         a relaxation/variation of the covenant if       an inadequate remedy and when, without
 not in accordance with normal compensato-         the offending party is willing to pay an        such an award, the innocent party would
 ry principles, but on the basis of the sum that   appropriate price                               obtain no “just recompense” for the breach.
 the parties would have agreed as a buy-out         The court must consider what                     Although helpful in determining what
 amount in a hypothetical negotiation.             sum would have been arrived at in               constitutes the hypothetical negotiation,
    In Attorney-General v Blake [2001] 1 AC        negotiations between the parties had            these decisions give no guidance on how to
 268, the government sought to prevent a           each been making reasonable use of their        apply these principles or how percentage
 former agent and spy from benefiting from         respective bargaining positions without         figures relating to the anticipated profits of
 the sale of his autobiography. This contra-       expecting unreasonable amounts                  the offending party are to be used to deter-
 vened undertakings that he had given under         The deal has “to feel right” and be a         mine the sum that parties would have
 the Official Secrets Act 1911, and which were     sum that the offending party would be           agreed in consideration of the covenant
 incorporated into his employment contract.        willing to pay in the circumstances (this is    being relaxed. The amount of damages that
 The court held that Blake was required to         not a Stokes v Cambridge [1961] 180 EG          might be awarded on this basis remains an
 account for the profits earnt by his book,        839 ransom-type situation)                      unknown quantity.
 which, in breach of contract, recounted his        The outcome of the hypothetical
 activities while working as a spy. Similarly,     negotiation must be determined by               Enhanced damages awards
 in Esso Petroleum Co Ltd v Naid Ltd [2001]        reference to the parties’ knowledge at          The uncertainty surrounding damages
 All ER(D) 324, Esso obtained an order for an      the time negotiations would have taken          awards can best be illustrated with reference
 account-for-profits award against a dealer        place (that is, before the breach of            to case law in which actual awards were
 that had refused to abide by the prices set by    covenant)                                       made or judicial indication was given as to
 Esso under its pricewatch scheme.                  Damages are to be assessed at the             what award may have been appropriate in
    Although an award of Wrotham Park              date of the breach                              the circumstances.
 damages was originally regarded as being           The fact that the innocent party would          Damages on a buy-out or account-for-
 subject to three important limitations (see       never have agreed to any relaxation is          profits basis can either be in lieu of an
 box on following page), it is now commonly        irrelevant as is the conduct of the             injunction, or in addition to an injunction in
 felt that the effect of Blake was to remove the   offending party as to the breach                order to reflect the benefit obtained by the
 first two Wrotham Park limitations, notwith-                                                      wrongdoer up to the grant of an injunction
 standing that Blake was concerned with an                                                         (that is, from the pre-injunction breach).
 account-for-profits award.                        to when a case could be considered               In lieu of an injunction
    Further, the decision in Experience Hendrix    “exceptional”. In Experience Hendrix,           In both Blake and Esso, an award accounting
 LLC v PPX Enterprises Inc [2003] EWCA Civ         Mance LJ identified three distinguishing        for 100% of the profits generated by the
 323; [2003] 1 All ER (Comm) 830 (a case           characteristics in Blake that appeared to       breach was made in lieu of an injunction
 involving the breach of a settlement agree-       make the decision exceptional; namely that      (although it is not clear whether this related
 ment concerning commercial licensing              it concerned national security, the breach      to the wrongdoer’s gross or net profits).
 obligations) is regarded as having removed        involved secret information and Blake’s         With regard to buy-out damages in lieu of
 the third limitation. It suggested that injunc-   position was akin to a fiduciary. These seem    an injunction, 5% was awarded in Wrotham
 tive relief is not a precondition to an           to have been case-specific circumstances,       Park and was expressed as a certain percent-
 enhanced damages award, and that the              given that none of these characteristics was    age of the anticipated profit. In Jaggard
 latter can be awarded in addition to (and not     present in Esso yet an account-for-profits      v Sawyer [1995] 13 EG 132, £6,250 was
 merely in lieu of) an injunction in order to      remedy was awarded.                             awarded as the deemed buy-out amount,
 reflect any pre-injunction breach. In theory,        If an award of buy-out damages is deemed     and, in AMEC, £350,000 was awarded,
 therefore, buy-out damages or damages             to be appropriate, how will the court deter-    being the sum that the judge considered the
 accounting for the profits of the offending       mine the amount that the offending party        parties would have agreed to release the
 party are potentially available where such an     would have paid to the injured party to agree   restrictive covenant.
 award can be justified or where common law        to a relaxation of the covenant/waiver of        In addition to an injunction (reflecting a
 damages would not be adequate.                    the breach?                                     pre-injunction breach)
                                                      In AMEC, Mr Anthony Mann QC consid-          Awards in this regard are scarce. Awards of
 Awarding damages                                  ered the effect of a hypothetical negotiation   2% in Experience Hendrix and 25% in Crest-
 Following Wrotham Park, case law indicates        and noted a number of features that seem to     fort Ltd v Tesco Stores Ltd [2005] EWHC 805
 that judges are increasingly willing to assess    be of general application. In World Wide        (Ch); [2005] 37 EG 148 were suggested as
 damages for breaches of covenant on a buy-        Fund for Nature (formerly World Wildlife        being worthwhile sums for agreeing to a
 out basis, which is now commonly viewed           Fund) v World Wrestling Federation Enter-       relaxation of the covenant (namely a buy-
 as the primary basis for assessing damages.       tainment Inc [2006] EWHC 184 (Ch) (a case       out of the right) from the point of breach up
 It appears that, for damages to be awarded        concerning a long-running dispute over          to the grant of an injunction. Both amounts
 on an account-for-profits basis, the injured      commercial rights to American wrestling),       were made with reference to the wrongdoer’s
 party should have a “legitimate interest” in      Peter Smith J considered the guidelines in      profits. There is no case law on an account-
 preventing the unlawful profit-making ac-         AMEC and set out criteria for quantifying       for-profits award of damages reflecting
 tivity of the offending party. A deliberate in-   buy-out damages.                                the profit that was made by the wrongdoer
 tention on the part of the offending party to        (The table above itemises the common         pre-injunction.
 profit from the breach would also seem to be      guidelines that have been established by
 a determinative factor.                           case law concerning the nature and assump-      Application to property law cases
    Lord Nicholls, in Blake, made it clear that    tions of a hypothetical negotiation.)           The original Wrotham Park decision may
 the account-for-profits measure will be              Peter Smith J referred to the court’s        have been seen as opening the door to
 awardable only in exceptional circumstanc-        flexibility when calculating buy-out damag-     negotiating greater damages for an innocent
 es, but he failed to provide any guidance as      es. He made it clear that such an award is      party. However, the principle as modified


172 | Estates Gazette 28 October 2006
and extended post-Blake would seem to give
lawyers greater scope for seeking to extract
the entire profit of a breaching party.
  In Crestfort, the tenant granted an under-
lease in breach of covenant. Lightman J
granted an order requiring the surrender of
the underlease, and also awarded damages
based upon the sum that the landlord might
reasonably have demanded at the date of the
breach for relaxing the covenant against
underletting, and relating to the period dur-
ing which no injunction was in force. This
decision, indicating that the breach could be
brought to an end as well as damages being
awarded, supports Experience Hendrix.

Further applications                             succeeded in evidencing anactiona-                 Conclusion and implications
Wrotham Park has also been applied in cases      ble interference to his rights of light, but the   The distinction between buy-out damages
that have involved a breach of a collateral      judge at first instance determined that the        and the remedy of account-for-profits dam-
contract. In Lane v O’Brien Homes Ltd            claimant should be awarded damages, to be          ages is that the former is based upon what
[2004] EWHC 363 (QB), the court held that        assessed, in lieu of an injunction. However,       the parties (hypothetically speaking) would
the proper approach to the assessment of         on 6 September 2006, the Court of Appeal           have agreed in order for the covenant to be
damages was the same as that applied in          reversed the first instance decision and           relaxed. The latter is based upon the actual
cases concerning restrictive covenants in        granted a mandatory injunction forcing the         tangible benefit that the offending party has
which a similar restriction was contained.       developer to tear down part of the scheme.         received as a consequence of its breach of
   One particular area in which the develop-       If the circumstances are exceptional, a          covenant. Both, however, refer to the benefit
ing case law will apply is that concerning the   damages award on an account-for-profits            to the offending party in ascertaining the
infringement of rights to light. In Carr-        basis may be awarded in future. Many were          quantum of the award (what it was worth to
Saunders v Dick McNeil Associates Ltd (1986)     disappointed that Midtown settled before           it to do a deal to agree to relax the covenant
279 EG 1359, Millett J, having reviewed          the assessment of damages came before the          in the given circumstances or what actual
Wrotham Park and other authorities, held         court. It is possible, however, that the ruling    benefit it obtained) rather than to the loss
that the same approach should be taken           in Regan will be reversed by the House of          suffered by the innocent third party as a
where damages are awarded, in lieu of a          Lords. Damages in lieu of an injunction            result of the breach.
mandatory injunction, for the interruption       would then have to be assessed and, given             In the spirit of Wrotham Park and Blake,
of the right to light. He therefore took         that the development causes a significant          the developing principles are beginning
account of the servient owner’s bargaining       loss of light to a long leaseholder in actual      to be applied in other circumstances; for
position and the amount of profit that the       occupation, an account-for-profits award of        instance, for breaches of collateral contracts
defendant would make in the development          damages could be made. This would break            as in Lane. In theory, buy-out damages or
of its site in the sum of £8,000.                new ground and could throw a shadow over           damages accounting for the profits of the
   Similarly, in Marine & General Mutual Life    future developments.                               offending party are potentially available in
Assurance Society v St James’ Real Estate Co                                                        any tort or contract action where such an
Ltd [1991] 38 EG 230, the judge applied the                                                         award can be justified.
principles of Carr-Saunders and Wrotham          “EXCEPTIONAL” FACTORS                                 Property owners that suffer an infringe-
Park and took into account the claimant’s         The breaching party being in a position          ment of a legal right should not look only at
bargaining position. He awarded damages          of trust (e.g. trustee or fiduciary capacity)      what loss they can show. If a developer or
that might reasonably have been demanded         making it more serious and accountability          third party will make a profit from its breach
for relaxing the restrictive covenant in the     of the offender greater                            (or agreeing to a relaxation of a covenant
sum of £18,000.                                   The breach being of a right/obligation           could have come at a price) there will be
   In Deakins v Hookings [1994] 14 EG 133,       expressly agreed between the innocent              scope to claim damages on an enhanced
Judge Roger Cooke QC considered that             and offending party (possibly                      basis, irrespective of whether the breach is
Wrotham Park and similar authorities             contractually) as opposed to a                     capable of injunctive relief.
applied in this case, which dealt with an        pre-existent legal right                              Lawyers therefore need to be aware of the
infringement to the claimant’s rights of light    The breach being a matter of public              potential for such claims and adjust their
from the construction of a rear extension.       interest or relating to issues of security         tactical strategy accordingly in order to
   All these cases demonstrate that the newly    or national importance rather than a               maximise (or minimise, as appropriate) the
established Wrotham Park assessment of           private matter                                     potential damages that may be claimed in
damages (as subsequently modified by              The offending party having had a                 any given action. Developers, and those who
Blake) is likely to have far-reaching            duplicitous and calculated attempt to              have previously thought little or nothing of
implications in rights to light claims.          make profit by the breach with no thought          infringing other parties’ property rights may
   In Midtown Ltd v City of London Real          to the innocent party’s rights                     find it prudent in future to concern them-
Property Co Ltd [2005] EWHC 33 (Ch);              The injured party having a “legitimate           selves less with what loss the injured party
[2005] 14 EG 130, the court determined that      interest” in preventing the unlawful profit        may suffer and ask themselves an entirely
the injured parties should be entitled to        making activity of the offending party             different question; who will suffer the
damages for an actionable nuisance, but           The seriousness of the breach having             greater (financial) damage as a result of
before the hearing to assess damages came        regard to the “purpose” of the covenant            any breach?
before the court the parties agreed a settle-     Other remedies being unavailable
ment. In Regan v Paul Properties DPF No 1        or inadequate                                      Matthew Baker is a partner and Keith Shaw is
Ltd [2006] EWHC 1941 (Ch), the claimant                                                             a solicitor at Pinsent Masons


                                                                                                                    28 October 2006 Estates Gazette | 173

								
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