Plans to encourage British consumers and small businesses to pursue legal action against companies that breach competition law suffered a blow today after judges rejected the award of American-style damages in civil cases.

In a keenly-awaited judgment, the Court of Appeal upheld a longstanding principle of English law that states damages should be limited to compensation for a claimant's provable losses — not to strip a perpetrator of unlawfully-gained profits or to deter other potential wrongdoers.

The ruling will be welcomed by critics who fear that proposals put forward by the Civil Justice Council and the Office of Fair Trading (OFT) to encourage so-called private enforcement of competition law will lead to an explosion of costly US-style class action lawsuits.

Instead, lawyers said, it is likely to deter many claimants by significantly restricting the size of potential payouts in successful cases.

Even with the availability of contingency fee arrangements and third-party litigation funding, lawyers said, potential claimants will now question whether the financial returns would justify the risk and expense of taking on such cases.

The judgment related to a lawsuit brought by poultry farmers and animal feed manufacturers against several chemical companies, including Aventis, BASF and Roche, who operated an illegal cartel to fix the price and supply of vitamins.

In November 2001, the companies were found guilty by the European Commission of breaching competition law and fined €855 million.

The lead claimant in the case, Devenish Nutrition Limited, a Belfast-based supplier of pig and poultry feed, adopted a novel legal argument in its bid for damages.

Although it could not prove that it had suffered a financial loss — in part because of incomplete documentation — Devenish's lawyers argued that it was entitled to a share of the cartel’s illegally gained profits.

It also asked the court to impose exemplary, or punitive, damages against the vitamin suppliers in order to act as a deterrent against other cartelists.

Both claims were rejected at first instance by a High Court judge, who ruled that the traditional system of compensatory damages was adequate.

The High Court also dismissed the claim for exemplary damages on the grounds that the suppliers had already been fined by the European Commission and did not deserve to be punished twice.

That ruling was today upheld by the Court of Appeal.

Mr Justice Tuckey, one of three judges hearing the appeal, said: "Devenish is entitled to be compensated for any loss it has suffered as a result of the cartel, no more and no less."

The appeal judges acknowledged recent moves by authorities to encourage collective action in competition law cases but said that it was not necessary for Devenish to share in the cartel’s profits in order for justice to be done.

Mr Justice Longmore said: "The only real argument in favour of an order for an account of profits is the argument of policy that cartels are a notorious evil and the civil courts should in some way provide an incentive for their eradication by making such an order."

He added: "But it does not seem to me to be right for the courts to take this step on their own initiative."

A lawyer for Devenish said that it plans to appeal to the House of Lords.

The Civil Justice Council, following earlier calls for reform by the OFT and European Commission, issued formal guidance on class actions to the Lord Chancellor in July.

Among its boldest recommendations is a proposal to introduce a US-style "opt-in" system, under which all consumers affected by a particular breach of competition law would automatically be included as claimants in any lawsuit.

The effectiveness of those proposals may now come into question. Clare Canning, a litigation partner at Mayer Brown, which represented one of the vitamin suppliers, said: "In deciding that as a matter of policy restitutionary principles should not apply, the Court of Appeal has made the pursuit of private competition damages a far less commercially viable and attractive prospect."

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