Damages based on breaching party’s gain
PELL FRISCHMANN ENGINEERING v BOW VALLEY (PC) [2009]
This case was an appeal to the Privy Council (PC) from the Jersey Court of Appeal so it carries a significant degree of authority. It concerned the level of damages which might be awarded in exceptional cases where little or no direct financial loss has been suffered. Ordinarily, damages are awarded to compensate the innocent party according to the amount of its financial loss. However, this case is a reminder that sometimes it is more appropriate for damages to be awarded on the basis of the benefit gained by the party in breach of contract.
facts:
P seemed to have secured exclusive negotiating rights for an oil field exploitation project with N. P then entered into confidentiality agreements with B and T as prospective members of a consortium to undertake the project. The agreements included provisions B and T would work exclusively with P and would not approach N without P's consent. The negotiations between P and N eventually collapsed. P, B and T began discussions as to buy-outs but no contract was concluded. P then lost the exclusivity with N and instead, B and T contracted directly with N. P issued proceedings against B and T alleging, amongst other things, breach of confidence.
decision:
- The PC considered when damages might be awarded on the basis of the benefit
gained by the breaching party - such as where there is a breach of a restrictive
covenant as in this case - rather than the financial loss of the innocent
party.
- In particular, the PC endorsed the view that damages should be assessed in such cases considering a hypothetical negotiation between two willing parties “acting reasonably” and the price which might have been paid in return for agreement to waive the restrictive covenant in question, even though one or more of the parties would, in reality, have refused to conclude a deal. Evidence of the actual negotiations and the price under discussion at that time (if any) was relevant when considering the value for the possible release of the covenant, albeit no deal was actually finalised. However, it is certainly not conclusive evidence.
- Damages of $2.5m were awarded even though by the time of the hypothetical negotiations P had lost all possibility of itself being awarded the project. The damages therefore did not reflect the value of P’s interest in the project since there was no such value. Instead, they reflected contractual rights of a negative nature, namely to stop B and T from negotiating directly with N and using confidential information for that purpose. As the PC said “even negative rights must be bought out at a proper price”. The PC found that the Jersey Courts had significantly understated the commercial value of P’s veto.
points to note:
- This case re-affirms that an effective remedy in damages may be available
where it would generally be difficult to show an obvious and quantifiable
financial loss. Contracting parties ought to bear this in mind.
- Some indication was also given as to how the level of damages should be calculated although, unfortunately, the judgment gives little or no guidance as to how the PC arrived at the figure finally awarded.