(D) NEGOTIATION DAMAGES

Despite the argument in the last section that the remedy which is awarded where the defendant has obtained a negative benefit in not negotiating with the claimant is properly analysed as restitutionary damages, the courts have gradually recognized a new type of remedy, relevant to particular torts, breach of contract and some equitable wrongs, which has regularly been characterized as compensatory.^[1] This pecuniary remedy has sometimes been described as user damages or the hypothetical bargain measure, but it is more elegantly called ‘negotiation damages’,^[2] which describes what the damages are providing for, namely what the claimant has lost and the defendant has gained by not negotiating with each other to release the claimant’s right. This is a court imposed hypothetical bargain which seeks to determine the price which the parties would reasonably have agreed for the claimant to allow the defendant to interfere with the claimant’s right.

The leading case on the award of this type of remedy is Wrotham Park Estate Co Ltd v Parkside Homes Ltd.^[3] The defendant had built houses in breach of a restrictive covenant and it was held that the appropriate remedy was damages in lieu of an injunction to demolish the houses. The claimant had suffered no obvious financial loss as a result of the breach, because the value of its land was unaffected by the development. The remedy which was awarded was assessed by reference to the price which the claimant would reasonably have demanded of the defendant to agree to a waiver of the covenant. This bargain was most definitely hypothetical because it was acknowledged that the claimant would not have agreed to relax the covenant on any terms.^[4] The price was assessed as five per cent of the defendant’s profit from building the houses. But it is unclear how this figure was determined. Further, it is unclear whether this hypothetical bargain measure should be characterized as compensatory, by reference to what the claimant had lost in not being able to bargain with the defendant,^[5] or restitutionary,^[6] by reference to what the defendant had saved in not having entered an agreement with the claimant.

A further crucial question concerns why the defendant in Wrotham Park was not liable to account for all of the profits which it had made as a result of the breach of the covenant. This was presumably because it could not be established that all of these profits derived from the breach, since most of the profits arose from the defendant’s contribution to the building of the houses. Consequently, the defendant could only have been liable to disgorge those profits which would not have been made but for the breach, but in a case such as this it is virtually impossible to determine which profits derived from the breach.

The formula which was adopted, namely five per cent of the profits, is artificial but it is at least realistic since it represents a reasonable sum which would have been demanded by somebody in the position of the claimant before agreeing to relax the covenant.

Subsequent cases have clarified how this reasonable sum should be assessed. In Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd⁹⁷ the Privy Council recognized that, when determining the reasonable sum to be paid by reference to a hypothetical bargain between the parties, it is to be assumed that both parties would have acted reasonably in the negotiations and the focus should be on how those negotiations would have progressed in the light of the information known to the parties at the time and the particular commercial context. In Vercoe v Rutland Fund Management Ltd⁹⁸ Sales J emphasized that the award of this measure of damages requires the court to assess a fair price for the release or relaxation of the claimant’s right, having regard to the likely parameters arising from ordinary commercial considerations, any additional factors which affect the just balance to be struck between the competing interests of the parties and the need to ensure that the relief awarded is not disproportionate to the claimant’s interest in proper performance of the obligation. In assessing the award it may be relevant to take expert evidence into account, especially where the hypothetical agreement is closely analogous to normal commercial bargains in an established market.⁹⁹ In Force India Formula One Team Ltd v 1 Malaysia Racing Team Sdn Bhd¹⁰⁰ Arnold J identified the following principles for the assessment of the negotiation measure:

• (1) They are to be assessed by considering what sum would have been arrived at in negotiations by the parties, had they been making reasonable use of their respective bargaining positions, having regard to the information available to them and the commercial context when the notional negotiation would have taken place.
• (2) It is irrelevant that one or both of the parties would not have agreed to the deal.
• (3) If there has not been any negotiation between the parties it is reasonable for the court to look at the eventual outcome and to consider whether this is a useful guide to what the parties would have thought at the time of their hypothetical bargain.
• (4) The court can take into account other factors, including delay on the part of the claimant in asserting his or her rights.

Whilst assistance has consequently been provided in determining the negotiation measure, by identifying relevant principles, a fundamental controversy remains as to whether they are properly considered to be compensatory or restitutionary. Whilst the dominant analysis now is that they are compensatory,¹⁰¹ that is not the universal view. In determining the appropriate characterization of this remedy, it is useful to consider the decision of the Privy Council in Horsford v Bird,¹⁰² where the claimant had sued the defendant for the tort of trespass to his land in Antigua. The defendant had built a boundary wall purportedly between his property and that of the claimant, but in fact the defendant had encroached on the claimant’s land and added 455 square feet to his property. The Privy ^{[7] [8] [9] [10] [11] [12]}

Council concluded that two types of pecuniary remedy should be awarded. First, mesne profits specifically to compensate the claimant for the defendant’s use of the claimant’s land until the point when the trial judge determined that damages should be awarded in lieu of an injunction to remove the wall. Secondly, damages in lieu of an injunction representing the price which the claimant would reasonably have demanded for the defendant to purchase part of the claimant’s property. This price was initially assessed by reference to the value of the land which the defendant had appropriated, but this amount was then doubled because the appropriation of the land had enhanced the amenity value of the defendant’s own property by providing vehicular access and a garden, plus the defendant had saved money in not having to demolish the wall and rebuild it along the proper boundary. This analysis is significant because there was explicit reliance on the benefit obtained by the defendant in committing the tort; this is consistent with a gain-based characterization of the remedy. But it is unclear what the justification was for doubling of the value of the land appropriated. This is unprincipled and close to a punitive award.

Analysing negotiation damages as a compensatory measure seems misplaced, and liable to mislead, where it is clear that the claimant would not have entered into the hypothetical bargain. For, where no bargain would have been made, how can the claimant have suffered loss from the failure to bargain? Surely in such circumstances it is more sensible to focus on the benefit which was actually obtained by the defendant in not paying the claimant to alter the settlement. The preferable approach is to treat negotiation damages as having both compensatory and restitutionary characteristics, since any bargain would take into account losses suffered by the claimant and gains made by the defendant. In many situations the appropriate characterization is of no significance since the loss suffered by the claimant is the same as the benefit obtained by the defendant in not making the bargain. But sometimes, as Horsford v Bird shows, the proper characterization will affect the amount awarded and it is therefore unhelpful to treat the negotiation measure as absolutely compensatory. In fact, this hybrid characterization of remedies has been previously recognized by the Privy Council in Inverugie Investments Ltd v Hackett^[13] in the context of assessing damages for the tort of trespass. In that case the defendant had excluded the claimant for 15 years from apartments which the claimant had leased from the defendant. During this period the defendant leased out the apartments itself, but only achieved an occupancy of about 40 per cent. It was held that damages should be assessed by reference to a reasonable rental value of all the apartments which the claimant had leased whilst the defendant was committing the trespass, after deduction of what the claimant had saved in not having to pay rent as a result of the defendant’s trespass. It was irrelevant that the premises had not been fully occupied. Crucially, the court said that the damages ‘need not be characterized as exclusively compensatory, or exclusively restitutionary; it combines elements of both’.^[14] This was not a case involving the negotiation measure, but does support a more sophisticated approach to the characterization of remedies. For in Inverugie the award could not be considered solely compensatory, because the claimant’s actual loss was confined to the income which it did not receive from the apartments. Since the defendant’s occupancy throughout the 15-year period was only about 40 per cent, which would presumably have been the same for the claimant, awarding the claimant the full rental value of the apartments would have overcompensated him. Similarly, the remedy could not be characterized as purely gain- based because, as the Privy Council recognized, the defendant had not derived a benefit from all of the apartments all of the time, but it was still expected to pay a reasonable rent for the use of the apartments throughout the period during which the tort had been committed.

Consequently, rather than a polarized debate about whether the negotiation measure is either compensatory or restitutionary, a holistic approach to the remedy should be adopted.^[15] The negotiation measure has restitutionary characteristics, but is not limited by them.

• [1] WWF—World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ286, [2008] 1 WLR 445, [59] (Chadwick LJ); Force India Formula One Team Ltd v 1 Malaysia Racing Team SdnBhd [2012] EWHC 616 (Ch), [381] (Arnold J). Cf Giedo van der Garde BV v Force India Formula One TeamLtd [2010] EWHC 2373 (QB), [528] (Stadlen J). See further p 448, below.
• [2] Primary Group (UK) Ltd v Royal Bank of Scotland plc [2014] EWHC 1082 (Ch). See also Lunn Poly Ltd vLiverpool and Lancashire Properties Ltd [2006] EWCA Civ 430, [2006] 2 EGLR 29, [14] (Neuberger LJ); ForceIndia Formula One Team Ltd v 1 Malaysia Racing Team Sdn Bhd [2012] EWHC 616 (Ch), [383] (Arnold J).
• [3] [1974] 1 WLR 798. 94 This was recognized by Brightman J, ibid, 815.
• [4] 95 This was how Megarry V-C explained the case in Tito v Waddell (No 2) [1977] Ch 106, 335, as did MillettLJ in Jaggard v Sawyer [1995] 1 WLR 269, 291 and Lord Hobhouse in Attorney-General v Blake [2001] 1 AC268, 298. See also Lunn Poly Ltd v Liverpool and Lancashire Properties Ltd [2006] EWCA Civ 430, [2006] 2EGLR 29, [29] (Neuberger LJ); Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45, [2011]
• [5] 1 WLR 2370, 50; Force India Formula One Team Ltd v 1 Malaysia Racing Team Sdn Bhd [2012] EWHC 616(Ch), [381] (Arnold J); One Step (Support) Ltd v Morris-Garner [2014] EWHC 2213 (QB), [104] (Phillips J).
• [6] Attorney-General v Blake [2001] AC 268, 283-4 (Lord Nicholls of Birkenhead); Experience Hendrix LLCv PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830, 839 (Mance LJ); Giedo van derGarde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB), [508] (Stadlen J).
• [7] [2009] UKPC 45, [2011] 1 WLR 2370, [49]. 98 [2010] EWHC 424 (Ch), [292].
• [8] 99 Ibid, [298]. 100 [2012] EWHC 616 (Ch), [386].
• [9] 101 One Step (Support) Ltd v Morris-Garner [2014] EWHC 2213 (QB), [104] (Phillips J). In Lunn Poly Ltd v
• [10] Liverpool and Lancashire Properties Ltd [2006] EWCA Civ 430, [2006] 2 EGLR 29, [29], although Neuberger LJ
• [11] considered the damages to be compensatory, he also described them as ‘quasi-equitable’ and concluded that,whilst they were normally to be assessed at the date of breach of the contract, the judge may select a differentvaluation date or take into account events after the breach when determining the award.
• [12] [2006] UKPC 3. See further GJ Virgo, ‘Hypothetical Bargains: Compensation or Restitution?’ (2006) 65CLJ 272.
• [13] [1995] 1 WLR 713. See further p 456, below.
• [14] Inverugie Investments Ltd v Hackett [1995] 1 WLR 713, 718.
• [15] SM Waddams, ‘Gains Derived from Breach of Contract: Historical and Conceptual Perspectives’ in DSaidov and R Cunnington (eds), Contract Damages: Domestic and International Perspectives (Oxford: HartPublishing, 2008), 192. Cf R Cunnington, ‘The Border Between Compensation, Restitution and Punishment’(2006) 122 LQR 382, 386.