Should you be entitled to damages when no loss has been suffered?
Sometimes an employee has clients who give their work to an employer only because a particular employee works there, and the employer will lose those clients’ custom once the employee leaves.
Sometimes that employee has post-termination restrictions that prevent them from still dealing with those loyal clients after leaving, but they continue to deal with them anyway.
Strictly speaking, the employer has suffered no loss (because the clients would have gone anyway) but there has still been a breach of contract by the employee.
The idea of Wrotham Park damages is to address that situation: where an employee breaches their restrictive covenants, but the employer suffers no loss because of this.
The problem is that this situation is, essentially, a licence to kill (or at least a licence to breach a contract) that sits uncomfortably with upholding a contract and the principle of fair play.
The Supreme Court decided that Spring 2018 was the right time to return to this thorny issue, known as Wrotham Park damages.
In Wrotham Park, the principle of a “hypothetical bargain” or “licence fee” damages was introduced, by which the courts awarded damages based on the price the employee would have negotiated to be released from their restrictions.
This unrealistic and hypothetical after-the-event situation made commercial sense, but was untested and seemed to break the principle that you have to suffer a loss before getting damages.
Recently the Supreme Court, having reviewed this carefully, came to the conclusion that, generally, an employer can only claim for their financial loss.
The Supreme Court was also not prepared to move away from the idea that identifying the value of the loss is essential to an award of damages for breach of contract, but that if the breach by the employee can be shown to damage a valuable asset, or if a protected right is infringed, then “negotiating damages” can be used (an esoteric concept and one that’s likely to be limited to intellectual property and confidentiality rights being infringed by the departing employee).
As a result, an employer will either have to show loss of business or goodwill (which may be impossible) or seek damages based on the gain made by the departing employee by breaching their contract (restitutionary damages – another esoteric concept in employment law).
This leads us to questioning the price of love.
The reason is that, for the moment, an employee with a very loyal personal following can breach their restrictions and can still come out of the situation smelling of roses.
The solution for the employer is commercially romantic, rather than legal: never allow any one person in your organisation to own the client – companies must ensure that their key clients are looked after by a team of staff interacting with the client at various levels within the organisation; and make your clients love your organisation, not individuals.