Reconsidering Disgorgement for Wrongs

Date01 March 1999
Publication Date01 March 1999
AuthorSarah Worthington
Reconsidering Disgorgement for Wrongs
Sarah Worthington*
Nobody should be permitted to profit by wrongdoing: this sentiment has compelling
intuitive appeal. Despite this, profits disgorgement1(or stripping the defendant of ill-
gotten gains) turns out to be a remedy with surprisingly limited application. This
may soon change. Both the Law Commission2and the judiciary3have indicated
support for wider recognition of the remedy; so too have academics.4However, few
would suggest the remedy ought to be available for all profit-generating wrongs,5
and here lies the difficulty. As yet no theory satisfactorily explains which wrongs
should give rise to disgorgement and which should not. Sometimes the focus has
been on the character of the wrong; at other times it has been on the moral
culpability of the wrongdoer. More importantly, and more worryingly, no theory
explains when the remedy should strip the defendant of every penny of the ill-gotten
gain and when something less – generally ‘expenses saved’ or ‘use value’ – should
suffice. This article re-assesses existing law and suggests that an alternative analysis
may provide some answers.
Put briefly, this article makes two claims. The first is based on an examination of
existing case law. It is that true disgorgement (stripping the defendant of every
penny of an ill-gotten gain)6is available only when the defendant has breached an
obligation of ‘good faith or loyalty’.7These obligations form a class which is
conceptually distinct from obligations arising in contract, tort or unjust enrichment.
ßThe Modern Law Review Limited 1999 (MLR 62:2, March). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.
* Department of Law, London School of Economics.
I would like to thank Peter Birks, Michael Bryan, Gareth Jones and Ewan McKendrick, and participants at
the International Conference on the Law of Restitution, University of Tel Aviv, May 1998, for their
thought-provoking comments on an earlier draft of this paper.
1 ‘Disgorgement’, rather than ‘restitutionary damages’, is used so as to better differentiate between this
remedy and the remedy of restitution for subtractive unjust enrichment (‘restitution’): see L. Smith,
‘The Province of the Law of Restitution’ (1992) 71 Can Bar Rev 672, 683–694.
2 Law Commission Report (No 247): Aggravated, Exemplary and Restitutionary Damages (1997),
recommendations 7–9 and Draft Bill, clause 12, suggesting that the common law ought to be allowed
to develop unimpeded, but that, in addition, restitutionary damages (their preferred term) ought to be
available where the defendant’s wrong (other than a breach of contract) was committed with
‘deliberate and outrageous disregard of the plaintiff’s rights’.
3A-G vBlake [1998] 1 All ER 833, 844–846 (CA), suggesting (obiter and without argument or
elaboration) that disgorgement for breach of contract might be appropriate where the breach consisted
in doing exactly what the contract expressly prohibited or in delivering shortfall performance.
4 See, eg, G. Jones, Goff & Jones: The Law of Restitution (London: Sweet & Maxwell, 4th ed, 1993)
(‘Goff & Jones’) 714–734; P. Birks, An Introduction to the Law of Restitution (Oxford: Clarendon
Press, rev ed, 1989) (‘Birks’) 326–327 (provided the defendant’s breach is cynical); Sir William
Goodhart QC, ‘Restitutionary Damages for Breach of Contract’ [1995] RLR 3; P. Jaffey,
‘Restitutionary Damages and Disgorgement’ [1995] RLR 30, 40 and ‘Disgorgement and
Confiscation’ [1996] RLR 92, 93, 96; H. McGregor, ‘Restitutionary Damages’ in P. Birks (ed),
Wrongs and Remedies in the Twenty-First Century (Oxford: Clarendon Press, 1996) 209 (but only if
the defendant’s breach is deliberate, cynical and with a view to profit).
5 See ns 2–4, above. Goff & Jones, 721, come close to this, suggesting that the remedy ought to be
available whenever the profit could not have been generated ‘but for’ the breach.
6 ‘Ill-gotten’ imposes an important limiting qualification: the remedy of disgorgement strips only those
gains derived as a result of the proven breach of duty.
7 The terminology is not elegant, but it will suffice. As is made clear later, the expression is intended to
have a wider compass than fiduciary duties and equitable duties of confidence.
Within this class, the disgorgement remedy is independent of the moral culpability
of the defendant. Outside this class, disgorgement is not available. It is not an
alternative remedial option (even in a limited circumstances) to a claim in tort,
contract, or subtractive unjust enrichment. Of course, the same facts may allow a
plaintiff to base claims on different causes of action; in this way, one scenario may
admit the possibility of both disgorgement and damages claims, for example, but
only if claimed as alternative (or perhaps cumulative?) remedies for the breach of
distinct obligations.8The second claim is that the law of subtractive unjust
enrichment is capable of – and, moreover, is the only9appropriate restitutionary
vehicle for – dealing with a defendant’s unauthorised use of the plaintiff’s
property.10 In itself this is not a new idea.11 However, its corollary, that the
restitutionary remedy must be quantified to reflect the defendant’s enrichment at
the plaintiff’s expense, has not been rigorously insisted upon. If this is recognised,
then the restitutionary remedy is limited to ‘use value’; the claim will not deliver
disgorgement. Both of these claims are such that they readily suggest avenues for
rational development of the law in the future; this article looks briefly at the
possibilities. Before attempting to defend these two claims, it is useful to
summarise the existing state of play.
‘Disgorgement for wrongs’ as a parasitic category
The area of law dealing with ‘disgorgement’12 has been claimed by restitution
lawyers.13 Profits disgorgement is seen as a remedy underpinned by the principle
against unjust enrichment, but in a way which is analytically distinct from
8United Australia Ltd vBarclays Bank Ltd [1941] AC 1 illustrates this possibility. The plaintiff was
the victim when a cheque was fraudulently indorsed to a third party payee. The plaintiff had a claim in
subtractive unjust enrichment against the recipient of the proceeds of the cheque and a claim in tort
against the collecting bank for conversion. The case has been variously interpreted, but it seems to
illustrate the potential for alternative causes of action on the same facts, rather than the potential for
different remedial responses to one tort claim. This is all the more evident where, as here, the claims
are against different defendants. But cf Birks 316, although also see 321.
9 The distinction between dependent and independent claims can have significant practical
consequences, so it is important that the courts choose the appropriate approach: see E. McKendrick,
‘Restitution and the Misuse of Chattels – The Need for a Principled Approach’ in N. Palmer and E.
McKendrick (eds), Interests in Goods (London: Lloyds of London Press, 2nd ed, 1998) 914–915.
10 Of course, the facts may also leave open a claim in contract or tort for expectation or compensatory
11 See J. Beatson, The Use and Abuse of Unjust Enrichment (Oxford: Clarendon Press, 1991) ch 8; and
D. Friedmann, ‘Restitution for Wrongs: The Basis of Liability’ in W.R. Cornish et al (eds),
Restitution Past, Present and Future (Oxford: Hart Publishing, 1998) ch 9. However, neither
commentator notes the need to limit the remedy. Most other restitution lawyers would categorise
these ‘wrongful use’ claims as dependent on the wrong, not as independent claims in subtractive
unjust enrichment.
12 Also termed ‘restitutionary damages’ or ‘restitution for wrongs’.
13 See especially D. Friedmann, ‘Restitution of Benefits Obtained Through the Appropriation of
Property or the Commission of a Wrong’ (1980) 80 Col LR 504; R. Sharpe and S.M. Waddams,
‘Damages for Lost Opportunity to Bargain’ (1982) 2 OJLS 290; G. Jones, ‘The Recovery of Benefits
Gained from a Breach of Contract’ (1983) 99 LQR 443; I.M. Jackman, ‘Restitution for Wrongs’
[1989] CLJ 302; D. Friedmann, ‘The Efficient Breach Fallacy’ (1989) 18 J Leg Studies 1; J. Beatson,
n 11 above; R. O’Dair, ‘Restitutionary Damages for Breach of Contract and the Theory of Efficient
Breach: Some Reflections’ (1993) 46 CLP 113; E. McKendrick, n 9 above ch 35; L.D. Smith,
‘Disgorgement of the Profits of Breach of Contract: Property, Contract and ‘‘Efficient Breach’’’
(1994) 24 Can Bus LJ 121; J. Stapleton, ‘A New ‘‘Seascape’’ for Obligations: Reclassification on the
Basis of Measure of Damages’ in P. Birks (ed), The Classification of Obligations (Oxford: Clarendon
Press, 1997) ch 8.
March 1999] Reconsidering Disgorgement for Wrongs
ßThe Modern Law Review Limited 1999 219

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