1
LIABILITY FOR PROFITS IN BREACH OF CONTRACT
Paul Anthony Collins
Submitted in partial fulfilment of the requirements of the degree of Master of Laws
April 2015
Law School
The University of Melbourne
2
I
INTRODUCTION
Damages for breach of contract have essentially and habitually measured the defendant’s liability in terms
of the loss suffered by the plaintiff. The dominant assumption of the law of damages for breach of
contract is that a breach of contract causes loss to the plaintiff, and, therefore, the defendant is answerable
to compensate the plaintiff’s loss.1 Yet cases arise from time to time to challenge this assumption in
circumstances where the defendant has profited from its breach, as opposed to the plaintiff suffering a
loss. In these cases fundamental questions emerge: what is the response of the law to the case of the
defendant profiting from its breach? Should it be disregarded, as decided by some cases?2 Or is it right
that the defendant account to the plaintiff for a profit made on breach?3
Accounting for a profit in breach of contract, it is submitted in Part II, is directed to the purpose of
contractual damages. The purpose of contractual damages is to obtain performance of the parties’
obligations and is reflected in the awards that the courts make. This means that remedies for breach of
contract are broader than mere compensation. Yet in many cases the courts strain logic by attempting to
equate a gain with a loss under the rubric of compensation. A fresh approach that is attracting judicial
support is to recognise that the performance interest forms the essence of contractual damages. 4 Once this
is recognised, there should be an open acceptance of compensation for loss and accounting for gain.
The recent recognition of gain-based relief for breach of contract that has started in England has yet to
gain acceptance in Australia. Gain-based relief should be appreciated as an important remedy by which
courts may vindicate a plaintiff’s interest in performance, although it does not come into play unless other
remedies such as compensatory damages, specific performance and injunction are unavailable. By
1
H G Beale (ed), Chitty on Contracts (Sweet & Maxwell, 30th ed, 2008) vol 1, 1598 [26.001].
See, eg, Tito v Waddell (No 2) [1977] Ch 106, 332 (Megarry V-C): ‘It is fundamental to all questions of damages
that they are to compensate the plaintiff for his loss and injury … The question is not one of making the defendant
disgorge what he has saved by committing the wrong, but one of compensating the plaintiff.’
3
Accounting for a profit is used in the general sense of liability to answer for a gain, unless the context requires the
meaning of the equitable remedy that strips from the defendant the gains it made from its equitable wrongdoing. For
a discussion of the equitable remedy of account, see Peter W Young, Clyde Croft and Megan Louise Smith, On
Equity (Lawbook, 2009) 1119–20 [16.1210]–[16.1220].
4
See, especially, Clark v Macourt (2013) 253 CLR 1, 30 [107] (Keane J); Tabcorp Holdings Ltd v Bowen
Investments Pty Ltd (2009) 236 CLR 272, 286–7 [13]–[14] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ);
A-G v Blake [2001] 1 AC 268, 285A (Lord Nicholls); Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1
AC 518, 546C, 548H, 553C (Lord Goff), 587F, 589F, 591H (Lord Millett).
2
3
awarding damages by way of gain-based relief, courts recognise that the defendant has committed a civil
wrong.5
Part III demonstrates how cases of awarding gain-based relief for tort and for breach of negative covenant
cannot be adequately explained by reliance on a notion of compensation. Rather the tort cases are better
viewed as gain-based relief for wrongdoing, with the case of a negative covenant providing a bridge into
contract law. The bridge, created by the capacity of a negative covenant to translate from tortious
interference to contractual breach, is that in contract, as well as tort, damages are not always confined to
financial loss but may be measured by the benefit gained from the breach. Gain-based relief can take the
form of a reasonable payment in respect of the benefit the defendant has gained which is consistent with
the remedy of full disgorgement.
Part IV reviews the ground breaking decision of the House of Lords in Attorney-General v Blake
(‘Blake’)6 that recognised gain-based relief for breach of contract and examines the authorities on which
Blake relied. It will be contended that gain-based relief is justified as protecting the innocent party’s
interest in performance of the other party’s obligations. Disgorgement or partial disgorgement should be
awarded in cases of breach of contract in order to enforce the wrongdoer’s promise of performance where
compensatory damages are inadequate. In these minority cases disgorgement is awarded by reference to
the benefit obtained by the party in breach in order to protect the promise of performance, such as
obtaining a profit from breaching a nondisclosure obligation. Likewise it will be submitted that the two
categories of cases, skimped performance and negative obligation, rejected by the House of Lords in
Blake as unsuitable for accounts, should be re-assessed in light of the protection of the performance
interest.
Part V discusses the intersection of disgorgement with fiduciary duty and suggests that fiduciary
obligations consistent with the terms of the contract can supply the performance interest to justify
disgorgement. It explores how Blake could be better understood in terms of contractual obligations
coexisting with fiduciary obligations in determining a remedy of disgorgement.
Part VI analyses the categories rejected by both appellate levels in Blake, namely cynical breach, the
wrongdoer’s ability to enter into a more profitable contract elsewhere, and the wrongdoer’s entry into a
new contract disabling its power to perform, and concludes that these cases can be reconciled as
5
6
James Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Hart Publishing, 2002) 1.
[2001] 1 AC 268.
4
manifestations of the performance interest consistent with the reasoning in Blake. Part VII reviews the
varying reception accorded to Blake where the courts occasionally struggle in their acceptance of
disgorgement out of a lingering loyalty to a compensatory analysis. The conclusion in Part VIII decides
that the reach of accounting for profit is comprehensively defined by the performance interest and only
operates once compensatory damages are inadequate. This standard can form part of the law of Australia
as it can in England.
II
CONTRACTUAL REMEDIES: DESIGN TO PROTECT THE PERFORMANCE INTEREST
A Clarification: Restitution, Disgorgement and Damages
1
Restitution and Disgorgement
Before exploring a wider perspective of damages, a distinction should be drawn, in the interests of clarity,
between different kinds of restitution. In practice ‘restitution’ is used to both describe restitution for
unjust enrichment (a ‘giving back’ of an unjustly obtained benefit) and restitution of the benefit of
wrongdoing (a ‘giving up’ of a benefit which never belonged to the plaintiff).7 However, the two should
be distinguished.
Unjust enrichment involves the reversal of a gain or benefit conferred on a recipient, also described as
giving back or subtraction in a corresponding loss and gain. Unjust enrichment is an autonomous cause of
action by way of money had and received, that is not dependent on a breach of contract or tort, such as
payment or services by mistake or under duress or non-fulfillment of a condition precedent.8 In contrast,
restitution (or giving up) of a benefit from wrongdoing is engaged on a breach of contract or commission
of a tort that results in a benefit to the defendant, either exceeding the loss to the plaintiff or where the
plaintiff suffers no loss at all.9 It is in this latter category that the term ‘disgorgement’ is used, as an
alternative to ‘restitutionary damages’, and it is in this context that the subsequent discussion is to be
understood. As others have done, the term ‘disgorgement’ or ‘disgorgement damages’ is used to describe
The terms ‘giving back’ and ‘giving up’ were developed in Peter Birks, An Introduction to the Law of Restitution
(Clarendon Press, revised ed, 1989) 12.
8
Andrew Burrows, Remedies for Torts and Breach of Contract (Oxford University Press, 3rd ed, 2004) 371; James
Edelman and Elise Bant, Unjust Enrichment in Australia (Oxford University Press, 2006) 5; Peter Birks,
‘Restitutionary Damages for Breach of Contract: Snepp and the fusion of law and equity’ [1987] Lloyd’s Maritime
and Commercial Law Quarterly 421, 422.
9
Harvey McGregor, McGregor on Damages (Sweet & Maxwell, 19th ed, 2014) 491–4 [14-002]–[14-004]; Bruce
Kercher and Michael Noone, Remedies (Lawbook, 2nd ed, 1999) 257.
7
5
the remedy which is awarded when a court causes the defendant to give up a wrongful benefit, rather than
the term ‘account of profits’.10
2
The Definition of Damages
It may be objected that gain-based awards cannot properly be regarded as ‘damages’, as damages
compensate for loss. However, according to McGregor, damages are best defined as a monetary award for
a civil wrong.11 Importantly this definition relies on an antecedent civil wrong, rather than an antecedent
loss. Furthermore the definition purposely avoids use of the term ‘compensation’ in order to reflect the
law’s evolving recognition of gain-based relief. Originally described in McGregor’s 1961 edition as the
pecuniary compensation for a wrong, being either a tort or a breach of contract, McGregor reformulated
the definition in the 2014 edition as an award in money for a civil wrong. This occurred for reasons that
included the arrival of restitutionary damages which, in the opinion of McGregor, represented the
‘antithesis of compensation’.12 If this definition is accepted, gain-based relief can conceivably be
accommodated within the notion of damages. It is now appropriate to examine this definition for
consistency with the purpose of contractual damages.
B The Purpose of Contractual Damages
The most famous explanation of the purpose of damages for breach of contract was stated in Robinson v
Harman by Parke B, ‘Where a party sustains a loss by reason of a breach of contract, he is, so far as
money can do it, to be placed in the same situation with respect to damages as if the contract had been
performed.’13 Under this definition the purpose of damages for breach of contract is to compensate the
plaintiff for its loss caused by the defendant’s breach. Hence an award of damages for breach of contract
does not operate to penalise the defendant and exemplary and punitive damages are not awarded.14
Accordingly the treatment of loss commences with the position of the plaintiff following the breach by
the defendant.15 At that point the enquiry looks to the benefit the plaintiff expected to receive from the
defendant but was withheld by reason of the defendant’s breach in not performing its promise. In the
10
See, eg, Edelman, above n 5, 1–4; Katy Barnett, Accounting for Profit for Breach of Contract: Theory and
Practice (Hart Publishing, 2012) 1–2. Cf Blake [2001] 1 AC 268, 284 where Lord Nicholls preferred the term
‘account of profits’.
11
McGregor, above n 9, 1 [1-001].
12
Ibid 1 [1-001], 5 [1-009].
13
Robinson v Harman (1848) 1 Ex 850, 855; 154 ER 363, 365.
14
J W Carter, Contract Law in Australia (LexisNexis Butterworths, 6th ed, 2012) 815 [35-07]; apart from Canadian
law.
15
Ibid 816 [35-07].
6
simplest of cases of a breach of an obligation to pay money due under a contract, the enquiry into
measuring the value of the performance withheld from the plaintiff is summarily satisfied by translating
the money due into an order that the defendant pay that amount to the plaintiff. As is well known, these
damages are termed ‘liquidated damages’ when the money due or the value of the performance rendered
is fixed and specific, or where it can be readily reduced to certainty by mathematical computation,16 as
opposed to independent evaluation in the case of unliquidated damages. Any award of damages, whether
liquidated or unliquidated, attracts an award of interest backdated according to the discretion regulated by
statute, with interest functioning as statutory damages to compensate for the period during which the
plaintiff had been kept out of its award of common law damages and which form part of the judgment
debt.17
On entering the field of unliquidated damages, the enquiry assumes an element of sophistication. The
court must put a value on the benefit of performance withheld as a result of the breach. If a contract is
profitable and is rescinded for breach, the profits lost and the costs reasonably incurred in performance
are compensable. If, on the other hand, the contract is loss making, the costs actually and reasonably
incurred in performance are compensable to the extent that the losses would have been recovered had the
contract been performed.18
Adopting Parke B’s standard, the ‘situation of a party if the contract had been performed’, means that the
enquiry can extend to the cost of obtaining performance to replace that promised under the agreement. In
anomalous cases of breach of an obligation to build or repair property the law recognises the inadequacy
of a remedy fixed on the difference in value where the completed but defective performance causes little
16
See, eg, City Mutual Life Assurance Society Ltd v Giannarelli [1977] VR 463, 468 (McInerney J). This distinction
resembles but does not replicate the classification of contractual remedies into specific remedies (recovery of a debt
as well as specific performance and injunction) and substitutional remedies (including compensatory damages and
recovery of profits from the party in breach): Daniel Friedmann, ‘The Performance Interest in Contract Damages’
(1995) 111 Law Quarterly Review 628, 630–1. A similar analysis is made by Zakrzewski, but as twin components of
replicative remedies, separately from transformative remedies (such as a remedial constructive trust), cited in Ralph
Cunnington, ‘The Measure and Availability of Gain-Based Damages for Breach of Contract’ in Ralph Cunnington
and Djakhongir Saidov (eds), Contract Damages: Domestic and International Perspectives (Hart Publishing, 2008)
207, 214.
17
Williams v Volta [1982] VR 739, 746 (McInerney J); President of India v Lips Maritime Corporation [1988] AC
395, 424 (Lord Brandon). For statutory interest, see, eg, Supreme Court Act 1986 (Vic) ss 58–60 with counterparts
throughout Commonwealth jurisdictions. These provisions are not an exclusive code governing the award of interest
by way of damages and do not preclude an award for loss of use of money which the plaintiff paid as a direct result
of the defendant’s breach of contract: Hungerfords v Walker (1989) 171 CLR 125.
18
Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64, 99 (Brennan J) (‘Amann’).
7
or no diminution in the value of the property. As a result the enquiry is redirected to examining the cost of
rectification of the defective work in accordance with the specifications of the contract.19
At all events the enquiry can extend to consequential losses to embrace loss of profits or expenses
reasonably incurred in consequence of the breach. Likewise the mere difficulty of estimating damages
does not relieve the responsibility of assessing a value on what has been lost. The enquiry into the
benefits on the hypothesis that ‘the contract had been performed’ extends to contingent events, where the
loss is again assessed by reference to the promised performance, but discounted by the degree of
probability of the occurrence of the opportunity or chance.20 All these lines of enquiry demonstrate the
capacity of the law to remedy the value of performance withheld in the event of a breach of contract.21
When exploring the remedial purpose of contractual damages, the limitations of the statement in
Robinson v Harman must be recognised. The issue of a defendant’s profits did not arise on the facts of
that case. The statement was not concerned with the question whether there was an exception to the
general rule. It did not have in mind the possibility of a claim for what Lord Millett called ‘restitutionary
damages’ in an appropriate case.22
In analysing the purpose of contractual damages, the highest courts in Australia and England have come
to emphasise the protection of the value of performance of the contract.23 This means that the practical
operation of Robinson v Harman may vary depending on the commercial context but its principle is
always applied with a view to assuring the promisee the monetary value of faithful performance by the
promisor of the bargain.24 The value of performance may be measured in terms that travel beyond loss to
a point where it is just and equitable that the defendant should retain no benefit from its breach of
contract, in the same way that the plaintiff’s performance interest may render it just and equitable to make
an order for specific performance or to grant an injunction.25 The purpose of damages is to obtain
performance of the parties’ obligations, rather than to compensate merely for loss. Therefore a wider
perspective of contractual damages can emerge, grounded in the concept that damages are redress for a
wrong.
19
See, eg, Bellgrove v Eldridge (1954) 90 CLR 613 (Dixon CJ, Webb and Taylor JJ); Tabcorp Holdings Ltd v
Bowen Investments Pty Ltd (2009) 236 CLR 272.
20
Jeannie Paterson, Andrew Robertson and Arlen Duke, Principles of Contract Law (Lawbook, 4th ed, 2012) 497
[26.15], 507–8 [26.85]–[26.86]; Amann (1992) 174 CLR 64, 88, 101 (Brennan J).
21
Friedmann, above n 16, 649–51.
22
Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, 580F.
23
See above n 4.
24
Clark v Macourt (2013) 253 CLR 1, 30 [107] (Keane J), citing Bellgrove v Eldridge (1954) 90 CLR 613, 617–18.
25
Blake [2001] 1 AC 268, 285A (Lord Nicholls).
8
C The Prominence of the Performance Interest
The performance interest with its roots in Robinson v Harman came to its full realisation in the 20th
century. The performance interest may be defined as the interest of the contracting party in the
performance by the other party of its contractual obligations to the first party.26 The term ‘interest’
denotes the purpose or reason for the injured party entering into the contract, being the promise of
performance.27
In what has been described as the most significant article on contract law ever written,28 Fuller and Perdue
rationalised the measure of damages of breach of contract into three interests that are protected by the
law: the restitution interest, the reliance interest and the expectation interest, more commonly known as
the performance interest.29 According to this analysis, the categories operate as follows:
(a)
The restitution interest requiring the defendant to return transferable value to the plaintiff in
order to prevent unjust enrichment.
(b)
The reliance interest compensating the plaintiff in changing its position in order to restore
the plaintiff to the position prior to making the contract; thus described, ‘We may award
damages to the plaintiff for the purpose of undoing the harm which his reliance on the
defendant’s promise has caused him’, giving the example of a purchaser in a contract of
sale of land incurring expense in investigating the vendor’s title, or neglecting the
opportunity to enter into other contracts.
(c)
The expectation interest (performance interest) compensating the plaintiff for the value of
the expectation of performance in order to put the plaintiff in the same position as if the
promise had been performed; described as making the defendant pay the money value of
the promised performance or granting an order of specific performance.30
26
Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, 548H, (Lord Goff),
Friedmann, above n 16, 629, 632. David Campbell and Roger Halson, ‘The Irrelevance of the Performance
Interest: A Comparative Analysis of “Keep-Open” Covenants in Scotland and England’ in Larry A Di Matteo et al
(eds), Commercial Contract Law: Transatlantic Perspectives (Cambridge University Press, 2015) 466 criticise the
performance interest on the narrow ground of refusal of specific performance in keep open covenants without
reconciling the weight of authority in favour of the performance interest.
28
Friedmann, above n 16, 628, citing Robert Birmingham, ‘Notes on the Reliance Interest’ (1985) 60 Washington
Law Review 217. ‘It is sometimes said that [the article] was the most influential article for the development of
contract and tort in the twentieth century’: Edelman and Bant, above n 8, 82.
29
L L Fuller and William R Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale Law Journal 52,
373.
30
Ibid 53–4.
27
9
Despite Fuller and Perdue’s advocacy of the reliance interest over the performance interest, the
development of the law of contract has been to evaluate the expectation interest in broader terms to
encompass reliance and restitution in allowing consequential loss. Consequently the expectation loss,
rather than the reliance loss, has come to inform the assessment of damages, such as to focus on the loss
of value of the promised performance.31 Protection of the expectation interest, as recognised by Fuller and
Perdue, ensures that the parties reap the benefit of their bargains and thereby encourages the practice of
bargaining as a function of the commercial world.32
Fuller and Perdue’s elevation of performance as the ‘normative order’33 resounds throughout the common
law world in the judicial dictum that ‘contracts are made to be performed and not to be avoided.’34 Hence
each contracting party is said to have a right to the performance of the contract by the other.35 This ‘right’
is better described as the performance interest, since actual performance of the breached obligation is not
commonly ordered because of the limited availability of discretionary remedies of specific performance
and injunction. Rather, the principal remedy is an award of monetary damages that functions as a
substitute for performance of the breached obligation.36 In this respect the injured party has a right to the
substitute of performance, since damages for breach of contract are, at common law, awarded as of right.
In understanding damages as a substitute for performance, the separation of the performance interest from
the compensation interest, as advocated by Webb,37 becomes unnecessary. The performance interest does
not stop at the right to receive performance, disjunctively from an award of damages. Instead the
performance interest explains the award of damages. Some courts have come to accept that the innocent
party’s interest in performance justifies a remedy which may extend in exceptional cases to an accounting
for profits.38 Likewise the identification of a third measure of damages, vindicatory damages, in addition
to compensatory damages (for loss) and restitutionary damages (for gain), as argued by Pearce and
31
Paterson, Robertson and Duke, above n 20, 496, 506–7, 512–13, [26.10], [26.80], [26.120]. See also Friedmann,
above n 16, 648, that despite Fuller and Perdue’s attempt to subordinate the performance interest to the reliance
interest, one of the major trends in modern contract law is the strengthening of the protection accorded to the
performance interest.
32
Burrows, above n 8, 35–6, quoting Fuller and Perdue, above n 29, 60–2.
33
Fuller and Perdue above n 29, 62.
34
The Hansa Nord [1976] QB 44, 71 (Roskill LJ). See also Clark v Macourt (2013) 253 CLR 1, 7 [11] (Hayne J).
35
Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460, 504 (Windeyer J); Zhu v Treasurer (NSW)
(2004) 218 CLR 530, 575 [129] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ).
36
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 848H (Lord Diplock).
37
Charlie Webb, ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’
(2006) 26 Oxford Journal of Legal Studies 41. See also Tareq Al-Tawil, ‘Damages for Breach of Contract:
Compensation, Cost of Cure and Vindication’ (2014) 34 Adelaide Law Review 351.
38
See, eg, Blake [2001] 1 AC 268, 285A (Lord Nicholls).
10
Halston,39 relies on the necessity to vindicate rights. This analysis confines restitutionary damages to a
correspondence between the defendant’s gain and the plaintiff’s loss,40 similar to Fuller and Perdue, and
does not appreciate that an award of damages vindicates the performance interest in its coverage of a loss
or a gain.
It is the performance interest, not the principle of deterrence, that supplies the purpose of gain-based relief
for breach of contract. Contrary to opinion such as Edelman and Barnett that the primary reason for
awarding disgorgement damages is deterrence,41 it will be submitted (in Part VIIF) that deterrence
operates only as a practical effect of an award of damages. It will be seen that the principle of deterrence,
unlike the criminal law, does not figure in the courts’ reasoning to grant gain-based relief, apart from the
important exception of fiduciary duty. In a similar vein, cases of cynical breach will be explained (in Part
VIA) as a feature of the performance interest, that is, the innocent party’s expectation of faithful
performance, and not, as Barnett argues, cases deserving of retribution where there is conscious or
advertent disregard of the rights of the claimant42 or, as Edelman argues, where the defendant has a
subjective intention to profit from the breach it procures.43
Breach of contract even when committed cynically has been promoted as an act devoid of any wrong
since it represents the exercise of an option to pay damages, as an alternative to performance.44 This
theory incorrectly assumes that contractual performance is merely optional and that the injured party had
agreed to accept it as such. The existence of the remedies of specific performance and injunction that
compels completion of performance, whether in positive or negative terms, tells against a notion of
optional performance.45 As specific relief is restricted to cases where damages are inadequate, damages
emerge as the pivotal remedy for the wrong of breach of contract and as the vindication of the
performance interest.46
David Pearce and Roger Halson, ‘Damages for Breach of Contract: Compensation, Restitution and Vindication’
(2008) 28 Oxford Journal of Legal Studies 73.
40
Ibid 97.
41
Edelman, above n 5, 83–6, quoted in Barnett, above n 10, 26.
42
Barnett, above n 10, 44.
43
Edelman, above n 5, 85, quoted in Barnett, above n 10, 41.
44
Richard A Posner, ‘Let Us Never Blame a Contract Breaker’ (2009) 107 Michigan Law Review 1349, 1350, citing
O W Holmes, ‘The Path of the Law’ (1897) 10 Harvard Law Review 457, 462.
45
Zhu v Treasurer (NSW) (2004) 218 CLR 530, 574 [128] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ),
quoting Holmes, above n 44, criticised this theory as ‘not true’ and ignoring a party’s right to performance.
46
Vindication in this context is intended to mean a making good of the plaintiff’s rights. See similarly Barnett,
above n 10, 11.
39
11
D The Expansive but Artificial View of Loss
The restriction of damages to loss is an inadequate response to redressing a civil wrong. In recognition of
this problem courts have attempted to expand the notion of loss in order to accommodate a gain. This is
highlighted by Hayne J’s analysis in Clark v Macourt47 where he reasoned that the difficulty of assessing
damages for breach of contract arises from the failure to identify what ‘loss’ (original quotation marks) is
to be compensated. In that case, being the sale of a business, the identification was not to be made by
uncritical analogy to the sale of goods in assuming that damages were to be limited to the difference in
the value of complying goods and noncomplying goods. Hayne J proceeded to explain that a proper
identification may comprise three different forms of ‘loss’:
First, there might be a loss constituted by the amount by which the promisee is worse off because the
promisor did not perform the contract. That amount would include the value of whatever the promisee
outlaid in reliance on the promise being fulfilled. Second, the loss might be assessed by looking not at the
promisee’s position but at what the defaulting promisor gained by making the promise but not performing
it. Third, there is the loss of the value of what the promisee would have received if the promise had been
performed.48 (emphasis in original)
While the second category described by Hayne J did not form the basis of the judgment, as the third
category in fact did, this passage suggests that loss has a broader meaning than that originally supposed. It
recognises, arguably, that ‘loss’ in its broad sense can accommodate a gain by the promisee in not
performing the promise it made.49
If this is correct, it represents a departure from the assumption that recoverable loss cannot extend to a
gain made by the promisee.50 Moreover the use of phrase ‘what the defaulting promisor gained’ does not
attempt to draw a distinction between an expense saved and a profit earned.51 Thus the expansive view of
‘loss’, carrying its self-conscious qualification of the expression, suggests an acknowledgment that ‘loss’
has an artificial meaning that effectively equates a loss with a gain.52
47
(2013) 253 CLR 1.
Ibid 7 [9].
49
An alternative interpretation is that ‘gain’ was meant as a proxy for a loss, which still expands the meaning of
loss.
50
Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157, 196–7 [159]–[162] (‘Hospitality
Group’) (Hill and Finkelstein JJ).
51
A case of saving expense effectively serves as a profit by the saving of costs otherwise incurred: see, Barnett,
above n 10, 156.
52
See Blake [2001] 1 AC 268, 284F (Lord Nicholls): ‘In these cases [of not permitting a wrongdoer to retain profits
from its breach of contract] the courts have reached the desired result by straining existing concepts.’
48
12
E
Financial Equivalence and Windfall
If, then, an award of damages is based on a gain, there emerges an objection of a windfall. It may be
thought that a windfall occurs when a person that suffers no loss receives an award of the defendant’s
profits. The epithet ‘windfall’ suggests that the remedy is undeserved and adventitious. This objection can
be answered by considering that the merit of a plaintiff receiving the defendant’s gain is the product of a
legal wrong. The remedy of damages is not determined by the presence of loss but by a finding of a
causative wrong in accordance with legal principle.53 Hence nominal damages are awarded where a
breach of contract causes no loss. Remedies are the law’s response to a wrong, or more specifically, to a
cause of action.54 It is not accurate to view a remedy as a response to a loss. Rather, loss is the usual but
not exclusive consequence of a wrong.
An analogy may be found in an award of the rectification cost in consequence of a breach of contract in
the construction of property which causes minimal loss of value to the property. For instance, in Bellgrove
v Eldridge55 the cost of rectification of a house built with defective materials reached £4950 compared to
a total contract price of £3500. In such a case the award should be understood in terms of vindicating the
performance interest which was subject to the qualification that the rectification cost, or cost of cure, must
be a reasonable course to adopt, so that a technical breach cannot be exploited to procure a profit.56
Consistently with Bellgrove v Eldridge, the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty
Ltd57 confirmed that the rectification cost, and not the diminution in value, should be applied to a breach
of a tenant’s obligation to repair a highly stylised fit out of office premises. Giving effect to the purposive
approach to damages, damages were assessed by reference to the obligation of performance, rather than
the technical line of authority that where a breach of a repair covenant is brought during the term of the
tenancy, the starting point is the diminution in value but if brought at or near its expiration, the starting
point is the cost of cure.58 The court’s decision was welcomed as providing wider protection to the
53
Edelman, above n 5, 21.
Blake [2001] 1 AC 268, 284H (Lord Nicholls).
55
(1954) 90 CLR 613.
56
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272, 287–8 [16]–[17], quoting Bellgrove v
Eldridge (1954) 90 CLR 613, 618; Radford v De Froberville [1977] 1 WLR 1262, 1270, citing Ruxley Electronics &
Construction Ltd v Forsyth [1996] AC 344, 360.
57
(2009) 236 CLR 272.
58
Djankovir Saidov, ‘A Further Step Towards Protecting the Performance Interest’ [2009] Lloyd’s Maritime and
Commercial Law Quarterly 295, 298. In that case the breach of covenant occurred near the expiration of the lease,
apart from the possibility of renewal.
54
13
performance interest59 in reflecting the subjective valuation of the innocent party’s expectations of
performance.60
The importance of the High Court’s decision in Clark v Macourt61 is its reaffirmation that contractual
damages do not require financial equivalence with the position where no breach had occurred. The court
approved its statements in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd62 that the standard in
Robinson v Harman —‘the same situation with respect to damages as if the contract had been performed’
— did not mean ‘as good a financial position as if the contract had been performed’ (emphasis in
original). While most awards of damages will coincide with the same financial situation of the innocent
party as if the contract had been performed, there will nevertheless be a minority of cases where damages
for diminution in value will be inadequate and the alternative award of rectification cost will not bring the
same financial result.63 Likewise it will be seen that gain-based relief occurs in a minority of cases where
compensatory damages are inadequate and where financial equivalence does not result.
III
DISGORGEMENT IN TORT AND ITS INFLUENCE ON CONTRACT
A The Broad Comparison
Having examined the purpose of contractual damages and its capacity to accommodate a gain, it is
pertinent to compare the treatment of gains with other wrongdoing. This is because disgorgement of gains
made in consequence of a tortious invasion of property, such as trespass to goods and trespass to land,
prompts a questioning of why disgorgement of a gain made in consequence of the wrong of a breach of
contract should not be similarly recognised. This comparison has practical application to cases where a
tort is concurrent with breach of contract when arising from the same facts and when the case before the
court pleads both tort and breach of contract, such as a claim for damages arising out of the carriage of
goods attracting allegations of tortious negligence as well as breach of contract.64 Similarly a tortious
interference with property is comparable with a breach of restrictive covenant in circumstances where a
defendant obtains a profit without diminishing the value of the plaintiff’s property. 65
Solène Rowan, ‘Protecting Contractual Expectations: An Australian Perspective’ (2009) 68 Cambridge Law
Journal 276, 278.
60
Saidov, above n 58, 298.
61
(2013) 253 CLR 1.
62
(2009) 236 CLR 272, 286 [13] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ), quoting Radford v De
Froberville [1977] 1 WLR 1262, 1273 (Oliver J).
63
See, especially, Clark v Macourt (2013) 253 CLR 1, 31 [107] (Keane J), quoting Tabcorp Holdings Ltd v Bowen
Investments Pty Ltd (2009) 236 CLR 272, 286 [13].
64
Burrows, above n 8, 5.
65
See, eg, Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, 812H (Brightman J).
59
14
In principle, the purpose of compensatory damages in tort is to put the plaintiff into as good a position as
it would have been in if no tort had been committed. Equally famous as the statement in Robinson v
Harman is the explanation of the purpose of damages in tort by Lord Blackburn in Livingstone v
Rawyards Coal Co:
that sum of money which will put the party who has been injured, or who has suffered, in the same position
as he would have been in if he had not sustained the wrong for which he is now getting compensation or
reparation.66
In the broadest of terms, damages for breach of contract and damages for tort have one feature in
common: to put the plaintiff into as good a position as if no wrong was no committed.67 However there
are differences: damages for breach of contract usually place the plaintiff in the position it would have
occupied had the defendant performed the obligation it breached, whereas tortious damages usually
involve the restoration of the plaintiff to its former position, for example, the position it occupied prior to
the defendant’s fraudulent misrepresentation or negligence.68 Nonetheless these qualifications, with the
varying results that may occur, do not detract from the relevance of a comparison with the treatment of
gains made in tort.
Falling outside contract, it must be noted that the performance interest does not arise in the case of the
tortious interference with proprietary rights. The congruence in assessing damages for contract and tort
should not disguise the distinction between the interests protected by tort and the interests protected by
contract. The interests protected by the law of contract are those created by the parties’ binding promises
whereas the interests protected by the law of tort are person and property.69 Yet the logical appeal of
consistency of remedies in contract, tort and property begs the question of why remedies in contract
should be confined to measurement of loss; or, put in another way, why it should be any more permissible
to expropriate personal contractual rights than it is permissible to expropriate property rights.70 This
66
(1880) 5 App Cas 25, 39; see Burrows, above n 8, 33.
Carter, above n 14, 815 [35-04].
68
Ibid. See also Burrows, above n 8, 34.
69
Friedmann, above n 16, 642.
70
Lionel D Smith, ‘Disgorgement of the Profits of Breach of Contract: Property, Contract and ‘Efficient Breach’”
(1995) 24 Canadian Business Law Journal 121, 132, cited in Blake [2001] 1 AC 268, 283C (Lord Nicholls).
67
15
question becomes acutely pronounced when compensatory damages are treated by the courts as covering
both tort and contract.71
B Australian Cases
In the present landscape of Australian cases debate persists as to whether a tortious invasion of
proprietary rights recompensed in the form of a reasonable fee payable by the defendant should be
regarded as restitutionary in nature or, on the other hand, should be regarded as a flexible application of
the compensatory nature of damages. As in England, the issue has not been resolved with any finality by
the Australian courts. Unlike England, Australia has yet to give a clear and comprehensive recognition of
disgorgement of gains for either tort or contract, although England has yet to fully come to terms with its
leading authority on the issue.72
A selection of Australian cases will now be reviewed to illustrate the tension between the compensatory
approach and the restitutionary approach. This review will demonstrate the inadequacy of the
compensatory approach when tested against gains made from a wrong. The review ends with a critique of
the decision in Butler v Egg and Egg Pulp Marketing Board73 where the High Court confirmed a strict
compensatory approach to damages that continues to influence a conservative policy towards
disgorgement in Australia.
1
Bunnings: Hire Fee for Unreturned Pallets
The treatment of damages as compensatory or as gain-based was sharply illustrated in the New South
Wales Court of Appeal in Bunnings Group Ltd v Chep Australia Ltd (‘Bunnings’).74 All the judges agreed
that the plaintiff should recover damages in conversion and detinue calculated on a commercial hiring fee
in respect of the defendant’s continuing use of delivery pellets for display and storage. Nevertheless
Allsop P, with whom McFarlan JA agreed, defined the award in compensatory terms which could be
‘sensibly and flexibly applied’ (emphasis added) without requiring extension of tortious remedies to
award the wrongdoer’s profit.75 Endorsing statements by the High Court that the fundamental principle of
See Harris v Bendall (1991) 172 CLR 60, 63 (Mason CJ, Dawson, Toohey and Gaudron JJ): ‘The settled principle
governing the assessment of compensatory damages, whether in actions of tort or contract, is that the injured party
should receive compensation in a sum which, so far as money can do, will put that party in the same position as he
or she would have been in if the contract had been performed or the tort had not been committed.’
72
Blake [2001] 1 AC 268.
73
(1966) 114 CLR 185.
74
(2011) 82 NSWLR 420.
75
Ibid 467 [174].
71
16
damages for tort and breach of contract is compensation for loss caused,76 Allsop P interpreted the award
of damages as compensation for the wrongful act of denial of the property rights of the owner.77
In contrast, the judgment of Giles JA openly accepted the restitutionary character of the award of
damages as representing the price ordinarily payable for the defendant’s use of the chattel and was
therefore a departure from strict compensatory principles.78 It is contended that this approach is to be
preferred because it reflects the wrongdoer’s profitable use, in preference to the compensatory analysis
that treats the award, in somewhat strained terms, as a recompense for a wrongful act which is not
assessed merely by reference to the plaintiff’s subjective financial position.79
2
Yakamia: Farmland Trespass
Yakamia Dairy Pty Ltd v Wood (‘Yakamia’)80 exemplifies a clear acceptance of the gain obtained by the
defendant when awarding damages for trespass to land. The defendant was manager of the plaintiff’s
farm. He ran his wife’s cattle upon the plaintiff’s land during a four year period without the plaintiff’s
knowledge. The Full Court of the Western Australian Supreme Court reversed the trial judge’s decision to
refuse damages based on the absence of damage to the land. Jackson CJ held, following English authority,
that when trespass consists in some beneficial use wrongfully made of the plaintiff’s land, even if it
causes no damage, the plaintiff is entitled to claim a reasonable remuneration for that use.81 Likewise
Wallace J held that the wilful element of the trespass could justify exemplary damages corresponding to
the value of the defendant’s gainful use.82 Yet this class of damages described by Wallace J as
‘compensatory’ in the sense of the prevention of unjust enrichment83 amounts to restitution of a gain.84
3
76
Butler: a Compensatory Emphasis
Ibid 467 [175], citing Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185; Haines v Bendall (1991)
172 CLR 60, 63.
77
(2011) 82 NSWLR 420, 468 [177].
78
Ibid 472 [198], citing Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246
discussed below.
79
(2011) 82 NSWLR 420, 468 [177], reflecting the approach of in WWF ─ World Wide Fund for Nature v World
Wrestling Federation Entertainment Inc [2008] 1 WLR 445, 474 [59] (Chadwick LJ), discussed in Part VII.
80
[1976] WAR 57.
81
Ibid 58, quoting Salmond on Torts (10th ed) 211, citing Whitwham v Westminster Brymbo Coal Co [1896] 2 Ch
538 and Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246, 253−4 (Denning
LJ).
82
[1976] WAR 57, 61, quoting the second category of exemplary damages formulated by Lord Devlin in Rookes v
Barnard [1964] AC 1129, 1227, being the contumelious disregard of the plaintiff’s rights, as in the example of
wilful clandestine trespass to minerals, where damages are awarded for the market value of the minerals without
deduction for the costs of working, such as Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 and Bulli Coal
Mining Co v Osborne [1899] AC 351.
83
[1976] WAR 57, 61, quoting McGregor on Damages and Broome v Cassell & Co Ltd [1972] AC 1027, 1129
(Lord Diplock).
84
Edelman and Bant, above n 8, 30–1.
17
Butler v Egg and Egg Pulp Marketing Board (‘Butler’)85 shows the High Court’s adherence to a
compensatory analysis in its rejection of an award based on the full value of the chattel converted. The
defendants wrongfully sold eggs the property in which was vested in the plaintiff by the egg marketing
legislation. The eggs were agreed to represent a value of £4000 to the plaintiff. If the defendants had
complied with their statutory obligations by delivering the eggs to the plaintiff for sale by it, the plaintiff
would have paid £2900 to the defendants out of the statutory pool. The High Court decided that damages
for the conversion of eggs were to be assessed not on the basis of the value of the eggs at the time of
conversion but on the basis of the actual loss sustained by the plaintiff. In determining that the plaintiff's
loss was the difference of £1100, the High Court observed that recovery of the value of the eggs would
place the plaintiff in a better position than if the eggs had been delivered to it:
But such a result would not accord with the general principle upon which compensatory damages are
assessed, whether in actions of contract or of tort. That principle is that the injured party should receive
compensation in a sum which, so far as money can do so, will put him in the same position as he would
have been in if the contract had been performed or the tort had not been committed … And this principle is
as much applicable to actions of conversion as it is to the case of other actionable wrongs. In most cases of
conversion it is, of course, obvious that its application will result in the injured plaintiff recovering the full
value of the property converted since that will usually represent the loss that he has sustained by the
defendant's wrongful act. Hence the statement which appears so often in the books that the general rule is
that the plaintiff in an action of conversion is entitled to recover the full value of the goods converted, but
this statement should not be allowed to obscure the broad principle that damages are awarded by way of
compensation.86
The result in Butler has been criticised on the basis that the case could have been approached on a
restitutionary basis to permit recovery of the objective value of the benefit obtained by the defendant,
being the value of the right to sell the eggs. 87 Rather Butler may be explained on the basis that the case in
conversion relied on the subjective value of the eggs to the plaintiff (in the sum agreed by the parties in
the proceedings) and did not present evidence of the value of the eggs sold by the defendant on the black
market. The High Court was concerned not to award excessive damages on the basis that the plaintiff was
liable to pay the controlled acquisition price had the eggs not been converted by the defendant. Thus these
circumstances presented a compensatory emphasis of a net loss suffered by the plaintiff, as opposed to the
market value of the goods, as in an ordinary case of conversion of goods such as Bunnings. The facts
were not open to an award to be made by reference to the wrongdoer’s profit.
85
(1966) 114 CLR 185.
Ibid 191 (Taylor and Owen JJ).
87
Edelman and Bant, above n 8, 40.
86
18
In light of Butler the High Court of Australia is yet to give its endorsement to restitutionary approaches in
tort, in contrast to various decisions at the intermediate appellate level and at first instance.88 Yet the
generality of the language in Butler and its subsequent treatment as a broad statement of principle89 has
reinforced the view, as stated by the majority of the Full Court of the Federal Court that the position in
Australia is that an aggrieved party is entitled only to compensation for loss, apart from exemplary
damages.90 Notwithstanding, it is submitted that Butler should not be misunderstood as entrenching a
policy that disapproves gain-based relief since the decision did not relate to a wrongdoer’s profit.
C The English Cases
Similar to Australia, a selection of English cases shows a recognition of a gain-based remedy based on the
wrongdoer’s profitable use as well as an acceptance in obiter dicta of the availability of accounts. As in
Australia these cases highlight the inadequacy of a compensatory approach. However a turning point for
the law of contract occurred in the decision in Wrotham Park Estate Co Ltd v Parkside Homes Ltd
(‘Wrotham Park’)91 which applied the analogy of a tortious invasion of proprietary rights to a restrictive
covenant that was readily transferable to a breach of contract. This laid the way for the explicit acceptance
of contractual disgorgement by the House of Lords in Blake92 discussed separately in Part IV.
1
Strand Electric: Commercial Hire Rate
The progression towards a restitutionary approach received its impetus from the Court of Appeal in
Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd (‘Strand Electric’).93 The plaintiff
carried on the business of hiring out portable switchboards for theatre lighting. The theatre owner in
retaking possession of the premises refused the plaintiff’s demand to return the switchboards previously
let out to the tenant, in view of the importance of the switchboards to the theatre’s resale or letting value.
The plaintiff brought proceedings against the theatre owner claiming the return of the switchboards or
damages for the period of their detention.
At first instance the court awarded damages during the period of detention but discounted the full figure
for hire by about half, reflecting contingencies that the switchboards were not all out on hire at any one
88
See, for example, Bunnings (2011) 82 NSWLR 420; Yakamia [1976] WAR 57. See also Bilambil-Terranora Pty
Ltd v Tweed Shire Council [1980] 1 NSWLR 465 (Reynolds, Mahoney and Samuels JJA); Gaba Formwork
Contractors Pty Ltd v Turner Corporation Ltd (1991) 32 NSWLR 175 (Giles J).
89
See, eg, Amann (1991) 174 CLR 64, 99 (Brennan J), 116 (Deane J), 161 (McHugh J).
90
Hospitality Group (2001) 110 FCR 157, 196 [159] (Hill and Finkelstein JJ).
91
[1974] 1 WLR 798.
92
[2001] 1 AC 268.
93
[1952] 2 QB 246.
19
time, that they were occasionally lent free of charge or hired out at a reduced rate, and that they might
have been accidentally destroyed. Varying the orders of the trial judge the Court of Appeal held that the
plaintiff was entitled to the full figure without any reduction.
Denning LJ decided that the unlawful detention of goods should attract a payment of a reasonable fee by
analogy to cases of trespass to land where a wrongdoer is obliged to pay a fair rental for land where
keeping the owner out of its land or making use of the land for the wrongdoer’s own purposes, even
though the owner would not have been able to use it himself or let it to anyone else.94
The judgment in Strand Electric is significant for Denning LJ’s forthright formulation of a restitutionary
approach:
The claim for a hiring charge is therefore not based on the loss to the plaintiff, but on the fact that the
defendant has used the goods for his own purposes. It is an action against him because he has had the
benefit of the goods. It resembles, therefore, an action for restitution rather than an action of tort. But it is
unnecessary to place it in any formal category. The plaintiffs are entitled to a hiring charge for the period of
detention, and that is all that matters. 95
Denning LJ allowed for the possibility of an account of profits by reason of the wrongful use of the
chattel but accepted that an account was unnecessary in the present case.96 Somervell LJ while expressing
his judgment in compensatory terms — as did Romer LJ — acknowledged obiter that there were some
cases in which a wrongdoer may be called on to account for profits.97
2
Trespass to Land
Corresponding to cases of conversion, as in Strand Electric, a trespasser upon land is generally liable to
pay the market rent for the land whether or not the landowner would have been willing or able to let the
land to someone else.98 The cases below illustrate how an award of damages or mesne profits amounts to
a restitution of the market value of the defendant’s use of the land without the need to show an
identifiable loss.
94
Ibid 253–4.
Ibid 254–5.
96
Ibid 255. There appear to be no reported English cases of ordering accounts in a proprietary tort. For an American
case awarding accounts see Edwards v Lee’s Administrator, 96 SW 2d 1028 (1936) (Ky Ct App), quoted in Barnett
above n 10, 158.
97
[1952] 2 QB 246, 252 (Somervell LJ). Since the Court of Appeal awarded damages at the market rate, the actual
benefit received by the defendant in an account of profits became irrelevant.
98
Inverugie Investments Ltd v Hackett [1995] 1 WLR 713, 717–8 (Privy Council), cited in Bunnings (2011) 82
NSWLR 420, 466 [173].
95
20
(a) Penarth Dock
In Penarth Dock Engineering Co Ltd v Pounds (‘Penarth Dock’)99 the defendant had trespassed on the
plaintiff’s dock by failing to remove a pontoon it had purchased from the plaintiff. Unlike the position in
Strand Electric the plaintiff could not have let out the dock to a third party nor would it have let the
defendant into possession subject to a hiring fee, as it was trying to get the defendant to remove the
pontoon because the delays it was causing to closure of the dock. Lord Denning sitting at first instance
stated that the test of the measure of damages was not what the plaintiff would have lost but what benefit
the defendant obtained by use of the berth.100 The damages were based on the rate which the defendant
would have had to pay if moving the dock elsewhere, subject to a discount reflecting the rate ordinarily
payable on the less valuable derelict site.101
(b) Whitwham
As a precedent of Penarth Dock, the Victorian case of Whitwham v Westminster Brymbo Coal & Coke Co
(‘Whitwham’)102 established a recognition, in somewhat muted terms, of a gain-based award in trespass to
land. The defendant had trespassed on the plaintiff’s land in tipping colliery waste for six years. It was
held that the proper measure of damages was not the diminution in value of the land assessed at £200 but
the value of the land to the defendants over the last six years assessed at £900. Cast in compensatory
terms the damages were assessed on the basis of a loss sustained by the plaintiff by not renting out that
part of the land or by not earning a fee if approached. Yet, on the evidence, it was impracticable for the
plaintiff to have rented out that part of the land.103
The concurring judgment of Lopes LJ demonstrates the inconsistency of a compensatory analysis that
excludes recognition of a gain-based award. The inconsistency is to hold the defendant liable for its
gainful use, as well as the plaintiff’s loss in value, while denying that the defendant’s benefit is to be
taken into account. Thus Lopes LJ stated that making the defendant pay for the use it made of the land, in
addition to the loss in value sustained by the plaintiff, did not depart from the rule that in trespass to land
the plaintiff is to be paid in respect of its loss sustained and any benefit accruing to the defendant should
[1963] 1 Lloyd’s Rep 359 (‘Penarth Dock’).
Ibid 361–2.
101
Ibid 362: ‘If he had moved it elsewhere, he would have had to pay, on the evidence, £37 10s a week for a berth
for a dock of this kind. But the damages are not put as high as that, and the damages are to be assessed in accordance
with the law as I have stated it at the rate of £32 5s a week [from the due removal date until the actual removal
date].’
102
[1896] 2 Ch 538 (Lindley, Lopes and Rigby LJJ).
103
Whitwham v Westminster Brymbo Coal & Coke Co [1896] 1 Ch 894, 900 (Chitty J at first instance).
99
100
21
be disregarded.104
A more lucid explanation as advanced by Lindley LJ recognised the defendant’s accountability for its
gainful use of the land in addition to its loss in value:
The plaintiffs have been injured in two respects. First, they have had the value of their land diminished;
secondly, they have lost the use of their land, and the defendants have had it for their own benefit. It is
unjust to leave out of sight the use to which the defendants have made of this land for their own purposes,
and that lies at the bottom of what are called the way-leave cases.105
As a result the court extended liability where a defendant’s gain is made in addition to the depreciation in
the value of the land. On terms similar to Penarth Dock as in the rent saved, the decision in Whitwham
can be explained on a restitutionary analysis as an expense saved by the defendant in disposing of its
spoil.106
(c) Landlord-Tenant: Mesne Profits
The landlord–tenant case of Swordheath Properties Ltd v Tabet107 confirmed that the absence of any loss
suffered in terms of the actual use of the land made by the plaintiff was no answer to a claim for mesne
profits. The landlord was entitled to have damages for trespass calculated on the ordinary letting value of
the property, without bringing evidence that it could have let the property to someone else. Viewed on a
restitutionary basis the defendant gained the saving of renting alternative premises during the overholding
period.108
More recently the Court of Appeal in Ministry of Defence v Ashman109 expressed the realisation that
mesne profits should be accepted as restitution. It was ‘time to call a spade a spade.’110 The majority
determined that the appropriate award of mesne profits was not the monthly market rate for the lease of
the property but the concessional rent that the defendant would have had to pay to lease a house
elsewhere. While debate continues in England as to whether mesne profits should be subjectively valued,
104
[1896] 2 Ch 538, 542–3. Cf Bunnings (2011) 82 NSWLR 420, 472 [198] (Giles JA): the law permits a departure
from compensatory principles when the wrongdoer has the benefit of use of the chattel.
105
[1896] 2 Ch 538, 541, citing Jegon v Vivian (1871) LR 6 Ch App 742; Martin v Porter (1839) 5 M & W 351; 151
ER 149; Phillips v Homfray (1871) LR 6 Ch App 770.
106
Burrows, above n 8, 381; see also Barnett, above n 10, 156.
107
[1979] 1 WLR 285 (Megaw, Browne and Waller LJJ).
108
Burrows, above n 8, 381.
109
(1993) 25 HLR 513.
110
Ibid 519 (Hoffmann LJ), quoted in Hampton v BHP Billiton Minerals Pty Ltd [2012] WASC 285 (9 August
2012) [331] (Edelman J).
22
the acceptance of a restitutionary basis has reached the point that a landlord can elect between a
restitutionary award and a loss based award.111
3
Wrotham Park: a Bridge Between Property Rights and Contract
The decision in Wrotham Park112 concerning an infringement of a property right, in the form of a
restrictive covenant, represents a vital bridge between the borders of disgorgement of gains made in an
invasion of property rights113 with the borders of the law of contract. This was because the court ordered
disgorgement of a profit by analogy to the invasion of property rights in an action brought against the
successor in title of the original covenantor that could readily translate to an action in breach of contract
between the original contracting parties.114
In Wrotham Park a developer constructed 14 houses on a vacant parcel of land without prior approval
from the neighbouring owners in breach of a restrictive covenant but in the self-serving belief that the
covenant was unenforceable. The plaintiffs issued proceedings seeking a mandatory injunction for the
removal of the homes, but did not seek an interlocutory injunction prior to the trial for the combined
reasons of the risks of giving an undertaking for damages, a pessimistic view of its prima facie case and
its reliance on the deterrent effect of the issue of a writ.
Brightman J considered that an order to demolish the houses was inappropriate for ‘social and economic
reasons’, an ‘unpardonable waste of much needed houses’ and would not achieve the object sought by the
plaintiffs to preserve the integrity of the restrictive covenants on the balance of the land affected.115 In
assessing damages in substitution of an injunction116 the court rejected the notion that the absence of any
loss suffered by the plaintiff meant that damages should be nil or nominal. In a conclusion that resonates
throughout gain-based awards, the court decided that it could not follow that the plaintiffs receive no
111
Hampton v BHP Billiton Minerals Pty Ltd [2012] WASC 285 (9 August 2012) [336], citing Shi v Jiangsu Native
Produce Import and Export Corp [2009] EWCA Civ 1582 (6 October 2009) [20]–[23] (Dyson LJ).
112
[1974] 1 WLR 798.
113
A breach of restrictive covenant is regarded as an invasion of a property right, since a restrictive covenant is akin
to a negative easement: Pell Frischmann Engineering Ltd v Bow Iran Valley Ltd [2011] 1 WLR 2370, 2386 [48]
(Privy Council), citing Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 (20 March 2003)
[56] (Peter Gibson LJ).
114
Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 (20 March 2003) [56] (Peter Gibson LJ).
115
[1974] 1 WLR 798, 811B–C, 812G.
116
As authorised by Lord Cairns Act and as sought by the plaintiffs as an alternative to an injunction.
23
‘compensation’ and the defendants be left to the ‘undisturbed possession of the fruits of their
wrongdoing’.117
The court treated the case as an invasion of the plaintiffs’ proprietary rights despite having suffered no
loss,118 by analogy to a patent infringement119 and the profitable use of land and chattels as established in
Whitwham, Strand Electric and Penarth Dock. Restating the principle in Robinson v Harman of
measuring damages by that sum which would the place the plaintiffs in the same position as if the
covenant had not been broken,120 the court resolved that the appropriate measurement was the amount that
the plaintiffs might reasonably have demanded as a quid pro quo for relaxing the covenant had the
developer applied to them for a release. The court reasoned that a landowner would have required a
certain percentage of the developer’s anticipated profit as a price for the relaxation of the covenant,
which, in the circumstances of the case, the court fixed at five per cent, making £2500. This amount,
described by Brightman J as reached with ‘great moderation’, reflected the fact that the plaintiffs could
not have turned the asset — the restrictive covenant — into account, the fact the breach related to only a
small part of the estate bound by the covenant,121 and the fact that the plaintiffs could have notified their
objection to the original vendor or to the developer prior to completing its purchase.122
While the authorities on reasonable rent emphasise that the objection that the plaintiff’s inability to turn
the asset to account is negated by the exploitative use of the land or chattels,123 the lack of a commercial
value of the Wrotham Park covenant was relevant to assessing the price required to relax the covenant. If
the owners enjoyed the advantage of a commercial value — such as a covenant specifying housing
density — the performance value of the covenant would have been measured in alignment with its
prospective commercial worth thus attracting a considerably higher amount.124 For this reason the court
117
[1974] 1 WLR 798, 812H.
Ibid 814H.
119
Ibid 813C–H, quoting Watson Laidlaw & Co Ltd v Potts Cassels and Williamson (1914) 31 RPC 104 (Earl of
Halsbury, Lord Kinnear, Lord Atkinson and Lord Shaw).
120
Translated by Brightman J in negative terms, rather than the original positive terms (‘as if the contract had been
performed’) in conformity with the negative nature of the covenant, namely, not to develop the land except in
accordance with a plan approved by the estate owner: [1974] 1 WLR 798, 812F, 815C.
121
The subdivision was built on a triangle of vacant land with a base of 100 yards and sides of 170 yards leaving the
apex unaffected and lying within the estate of 47 acres: ibid 803C.
122
There is a question of what avenues of objection were available to the plaintiffs when the county council granted
the planning permit for the offending development two years prior to the developer’s acquisition of the site: ibid
803F.
123
As in the facts in Whitwham, Penarth Dock and Bunnings.
124
Cf Lane v O’Brien Homes Ltd [2004] EWHC (QB) 303 (5 February 2004) (David Clarke J) where the plaintiff
vendor could turn to account the breach of the collateral promise not to build more than three houses on the land,
with the defendant held liable to pay 50 per cent of the profit made from building a fourth house. The vendor had
lost the opportunity of a higher asking price because of the purchaser’s promise to restrict density to three houses.
118
24
rejected the measure of a half or third of the development value as the amount usually demanded by a
landowner that stood in the way of development.125 The present case was not one being able to stand in
the way of development but was a breach of the obligation to have the plaintiffs approve the development
which approval could not have been unreasonably withheld.126
(a) Objective Nature of the Award
The award in Wrotham Park has attracted criticism of its artificiality in putting a price on negotiability of
the covenant when the plaintiffs would never have agreed to a relaxation of the covenant.127 This criticism
arises from the remarks of Brightman J:
On the facts of this particular case the plaintiffs, rightly conscious of their obligations towards existing
residents, would clearly not have granted any relaxation, but for present purposes I must assume that it
could have been induced to do so.128
It is submitted that this criticism overlooks the objective nature of the assessment of the reasonable fee in
the cases on which Wrotham Park relied. Wrotham Park is but a restatement that an assessment removes
the element of subjectivity of the plaintiff’s actual or intended use of the asset. On the facts in Wrotham
Park, the plaintiffs had no intention of releasing the covenant. In Penarth Dock the lessee wanted to get
rid of the purchaser. Strand Electric never had all switchboards on hire for the full term. In Whitwham the
plaintiffs disclaimed an intention to lease out the land trespassed upon. This explains why Brightman J
chose the words he did: ‘I must assume that [the plaintiffs] could have been induced to do so’ (emphasis
added). It should be noted that the supposed impossibility of the owners ever agreeing to a relaxation of
the covenant should be qualified by the owners’ admission that they could not unreasonably withhold
consent to the development.129
(b) Reasonable Fee Awards Reviewed
The award of a reasonable fee, originating as a remedy for the invasion of property rights, is, in the case
of a breach of contract, an award of damages measured objectively by the benefit gained by the
wrongdoer from the breach.130 It is in this sense that a benefit or profit is disgorged. Other opinions treat
125
The development value was estimated to have been £10 000 per plot: [1974] 1 WLR 798, 815E.
Counsel for the plaintiffs had conceded that the covenantee would have no right to refuse approval unreasonably:
ibid 804H.
127
See, eg, Barnett, above n 10, 17.
128
[1974] 1 WLR 798, 815D.
129
See above n 125.
130
Blake [2001] 1 AC 268, 283H–4A (Lord Nicholls), quoted in Barnett, n 10, 154.
126
25
reasonable fee awards as not amounting to disgorgement. Jaffey interprets reasonable fee awards as user
fees for the unauthorised use of property, and not as a response to a wrong, as in the case of
disgorgement, which he assumes must necessarily comprise the entirety of the benefit.131 Similarly,
Worthington limits disgorgement to equitable obligations of good faith and loyalty where disgorgement in
its ‘true sense’ means stripping the defendant of ‘every penny of an ill-gotten gain’.132
Notwithstanding these views, a reasonable fee can operate as a partial disgorgement since a reduction can
be made for allowances.133 A reasonable fee is not limited to a property right as it can equally apply to the
compulsory acquisition or relaxation of a contractual right,134 reflected in the description ‘negotiating
damages’.135 The amount of the reasonable fee, whether a full award of profits or only a proportion of
profit, depends on whether, as a matter of causation, it was attributable to the breach of contract.
Otherwise there would be no justification for disgorging the benefit.136
An account of profits and a reasonable fee award share a common feature as a gain-based remedy for a
wrongful act. The distinction between an equitable account and a common law reasonable fee appears to
be an accident of history.137 Nevertheless a reasonable fee is objective in nature in contrast to the
subjectivity of an account of profits received by the defendant.
If an award were simply a fee for use of property, as in a licence fee, royalty or rent, as argued by Jaffey,
there would be no occasion for judicial intervention, unless the award amounted to redress for a legal
wrong. In its essentials the unauthorised use of property is a wrong in the form of a proprietary tort, such
as trespass to land or conversion of goods, or a breach of covenant. Similarly in the realm of contract a
reasonable fee is redress for a wrong, but there its complexion changes from a remedy for an invasion of a
property right founded on unauthorised use to a remedy for an invasion of a contractual right founded on
the promise of performance. In recognition of the distinctive nature of a reasonable fee in respect of a
Peter Jaffey, ‘Restitution, Property and Unjust Enrichment’ [2011] Restitution Law Review 95, 98. See also
Mitchell McInnes, ‘Account of Profits for Common Law Wrongs’ in Simone Degeling and James Edelman (eds),
Equity in Commercial Law (Lawbook, 2005) 405, 416–18.
132
Sarah Worthington, ‘Reconsidering Disgorgement for Wrongs’ (1999) 62 Modern Law Review 218, 218.
133
Warman International Ltd v Dwyer (1995) 182 CLR 544 which can be best explained as a reduced award made
on causation grounds so that a fiduciary is not accountable for gains that have a tenuous connection to the
wrongdoing: Barnett, above n 10, 199; Peter Devonshire, ‘Account of Profits for Breach of Fiduciary Duty’ (2010)
32 Sydney Law Review 389, 401.
134
Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2011] 1 WLR 2370, 2386 [49] (Privy Council).
135
Ibid [48], quoting Lunn Poly Ltd v Liverpool & Lancashire Properties Pty Ltd [2006] 2 EGLR 29, [22]
(Neuberger LJ).
136
Burrows, above, n 8, 378.
137
Blake [2001] 1 AC 268, 280D (Lord Nicholls).
131
26
breach of contract, the divergence between reasonable fee awards and full disgorgement based on the
refusal of specific relief will now be reviewed.
(c) Analysis by Way of Specific Relief
The distinction between reasonable fee awards and full disgorgement has been analysed by reference to
the refusal of specific relief. According to this analysis a reasonable fee is awarded where the court ‘will
not’ order specific relief, in the sense of deciding in the exercise of discretionary factors not to grant
specific relief, as for example, because of delay, hardship on the defendant or public policy. On the other
hand, full disgorgement is ordered, under this analysis, where the court ‘cannot order’ specific relief
because of impossibility or the need for constant supervision.138 The difficulty in this analysis, while
valuable for classification, is its focus on the rejection of specific relief without explanation of the link
between the contractual breach and the remedy awarded.
The fragile connection between the refusal or unavailability of specific relief on grounds of impossibility
and full disgorgement is demonstrated in Surrey County Council v Bredero Homes Ltd.139 There the Court
of Appeal decided that, as the plaintiff had not sought an injunction, damages at common law, as opposed
to damages under Lord Cairns Act140 as in Wrotham Park, could not include a gain-based award, with the
result that only nominal damages were available, observing ‘there was never any practical possibility’ of
an injunction being granted.141 Accepting the criticism that the Court of Appeal ought to have awarded a
reasonable fee,142 the categorisation produces the variable result that a situation of impossibility of
specific relief would have made the case deserving of full disgorgement.143
The division between ‘will not’ order and ‘cannot order’ could also be questioned in the situation of the
refusal of specific relief on grounds of the need for constant supervision. Arguably this situation could fall
into the first category, instead of the second category, where an injunction is refused on discretionary
grounds because of the need for constant supervision ─ as a case of ‘will not’ order144 ─ in contrast to
138
Cunnington, above n 16, 207, 236.
[1993] 1 WLR 1361.
140
Chancery Amendment Act 1858 [Lord Cairns Act], 21 & 22 Vict, c 27, s II. Enacted throughout Commonwealth
jurisdictions: see, eg, Supreme Court Act 1986 (Vic) s 38.
141
[1993] 1 WLR 1361, 1367 (Dillon LJ).
142
See, eg, Peter Birks, ‘Profits of Breach of Contract’ (1993) 109 Law Quarterly Review 518, 519.
143
Barnett contended that real basis of the decision was that the council’s delay and acquiescence barred relief:
above n 10, 206.
144
See Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1, 46 (Brennan
CJ, McHugh, Gummow, Kirby and Hayne JJ) where the High Court said the objections that the court will be
involved in constant supervision are questions of degree rather than absolute restrictions on the scope of relief. The
court added that the significance of Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1
139
27
impossibility in the second category of ‘cannot order’, as in Blake where an injunction against disclosure
could not be contemplated because the disclosures had already been made and the book was published
before the plaintiff could take action.
As explained in Part IV, Blake established a broad power to award disgorgement damages at common
law.145 It was not necessary that an injunction should actually have been claimed in the proceedings, or
that there could be no claim for an injunction.146 Since Blake had laid down general principles of
accounting for profits in breach of contract without reference to the categories of refusal of specific relief,
an analysis in terms of specific relief is of limited utility. At all events, Blake treated a claim for all the
defendant’s profits as a reasonable payment in respect of the benefit gained.147 Thus a reasonable fee
converges with full disgorgement by measuring damages by the benefit obtained by the wrongdoer.
was that the concept of constant supervision by the court by itself is no longer an effective or useful criterion for
refusing a decree of specific performance.
145
Giedo Van Der Garde BV v Force India Formula One Team Ltd [2010] EWHC (QB) 2373 (24 September 2010)
[528] (Stadlen J).
146
Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2011] 1 WLR 2370, 2386 [48] (Privy Council).
147
[2001] 1 AC 268, 284A (Lord Nicholls).
28
IV
BLAKE AND GAIN BASED RECOVERY IN CONTRACT
A Blake as the Highpoint of Disgorgement
Leaving reasonable fee awards, this Part examines the significance of the decision of the House of Lords
in Blake.148 This Part will critically review its criteria for disgorgement and its treatment in obiter dicta of
cases of skimped performance and negative obligation as inappropriate for the remedy of accounts.
The significance of Blake is to free gains in breach of contract from the disguise of compensatory
damages and to give express recognition of contractual disgorgement of profit as advocated in this
introduction. Blake is a remarkable decision for its vision and clarity. Its vision is to achieve coherence in
the law of remedies so that the law of contract can measure damages by reference to a wrongdoer’s gain
as does the law of tort. Likewise an account of profits can be available at common law as it is in equity.149
Its vision extends to limiting disruption to the commercial world by treating disgorgement as an
exceptional remedy. Its clarity is to reaffirm the established principle of compensation for loss while
isolating cases where the concept of compensation is no longer credible to explain a gain-based remedy.
Its clarity endures in setting the performance interest as the foundation of disgorgement, since the
performance interest forms the essence of damages for breach of contract.
In Blake the defendant, a former intelligence officer, had, on joining the intelligence service, signed a
statutory undertaking not to divulge any official information gained as a result of his employment. In
1961 he was convicted of spying and sentenced to imprisonment150 but later escaped to Moscow. In 1989
he wrote an autobiography, mostly based on information he had obtained in the intelligence services. The
Attorney General issued proceedings against Blake seeking recovery of all royalties received from the
publisher on the ground of breach of fiduciary duty not to make use of his position as a former
intelligence officer or make use of confidential information to generate a profit for himself. At first
instance the court dismissed the proceedings on grounds that the defendant’s lifelong duties of
confidentiality did not extend to information that was no longer confidential.151 The Court of Appeal
148
Ibid 268.
Devenish Nutrition Ltd v Sanofi-Aventis SA [2009] Ch 390, 448 [49] (Arden LJ).
150
After pleading guilty to communicating information useful to an enemy contrary to Official Secrets Act 1911, 1
& 2 Geo 5, c 28, s 1(1)(c) the defendant was convicted and sentenced to 14 years imprisonment on the first three
counts cumulatively and 14 years on the fourth and fifth counts concurrently, with a total effective sentence of 42
years. An appeal against sentence was dismissed: R v Blake [1962] 2 QB 377 (Hilbery, Ashworth and Paull JJ).
151
A-G v Blake [1997] Ch 84 (Scott V-C).
149
29
found that the defendant had breached the undertaking he signed on entering the service but since the
Crown could not establish any loss from Blake’s breach of contract it was only entitled to nominal
damages, while leaving open the prospect of restitutionary damages, as an exception to compensatory
damages, to be decided by the House of Lords.152
The conclusion of the majority of the House of Lords153 was that in an exceptional case, where the normal
remedies of damages, specific performance and injunction were inadequate compensation for a breach of
contract,154 the interests of justice could justify the discretionary grant of an order requiring the defendant
to account to the plaintiff for the benefits received from the breach of contract, akin to a breach of a
fiduciary duty. Because compensatory damages were not always a sufficient remedy for breach of
contract, damages may be measured, when the circumstances require, by reference to the benefit obtained
by the wrongdoer.155
The reasonable fee awards, illustrated in Part III, particularly Wrotham Park, supported a defendant’s
obligation to account for the benefits received from its contractual breach. The leading speech of Lord
Nicholls underlined the importance of Wrotham Park as a bridge between tortious and contractual
disgorgement. Shining as a ‘solitary beacon’, Wrotham Park showed that damages for breach of contract
and tort are not always confined to recovery of financial loss but may be awarded by reference to the
profit obtained by the party in breach, based on an analogy with awards of a reasonable fee for invasion of
property rights.156 There was no reason why a violation of a party’s contractual rights should not attract a
lesser degree of remedy than a violation of property rights.157 As the remedy was exceptional, there would
be no reason to disturb settled expectations in the commercial or consumer world.158
Lord Nicholls identified various cases that ordered an account of profits under different but strained
labels. The examples cited, however, were labelled as fiduciary cases, rather than as compensation, drawn
from Birks’ criticism of fiduciary instrumentalism.159 A person who resells land in breach of contract
152
A-G v Blake [1998] Ch 439 (Lord Woolf MR, Millett and Mummery LJJ). However the Court of Appeal held that
the defendant could be restrained by injunction from receiving payment on public law grounds of deriving financial
benefits from contravening the criminal law in the Official Secrets Act 1989 (UK) c 6. This point was reversed by
the House of Lords as a confiscation of property unauthorised by statute.
153
Lord Nicholls, Lord Goff, Lord Browne-Willkinson, Lord Steyn; Lord Hobhouse (dissenting).
154
Echoing Birks, ‘Restitutionary Damages’, above n 8, 442.
155
[2001] 1 AC 268, 285B–C (Lord Nicholls).
156
Ibid 283H.
157
Citing Smith, above n 69.
158
[2001] 1 AC 268, 283C–5F.
159
Birks, ‘Restitutionary Damages’, above n 8, 434. Birks’ criticism is discussed in the negative obligation category
below and in Part VB.
30
being ordered to surrender the profits on the second sale to the original buyer was treated under the label
of a constructive trustee.160 A railway company in breach of its promise not to transmit commercial
messages over the plaintiff’s telegraph wire was held liable as constructive trustee for its profits.161
On the other hand, the case cited of British Motor Trade Association v Gilbert162 was decided in explicit
terms of stripping a profit by way of contractual damages in the sale of a motor car on the black market.
This case represents the line of authority that awards damages by reference to the actual market value
where goods are sold in breach of a contractual stipulation, such as agreed price controls, with the result
that the plaintiff receives damages at a greater amount than it would have realised had the contract been
performed according to its terms.163
In reviewing the black market cases, it is timely to contrast the decision in Butler. While the black market
cases award damages by reference to the actual market value of the goods despite the plaintiff receiving
more than if the obligation had been performed, the High Court in Butler had, in reducing damages,
emphasised that the plaintiff would be in a better position financially than would have been the case had
the defendant complied with its statutory obligations.164 Nonetheless there is no parity between Butler and
the black market cases because the claim for damages in Butler did not rely on the black market price but
instead was based on the subjective value to the plaintiff.
Rather, the black market cases may be better compared to the rectification cases discussed in Part II
which collectively explain the supposed windfall by the vindication of the performance interest. The
retention of a profit made in breach of a price control stipulation denies performance of the contract and
represents the value of the performance denied. Hence, the totality of the cases cited by Lord Nicholls
was intended to illustrate that circumstances arise when the just response to a breach of contract is that the
wrongdoer should not be permitted to retain any profit from the breach.165
160
[2001] 1 AC 268, 284D, citing Lake v Bayliss [1974] 1 WLR 1073.
[2001] 1 AC 268, 284D, citing Reid-Newfoundland Co v Anglo-American Telegraph Co Ltd [1912] AC 555.
162
[1951] 2 All ER 641 (‘Gilbert’), cited in Blake [2001] 1 AC 268, 284E.
163
Gilbert [1951] 2 All ER 641, 645 (Danckwerts J). See, especially, Rodoconachi v Milburn (1896) 18 QBD 67, 77
(Lord Esher MR); Mouat v Betts Motors Ltd [1959] AC 71, 82 (Lord Denning); Building and Civil Engineering
Holiday Scheme Management Ltd v Post Office [1966] 1 QB 247, 268–9 (Pearson LJ); R v Islam [2009] AC 1076,
1082–3 [11]–[12] (Lord Hope). In Gilbert Danckwerts J acknowledged, at 644–5, the irony of awarding damages at
the black market rate which the breached term was designed to prevent but applied the prima facie rule in Sale of
Goods Act 1893, 37 & 38 Vict, c 71, s 51 that the measure of damages for nondelivery is the difference between the
market value and the contracted price.
164
(1966) 114 CLR 185, 190 (Taylor and Owen JJ), 192 (Menzies J).
165
[2001] 1 AC 268, 284F.
161
31
B The Dissenting Approach: Compensatory Damages
The dissenting speech of Lord Hobhouse represents the insistence of a compensatory characterisation of
damages, which, in consequence, excludes an account of profits. Lord Hobhouse drew a conceptual
demarcation between restitution and compensation. Restitution was analogous to property, in procuring
the in specie performance of the defendant’s obligations, such as an account of profits. In contrast,
damages for breach of contract were a substitute for performance of the defendant’s obligations and were
therefore fundamentally compensatory. In his view a Wrotham Park award should be classified as
compensatory on the basis of the compulsory purchase of the plaintiffs’ rights of refusal. But in the
present case, as an award of damages, the account of profits did not, in his view, properly represent the
reasonable price to pay for permission to publish. As a matter of restitution, accounts were predicated on
proprietary rights which were absent on the facts.166
Yet this compensatory interpretation of damages poses problems. Wrotham Park damages viewed as
compensatory are not consistent with the intention expressed by Brightman J to deprive the defendant of
the benefit it gained unjustly, after concluding that the breach of covenant had not diminished the value of
the land.167 The demarcation between restitution confined to property rights and damages confined to
compensation for contractual rights tends to blur in its practical application to cases of disgorgement for
breach of contract. Cases of disgorgement were treated by Lord Hobhouse as ‘closely analogous to
proprietary rights’ so as to be covered by remedies appropriate to proprietary rights. Adopting this
analysis, Wrotham Park could ambiguously fall into the first category as ‘closely analogous with
proprietary rights’, given Brightman J’s reliance on invasions of proprietary rights, as well as falling into
the second category as compensatory damages, as Lord Hobhouse chose to categorise Wrotham Park.168
166
[2001] 1 AC 268, 298–9.
[1974] 1 WLR 798, 812.
168
Lord Hobhouse considered that it was erroneous to interpret Wrotham Park as restitution because of the incorrect
assumption that the only loss was the reduction in the value of the dominant tenement: [2001] 1 AC 268, 298G. Cf
Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 (20 March 2003) [56] where Peter Gibson
LJ described Wrotham Park as ‘an infringement of a property right’.
167
32
C The Exceptionalism of Blake and its Guidance
1
The Guidelines
The liability to account for profits in breach of contract recognised in Blake presents, at first sight, a
challenge to popular expectations in contractual dealings that damages are assessed as compensation for
loss. Conscious of the unsettling effect of a potential disgorgement of profits in the commercial world,
Lord Nicholls sought to give definition to the remedy of accounts in cases of breach of contract. The
remedy of accounts would only be ordered in exceptional cases. As it would be impractical and unwise to
define specific limits, the exercise of the court’s discretion would, as envisaged by Lord Nicholls, have
regard to all the circumstances. Such circumstances would include:
(a) the subject matter of the contract;
(b) the purpose of the contractual provision which has been breached;
(c) the circumstances in which the breach occurred;
(d) the consequences of the breach; and
(e) the circumstances in which relief is being sought.169
To assist in the exercise of the court’s discretion, a ‘useful general guide’ was whether the plaintiff had a
legitimate interest in preventing the defendant's profit-making activity and hence in depriving it of its
profit.170 However, in this section it will be contended that ‘legitimate interest’ is a re-expression of the
performance interest, particularly when tested against the excluded categories of skimped performance
and negative obligation below.
2
The Exclusions: Skimped Performance and Negative Obligation
Within the remedy of accounts for contractual breach, Lord Nicholls excluded the categories of skimped
performance and negative obligation. Following the Court of Appeal’s discussion in obiter dicta of the
possible categories of accounting for profits that could be recognised in the law of contract,171 Lord
Nicholls considered that such discussion was too broad, going beyond accounts in the conventional sense
to include restitutionary damages in general. Such categorisation of first, defective or skimped
performance and secondly, obtaining a profit from the very thing the defendant had contracted not to do,
did not assist for the purpose of ordering accounts.172
169
[2001] 1 AC 268, 285G.
Ibid 285H.
171
The Court of Appeal’s discussion of Blake’s liability to account for profits on the basis of breach of contract was
on its initiative. The Crown declined the court’s invitation to argue the point, while reserving its position for a higher
court: A-G v Blake [1998] Ch 439, 456C (Lord Woolf MR).
172
[2001] 1 AC 268, 286A–E.
170
33
In the opinion of Lord Nicholls, skimped performance did not require accounts because a sufficient
remedy was available in the form of a refund of expenditure as a common case of damages, by analogy
to a refund of the price difference in the sale of inferior and cheaper goods. The second category
embracing all negative covenants was defined too widely, in that ‘something more’ was required before
an account of profits would be appropriate.173 The rejection of the two categories will now be reexamined to show that accounts can be appropriate when justified by the performance interest, an
outcome that is consistent with the reasoning in Blake.
(a) The Skimped Performance Category
The significance of skimped performance can be misunderstood when simply compared to the sale of
defective goods. The analogy in the sale of goods of answering for the difference in price may result in an
inadequate remedy for skimped services. Rather skimped services present a case for disgorgement of
profits where no measurable loss has been suffered by the injured party. Moreover, skimped performance
in the supply of services is capable of amounting to fraud where the importance of performance of
contractual promises emerges in its most pronounced form.
In the Court of Appeal’s discussion, the challenge posed by skimped performance was represented in the
American case of City of New Orleans v Firemen’s Charitable Association (‘New Orleans’).174 The
plaintiff discovered after expiry of the contract that the defendant firefighting service had failed to
provide the stipulated number of firemen or horses and the promised length of hosepipe. The plaintiff was
able to particularise the expense saved by the defendant. As the defendant had not failed to put out any
fires in consequence, the court held that the plaintiff had failed to prove a loss and affirmed the dismissal
of the proceeding.175 Lord Woolf reasoned that the appropriate measure of damages should have been the
amount saved by the breach by way of restitutionary damages.176 The outcome in New Orleans casts
doubt on Lord Nicholls’ solution of the analogy of a refund for the difference in supplying cheaper goods:
the supply of nonconforming goods has a verifiable loss177 which is often absent in the supply of
nonconforming services.
173
Ibid 286C–D.
9 So 486 (La, 1891) (McEnery J), cited in A-G v Blake [1998] Ch 439, 458C (Lord Woolf MR).
175
According to Lord Woolf the plaintiff was unable to recover more than nominal damages: [1998] Ch 439, 458D,
but the report states ‘the dismissal of the suit by the District Court on the exception of no cause of action was
proper’: 9 So 486 (1891), 487─8.
176
[1998] Ch 439, 458E.
177
See, eg, Goods Act 1958 (Vic) s 59(1)(a) where the buyer may set up the breach of warranty in diminution of the
purchase price; see also M G Bridge, The Sale of Goods (Oxford University Press, 3rd ed, 2014) 701 [12.117].
174
34
Aside from the cases discussed in Blake, the difficulty of quantifying a refund representing
nonconforming services is illustrated in White Arrow Express Ltd v Lamey’s Distribution Ltd.178 A mail
order business contracted with the defendant to provide courier services to customers under enhanced
service standards. The defendant only carried out a basic level of service. The plaintiff claimed damages
for failure to comply with the service standards measured by the proportion of consideration relating to
the enhanced level of service, calculated as an overpayment. The Court of Appeal, while accepting that a
party who fails to receive a superior service in accordance with the contract is entitled to damages
between the price paid and the value of what was obtained, considered that the plaintiff’s attempts to
calculate the fractional consideration referable to the breach was an attempt to advance a quasi contractual
claim for a partial failure of consideration under the guise of damages for breach of contract and was
therefore entitled to no more than nominal damages. The court contemplated that the plaintiff may not
have been in a position to make the right comparison and acknowledged that the plaintiff could
conceivably reformulate its claim so as to found a claim for substantial damages.
In that case the problem in quantifying loss could have been resolved by a restitutionary order for the
expense saved by the contractor.179 Otherwise the problem persists that if damages are assessed, as
envisaged by Lord Nicholls, by the difference between the value of what the defendant agreed to supply
and what it did supply, one can see that if the inferior services actually supplied can be proved to have
been no less effective in securing the contracted objective intended to be achieved by the superior
services, a court might readily accept that the breach of contract did not result in any difference in the
value of the contracted services.180
In such circumstances the insistence on proof of loss in the event of skimped services raises disturbing
questions about the capacity of the law of contract to deal with certain kinds of breach.181 To illustrate this
point, using Birks’ hypothetical example,182 similar to New Orleans, a major hospital outsources its
cleaning services under rigorous hygiene and safety standards and the defendant contractor decides to
obtain an additional 20 per cent profit by ignoring the standards. Because the defendant successfully
gambled on the fact that no deaths or safety incidents occurred throughout the term of the contract, the
result is that the plaintiff is confined to nominal damages.
178
(1995) 145 New Law Journal 1504 (Bingham MR, Rose and Morritt LJJ).
McGregor, above n 9, 510 [14.033].
180
Giedo Van Der Garde BV v Force India Formula One Team Ltd [2010] EWHC (QB) 2373 (24 September 2010)
[476]. For a critique of attempting to measure the difference in the value of the service promised and the service
provided, see Adam Kramer, The Law of Contract Damages (Hart Publishing, 2014) 34−48.
181
Birks,‘Profits of Breach of Contract’, above n 141, 519.
182
Ibid.
179
35
If it is accepted that the offending party’s profits can be disgorged by reference to the expense saved,
cases of skimped performance may be brought within the confines of the Blake decision by characterising
the plaintiff as having a legitimate interest in preventing the defendant's profit making activity by reason
of its interest in performance of the contractual terms breached. Applying Lord Nicholls’ test, the
legitimate interest is to be determined against the indicia of the subject matter of the contract; the purpose
of the term breached; the circumstances and consequences of the breach; and the circumstances of the
relief.
Continuing the example of the hospital cleaning services, the hospital would have an acute interest in
observance of hygiene and safety standards by reason of its obligations as health services provider.
Measuring the Blake indicia, the subject matter is to ensure the rigorous health standards of a hospital; the
purpose of the obligation is to ensure service in compliance with the standards; the consequence is an
abject failure of its duty as a health services provider and the circumstances of the relief is to strip the
profit earned from the breach to vindicate the hospital’s interest in performance since compensatory
damages were unavailable.183 Any profit contrived by the contractor in ignoring the rigorous standards
required by the contract would in these circumstances justify disgorgement to the hospital.
An analysis on the basis of fraud could, because of the plaintiff’s reliance on the truth of the defendant’s
contractual representations, justify the legitimacy of the plaintiff’s interest in enforcing the accounting of
profits in cases of skimped performance. Cases of skimped performance, such as the hospital example or
New Orleans, could be interpreted as the representor having no honest belief in the truth of the
representation in the sense in which the representor intended it to be understood.184 The disgorgement of
profit from fraudulent conduct vindicates the legitimate interest of the kind identified in Blake: a reliance
on the representations that were made fraudulently, such reliance reflected in the price paid and the level
of service expected.
Cf the comments of Lord Nicholls: ‘[The innocent party] fails to obtain the benefit promised by the other party to
the contract. To him the loss may be as important as financially measurable loss, or more so. An award of damages,
assessed by reference to financial loss, will not recompense him properly’: Blake [2001] 1 AC 268, 282B.
184
See, eg, Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563. Edelman argues that ample authority exists
for disgorgement of profits of deceit or fraud, such as the bribe cases: James Edelman, ‘Gain-Based Damages and
Compensation’ in Andrew Burrows and Lord Rodger of Earlsferry (eds), Mapping the Law: Essays in Memory of
Peter Birks (Oxford University Press, 2006) 141, 148–9. Cf Halifax Building Society v Thomas [1996] Ch 217 that
held in damages for fraud the claimant is entitled only to be put in the position had the representation not been made.
183
36
(b) The Negative Obligation Category
This category based on the offending party obtaining a profit by doing an act which it promised not to do
as a negative obligation likewise reinforces the primacy of performance. This category, as formulated by
Birks, justifies disgorgement by the prevention of the defendant’s pursuit of profit in breach of its
contractual promise not to pursue a profit making activity, where the ‘defendant has obtained his profit by
doing the very thing he contracted not to do.’185
In Blake the Court of Appeal approved this formulation in terms that the defendant submitting his
autobiography for publication exhibited a direct connection between the breach of his undertaking of
nondisclosure and the profit he realised from the publishers thereby justifying the remedy of accounts.186
While the House of Lords did not endorse this category because of its uncertain scope, the breach of the
nondisclosure undertaking was of central significance which it saw as closely akin to a fiduciary
obligation. The breach of undertaking engaged the Crown’s legitimate interest in preventing the
defendant’s profit making activity, taking into account the special circumstances of the intelligence
services and the notoriety exploited by the defendant.187
Reid-Newfoundland Co v Anglo-American Telegraph Co Ltd (‘Reid-Newfoundland’)188 confirms that an
account of profits can be an appropriate response to a breach of a negative stipulation. A telegraph
company contracted to install and maintain a dedicated telegraph wire for operational use by the railway
within a specified rail line, subject to the railway’s undertaking not to usurp the telegraph company’s
business by transmitting commercial messages except for the account of the telegraph company. In breach
of the agreement the railway company used the wire for new rail lines, its shipping business and other
commercial undertakings. The Privy Council affirmed an order for accounts on the footing that a trust
arose requiring the defendant to account to the plaintiff as a fiduciary.189 At first sight a fiduciary
relationship does not sit easily with a contract made between the parties in an arms length commercial
dealing, given that parties to a contract ‘are taken to be independent and equal actors, concerned primarily
A-G v Blake [1998] Ch 439, 458F (Lord Woolf MR); Birks, ‘Restitutionary Damages’, above n 8, 434.
[1998] Ch 439, 458G.
187
[2001] 1 AC 268, 287G (Lord Nicholls). See also, at 292A: ‘The distinctive feature of this case is, however, that
Blake gave an undertaking not to divulge any information, confidential or otherwise, obtained by him...’ (Lord
Steyn).
188
[1912] AC 555.
189
Birks, ‘Restitutionary Damages’, above n 8, 434; Blake [2001] 1 AC 268, 284F (Lord Nicholls) described this as
one of the cases that ‘strained existing concepts’ and quoting Birks, ‘Profits of Breach of Contract’, above n 141,
520 as a ‘kind of abusive instrumentalism’.
185
186
37
with their own self-interest.’190 From a commercial perspective, the case could be justified as a breach of
the obligation not to engage in commercial exploitation of the telegraph line. As seen above in section A,
Lord Nicholls approvingly cited the case as deserving of disgorgement while disguised under a fiduciary
label.
Birks’ formulation of the category as a ‘person, giving good consideration, may have an entirely
legitimate interest in obtaining an undertaking from another not to pursue profit from a particular
activity…’191 (emphasis added) was the probable inspiration for the legitimate interest test in Blake. The
formulation is synonymous with the performance interest, as the promisee is interested in obtaining the
promisor’s offer of performance and is prepared to give value for its performance.192
A conception of the performance interest as the foundation of gain-based recovery makes redundant the
usage of ‘legitimate interest’. This avoids the distraction of legitimate interest being misunderstood as a
condition of recovery in addition to the performance interest. The performance interest as the essence of
contractual disgorgement can be understood by revisiting Lord Nicholls’ fundamental statement of
principle, occurring before his discussion of the legitimate interest test:
My conclusion is that there seems to be no reason, in principle, why the court must in all circumstances
rule out an account of profits as a remedy for breach of contract. …In the same way as a plaintiff's interest
in performance of a contract may render it just and equitable for the court to make an order for specific
performance or grant an injunction, so the plaintiff's interest in performance may make it just and equitable
that the defendant should retain no benefit from his breach of contract.193 (emphasis altered)
Viewed in this light, legitimate interest serves the same function as the performance interest in defining
the entitlement to gain-based recovery in breach of contract. The comprehensive nature of the
performance interest embraces both the skimped performance category and the negative obligation
category when measured by a plaintiff’s legitimate interest. This way the two categories of skimped
performance and negative obligations discussed in Blake are in reality manifestations of the protection of
the performance interest.
190
Norberg v Wynrib [1992] 2 SCR 226, 272 (Sopinka J), quoted in Pilmer v Duke Group Ltd (2001) 207 CLR 165,
196 (McHugh, Gummow, Hayne and Callinan JJ).
191
Birks, ‘Profits of Breach of Contract’, above n 141, 520.
192
Friedmann, above n 16, 629.
193
Blake [2001] 1 AC 268, 284H─5A.
38
V
DISGORGEMENT AND THE FIDUCIARY RELATIONSHIP
Part V discusses how an autonomous fiduciary duty imposes a liability to account for profits in contrast to
a contract creating or modifying the terms of a fiduciary relationship. It is thus within the terms of the
contract that a fiduciary relationship can influence the scope of the performance interest and the
contractual obligation to account for profits. This Part contends that Blake should have openly accepted
the existence of a fiduciary duty to account for profits coexisting with contractual obligations, rather than
treating the defendant as a quasi-fiduciary imposed by the procedural complications in that case.
A The Fiduciary Background to Blake
To appreciate the fiduciary background to Blake, it is important to consider the nature of the equitable
obligation to account for a profit obtained in breach of fiduciary duty. In an autonomous fiduciary
relationship, once any profit accrues to a person in breach of a fiduciary duty or by misuse of its fiduciary
position, an equitable duty to account for the profit can take three forms:
(a) at the beneficiary’s election and subject to considerations of appropriateness, the fiduciary will
hold the benefit on a constructive trust to the extent that the benefit remains extant or can be
traced in the fiduciary’s hands, as derived from Keech v Sandford;194
(b) the fiduciary is held liable in personam to account for profits attributable to the breach of
fiduciary duty; or
(c) the fiduciary is liable, at the beneficiary’s election, to pay equitable compensation to a
beneficiary who has suffered loss thereby in order to restore the beneficiary to the position it
would have been, had there been no breach of fiduciary duty.195
Hence the forms of equitable account are restitutionary in the first two categories and compensatory in the
third. In the case of Blake the House of Lords applied the analogy of a fiduciary to reinforce its
conclusion that the defendant account for the profits of the sale of his book in breach of his contractual
undertaking. There the form of order attracted a personal liability under the second category, Lord
Nicholls making it clear that the order did not confer any proprietary interest in the debt due to Blake
from the publisher.196
194
(1726) Sel Cas Ch 61; 25 ER 223.
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, 346–8 [183]–[187] (Finn, Stone and Perram JJ).
196
Blake [2001] 1 AC 268, 288D, contrasting it to the constructive trust imposed in Snepp v United States, 444 US
507 (1980).
195
39
The terms of a contract can intervene to mould a fiduciary relationship. The existence of a contractual
relationship between the parties may provide a basis for a fiduciary relationship which accommodates
itself in conformity to the terms of the contract. The modification of a fiduciary relationship by
contractual terms means that a more limited fiduciary relationship can arise, since a person may be a
fiduciary in some activities but not in others.197 A striking example is the finding of a limited fiduciary
relationship in a commercial distributorship contract. On the one hand, the distributor could make
ordinary business decisions by reference to its own interests, subject to the best efforts obligation and an
implied obligation of prohibiting injury to the manufacturer’s market. On the other hand, the distributor
was subject to a fiduciary obligation to protect and promote the manufacturer’s goodwill in the specified
distribution market.198
The significance of the fiduciary relationship set consistently within the terms of the contract is to
construe the performance interest as expecting the offending party to complete its obligations in the
contract and not to profit from its breach by reference to, at the least, the twin proscriptive, or negative,
fiduciary obligations; namely, to avoid conflicts of interest and to avoid profits arising out of the fiduciary
office, in the absence of fully informed consent.199 Accordingly, the House of Lords construed the
importance to the Crown of Blake’s undertaking not to disclose official information and the preservation
of secrecy of information within the intelligence service as meaning that, as in the case of a fiduciary, the
defendant should have no financial incentive to breach his contractual undertaking.200 This occurred
against the background of a procedural complication where the Crown did not pursue an appeal against
the Court of Appeal upholding the dismissal of the claim based on fiduciary duty.
The dismissal of the fiduciary claim in Blake rested on the basis that the information was no longer secret
or confidential and that a fiduciary duty not to profit from a fiduciary office that survives termination of
the office was too wide. The examples of too wide a protection instanced by Scott V-C — that of an
intelligence officer acting in retirement as adviser to businesses on electronic surveillance techniques201 or
that illustrated by the Court of Appeal of the memoirs of a retired director of a public company revealing
197
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 97–8 (Mason J), 123 (Deane J)
(‘Hospital Products’).
198
Ibid 94, 97, 99–100. The majority (Gibbs CJ, Wilson and Dawson JJ) found that on the facts the distributorship
agreement created no fiduciary obligations.
199
Breen v Williams (1996) 186 CLR 71. The prescriptive, or positive, obligation to act in the interests of the other
party may also apply in the exercise of a contractual power or discretion affecting that other party’s interests:
Hospital Products (1984) 156 CLR 41, 108 (Mason J).
200
Blake [2001] 1 AC 268, 280H, 287E (Lord Nicholls), 292B (Lord Steyn).
201
A-G v Blake [1997] Ch 84, 93E (Scott V-C).
40
negotiations in a takeover bid that had since passed into the public domain202 — may be reconsidered as
cases of disclosures that were not made in breach of fiduciary duty as may be modified by the terms of
employment occurring after termination of the fiduciary office without any impact on the interests of the
persons to whom confidentiality and loyalty was owed. The fiduciary liability to account for a personal
benefit does not arise in circumstances where it would be unconscientious to assert it or in which there is
no possible conflict between personal interest and fiduciary duty.203
Nonetheless the point that was not considered was whether standards of behaviour more severe than with
the usual fiduciary officeholder, in the form of the survival of fiduciary obligations after termination of
the fiduciary office, should be imposed by reason of the public interest in the maintenance of confidence
in important institutions in society.204 The rejection of a continuing fiduciary duty pre-empted acceptance
that publication of the book amounted to a profit from the breaches of fiduciary duty committed during
the defendant’s employment which led to his conviction and imprisonment. Hence it could be seen that
the book published after termination of the defendant’s employment was an exploitation of the infamy of
the defendant’s breaches of fiduciary duty occurring throughout his employment.205 However Scott V-C
did indicate that if the defendant had owed the Crown a continuing fiduciary duty, the Crown was entitled
to the profits of the publication of the book.206 As noted in the appellate courts, but for Blake’s notoriety
as an infamous spy, his autobiography would not have commanded royalties of the magnitude the
publisher agreed to pay.207
The decision to order an account of profits in Blake may be better understood in the context of a breach of
contract coexisting with breach of fiduciary duty. This way the decision in Blake avoids the contrived
characterisation of a quasi-fiduciary and the criticism that an order for accounts for a common law breach
of contract is a misapplication of the equitable remedy of accounts. As contended by Justice R I Barrett,
the remedy of account for profits is to be reserved for ‘cases where someone misuses a position of
202
A-G v Blake [1998] Ch 439, 455B (Lord Woolf MR).
Chan v Zacharia (1984) 154 CLR 178, 204–5 (Deane J).
204
P D Finn, ‘Conflicts of Interest–The Businessman and the Professional’ (Paper presented at the Seminar on
Professional Responsibility, University of Auckland, 28–29 May 1987) 15–16, speaking of former client conflicts in
law firms, quoted in Spincode Pty Ltd v Look Software Pty Ltd (2001) 4 VR 501, 519 (Brooking JA). For a
discussion of the dogmatic fiduciary obligation of public officials, see Paul Finn, ‘Fiduciary Reflections’ (2014) 88
Australian Law Journal 127, 139. For the surviving fiduciary duty of intelligence officials, see, especially, Snepp v
United States, 444 US 507 (1980) discussed below.
205
‘In his own words, “there was not an official document of any importance to which I had access which was not
passed on to my Soviet contact”’: R v Blake [1962] 2 QB 377, 382.
206
A-G v Blake [1997] Ch 84, 96G–7A, citing A-G (HK) v Reid [1994] 1 AC 324 in preference to Lister & Co v
Stubbs (1890) 45 Ch D 1. The Supreme Court of the United Kingdom overruled Lister & Co v Stubbs in FHR
European Ventures LLP v Cedar Capital Partners LLP [2015] AC 250, 274–5 [49].
207
Blake [2001] 1 AC 268, 275F, 287H (Lord Nicholls); A-G v Blake [1998] Ch 439, 450E (Lord Woolf MR).
203
41
ascendancy or influence or trust and obtains something that ought to have gone to a person in a position
of protection, vulnerability or beneficial entitlement.’208 Applied to the facts in Blake, it may be said that
the defendant had misused a position of trust and obtained a profit from his consequent notoriety that
ought to have gone to the Crown in a position of protection, that is protection from disclosure,209 or by
beneficial entitlement, as the person to whom the duty of nondisclosure was owed.
B The Broad Scope of Fiduciary Duty
The protean character of a fiduciary duty moulded by the terms of the contract210 can operate to attract an
obligation to disgorge a profit in response to a breach of contract where a fiduciary relation coexists. On
one view the fusion of equity with common law211 should open the way to the equitable remedy of
accounts applying to breach of contract in general. The alternative view that condemns ‘fusion fallacy’ 212
may be reconciled to the position that accounts may be properly ordered to the extent that breaches of
fiduciary duty also constitute a breach of contract.
Since the categories of fiduciary duty are not closed,213 its extraordinary reach extends to such routine
commercial transactions as a bailee entrusted with goods for the benefit of the bailor,214 or at its most
mundane, an errand boy.215 Birks has warned against the potential for overuse of the fiduciary relationship
for mere instrumental purposes, that is, imposing a fiduciary relationship in order to grant a remedy, as for
instance in Reid-Newfoundland, where, in Birks’ opinion, the judges did not scrutinise the nature of the
fiduciary relationship nor reconcile the parties’ commercial relationship to the fiduciary relation.216
Nevertheless the Privy Council regarded the fiduciary relation as arising simply from the trust reposed in
R I Barrett, ‘The “Most Wrong” Equity Cases 1990–2003: Attorney General v Blake’ (Paper presented at the
Supreme Court of New South Wales Judges’ Conference, 24 August 2003). But see Justin Gleeson and James
Watson, ‘Account of Profits, Contracts and Equity’ (2005) 79 Australian Law Journal 676 who contend that a
fiduciary relation is not necessary for an equitable account. See also J D Heydon, M J Leeming and P G Turner,
Meagher Gummow and Lehane’s Equity, Doctrine and Remedies (LexisNexis Butterworths, 5th ed, 2015), 915–6
[26-075] which, supporting Justice Barrett, argues that accounts should not be not available for breach of contract as
such.
209
Or, put in another way, vulnerable to abuse by the fiduciary of its position: Hospital Products (1984) 156 CLR
41, 97 (Mason J) or the fiduciary enjoying a dominant position in terms of information and knowledge: Devonshire,
above n 132, 395.
210
(1984) 156 CLR 41, 102 (Mason J).
211
See especially United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, 924 (Lord Diplock).
212
Heydon, Leeming and Turner, above n 207, 46−51, [2-130] –[2-185]. This debate is explored in Harris v Digital
Pulse Pty Ltd (2003) 56 NSWLR 298, 306 [18]–[20] (Spigelman CJ), 325–9 [132]–[155], 341 [224]–[225] (Mason
P), 414–19 [440]–[458] (Heydon JA).
213
Hospital Products (1984) 156 CLR 41, 68 (Gibbs CJ), 96 (Mason J).
214
Ibid 101 (Mason J), citing Re Hallett (1880) 13 Ch D 696, 708–9.
215
Re Coomber [1911] 1 Ch 723, 728 (Fletcher Moulton LJ).
216
Birks, ‘Restitutionary Damages’, above n 8, 434.
208
42
the defendant’s observance of the restricted use of the telegraph wire, which it compared to the cases of
an agent entrusted with funds to invest in the manner directed by its principal or an agent receiving rents
on behalf of its principal.217 Because of this reasoning no further relational analysis of the kind
contemplated by Birks was necessary. Although instrumentalism is to be deprecated, the fiduciary
relation has an expansive dynamism in interpreting the obligations of parties in a contractual relationship,
as seen above in the analysis of fiduciary law in Hospital Products.218
C Reading: Fiduciary and Contract
The case of Reading v Attorney-General (‘Reading’)219 illuminates how a fiduciary duty can support a
contractual obligation to disgorge a profit and suggests by analogy that Blake could have identified the
existence of a fiduciary duty not to profit from the relationship. Reading concerned an army sergeant
stationed in wartime Egypt who received bribes. The arrangement involved him accompanying in
uniform, when off duty, trucks loaded with contraband alcohol for the purpose of evading police
inspection. After the Crown confiscated the balance of the bribes, the sergeant issued a petition of right to
recover the proceeds from the Crown. The trial judge, Denning J, observed that the fusion of law and
equity meant that the common law remedy of money had and received and the equitable remedy of
constructive trust in a fiduciary relationship had to be considered in light of their combined effect and
concluded that the officer had violated his duty of honesty and good faith by taking advantage of his
military service to obtain a profit for himself.
Of relevance to Blake, this conclusion points to a contractual implied term while suggesting a concurrent
equitable obligation not to profit from service of the Crown. The judgment took a literal direction in
analysing the sergeant’s use of his uniform and accompanying the truck driver to the extent of deciding
that there was no fiduciary relationship in respect of the journeys or in respect of his uniform, which were
identified by Denning J as not essential ingredients of the cause of action.220
Nevertheless, the Court of Appeal saw that cases of recovering a profit, secret commission or bribe made
by an employee or agent without the principal suffering a loss were generally assumed to require proof of
a fiduciary relation between the parties. Yet the fiduciary relation was, in the court’s opinion, commonly
217
[1912] AC 555, 560.
Some six years later Birks described fiduciary obligations as ‘malleable concepts’ that can be ‘probably
hammered into service in most needful cases’: Birks, ‘Profits of Breach of Contract’, above n 141, 520.
219
[1951] AC 507 (Viscount Jowitt LC, Lord Porter, Lord Normand, Lord Oaksey, Lord Radcliffe).
220
Reading v The King [1948] 2 KB 268, 276.
218
43
used in a very loose and comprehensive sense, varying from entrusting property and relying on the
defendant to deal with it for the plaintiff’s benefit to entrusting to the defendant a job to be performed —
such as the negotiation of a contract — and relying on the defendant to procure the best terms available.
In this wide sense, the officer was bound to use his uniform for the Crown’s benefit, with all the
opportunities, status and advantages it comprised, differing from the literal approach of Denning J. This
was sufficient to attract a fiduciary relationship, but without implying that a fiduciary relationship was
fatal to the appeal.221 The Court of Appeal further held there was an imputed promise made at the time of
receiving the bribe to pay it over to the Crown, which suggests both an implied term and a fiduciary
duty.222
The House of Lords agreed with the Court of Appeal that it was the misuse of the sergeant’s position that
enabled the Crown to recover the money, notwithstanding any question of acting in the course of
employment. There was no necessity to require a fiduciary relationship but the wide sense of fiduciary
adopted by the Court of Appeal was appropriate in the misuse of authority in an employment or service
relationship.223 Lord Porter and Lord Oaksey differed from the Court of Appeal in the timing of the
implied promise to repay a bribe, seeing no difficulty in implying the promise at earlier point; that is, in
anticipation of receiving any money in misuse of the employee’s position.224 Lord Normand relied solely
on a fiduciary obligation, finding it unnecessary to decide on a common law claim for money had and
received.225 Although the fiduciary relationship was not essential to the decision by the courts at all three
levels, the contractual duty and the fiduciary duty appear in Reading to have converged in an obligation to
disgorge the proceeds of the bribes.
221
Reading v The King [1949] 2 KB 232, 237–8 (Tucker, Asquith and Singleton LJJ).
A person accepting a bribe is liable in equity to account to the principal as a fiduciary: A-G (HK) v Reid [1994] 1
AC 324.
223
[1951] AC 507, 516 (Lord Porter).
224
Ibid 517.
225
Ibid. While confirming that the sergeant owed a fiduciary duty to the same extent as a servant or agent, Lord
Normand doubted the accuracy of classifying the relation of a member of the armed forces to the Crown as a servant
under a contract of service or as an agent under a contract of agency.
222
44
D Reading and Blake Compared
In order to identify a fiduciary relationship, as appearing in Reading and Blake, there must exist a duty of
loyalty that, reflecting higher community standards or values, gives rise to a legitimate expectation that
the other party will act in the interests of the first party or at least in the joint interests of the parties and
not solely self-interestedly.226 It is the central idea of loyalty or selflessness that comes to signify the
essence of a fiduciary relationship.227
Analysing the facts by the discipline of fiduciary principle, the decision in Blake can be reinterpreted
without falling into the danger of the fiduciary instrumentalism identified by Birks. The point that escaped
the consideration of the Court of Appeal and the trial judge was whether Blake had profited, after
termination of the fiduciary relationship, from misuse of his fiduciary office occurring during the
currency of the relationship.228 In other words, Blake was a case of a traitor seeking to profit from his
treachery by making a self-justificatory book about it.229 The book, as described by Scott V-C, was ‘his
apologia for the course his life has taken.’230
In other words, the liability to account arises from a benefit received by use of a person’s fiduciary
position or of an opportunity resulting from it,231 given that the purpose of a fiduciary’s obligation to
account is to hold fiduciaries to their duty.232 The parallels between Reading and Blake both relating to
Crown servants misusing their office, with the variation that Blake earned his profit after termination of
his office in the exploitation of his notoriety, cause a reappraisal of Blake in the form of a fiduciary
P D Finn, ‘The Fiduciary Principle’ in T G Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, 1989) 1, 27–
8, quoted in Pilmer v Duke Group Ltd (2001) 207 CLR 165, 219 (Kirby J).
227
Pilmer v Duke Group Ltd (2001) 207 CLR 165, 220 (Kirby J).
228
The fiduciary claim was not pursued in the House of Lords. The case came before the House of Lords as an
appeal by Blake against the decision of the Court of Appeal to grant an injunction in protection of the criminal law
to restrain payment of royalties as profits from contraventions of the Official Secrets Act 1989 (UK) c 6. This
followed leave granted by the Court of Appeal to the Crown to amend its statement of claim to plead a public law
claim on that basis. The Crown cross appealed by leave to argue the restitutionary claim based on breach of contract.
The Crown declined to argue the point in the Court of Appeal but the Court of Appeal nevertheless made obiter
comments on the issue.
229
As described in Devenish Nutrition Ltd v Sanofi-Aventis SA [2009] Ch 390, 478 [148] (Longmore LJ).
230
A-G v Blake [1997] Ch 84, 90A.
231
Regal (Hastings) Ltd v Gulliver [Note][1967] 2 AC 134, 154B (20 February 1942) (Lord Wright); Chan v
Zacharia (1984) 154 CLR 178, 199 (Deane J).
232
Maguire v Makaronis (1997) 188 CLR 449, 468 (Brennan CJ, Gaudron, McHugh and Gummow JJ). See also
Blake [2001] 1 AC 268, 280G (Lord Nicholls).
226
45
analysis consistent with the performance interest to account for the benefit of a profit made from a breach
of contract.
E Snepp v United States: a Fiduciary Analysis
The decision of the Supreme Court of the United States in Snepp v United States (‘Snepp’)233 stands as an
instructive contrast to Blake. Its significance was to impress a former intelligence officer with a fiduciary
duty surviving termination of his office to comply with his nondisclosure obligation. This may be
compared to Blake holding the defendant to have been in breach of his contractual obligation surviving
termination of his office but rejecting a surviving fiduciary obligation. While both cases had common
features, Snepp was decided without the procedural complications that affected Blake.
In Snepp the issue was whether a constructive trust should be ordered over the royalties receivable by a
former intelligence officer who had written a book about CIA activities in Vietnam in breach of his
undertaking not to disclose any information without authorisation. The defendant had received $60 000 in
advance payments and was entitled to additional royalties under his publishing contract. The Court of
Appeals, like the Court of Appeal in Blake, held that the agent’s fiduciary obligation extended only to
respecting confidential information and as the information disclosed was not classified, a constructive
trust was not appropriate, although the defendant was in breach of his surviving contractual duty of
nondisclosure.234 The Supreme Court, by majority, reversed the decision, holding that the contractual
undertaking of nondisclosure attracted a fiduciary relationship which justified the equitable remedy of a
constructive trust.235
However, unlike the position in Blake, the information contained in the book, while not confidential, was,
according to the unchallenged evidence given at the trial by the director of the CIA, damaging to the
national interest in deterring existing and potential sources of information.236 The majority considered that
Snepp’s employment involved an extremely high degree of trust, noting that the undertaking included an
acknowledgment that the employee was entering into a position of trust. Apart from the undertaking, the
nature of the defendant’s duties and access to confidential sources and materials was capable of
establishing a trust relationship. The breach of fiduciary duty did not depend on the unauthorised
233
444 US 507 (1980).
United States v Snepp, 595 F 2d 926 (4th Cir, 1979), reversing United States v Snepp, 456 F Supp 176 (ED Va,
1978) which, unlike at first instance in Blake, found that there had been a breach of fiduciary duty.
235
444 US 507, 514 (1980).
236
The director of the CIA testified at the trial that the agency had a number of sources discontinue work, that a
number of foreign intelligence services had questioned the utility of future exchanges and that an indeterminate
number of sources never germinated as a result: ibid 512–13.
234
46
disclosure of confidential information but was grounded in the failure to give the defendant’s employer an
opportunity to determine whether the material would compromise classified information or sources.237
The majority resolved that the remedy of a constructive trust was a natural consequence of a breach of
trust in requiring the defendant to disgorge the benefits of his faithlessness and was tailored to deter those
who would place sensitive information at risk. Compensatory damages were unquantifiable and punitive
damages would be unusual and speculative. The presence of the nondisclosure obligation involving the
duty to obtain a prepublication clearance made it unnecessary to otherwise explore the scope of the
defendant’s fiduciary obligation.238 In answer to the alleged infringement of freedom of speech it was
reasonable to impose restrictions on employees’ activities that might be otherwise protected by the First
Amendment justified by a compelling government interest in protecting the secrecy of information
important to national security and the appearance of confidentiality essential to the operation of the
foreign intelligence service.239
The reasoning in Snepp suggests a reinterpretation of the Blake decision. It indicates that Blake could
have been decided at first instance and in the Court of Appeal as having breached a coextensive fiduciary
obligation,240 given that both cases ordered an account of profits, Blake in a personal form and Snepp in a
proprietary form. Relevant to a contractual and fiduciary obligation to account for profits, Snepp discloses
a case for imposing a fiduciary duty to maintain high obligations of secrecy and loyalty that survives
termination of the fiduciary office.
237
Ibid 510–12 (joint judgment of Burger CJ, Stewart, White, Blackmun, Powell and Rehnquist JJ).
Ibid 511–16. The dissenting judgment of Stevens J (with whom Brennan and Marshall JJ agreed) found that the
contractual breach of the nondisclosure obligation, involving unclassified material, did not constitute a breach of
fiduciary duty and therefore could not justify the imposition of a constructive trust and infringed the defendant’s
rights of free speech under the First Amendment.
239
Ibid 510. In Blake the House of Lords found it unnecessary to decide the human rights issue under the European
Convention posed by the width of the offence provisions in the Official Secrets Act 1989 (UK) c 6 since the House
set aside the Court of Appeal’s injunction in protection of the criminal law: [2001] 1 AC 268, 288H–9H (Lord
Nicholls), 292G (Lord Steyn).
240
The rejection of a surviving fiduciary duty continued in Prince Jefri Bolkiah v KPMG [1999] 2 AC 222
(‘Bolkiah’) in the context of a solicitor acting against a former client, the reasoning of which was criticised and not
followed in Spincode Pty Ltd v Look Software Pty Ltd (2001) 4 VR 501, 514 [37] (Brooking JA), 526 [63] (Chernov
JA). Bolkiah was not cited in Blake.
238
47
F
Reconciling Fiduciary Analysis with Contractual Disgorgement
If Blake is really about fiduciaries, does this mean that its authority as recognising contractual gain-based
disgorgement is weakened? The answer is, despite its fiduciary subtext, Blake is a reorientation of the
strictly compensatory rationalisation of damages into an open acceptance that contractual damages can in
exceptional circumstances be measured as disgorgement of a gain. Although the House of Lords was
presented with argument based on contract alone, the speeches could not ignore fiduciary considerations
when interpreting the contractual obligations of the parties in determining a liability to account for profits.
The intervention of fiduciary principle in interpreting contractual obligations is regulated by the
requirement that the fiduciary relationship must be consistent with the contractual relationship. A
fiduciary relationship cannot be superimposed upon the contract in such a way to alter the intended
operation of the contract according to its true construction.241 In this way existence of a fiduciary duty
does not detract from the performance interest in the relevant contractual obligation in order to justify the
liability to account for a gain arising from breach of that obligation. The controlling theme of the
performance interest in contractual relations will now move to the remaining categories of cases rejected
by the appellate courts in Blake.
VI
THE CATEGORIES REJECTED BY BLAKE: CYNICAL BREACH AND SECOND SALES
This Part challenges the rejection in Blake of the three categories of cases as appropriate for
disgorgement: cynical breach; the wrongdoer’s ability to enter into a more profitable contract elsewhere;
and the wrongdoer’s entry into a new contract disabling its power to perform its contract with the
plaintiff. After a broad review this Part concludes that these categories can appropriately be
accommodated within disgorgement of profits in order to satisfy the performance interest, as with the two
categories of skimped performance and negative obligation discussed in Part IVC.
In Blake the House of Lords expressed its agreement with the Court of Appeal in rejecting these three
categories of cases as grounds to award disgorgement of profits.242 As in Part IV that questioned the
rejection of skimped performance and negative obligation, these three categories, being the subject of
obiter discussion, deserve closer attention to determine whether the House of Lords was justified in their
241
242
Hospital Products (1984) 156 CLR 41, 97 (Mason J).
Blake [2001] 1 AC 268, 286A (Lord Nicholls); A-G v Blake [1998] Ch 439, 457G–8B (Lord Woolf MR).
48
rejection. The second and third categories because of their similarity in entering into a new contract will
be considered together under the label ‘second sale’.243
A Cynical Breach
Cynical breach may be described as a breach of contract by the offending party in conscious disregard of
the rights of the innocent party in order to make a profit in excess of the loss suffered by the innocent
party.244 The critical question is whether cynical breach deserves disgorgement, given that an award of
exemplary damages represents the gain obtained by a tortfeasor calculated to outweigh the compensatory
damages payable to the plaintiff.245 With its focus on the wrongdoer’s mental state in wilfully breaking a
contract to make a profit, cynical breach collides with the interest of the innocent party in the faithful
performance of the wrongdoer’s obligations.
Cynical breach is not synonymous with ‘efficient breach’. ‘Efficient breach’ is the view that anyone who
enters into a contract is at complete liberty to break it provided damages are paid if adequate to
compensate the innocent party.246 Nonetheless efficient breach might have practical overlap in its neglect
of an obligation to perform a contract and could conceivably exert some influence in the mind of a person
deciding to induce a cynical breach of contract.
1
Hospital Products:‘calculated breach’
Hospital Products was a case where the distributor had put into effect a ‘dishonest plan’ prior to its
appointment to pass off its own repackaged medical products as those of the American manufacturer in
the Australian market247 and to dishonestly appropriate the manufacturer’s goodwill.248 In these
circumstances Deane J reasoned that a constructive trust for the profits gained by the wrongdoer was
available, in the absence of a breach of fiduciary duty, as appropriate equitable relief where a wrongdoer
could not ‘in good conscience’ retain for itself a benefit in breach of a contractual obligation or other
breach of a legal or equitable duty.249 This entitlement arose, in Deane J’s view, from the distributor
engaging in a course of conduct that involved calculated breach of its contractual obligations of
The distinction between the two ‘is not one of substance’: A-G v Blake [1998] Ch 439, 458B (Lord Woolf MR).
Barnett, above n 10, 44. Barnett points, at 41–3, to a variation by Birks that suggests dishonesty, in contrast to
Edelman’s characterisation as wilful breach with the intent to make a profit, irrespective of dishonesty. Birks’
reference to dishonesty is likely to mean bad faith in the context in which it appears.
245
Rookes v Barnard [1964] AC 1129, 1227 (Lord Devlin). McGregor asserts that the tortious award in such a case
amounts to restitutionary damages: see McGregor, above n 9, 490 [13-052].
246
Zhu v Treasurer (NSW) (2004) 218 CLR 530, 574 [128], quoting O W Holmes, above n 41, 462. There the High
Court criticised efficient breach as ignoring a party’s right to performance.
247
(1984) 156 CLR 41, 52 (Gibbs CJ).
248
Ibid 115 (Mason J).
249
Ibid 125.
243
244
49
maintaining the local goodwill for the manufacturer’s products, rather than a breach of some fiduciary
duty flowing from an identified fiduciary relationship.250
Thus Deane J’s recognition of a constructive trust in Hospital Products in the case of contractual breach,
apart from breach of fiduciary duty, assumes the intervention of equitable principle by reference to
unconscientious conduct or unconscionability.251 The passage has been interpreted as meaning that if an
account of profits is sometimes available for breach of contract, something more than mere breach of
contract is needed to demonstrate the suitability of awarding an equitable remedy.252
2
Hickey:‘bad faith’
The Irish case of Hickey and Co Ltd v Roches Stores (Dublin) Ltd (No 1) (‘Hickey’)253 provides an
example, by comparison with Hospital Products, of how a calculated breach of contractual obligations
can attract the disgorgement of the profits of the wrongdoer. The defendant Roches Stores licensed a
section of its department store to the plaintiff to sell the plaintiff’s imported fashion fabrics under a profit
sharing arrangement. Later Roches terminated the plaintiff’s licence without the required notice and sold
fabrics for a period of 12 months from the expiration of the notice in breach of the noncompetition clause.
The arbitrator found that the real reason for Roches’ decision to terminate was to consolidate its
distribution channels across all its stores. The parties referred the question before Finlay P whether, in
addition to compensatory damages — being the plaintiff’s net loss of profits for the failure to give six
months’ notice and the breach of the 12 month noncompetition obligation, realised by the plaintiff trading
in a less profitable replacement store — the defendant should account for the value of its trade in fabrics
during the 12 month period together with the value of the goodwill at the end of that period calculated on
the basis of three years’ profits. After referring to Strand Electric and Reading as exceptions to the
compensatory principle in its broad application across tort and breach of contract, Finlay P held that
250
Ibid. Deane J did not make a finding on the matter, stating that it was preferable to defer until some subsequent
occasion a more precise identification of the principles governing the imposition of a constructive trust in those
circumstances, given that the matter was not explored in argument and the majority had decided there was no basis
for a constructive trust.
251
The term ‘unconscionable’ is used in the general law as a description of the various grounds of equitable
intervention to refuse enforcement of or to set aside transactions which offend equity and good conscience:
Australian Competition and Consumer Commission v C G Berbaitis Holdings Pty Ltd (2003) 214 CLR 51, 72 [42]
(Gummow and Hayne JJ). In Muschinski v Dodds (1985) 160 CLR 583, 616–17 Deane J pointed out that a
constructive trust was not confined to fiduciary principle but rather was founded on general equitable principle by
reason of its remedial character.
252
Town and Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 (26 March 2002) [83]
(Campbell J).
253
[1994] Restitution Law Review 196 (14 July 1976; Finlay P).
50
where a wrongdoer has calculated and intended to achieve a gain or profit which it could not otherwise
achieve and has acted mala fide,254 then, irrespective of whether the form of his wrongdoing constitutes a
tort or breach of contract, the assessment of damages should look not only to the loss suffered by the
injured party but also to the profit unjustly claimed by the wrongdoer.
The reference in Hickey to mala fides bears some resemblance to the unconscientious behaviour in the
calculated appropriation of product goodwill in Hospital Products.255 As explained by Finlay P, the
purpose of the noncompetition clause was to prevent acquisition of the goodwill built up at the time of
termination which was otherwise intended to lapse or die during the 12 month post-termination period.
Although Hickey did not expressly invoke the equitable remedy but relied upon the broad principle of
accounting for profit in the general measure of damages, both cases point to the obligation to preserve the
product goodwill in the form expressed in the relevant agreement between the parties with the result that
the remedy granted (Hickey) or contemplated (Hospital Products)256 had the effect of protecting the
performance interest in the preservation of the injured party’s goodwill.
3
Something more than mere breach
Following the position that something more than mere breach of contract is needed to demonstrate the
suitability of awarding an equitable account,257 Burrows’ review of English cases concludes that
restitution, in its broad sense beyond the equitable remedy, is not available for a ‘pure breach of contract’.
Hence, restitution was awarded where a breach of contract also constituted the tort of trespass, as in
Penarth Dock, or breach of fiduciary duty, as in Reading.258 Yet, the existence of ‘something more’
serves to classify those cases which, because of their coexistence with equitable or proprietary rights and
the absence of a measurable loss, engaged the remedy of disgorgement. In the case of the equitable
254
The bad faith appears to have been the purported termination on grounds that did not properly exist and trading in
competition despite the defendant’s confirmation at the time of termination of its contractual undertaking not to so
trade in competition for 12 months. Bad faith has been described as behaviour not confined to dishonesty but
extending to dealings in the knowledge that they fall short of the standards of acceptable commercial behaviour: see,
eg, Harrison v Teton Valley Trading Co Ltd [2003] 1 WLR 2577, 2583–5 (Aldous J). This behaviour thus
corresponds with cynical breach.
255
See Hospital Products (1984) 156 CLR 41, 124 (Deane J). The egregious conduct in Hospital Products should be
compared to Finlay P’s reference to counsel for the plaintiff not asserting that Roches had worked out a scheme
purposely designed to break the agreement in order to produce an unjust profit: [1994] Restitution Law Review 196,
201. Yet the facts suggest that Roches deliberately broke the agreement to achieve a commercial objective of
rationalising its distribution channels in disregard of the plaintiff’s rights.
256
To the extent discussed by Deane J. The majority in Hospital Products held that the matter be remitted for
assessment of damages without accepting a constructive trust of the profits, making it clear that the appropriation of
the manufacturer’s goodwill was a breach of the distributor’s contractual obligations, thereby enabling
compensatory damages for loss of goodwill: see, eg, (1984) 156 CLR 41, 76 (Gibbs CJ).
257
See above n 251.
258
Burrows, above n 8, 143.
51
remedy of account or constructive trust, the ‘something more’ was the unconscientious conduct or breach
of fiduciary duty. In the case of proprietary rights, the ‘something more’ was the invasion of the owner’s
proprietary rights without a corresponding loss.
Apart from Burrows’ examples, the existence of ‘something more’ is consistent with Blake both in its
fiduciary analogues and its exceptionalist approach to accounting for profit in its requirement of a
legitimate interest. The ‘something more’ description, while valuable to the task of exploring the limits of
contractual disgorgement to demonstrate that a breach of contract is insufficient, of itself, to justify
disgorgement, does not supply an explanation as to why disgorgement should be made in the event of a
contractual breach. Rather, the performance interest, described in Blake as the ‘legitimate interest’,
supplies the justification to account for profit for, as in that case, the performance interest could not be
protected by compensatory damages. In such circumstances a ‘pure breach of contract’ will not of itself
justify disgorgement which explains why Blake treated the remedy as exceptional.
B Second Sales
The two categories of a wrongdoer’s ability to enter into a more profitable contract elsewhere and the
wrongdoer’s entry into a new contract disabling its power to perform its contract with the innocent party
share a common feature of a breach committed by the offending party for the purpose of entering into a
contract with a third party. The first category refers to a breach antecedent to entering into the new
contract compared to the second category of entering into a new contract with the effect of disabling its
performance of the present contract, both categories involving the defendant renouncing its obligations
under the present contract.
Second sales can be classified as a species of cynical breach because a decision either to break the present
contract in preparation for a new contract or to enter into a new contract that disables the present contract
requires a wilful disregard of the innocent party’s rights to performance. The generality of cynical breach
includes cynical breaches that do not involve third party contracts, such as Hickey, as well as cynical
breaches made in contemplation of third party contracts, such as in Hospital Products with the distributor
entering into contracts to sell its own products in the manufacturer’s market. This latter type can easily
fall into the category of second sales. Another example is Experience Hendrix LLC v PPX Enterprises
Inc,259 discussed in Part VII, where a defendant that had breached a settlement agreement imposing
licensing restrictions on the sale of guitar recordings by entering into sub-licensing agreements with third
259
[2003] EWCA Civ 323 (20 March 2003) (Peter Gibson and Mance LJJ, Hooper J).
52
parties was held liable in a gain-based award, with the court taking into account the deliberate nature of
the breach in the second sales.
The late 19th century Scots case of Teacher v Calder260 signifies a restrictive compensatory approach in a
second sale, in facts that equally amount to a cynical breach. The defendant received a loan advance from
the plaintiff to invest the proceeds in the defendant’s timber business, with interest repayable in a share of
the profits of the business. It was a condition of the agreement that the defendant not draw down on his
own capital beyond specified limits in order to avoid endangering the plaintiff’s investment. Thereafter
the defendant diverted his own capital in breach of the drawdown limit to invest in a profitable distillery
business. The defendant was held liable only for the loss sustained by the plaintiff by not investing in the
timber business as promised. The decision was narrowed on the basis that the defendant was liable to
restore the withdrawals of capital beyond the drawdown limit which he did restore together with damages
representing the lost opportunity for profits in the timber business which compensated the plaintiff for
breach of the agreement not to exceed the drawdown limit.261 The issue of a profit from a fiduciary
relationship did not arise. Today the case could have been decided differently, apart from the issue of a
fiduciary duty in a joint venture, on the basis of that the performance interest, or legitimate interest, in
applying the loan proceeds to the promised investment justified an account of the distillery profits.
The decision in The Sine Nomine262 rejected a claim for profits when the owners withdrew a vessel from
the charterer’s service and made profits on the vessel elsewhere during the balance of the charter period.
The arbitration award rejected the charterer’s claim for wrongful profits on the ground that a marketable
commodity, such as the services of a ship, can be replaced in the market place with the result that the
compensatory damages by the plaintiff having to buy in at the market price will be equal to the profit
made by the wrongdoer. The effect of The Sine Nomine may be seen as no more than establishing that the
performance interest was satisfied by compensatory damages in the case of a marketable commodity.263
The award pointed out that the plaintiff’s claim for profits in addition to damages from the deprivation of
the vessel’s services would amount to double compensation.
260
[1899] AC 451 (Lord Watson, Lord Shand and Lord Davey).
A substantial global award of £250 was made in respect of the lost opportunity for profits in the timber business.
As to determining a fiduciary relation, see United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1,
10: Where one party contributes only money, it may be difficult to determine whether a relationship is a joint
venture in which both parties are entitled to a share of the profits or a simple loan contract under which the interest
payable to the party providing the money is determined by reference to the profits made by the other (Mason,
Brennan and Deane JJ).
262
[2002] 1 Lloyd’s Rep 805 (Sir Christopher Staughton, Messrs Packer and Baker-Harber).
263
J Beatson, ‘Courts, Arbitrators and Restitutionary Liability for Breach of Contract’ (2002) 118 Law Quarterly
Review 377, 379; Barnett, above n 10, 74–5, 94.
261
53
The Sine Nomine is to be contrasted to the award in Hickey where the compensatory damages for lost
profits could not cover the appropriation of the plaintiff’s goodwill. The arbitrators commented with
approval on Blake’s requirement of an exceptional case and Blake’s rejection of the grounds of cynical
breach and second sales but concluded that they could not determine that the defendant’s action was
either deliberate or cynical wrongdoing. Given all these circumstances, the award in The Sine Nomine was
able to resolve the claim for profits as an extraneous moral or punitive issue which should not form part
of English commercial law.264
Reflecting on the House of Lords’ disapproval of cynical breach and second sales as cases deserving of
disgorgement, one wonders why the performance interest was not identified as the control of the remedy
of disgorgement in these cases, consistent with the ratio in Blake that the plaintiff's interest in
performance may make it just and equitable that the defendant should retain no benefit from its breach of
contract.265 Indeed, there was no need to isolate all four categories of exclusion (skimped performance,
negative obligation, cynical breach and second sales) when these could have been accommodated within
the broad ratio of Blake. For instance, a breach of a price control stipulation cited by Lord Nicholls as
deserving disgorgement was in fact a negative obligation.266 A possible explanation could be the
consciousness of the House of Lords of the radicalism of its decision; in particular, the anticipation of a
wide ranging and potentially speculative impact of accounting for profits in the minds of the commercial
world. Yet, as will be discussed in Part VII, the scope of disgorgement of profits after Blake as an
exception to the compensatory rule is still to be explored on a case by case basis.
[2002] 1 Lloyd’s Rep 805, 807 [10].
Blake [2001] 1 AC 268, 284H─5A (Lord Nicholls).
266
Ibid 284F. It has been argued that the appellate courts in Blake sought to protect Teacher v Calder [1899] AC 451
as authority for cynical breach: David Campbell, ‘The Treatment of Teacher v Calder in AG v Blake’ (2002) 65
Modern Law Review 256, 265, 268.
264
265
54
VII
THE POST-BLAKE ENVIRONMENT
The unusual facts in Blake decided under the constrictions in which the case was argued — where counsel
abandoned the claim based on fiduciary duty — and the emphasis of the exceptional nature of
disgorgement of profits presented an obstacle to its enthusiastic reception. As anticipated by Lord Steyn,
exceptions to the general principle that there is no remedy for disgorgement of profits against a contract
breaker were best to be hammered out ‘in the anvil of concrete cases’.267 It will be seen that courts
deciding commercial disputes after Blake have given a varying degree of acceptance of a disgorgement of
profit and have at times struggled with the concept.
A Esso: A Commercial Application of Blake
An unexceptional commercial setting in Esso Petroleum Co Ltd v Niad Ltd (‘Esso’)268 saw the unqualified
application of Blake. Under a contractual scheme between Esso and its dealers called Pricewatch, dealers
agreed to report competitors’ prices and abide by matching prices set by Esso in exchange for a financial
subsidy to the dealers. In breach of the agreement the defendant failed to maintain prices while receiving
the price support. An account of profits was ordered since compensatory damages were inadequate by
reason of the inability to attribute Esso’s lost sales to a breach by Niad, who was one out of several
hundred dealers operating under the scheme.
Morritt V-C held that Esso had a legitimate interest in preventing Niad from profiting from its breach of
obligation, having regard to the fact that the obligation to implement and maintain the recommended
pump prices was fundamental to Pricewatch and the failure to observe it undermined its advertising
campaign and the benefits intended for both Esso and all its dealers within Pricewatch. Hence the
‘legitimate interest’ can in this case be seen as an expression of protecting the expectation of Esso that
Niad would abide by its recommended prices for the effective operation of the scheme.
B Hendrix: Disgorgement by Way of Reasonable Fee
In Experience Hendrix LLC v PPX Enterprises Inc (‘Hendrix’)269 the reasoning in Blake received a mixed
reception from the Court of Appeal which decided to award restitutionary damages in the form of a
reasonable fee for the benefit the defendant had gained but falling short of an account of profits. There the
plaintiff’s predecessor in title had entered into terms of settlement of litigation with the defendant many
years earlier to the effect that the defendant would not grant further licences or extensions over specified
267
[2001] 1 AC 268, 291F (Lord Steyn).
[2001] All ER (D) 324 (Morritt V-C).
269
[2003] EWCA Civ 323 (20 March 2003).
268
55
recording tapes without the plaintiff’s consent. In breach of the settlement agreement the defendant
granted licences without the plaintiff’s consent from which the defendant made substantial profits. At trial
the plaintiff obtained an injunction against further licensing infringements but failed to obtain damages
and an account of profits because it was unable to prove a financial loss.
On appeal Mance LJ described Blake as marking a ‘new start’ in the law relating to accounting for profits
in the absence of financial loss. He interpreted Blake as establishing that a party may have an interest in
performance that is not readily measurable in terms of money in which case the law’s response is to
ensure, if possible, that the contract is performed in accordance with its terms. Hence, damages may be
measured by the benefit gained by the wrongdoer from the breach.270 Applying the criteria in Blake, the
defendant had committed a breach of a negative obligation, in doing the very thing it had contracted not
to do, and the plaintiff had a legitimate interest in preventing the defendant’s profit making activity.
On the other hand, Mance LJ considered that the case had obvious distinctions from Blake because:
(a) there was no concern with any sensitive or special matters as national security and that the
State’s interest in preventing a spy from benefiting by breaches of his contractual duty of secrecy
and removing the financial attraction of such breaches had no parallel to Hendrix;
(b) the notoriety accounted for the magnitude of Blake’s royalty earning capacity derived from his
prior breaches of security had no parallel; and
(c) there was no direct analogy between the defendant’s position and that of a fiduciary.
Mance LJ went on to decide that the case was not exceptional to the point of ordering a full account of
profits but took the view that in recognition of the commercial value in the infringements, there should be
a reasonable royalty based on Wrotham Park remitted for assessment in the expectation that it be not less
than one third of the defendant’s royalties on the retail selling price of the records, substantially in excess
of the settlement agreement.
The reasoning of Mance LJ calls for critical scrutiny. As to (a) above, there was no intention in Blake to
limit its application to sensitive or special matters, such as national security. The speeches of Lord
Nicholls and Lord Steyn were marked with a concern as to their impact on commercial dealings. 271 This
concern may explain the reticence displayed by the Court of Appeal in accepting an account of profits. As
270
Ibid [20]–[23].
See, especially, Blake [2001] 1 AC 268, 285F where Lord Nicholls stated that the availability of an account of
profits need not disturb settled expectations in the commercial or consumer world; at 291E where Lord Steyn said
that such exceptions were to be hammered out on the anvil of concrete cases.
271
56
to (b) there was some parallel between the magnitude of the royalties attributable to Blake’s notoriety and
the magnitude of the royalties attributable to the Hendrix name, both involving commercial exploitation
of a breach of a nondisclosure (Blake) or non-infringing (Hendrix) contractual promise. In answer to (c)
there was a fiduciary analogy in the plaintiff’s acute vulnerability to the defendant’s obedience to the
terms of settlement in seeking consent to further licences and to faithful delivery up of the specified
master tapes.272 The deliberate nature of the breach, as acknowledged by Mance LJ,273 not only suggested
cynical breach but indicated, consistently with Blake, the need to protect the plaintiff’s performance
interest in the defendant not profiting from its conscious and deliberate undermining of the settlement
agreement.
Peter Gibson LJ agreed with Mance LJ that the case was suitable for awarding damages measured by the
benefits gained by the wrongdoer from the breach as accepted in Blake. Joining with Mance LJ he
decided in favour of a Wrotham Park reasonable fee, instead of an account of all profits, acknowledging
its putative nature as an amount obtainable on negotiation that in practice the plaintiff would have had no
inclination to negotiate.274 Peter Gibson LJ rested his conclusion on the combination of three grounds, the
deliberate breach, the difficulty in quantifying the plaintiff’s loss and the plaintiff’s legitimate interest in
preventing the defendant’s profit making activity in breach of its contractual obligations.
These three factors effectively combine to restate the eligibility to an account for profits where
compensatory damages are ineffective and the need to protect the performance interest is emphasised by
the wilfulness of the breach. A conscious and deliberate breach of a contractual obligation serves to
magnify the protection of the injured party against the offending party’s failure to perform its obligations
and thus assumes relevance in the court’s reasons for granting relief by way of disgorgement or
reasonable fee.
C Hendrix and the Questionable Use of Reasonable Fee
The controversy in Hendrix in limiting relief to a Wrotham Park award arises from the tendency of the
Court of Appeal to overlook the distinction, on the one hand, between accountability for profits obtained
from a breach, as had occurred in Blake, and, on the other hand, the Wrotham Park award that
272
The defendant delivered up virtually useless copies or masters. There was also evidence that buyers may have
mistakenly purchased sideman recordings misrepresented as featured recordings that effectively diverted and
discouraged potential purchasers: [2003] EWCA Civ 323 (20 March 2003) [7], [14] (Mance LJ).
273
Ibid 323 [44].
274
Ibid [58], quoting Wrotham Park [1974] 1 WLR 798, 815C.
57
consciously reflected the fact, as a matter of causation, that only a small proportion of the defendant’s
profits could conceivably be attributed to the breach of the restrictive covenant. Wrotham Park was in
effect a decision that the profit made by the defendant from its breach of the restrictive covenant was not
the profit from the development of the land but the amount required to negotiate a relaxation of the
covenant that was breached. In the circumstances of the case, the court felt obliged to act with ‘great
moderation’ and determined that five per cent of the defendant’s profit was the amount that could
reasonably have been demanded.275
The distinguishing feature in Hendrix was that the entirety of the defendant’s profit could, on the facts, be
attributable to the sale of licences in breach of the settlement agreement. Yet, Mance LJ expressed the
contestable opinion that accounts were inappropriate because, in addition to the reasons stated above, the
defendant may have been entitled to allowances for its time, effort and skill276 and it was not shown that
the defendant’s breaches went to the root of the claimant’s promotional programme or gave the lie to its
integrity or that the defendant profited directly by receipt of monies it ought in fairness to restore.277
Nonetheless it is debatable whether the defendant would have been entitled to allowances. The authorities
that recognise allowances in favour of a defaulting fiduciary are cases in which a business is acquired and
operated as distinct from the acquisition of an asset.278 Contrary to the view of Mance LJ, it is submitted
that the defendant’s breaches directly undermined the integrity of the licensing restrictions in the terms of
settlement and the claimant’s promotional programme as supported by the evidence in the trial.279 The
defendant had profited directly by contracting to receive an advance of $350 000 on an infringing licence
granted to a European record company and an advance of $35 000 from an Asian record company.280
Nevertheless the putative negotiable amount favoured by the Court of Appeal, subject to a formal
assessment, was in recognition of the fact that the plaintiff was in a strong bargaining position to negotiate
the defendant’s release from its licensing restrictions.
275
[1974] 1 WLR 798, 815F.
[2003] EWCA Civ 323 (20 March 2003) [44], echoing Boardman v Phipps [1967] 2 AC 46 which accepted an
allowance in favour of a fiduciary profiting in a conflict of interest.
277
[2003] EWCA Civ 323 (20 March 2003) [38].
278
Warman International Ltd v Dwyer (1996) 182 CLR 544, 560 (Mason CJ, Brennan, Deane, Dawson and Gaudron
JJ). Cf Devenish Nutrition Ltd v Sanofi-Aventis SA [2009] Ch 390, 445 [39] (Arden LJ): an order for accounts has
flexibility in the percentage of profit awarded and its calculation.
279
See above n 271.
280
[2003] EWCA Civ 323 (20 March 2003) [12].
276
58
In its result the decision of the Court of Appeal could be rationalised as declining to order an account of
profits on causation grounds, as the court saw it,281 and on policy grounds, in deference to the exceptional
nature of Blake. Despite the court’s reluctance to award an account of profits, Hendrix is significant for
moving in the direction of Blake by making a substantial award in recognition of the defendant’s benefits
obtained in breach of a contractual obligation.
D WWF Case: a Return to Compensation
In contrast to Esso and Hendrix that followed in the path of gain-based analysis constructed by Blake, the
decision of the Court of Appeal in WWF ─ World Wide Fund for Nature v World Wrestling Federation
Entertainment Inc (‘WWF’)282 leans in the opposite direction towards a strict compensatory analysis of
contractual damages. The Court of Appeal had to consider, as one of the appeal points brought by the
defendant, whether the pleading to pursue a claim for a reasonable fee arising out of the defendant’s
breach of a global settlement agreement to restrict the use of the initials WWF, could be characterised on a
juridical basis as damages within the scope of the inquiry.283 Although the court decided the point in
favour of the plaintiff, the contentious aspect of the judgment of Chadwick LJ is its view that Wrotham
Park damages and an account of profits are compensatory in nature.
This perspective relied on a compensatory interpretation of Wrotham Park expressed in Jaggard v
Sawyer284 before Blake was decided and in the dissenting speech of Lord Hobhouse in Blake. Although
acknowledging that exceptional cases may justify a deprivation of the wrongdoer’s profits in the absence
of identifiable financial loss, Chadwick LJ concluded that the underlying feature of Wrotham Park
damages and account of profits was the recognition of the need to compensate the claimant in
circumstances where it cannot demonstrate identifiable financial loss, both remedies seen equally as a
flexible response to the need to compensate the claimant for the wrong done to it.285
The difficulty in this interpretation is not only its inconsistency with the majority in Blake but its
weakening of the meaning of compensatory damages so as to blur the distinction between compensation
for loss and disgorgement of a gain. The indiscriminate assimilation of all monetary relief for breach of
281
In holding a fiduciary liable for a gain, the question is to determine as accurately as possible the true measure of
the profit or benefit obtained by the fiduciary in breach of its duty: Hospital Products (1984) 156 CLR 41, 110
(Mason J).
282
[2008] 1 WLR 445 (Chadwick, Maurice Kay and Wilson LJJ).
283
The plaintiff had obtained at first instance an injunction restraining use of the initials in breach of the settlement
agreement and an inquiry as to (compensatory) damages which was not in issue in the appeal.
284
[1995] 1 WLR 269, 281 (Bingham MR), 291 (Millett LJ), cited in WWF [2008] 1 WLR 445, 465–6 [38].
285
[2008] 1 WLR 445, 475 [59]; later echoed in Bunnings (2011) 82 NSWLR 420, 468 [177] (Allsop P).
59
contract as compensatory damages makes it difficult to identify when compensation ends and
disgorgement starts. Retaining the distinction serves a highly useful purpose in the law of contract by
defining the availability of disgorgement by the event of the inadequacy of compensatory damages in
satisfying the performance interest. Moreover a generalised compensatory analysis of monetary relief for
breach of contract fails to explain the equitable remedy of account. The three forms of equitable account
by way of constructive trust, personal liability and equitable compensation when distorted as
compensation fail to reflect that their design was to strip profits in order to make wrongdoers accountable
for their breach of equitable duty286 — in particular, to preclude the fiduciary from being swayed by
considerations of personal interest and to preclude the misuse of the fiduciary position for personal
advantage.287
The historical development of the equitable remedy of account as explained by Lord Nicholls in Blake
meant that equity considered that the appropriate response to the violation of the plaintiff’s right was that
the defendant surrender all its gains, even when the disgorged gains did not correspond with any
disadvantage suffered by the plaintiff.288 The treatment of accounts as compensation where no loss has
been suffered, as occurred in WWF, has the tendency to disturb the natural meaning of compensation289
and to depreciate the distinctiveness of the equitable remedy of account from the remedy of damages.
E
Recapitulating the Meaning of Compensation
The result of an unqualified compensatory interpretation, as was advanced in WWF, is to struggle to
maintain a transparent definition of compensation when confronted with gain-based remedies. An explicit
gain-based award, such as Hickey, succeeded in distinguishing between damages for the plaintiff’s loss of
profits and accounting for the defendant’s profits. These cases would otherwise be obscured under the
label of compensation in its flexible operation. This obscurity is exemplified in the Privy Council
describing the user principle as ‘neither exclusively compensatory nor exclusively restitutionary’ but
combined elements of both.290
286
Chancery commonly ordered accounts as incidental to an injunction in cases of passing off, trade mark
infringement, copyrights, patents and breach of confidence: Blake [2001] 1 AC 268, 279F (Lord Nicholls).
287
Ibid 280H (Lord Nicholls). See also Chan v Zacharia (1984) 154 CLR 178, 198–9 (Deane J).
288
Blake [2001] 1 AC 268, 280B–C (Lord Nicholls).
289
‘Something given or received as an equivalent for … loss’: Susan Butler (ed) Macquarie Dictionary (Macquarie
Dictionary Publishing, 2nd ed, 2009) 352.
290
Inverugie Investments Ltd v Hackett [1995] 1 WLR 713, 718B. Cf Personal Representatives of Tang Mang Sit v
Capacious Investments Ltd [1996] AC 514, 520B–D where the Privy Council said that compensatory and
disgorgement damages are inconsistent, except where the remedies are cumulative. Lord Keith, Lord Lloyd and
Lord Steyn sat in both cases.
60
The better view, it is submitted, is to equate compensation with loss and disgorgement with gain. In the
interests of transparency it would be simpler to treat the user principle as a remedy — not ‘compensation’
— for unauthorised use measured by the defendant’s gain. Confusion is caused by the interchangeable use
of the term ‘compensation’ with ‘remedy’. To say that damages for trespass to land are intended to
‘compensate’ the claimant for being kept out of its land291 would be better stated as damages for trespass
to land are intended as a remedy for the claimant being kept out of its land.
Standing as the resolution of breach of contract is the remedy. Here the remedy is to be understood in its
ordinary sense of redress, without the need to conceptualise it as a secondary obligation in substitution of
the primary obligation of performance.292 The remedy is divisible into specific relief and damages, where
damages are subdivided into compensation for loss and disgorgement for gain. Amid the laboured
attempts to straighten an award of damages as compensatory the confusion may be resolved by
recognising a basic standard of measurement of damages: the loss suffered by the plaintiff or the gain
made by the defendant.293 Plainly compensation for loss is inconsistent with disgorgement for gain.294 In
order to promote clarity and consistency, the understanding of what is meant by ‘compensation’ should be
restricted to its natural meaning of something given as an equivalent for a loss.295
The confusing use of language oscillating between compensation and disgorgement may be seen in the
line of cases, starting with Whitwham and highlighted in Wrotham Park, that is suggestive of
compensation296 but discloses an intent to measure damages by the gain to the defendant. For instance, in
Wrotham Park Brightman J used the term ‘compensation’ when ‘remedy’ would have been, in hindsight,
more accurate. In this sense the following passage could be recast as follows:
‘[I]s it just that the plaintiffs should receive no compensation and that the defendants should be
left in undisturbed possession of the fruits of their wrongdoing?297 (emphasis added) —
may read:
‘[I]s it just that the plaintiffs should receive no remedy and that the defendants should be left in
undisturbed possession of the fruits of their wrongdoing? (emphasis added)
291
See, eg, Devenish Nutrition Ltd v Sanofi-Aventis SA [2009] Ch 390, 444 [37] (Arden LJ).
See, eg, Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 848H (Lord Diplock).
293
Penarth Dock [1963] 1 Lloyd’s Rep 359, 362.
294
Mitchell McInnes, ‘Gain, Loss and the User Principle’ [2006] Restitution Law Review 76, 77; McGregor, above n
9, 5 [1-009]; Premium Real Estate Ltd v Stevens [2009] 2 NZLR 384, 419 [102] (Tipping J).
295
See above n 289.
296
McGregor, above n 9, 505 [14-023].
297
[1974] 1 WLR 798, 812H.
292
61
The contortions of a strictly compensatory analysis are realised in the comments of Millett LJ298 that the
Wrotham Park award was measured by what the plaintiff had lost as the price for giving its consent to the
relaxation of the covenant, with the defendant’s anticipated profit merely serving as a relevant factor in
that assessment.299 In other words, according to this analysis, the plaintiff’s loss was measured by the
defendant’s gain, ‘as a relevant factor’, redolent of the ambiguity of Hayne J’s statement in Clark v
Macourt.300 Similarly the interpretation advanced by Allsop P in Bunnings that a user fee was
‘compensation’ for the denial of the owner’s property rights301 detracts from the practicality of a
measurement made by reference to the wrongdoer’s use of the property to its profit. In essence the
insistence on strictly compensatory analysis compares unfavourably with the logical force that
compensation is for loss and disgorgement is for gain.
F
The Role of Deterrence
It is submitted that awarding disgorgement damages is not founded upon deterrence. Rather deterrence
arises only incidentally in consequence of the wrong of breach of contract, not as a guiding principle of an
award of profits. In other words, deterrence is not the purpose of disgorgement but is only an effect.302 An
exception is a breach of fiduciary duty where a policy of deterrence is grounded in a fiduciary’s duty to
account such as to preclude the fiduciary from being swayed by personal interest. A strong theme of
deterrence runs through the fiduciary analogising in Blake. In the criminal law the concepts of general and
specific deterrence function as guiding principles of sentencing. However the grant of contractual relief
depends on the existence of a breach, with general and specific deterrence only operating incidentally in
the practical effect of contractual remedies that extend to disgorgement.
Although, in practice, some contract breakers could be specifically deterred by an award, whether by
compensatory damages or disgorgement of profits, and although an adverse award could serve to remind
Jaggard v Sawyer [1995] 1 WLR 269, 291D, reflecting the theory that a court’s assessment of compensatory
damages considers the defendant’s gain as evidence of the objective value of the claimant’s right of dominium and
that a gain-based perspective is superfluous: Mitchell McInnes, ‘Gain, Loss and the User Principle’ [2006]
Restitution Law Review 76.
299
Cf Surrey County Council v Bredero Homes Ltd [1995] 1 WLR 1361, 1369G (Steyn LJ): ‘The object of the
award in Wrotham Park was not to compensate the plaintiffs for financial injury, but to deprive the defendants of an
unjustly acquired gain.’
300
(2013) 253 CLR 1, 7 [9]; reflecting Robert J Sharpe and S M Waddams, ‘Damages for Lost Opportunity to
Bargain’ (1982) 2 Oxford Journal of Legal Studies 290, 296.
301
(2011) 82 NSWLR 420, 468 [177].
302
Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298, 407 [407], 409 [414] (Heydon JA).
298
62
potential contract breakers of the risks of engaging in conduct causing a breach, these matters do not
function as a consideration in the court’s decision to order relief, as in the case of a criminal court
deciding an appropriate sentence. The purpose of the law of contract is not to punish wrongdoing but to
satisfy the expectations of the party entitled to performance.303
VIII
CONCLUSION
The foundation of accounting for profits in the law of contract is the performance interest, or the
expectation interest. In its practical application, the event of a breach of contract stands to measure the
expectation interest, as, for instance, in Amann, except where it is appropriate to apply the reliance
interest, as, for instance, in the case of sale of land.304 In most cases, as in Amann, compensatory damages
for loss will suffice to protect the performance interest. The inadequacy of compensatory damages arises
when the expectation or performance interest is unsatisfied. It is only in unusual cases that no loss is
suffered by the injured party or that compensation for such loss it has suffered still leaves the performance
interest in need of protection.
The protection of the performance interest arises in consequence of the wrong of breach of contract. The
civil wrong of breach of contract as the basis of the remedy to vindicate the performance interest by a
substitutionary monetary award supplies the principled application of the liability to account for profits.
The theory that disgorgement is explained by the unauthorised use of another’s exclusive entitlement of
property305 depreciates the doctrinal rigour of an enforceable promise of performance and the court’s
protection of the performance interest. Although descriptive of many cases of disgorgement, the theory
does not explain all cases306 and does not correspond with the reasoning in Blake that recognised gainbased awards in the law of contract.
In assessing a gain-based remedy for breach of a contractual promise, the question of whether the
defendant’s behaviour was blameworthy in the sense of innocent or dishonest may have a tendency to
distract attention from the central purpose of an award of damages which is to protect the plaintiff’s
expectation of receiving the defendant’s promised performance. The culpability of the defendant may
have some influence in identifying the performance interest measured against the circumstances in which
303
Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 15 (Lord Hoffmann).
See Part IIC in relation to Fuller and Perdue’s discussion of the reliance interest.
305
Sirko Harder, Measuring Damages in the Law of Obligations: the Search for Harmonised Principles (Hart
Publishing, 2010) 217.
306
Ibid 243: where Harder acknowledges that the theory does not explain the award of accounts in Esso [2001] All
ER (D) 324 but argues that the case was of doubtful merit.
304
63
the particular breach had occurred. The more wilful or deliberate the breach, as for example, a fraudulent
representation or a conscious breach of confidentiality, the more pronounced may be the expectation of
performance. As explained in Blake, the assessment of the plaintiff’s legitimate interest in preventing the
defendant's profit making activity, equating to its expectation interest, is intended to take place against the
relevant indicia of the contract: the subject matter of the contract; the purpose of the term breached; the
circumstances and consequences of the breach; and the circumstances of the relief. Thus if the purpose of
the term, as for example in Blake, was to ensure the confidentiality of intelligence information and the
integrity of the intelligence service, the deliberate breach of the undertaking emphasises the need for
protection of the promise of confidentiality.307
In all practicality it remains to be seen whether an inadvertent breach will produce a profit. As appears in
various cases, the gaining of a profit on breach of contract is usually the outcome of a calculated act,
varying from dishonesty in Hospital Products, deliberate conduct in Hendrix to the ‘overly generous
view’ of the defendant’s own legal position308 as possibly instanced in Wrotham Park.309 In the absence of
a reported case, it is difficult to postulate a situation of an inadvertent breach that results in a profit.310 In
effect, the possibility that a party could breach its contract without wilfulness in not appreciating its
obligations or being unable to perform but ends up with a more profitable contract is an outcome that is
suggestive of a wilful mental state. Considerations of bad faith, dishonesty and unjust enrichment arise, as
has been seen, from cases of equitable principle and invasion of proprietary rights that attract a remedy
measured by the benefit to the wrongdoer. However in cases of breach of contract these considerations
are subordinated to the assessment of the injured party’s performance interest in the grant of a gain-based
remedy.
The exceptionalism of Blake may be readily understood on the footing that generally the performance
interest is satisfied by compensation for loss.311 The exception came into play in Blake because the loss
307
Blake [2001] 1 AC 268, 286G, where Lord Nicholls described secret information as the lifeblood of the
intelligence agencies, stating that Blake’s deliberate and repeated breaches of his undertaking caused untold damage
to the public interest, followed by his further breach in publishing his autobiography.
308
‘The contract-breaker takes an over-generous view of his rights, knowing that the law may ultimately be against
him’: The Sine Nomine [2002] 1 Lloyd’s Rep 805, 807.
309
[1974] 1 WLR 798. The defendant contending that the restrictive covenant was only to coordinate the
construction of roads and drainage: at 805D; that the description ‘Wrotham Park’ was confined to the mansion
house, park and home farm: at 806E; that the estate was not capable of being benefited by the restriction: at 806G;
and that the plaintiff’s land was not damaged by the breach and the covenant was therefore not enforceable by it; at
807C.
310
Barnett, above n 10, 45.
311
A case such as Tito v Waddell (No 2) [1977] Ch 106, see above n 2, can be regarded as correctly decided since
compensatory damages satisfied the performance interest, (diminution in value of the land for breach of the
replanting obligation), thus rejecting the question of disgorgement. The passage quoted at n 2 above can be
understood in that context.
64
was unquantifiable. This may be compared to the general case, such as The Sine Nomine, where the
defendant’s profit made on breach did not feature in the relief awarded because the performance interest
was readily satisfied by compensatory damages with respect to the plaintiff buying a replacement
commodity at a higher price. Likewise in commercial dealings governed by the sale of goods code the
performance interest is conditioned by the statutory terms which restrict the prima facie remedy for
nondelivery of goods to the prevailing market value even where the price has fallen and not the benefit
obtained by the vendor in diverting delivery to a third party at a higher price.312
Located between instances of no loss (such as Blake) and instances of full compensation (such as The
Sine Nomine) are cases where compensatory damages alone do not satisfy the performance interest.
Hickey was a case that required an award comprising a combination of damages for the plaintiff’s losses
and the defendant’s profits. Compensation for the plaintiff’s loss of trade did not satisfy the performance
interest in the preservation of the plaintiff’s goodwill represented in the form of profits acquired by the
wrongdoer. Hendrix and WWF were cases, controversially, that declined to award an account of profits
but were prepared to award a substantial reasonable fee. They are cases which could have been decided
differently where it was open to conclude that the performance interest ought to have been vindicated by
an account of profits. That these cases could or should have been so decided does not detract from the
cogency of accountability for profits.
The principled limits of recovery are in effect to measure the expectation interest in the judicial function
of contractual interpretation, guided by a steady line of authority identified in Part II, as exemplified by
Fuller and Perdue and culminating in Blake, and to examine whether the interest is satisfied by an award
of compensatory damages. If not, then, and only then, does the entitlement to profits arise. The coherence
of the principle lies in the antecedent finding of a liability by reference to the commission of a wrong and
the inadequacy of compensatory damages.313 This understanding answers the objection that the plaintiff
recovers a windfall or at least, recovers more in a breach of contract than if the defendant had performed
its obligations. Far from unsettling commercial and consumer expectations,314 accounting for profits,
when justified by the performance interest, strengthens the binding force of contractual promises.
312
Carter, above n 14, 817 [35-07]; Bridge, above n 175, 671 [12.55]. See, eg, Goods Act 1958 (Vic) ss 56(3), 57(3).
See Birks, ‘Restitutionary Damages’, above n 8, 442.
314
Blake [2001] 1 AC 268, 285F (Lord Nicholls).
313
65
Accounting for profits does not diminish the distinctiveness of the law of contract, as feared by Meagher
Gummow and Lehane,315 but rather maintains its distinctiveness.
In response to the opening questions: should a profit be disregarded, or is it right that the defendant
account to the plaintiff for a profit made on breach? The answer is, in conclusion, that the profit should be
disregarded if the performance interest of the injured party is satisfied by compensatory damages. If the
performance interest is not satisfied by compensatory damages, it is right that the defendant account for a
profit. In that case an account is necessary to satisfy the performance interest of the injured party. Thus
this condition supplies the judicial control of an account of profits for breach of contract and maintains
stability in the law. It is on this basis that accounting for profit for breach of contract should be defined as
the law of Australia as it can in England.
315
Heydon, Leeming and Turner, above n 207, 916 [26-075].
66
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Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518
Attorney-General v Blake [2001] 1 AC 268
Attorney-General v Blake [1998] Ch 439
Attorney-General v Blake [1997] Ch 84
Attorney-General (Hong Kong) v Reid [1994] 1 AC 324
Australian Competition and Consumer Commission v C G Berbaitis Holdings Pty Ltd (2003) 214 CLR 51
Bellgrove v Eldridge (1954) 90 CLR 613
Bilambil-Terranora Pty Ltd v Tweed Shire Council [1980] 1 NSWLR 465
Boardman v Phipps [1967] 2 AC 46
Breen v Williams (1996) 186 CLR 71
British Motor Trade Association v Gilbert [1951] 2 All ER 641
Broome v Cassell & Co Ltd [1972] AC 1027
Building and Civil Engineering Holiday Scheme Management Ltd v Post Office [1966] 1 QB 247
Bulli Coal Mining Co v Osborne [1899] AC 351
Bunnings Group Ltd v Chep Australia Ltd (2011) 82 NSWLR 420
Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185
Chan v Zacharia (1984) 154 CLR 178
City Mutual Life Assurance Society Ltd v Giannarelli [1977] VR 463
City of New Orleans v Firemen’s Charitable Association, 9 So 486 (La, 1891)
Clark v Macourt (2013) 253 CLR 1
Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64
Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1
Re Coomber [1911] 1 Ch 723
Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460
Devenish Nutrition Ltd v Sanofi-Aventis SA [2009] Ch 390
Edwards v Lee’s Administrator, 96 SW 2d 1028 (1936) (Ky Ct App)
Esso Petroleum Co Ltd v Niad Ltd [2001] All ER (D) 324
Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 (20 March 2003)
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69
Giedo Van Der Garde BV v Force India Formula One Team Ltd [2010] EWHC (QB) 2373 (24 September 2010)
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296
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Re Hallett (1880) 13 Ch D 696
Hampton v BHP Billiton Minerals Pty Ltd [2012] WASC 285 (9 August 2012)
The Hansa Nord [1976] QB 44
Harris v Bendall (1991) 172 CLR 60
Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298
Harrison v Teton Valley Trading Co Ltd [2003] 1 WLR 2577
Hickey and Co Ltd v Roches Stores (Dublin) Ltd (No 1) [1994] Restitution Law Review 196 (14 July 1976)
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157
Hungerfords v Walker (1989) 171 CLR 125
Inverugie Investments Ltd v Hackett [1995] 1 WLR 713
Jaggard v Sawyer [1995] 1 WLR 269
Jegon v Vivian (1871) LR 6 Ch App 742
Keech v Sandford (1726) Sel Cas Ch 61; 25 ER 223
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563
Lake v Bayliss [1974] 1 WLR 1073
Lane v O’Brien Homes Ltd [2004] EWHC (QB) 303 (5 February 2004)
Lister & Co v Stubbs (1890) 45 Ch D 1
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25
Lunn Poly Ltd v Liverpool & Lancashire Properties Pty Ltd [2006] 2 EGLR 29
Maguire v Makaronis (1997) 188 CLR 449
Martin v Porter (1839) 5 M & W 351; 151 ER 149
Ministry of Defence v Ashman (1993) 25 HLR 513
Mouat v Betts Motors Ltd [1959] AC 71
Muschinski v Dodds (1985) 160 CLR 583
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Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd’s Rep 359
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Phillips v Homfray (1871) LR 6 Ch App 770
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Pilmer v Duke Group Ltd (2001) 207 CLR 165
Premium Real Estate Ltd v Stevens [2009] 2 NZLR 384
70
President of India v Lips Maritime Corporation [1988] AC 395
Prince Jefri Bolkiah v KPMG [1999] 2 AC 222
R v Blake [1962] 2 QB 377
R v Islam [2009] AC 1076
Radford v De Froberville [1977] 1 WLR 1262
Reading v Attorney-General [1951] AC 507
Reading v The King [1948] 2 KB 268
Reading v The King [1949] 2 KB 232
Regal (Hastings) Ltd v Gulliver [Note][1967] 2 AC 134 (20 February 1942)
Reid-Newfoundland Co v Anglo-American Telegraph Co Ltd [1912] AC 555
Robinson v Harman (1848) 1 Ex 850, 855; 154 ER 363
Rodoconachi v Milburn (1896) 18 QBD 67
Rookes v Barnard [1964] AC 1129
Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344
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Snepp v United States, 444 US 507 (1980)
Spincode Pty Ltd v Look Software Pty Ltd (2001) 4 VR 501
Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246
Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361.
Swordheath Properties Ltd v Tabet [1979] 1 WLR 285
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272
Teacher v Calder [1899] AC 451
Tito v Waddell (No 2) [1977] Ch 106
Town and Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 (26 March 2002)
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904
United States v Snepp, 456 F Supp 176 (ED Va, 1978)
United States v Snepp, 595 F 2d 926 (4th Cir, 1979)
Warman International Ltd v Dwyer (1996) 182 CLR 544
Watson Laidlaw & Co Ltd v Potts Cassels and Williamson (1914) 31 RPC 104
White Arrow Express Ltd v Lamey’s Distribution Ltd (1995) 145 New Law Journal 1504
Whitwham v Westminster Brymbo Coal Co [1896] 2 Ch 538
Williams v Volta [1982] VR 739
Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798
WWF ─ World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] 1 WLR 445
Yakamia Dairy Pty Ltd v Wood [1976] WAR 57
71
Zhu v Treasurer (NSW) (2004) 218 CLR 530
C Legislation
Chancery Amendment Act 1858 [Lord Cairns Act], 21 & 22 Vict, c 27
Goods Act 1958 (Vic)
Official Secrets Act 1911, 1 & 2 Geo 5, c 28
Official Secrets Act 1989 (UK) c 6
Sale of Goods Act 1893, 37 & 38 Vict, c 71
Supreme Court Act 1986 (Vic)