Contract Theory and Gain‐Based Recovery

Date01 November 2013
Published date01 November 2013
DOIhttp://doi.org/10.1111/1468-2230.12051
REVIEW ARTICLE
Contract Theory and Gain-Based Recovery
David Winterton*
Katy Barnett,Accounting for Profit for Breach of Contract: Theory and
Practice, Oxford: Hart Publishing, 2012, 256 pp, hb £57.00.
INTRODUCTION
The orthodox understanding of the money awards available in an action for
breach of contract is that such awards aim to compensate the innocent party for
the loss which breach has caused. Normally this loss is measured by reference to
the position this party would have occupied had the contract been performed,1
though occasionally compensation is awarded for expenditure the innocent party
incurred in reliance on the contract.2Awards measured by reference to the gain
the defendant made as a result of breach are thus outside the traditional com-
pensatory paradigm which English law adopts. Nevertheless, despite some fierce
resistance,3English courts appear increasingly willing to order gain-based relief in
certain exceptional cases.4
In Accounting for Profit for Breach of Contract: Theory and Practice, Dr Barnett
attempts to systematically explore the circumstances in which such gain-based
relief both is and should be available.5The book’s principal focus is on awards
that strip the entire profit the defendant made from breach, which Barnett labels
‘disgorgement damages’.6But Barnett also claims that awards assessed by
*University of New South Wales.
1Robinson vHarman (1848) 1 Exch 850, 855 (Parke B).
2 It is generally acknowledged that such awards are based on a rebuttable presumption, applicable
in circumstances where expectation loss is difficult to quantify, that the innocent party would have
broken even on the contract. See Omak Maritime Ltd vMamola Challenger Shipping Co Ltd (The
For a difficult, but illuminating, application of this principle, see Commonwealth vAmann Aviation
Pty Ltd (1991) 174 CLR 64 (HCA).
3 For example, see Attorney-General vBlake [2001] 1 AC 268 (HL) 299 (Lord Hobhouse) (Blake);
D. Campbell and D. Harris, ‘In defence of breach: a critique of restitution and the performance
interest’ (2002) 22 Legal Studies 208, 218.
4 See Blake ibid;Esso Petroleum Co Ltd vNiad [2001] All ER (D) 324 (Nov).
5 K. Barnett, Accounting for Profit for Breach of Contract: Theory and Practice (Oxford: Hart Publishing,
2012).
6 This is a term popularised by earlier writers on the topic. For example, see J. Edelman, Gain-based
Damages – Contract, Tort, Equity and Intellectual Property (Oxford, Hart Publishing 2002); L. Smith,
‘Disgorgement of the Profits of Breach of Contact: Property, Contract, and “Efficient breach”’
(1995) 24 Canadian Business Law Journal 121.
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© 2013 The Author. The Modern Law Review © 2013 The Modern Law Review Limited. (2013) 76(6) MLR1129–1155
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
reference to a ‘hypothetical bargain’ between the two contracting parties at the
date of breach should be seen as ‘gain-based’ on the basis that such awards are
best understood as instances of ‘partial disgorgement’ of the defendant’s profits
from breach.7
Barnett’s book has many strengths, including its comprehensive review of the
case law and academic literature on gain-based awards in all the major common
law jurisdictions, its clarity of expression, and its ambition of providing a
structured regime for determining the availability of such awards. The author is
to be commended for the scope of the project she has undertaken and the
breadth of her research. Rather than focussing on these strengths, however, this
article seeks to examine two important theoretical questions raised by Barnett’s
book.
The first of these questions concerns the theoretical foundations of Barnett’s
account. In outlining her explanation for when and why disgorgement awards
are an appropriate response to breach, Barnett invokes a normative theory of
contractual rights which, in addition to being highly contestable in its own right,
does not seem to advance her argument in any meaningful way. More funda-
mentally, it is not clear that the various normative considerations Barnett’s theory
invokes are all compatible mutually consistent and thus whether her account
satisfies the requirement of ‘coherence’ which she imposes on herself. A second
related theoretical question raised by Barnett’s account concerns the justifiability
of disgorgement awards in the contractual context. Like other writers on the
topic, Barnett claims that profit-stripping in the contractual context is justified by
considerations of ‘deterrence’ and ‘retribution’. But this common view is often
too quickly assumed. In reality, there are good reasons to be sceptical of whether
these two rationales, either individually or in some combination, are capable of
justifying disgorgement awards for breach of contract.8
AN OVERVIEW OF BARNETT’S ACCOUNT
Barnett’s book commences by outlining three possible rationales for why
disgorgement awards for breach of contract may sometimes be legitimate. The
three potential rationales she advances are ‘compensation’, ‘deterrence’ and
‘punishment or retribution’. After persuasively arguing that the ‘temptation . . .
to classify disgorgement damages as compensatory should be resisted’,9she
concludes that it is only ‘deterrence’ and ‘punishment or retribution’ that are
capable of justifying full disgorgement.10 This claim, along with other theoretical
questions raised by Barnett’s account, is examined below. First, however, it is
necessary to outline Barnett’s positive account of when disgorgement awards for
7 Barnett, n 5 above, ch 6 in particular. There are problems with this view, which are explained
below.
8 Although the book’s major focus is doctrinal, a focus on such theoretical questions is legitimate.
Not only does the book purport to make substantive theoretical claims, but any comprehensive
account of gain-based relief for breach of contract must do so. At the very heart of any analysis of
this topic lies the question of why the law should ever make such awards.
9 Barnett, n 5 above, 25.
10 ibid, 12.
Contract Theory and Gain-Based Recovery
© 2013 The Author. The Modern Law Review © 2013 The Modern Law Review Limited.
1130 (2013) 76(6) MLR 1129–1155

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