DAMAGES IN LIEU OF AN INJUNCTION: HOW MUCH?
Published in [2001] The Conveyancer 453
A traveller is dying of thirst in the desert. A water-carrier approaches him. They both
know that there is an oasis on the horizon and that there are no other customers within
sight who need water. What price should the traveller pay for a glass of water?
Fortunately there happens to be a Chancery judge standing by in this busy corner of the
Sahara. He rules that the right price is the fair value of the water in the particular
circumstances of the case. The parties are puzzled by this Delphic pronouncement: Is the
fair value the traveller’s entire fortune or a few coins or something in between?
This is only a little less plausible than the task which the Court performs when equity in
its discretion refuses to grant an injunction and awards damages in lieu. The discretion is
well-established and was comprehensively reviewed by the Court of Appeal in Jaggard
v. Sawyer1. However, the Courts have tended to focus on the question of whether to
exercise the discretion, leaving the quantification to a few lines at the end of the
judgment. In Wrotham Park Estate Co Ltd v. Parkside Homes Ltd2 the damages were
quantified on the basis of 5% of the anticipated development profit whilst in Bracewell v.
Appleby3 the figure was 40%. Can we extract any broad guidelines which will enable the
cases to be reconciled and will enable practitioners to predict the level of damages when
advising clients?
The underlying rationale was explained by Brightman J. in Wrotham Park. He said that:
“a just substitute for a mandatory injunction would be such sum of money as might
reasonably have been demanded … as a quid pro quo for relaxing the covenant”.
1
[1995] 1 W.L.R. 269. The jurisdiction is embodied in section 50 of the Supreme Court Act 1981 which
reads: “Where the Court … has jurisdiction to entertain an application for an injunction or specific
performance, it may award damages in addition to, or in substitution for, an injunction or specific
performance.”
2
[1974] 1 W.L.R. 794.
3
[1975] Ch. 408. The actual figures were very similar: £2,500 in Wrotham and £2,000 in Bracewell.
1
In Jaggard v. Sawyer the Court of Appeal confirmed this approach. Bingham M.R. said
that the trial judge:
“valued the right at what a reasonable seller would sell it for. In situations of this kind
a plaintiff should not be taken as eager to sell, which he very probably is not. But the
court will not value the right at the ransom price which a very reluctant plaintiff
might put on it. I see no error in the judge’s approach to this aspect.”
The Court in that case held that the measure of damages was compensatory and that it
represented the fair price which the Defendant would have paid, not just as compensation
for past breaches, but also in return for a licence to commit future breaches. In real life
the Claimant probably has no desire to sell, but the Court is required to assume that the
parties would have concluded a deal. Unfortunately the reported cases do not provide
much guidance to enable a practitioner to predict whether the measure of damages in his
case will be nearer to 5% or to 40%. The only case which gives a detailed analysis of the
methodology is the recent unreported decision in Amec Developments Ltd v. Jury’s Hotel
Management (UK) Ltd4.
Let us suppose that the Defendant owns a field which is separated from the highway by
the Claimant’s ransom strip. As agricultural land it is worth £2,000. There is planning
permission for 10 houses, but the only practical means of access is across the Claimant’s
strip. The houses would be expected to sell for £100,000 each and the cost of
construction (including building costs, holding costs and developer’s profit) is £80,000
per house. On this basis the residual value of the land with the benefit of access would be
£200,000 (i.e. (£100,000 – £80,000) x 10). The uplift in value attributable to buying out
the Claimant is therefore £198,000. The ransom value might be about £60,000; at all
events that is the sort of figure which would be paid upon a compulsory purchase of the
ransom strip: Stokes v. Cambridge Corporation5. (I call this “Example A”.)
Now vary the example by imagining that the houses had already been built but not yet
sold. On that basis the amount invested by the developer would be £800,000. Not only is
this much more than in the previous example, but the percentage which the Defendant
was prepared to pay is probably also higher. The Claimant has the Defendant over a
4
[2001] 07 EG 163 (Anthony Mann QC sitting in the Chancery Division).
5
(1961) 13 P. & C.R. 77. See also Ward v. Medway [1994] 2 E.G.L.R. 32.
2
barrel, because the latter has already spent a large sum on development without having
secured his access (“Example B”).
The two ends of the spectrum
In order to establish the fair value in Examples A and B, the starting-point should be to
determine the two ends of the spectrum. The Claimant, even if he were a willing seller,
would demand at least as much as the value of what he would lose by reason of the
infringement. Conversely, the Defendant, even if he were a willing buyer, would never
pay more than the “ransom” value of what he is buying.
In Shelfer v. City of London Electric Lighting Co6, A.L. Smith L.J. laid down his “good
working rule” as to the circumstances in which equity would award damages in lieu of an
injunction. These included the fact that the injury to the Claimant’s rights was small, that
it was capable of being estimated in money and that it could be adequately compensated
by a small money payment. Although this should be a guideline and not an inflexible
rule7, it does mean in many cases that the Court, when considering the measure of
damages, will already have concluded that the Claimant’s loss is small. (This will not
always be true. There may be cases where an injunction is refused for different reasons,
e.g. because the Claimant has indicated a willingness to accept damages in lieu8.)
At the other end of the spectrum lies the ransom value. This typically arises where the
Defendant owns land which he cannot successfully develop without infringing the
Claimant’s rights, be it trespass across a “ransom strip” in order to gain access to the
highway or breach of a restrictive covenant or right of light. The conventional wisdom is
that the ransom value of the Claimant’s interest is worth somewhere between 30% and
50% of the uplift in value of the Defendant’s land attributable to the neutralisation of the
Claimant’s interest. This is worked out by comparing the value of the Defendant’s land
before and after. Although in theory the Defendant is not buying a release from the
covenant or a right to commit trespass (as the case may be), in practice that is the effect
of awarding damages in lieu. Once the Court has refused an injunction, there will be an
6
[1895] 1 Ch. 287 at 322-3.
See “Damages in Equity: A Study of Lord Cairns’ Act” by A.J. Jolowicz [1975] C.L.J. 224 and Jaggard
v. Sawyer (ibid.) at 287H.
7
8
Graham v. Gafford (see below).
3
issue estoppel which will prevent the Claimant and his successors in title from claiming
an injunction in the future9.
Let me now return to the hypothetical negotiations between Claimant and Defendant
which the Court is required to assume. The following matters need to be considered:
1. The nature of the parties and the properties.
2. The conduct of the parties.
3. The date of the hypothetical negotiations.
4. The outcome of the hypothetical negotiations.
The nature of the parties and the properties
The negotiations are hypothetical, but the Court will introduce as much reality as possible
by imagining the actual parties doing the negotiating against the actual matrix of facts. In
Wrotham Park the Court took into account two factors. The first was that the Claimant
company was the owner of a housing estate which was professing to enforce the covenant
for the benefit of other residents; this meant that it could not properly say that it intended
to extract any commercial value from the benefit of the covenant. The second was that
the breach took place over a very small area and had an insignificant effect on the
Claimant’s land. Although not spelled out, the point is presumably that the Defendant
might well have succeeded in having the covenant discharged or modified under section
84 of the Law of Property Act 1925. The conclusion to be drawn from this second factor
is that damages for licence to commit a breach of covenant might well be lower than
damages for licence to commit a trespass, since the parties would factor the impact of
section 84 into their hypothetical negotiations.
By contrast, in Bracewell v. Appleby the judge took into account the fact that the
Defendant was not a speculative builder but an owner-occupier who was building a house
for himself and would have been prepared to pay a relatively high price in order to obtain
a right of way across the Claimant’s land. He found that the appropriate figure was 40%
of the notional profit. The judge appears to have treated this as a pure Stokes v.
Cambridge case. This can be reconciled with Wrotham Park by saying that Stokes v.
9
Jaggard v. Sawyer ibid. at pp. 285H-287B per Millett L.J; A-G v. Blake [2000] 3 W.L.R.. 625 at 635A-G
per Lord Nicholls.
4
Cambridge represents the measure of damages unless there are special factors, but what
does not emerge from the judgment is how special the factors need to be in order to
justify a significant departure from Stokes v. Cambridge.
In Jaggard v. Sawyer the Court of Appeal approved the approach of the judge at first
instance without commenting on it in detail. Fortunately the first-instance judgment is
reported10. The judge found that the Defendant would have offered £5,000 for a right of
way and a release of the covenant, that the Claimant would have made a counter-offer of
£7,500 and that they would have compromised at £6,250. The judge said that this
represented between a quarter and a third of the net profit from the development. This is
broadly within the Stokes v. Cambridge parameters.
Graham v. Gafford11 concerned a breach of covenant by constructing and using the
premises as a riding school. Damages were assessed at £25,000. This was close to the
Claimant’s suggested figure, which was based on the income assumed to have been
generated by the business (it is not clear from the report what percentage of that income
this represents) or alternatively on the marriage value between the land and the facility
afforded by having the riding school (again, it is not clear what percentage of that
marriage value). These figures were chosen in preference to the Defendant’s suggestion
of £5,000 representing 5% of the cost of construction. Unfortunately the case is not of
much help in formulating a principle.
The conduct of the parties
In Wrotham Park the judge took account of the fact that the Claimant knew that the
Defendant was purchasing with a view to development; it nevertheless stood by and
allowed the Defendant to purchase its land without indicating that it intended to rely on
the covenant. There was insufficient material to amount to an estoppel, since the Court
held that a case for an injunction had been made out, but there was enough to affect the
issue of fairness in quantifying damages. The clear impression which emerges from the
judgment is that the judge viewed the Claimant’s attempt to claim an injunction as
nothing more than a device to extract a ransom from the Defendant. In all the
circumstances the damages were limited to 5% of the profit.
10
[1993] 1 EGLR 197 at 202, Judge Jack QC.
11
(1999) 77 P. & C.R. 73.
5
In Amec the Court held that conduct was irrelevant, on the ground that the Defendants
“while negligent if not cavalier, were still innocent”. This is likely to be the typical
situation. In most cases a Defendant who commits a flagrant breach will be liable to an
injunction12; in such a case the Defendant’s only way of avoiding an injunction is by
paying a ransom. Conversely, in a case where the Claimant has encouraged the
Defendant to develop his land, or has stood by and acquiesced in the development, the
Claimant’s right to an injunction might well be barred by laches or acquiescence or
extinguished by proprietary estoppel.
It is therefore likely that most cases involving damages in lieu of an injunction will fall
somewhere between these two extremes. In a typical case, the Defendant will have acted
wrongly to the extent of being negligent or even reckless, but not fraudulent, whilst the
Claimant will have been guilty of some delay or acquiescence, but not so great as to
extinguish his rights altogether. In such a case, conduct ought to be irrelevant.
However there may be exceptional cases where an injunction is refused for some reason
other than the Claimant’s delay or acquiescence. Such a case was A-G v. Blake13, where
the notorious traitor George Blake was required to account for profits from his book. In
such exceptional cases, conduct is relevant and may lead to the choice of a different
hypothetical date and to a different outcome to the hypothetical negotiations.
The date of the negotiations
The date at which the negotiations are deemed to have taken place is important for two
reasons. Firstly, it may be significant if the market is volatile. Secondly it is always
important to establish whether it is deemed to pre-date the Defendant’s development (i.e.
the distinction between Examples A and B above). In my view the right approach is to
take the date immediately before the Defendant needed the release of the Claimant’s
rights, unless there are reasons to the contrary (e.g. the parties’ conduct). It is this factor
which marks the most important distinction between damages in lieu of an injunction and
Stokes v. Cambridge. As we have seen, the purpose of the award of damages is to put the
Claimant in the same position as if he had been bought off by the Defendant. The time
when he ought to have been bought off is immediately before the Defendant started his
12
e.g. Wakeham v. Wood (1982) 42 P.& C.R. 40, where the Court ordered the Defendant to demolish a
house built in flagrant breach of a restrictive covenant.
13
[2000] 3 W.L.R. 625.
6
development. If the market value has risen between that date and the trial date, this ought
not to increase the damages, since otherwise the Claimant would be holding the
Defendant to ransom. Similarly, the fact that the Defendant has gone ahead and spent a
large sum on the development (as in Example B) should not result in increased damages.
However the corollary is that interest should be awarded to reflect the fact that the
Claimant has notionally been kept out of his money during the period between the
hypothetical date of negotiations and the trial14.
The opinion which I have expressed is consistent with all the cases except Bracewell. The
language used in Wrotham Park (“such a sum of money as could reasonably have been
demanded … as a quid pro quo for relaxing the covenant”) implies that the negotiations
took place before the development proceeded. In Amec the Court expressly held that the
relevant date ought prima facie to be the date immediately before the development.
By contrast, in Bracewell Graham J. based his figure on the difference between the
notional overall cost of the new house and its present-day value. That suggests that the
Court took a different view as to the relevant date. I respectfully suggest that this is
wrong: the only relevance of the fact that the Defendant has completed his development
is that the Claimant has him over a barrel, but that is the very thing which has to be left
out of account in determining a fair value.
In Blake15 Lord Nicholls said that the Claimant should “make a reasonable payment in
respect of the benefit he has gained”. This requires the Court to look ahead at what
actually transpired. As was pointed out in Amec, that is not inconsistent with saying that
the relevant date is the earlier date. It is simply an illustration of the principle that the
Court prefers reality to speculation16.
The figure which “feels” right
The most helpful analysis is to be found in Amec. In that case the Defendant bought a site
for £2.65 million with a view to building a hotel. The Claimant owned neighbouring land
with the benefit of a covenant which imposed a building line on the Defendant’s land.
The Defendant built a 265-room hotel which went 3.9 metres across the line. If the hotel
14
Interest was awarded in Graham v. Gafford (see below).
15
Ibid. at 637H.
16
cf. Charles v. Hugh James Jones Jenkins [2000] 1 W.L.R. 1278.
7
had been built behind the line, it would have had at least 240 rooms and possibly more,
but the evidence was inconclusive. No loss was suffered by the Claimant. The Court went
through the factors considered above and concluded with these important words:
“In any negotiation science and rationality get one only so far. At the end of the day
the deal has to feel right. Some of the numbers that have been suggested by Amec in
the course of this litigation, while perhaps intellectually justifiable, seem to me to be
way over the top of what Jury would have been prepared to pay, when set in the
context of the rest of the cost of this hotel.”
The Court held that the figure should be £375,000. This represented about 16% of the net
profit resulting from the increase from 240 to 265 rooms (i.e. the increase in value less
development costs). This equates to about a half or a third of the Stokes v. Cambridge
figure. To some extent the discount arose because the Defendant might have convinced
the Claimant that there was a chance of being able to build more than 240 rooms without
trespass; however it seems that the more significant factor in the case was that the full
Stokes v. Cambridge measure did not feel right.
The importance of Amec is that it is the first case which lays bare the reasoning process.
At the end of the day the jurisdiction is a discretionary one and the Courts are rightly
anxious not to fetter their discretion, but at the same time the exercise of standing back
and looking at the matter in the round should be done as a cross-check (as it was in Amec)
and not as a substitute for analysis.
Conclusion
As we have seen there is an air of unreality about the hypothetical negotiations which the
Court is required to perform in order to establish the quantum of damages payable in lieu
of an injunction. That is not a criticism of the approach laid down in Wrotham Park but
simply a reflection of the problems inherent in any judgment of Solomon. An analogy
might be drawn with a rent review where the nature of the premises or the lease is such
that nobody else (and sometimes not even the tenant) wants to bid for them17. This is
another situation in which the Court is required to suspend its disbelief by imagining
hypothetical negotiations which border on the fanciful. The difference is that, in the
context of rent reviews, there are a number of cases which recognise the artificiality of
17
Dennis & Robinson Ltd v. Kiossos Establishment (1987) 282 E.G. 857.
8
the exercise but nevertheless show what assumptions need to be made. Similarly, in the
matter currently under discussion, it may not be possible to overcome the inherent
artificiality of the exercise but the Courts should least set out some broad guidelines.
These would provide practitioners and litigants with a framework and dispel the
impression of palm-tree justice which might otherwise be given.
If the desert traveller has not died of thirst by the time he reaches the end of this article, I
hope that he will find following guidelines helpful:
1. The hypothetical negotiations should be deemed to have been conducted immediately
before the date when the Defendant first needed the licence, unless there are special
factors to the contrary (such as the Defendant’s conduct).
2. The starting point for the negotiations will usually be the Stokes v. Cambridge
measure, but it may not take much to persuade the Court to depart from it.
3. The Court will bear in mind that the purpose of the exercise is to come up with a
figure which feels right (i.e. represents what the parties are likely to have agreed, had
they in fact negotiated a licence) and which is fair. Both these goals require the Court
to look at all the circumstances, including the nature of the parties (e.g. whether the
Claimant would have demanded a full ransom), the nature of the property (e.g.
whether the Defendant stood a chance of having the covenant discharged or modified
under section 84), and the parties’ conduct (e.g. whether it would be unconscionable
for the Claimant to demand a ransom).
David Halpern
4 New Square
Lincoln’s Inn
London WC2A 3RJ
9