Restitutionary Damages for Breach of Contract: A Bad Precedent?

Introduction:

Some legal scholars have described contract law as the law of markets. Much like economic transactions, contractual dealings are guided by a series of abstract rules in a marketplace of bargains.[1] This view, commonly associated with ‘market individualism’, suggests that such dealings assume a certain distance between the parties concerned, and that both operate from a position of mutual self-interest. Within this context, damages for ‘breach of contract’ function to preserve the stability of this ‘market’. They help to remedy the loss suffered from the breach, thus providing security for parties who enter into contractual bargains. Within English contract law, remedies are meted out with a degree of impartiality, with an eye to redistributive justice. However, one species of damages, restitution, goes further than mere compensation. Without reference to loss, it seeks to reverse some or all of the enrichment that has been unjustly acquired by a contract breacher. Morally commendable as this might be, it will be argued that restitution should not be made available as a remedy for a breach of contract. As used in the case of Attorney General v Blake, it is a perversion and distortion of the original intent behind contractual damages, and stands to do more harm than good if generally recognised. 

Common law compensatory damages

To assess what value, if any, that restitutionary damages would have within the law of contracts, it is first important to survey the functions that damages are meant to serve within this context. Moreover, in making this determination, further questions arise as to whether restitution would achieve its desired effect, if adopted. In their seminal paper The Reliance Interest in Contract Damages, Fuller and Perdue contend that damages primarily serve the function of rendering compensation for injury or loss.[2] At the root of compensatory remedies, is a reference to loss incurred (imputed or actual) by an innocent party. Traditionally, the common law does not take a punitive approach for a breach. This is evinced in the case of Surrey County v Bredero,[3] where the defendant’s breach of a restrictive covenant only resulted in claimants being awarded nominal damages because no actual loss had occurred.[4] In this case, Dillon LJ in his judgment emphasises the ‘conventional rule’ of contracts, which states that “the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed”[5] This rule acknowledges that the defendant’s failure to perform an undertaking negates or attenuates the consideration provided within the contractual bargain.[6] Where this happens, compensation greater than a nominal one is to be awarded only where loss has been occasioned. Much like any market, parties enter freely into bargains and secure a promise of performance. However, liability is imposed if one party devalues the market by reneging on their end of the bargain. The quantum of damages in such circumstances is measured by expectation loss, that is, the loss calculated by the benefit the claimant hoped to gain, had the contract been performed. Alternatively, the claimant could also be awarded a reliance loss if expectation is difficult to calculate. The reliance loss takes account of expenditures that claimant had undertaken in reliance on the defendant’s representation or promise.

 

Remedies in Equity

It is however acknowledged that in certain circumstances, damages alone are not adequate in compensating the innocent party for a breach of contract. Examples include situations where pecuniary damages are incapable of putting the breachee in the same position as if the contract had been performed or where only performance is capable of satisfying the terms of the contract, and consideration provided therewith. In these circumstances, recourse to remedies in equity is preferable. The classic case of Beswick v Beswick[8] illustrates this point. In this case, the defendant was required, inter alia, to pay an annuity to the deceased’s wife in exchange for the sale of a coal business at a considerable discount. The defendant however defaulted on his promise once Mr. Beswick died, thus breaching the contract. The court ordered specific performance for Mrs Beswick, as nominal damages would have been inadequate to satisfy the bargain which the defendant had gained in making his promise to the testator. Although this case was concerned primarily with ‘privity of contracts’, one of its upshots was to delimit certain circumstances under which remedies in equity were preferred for a breach. Remedies such as specific performance or injunctions may thus be granted in cases where money does not adequately capture the essence of performance.

 

Restitutionary damages 

Restitutionary damages differ from the aforementioned remedies in some crucial ways. For one, they are concerned with the reversal of benefits that have been earned unjustly by the defendant, at the expense of the claimant. In effect, the claimant is awarded relief measured, not by reference to her material financial loss, but the benefit gained by the defendant.[9] This is commonly carried out under two conditions. First, where there’s a total failure of consideration, the claimant may seek to reclaim the value of her performance from the defendant. Secondly, where there is enrichment by wrongdoing, that is, the defendant has usurped the claimant’s assets to gain a profit, the courts may order a disgorgement or an ‘account of profits’, to reverse the unjust enrichment.  Restitutionary damages therefore depart from the ‘conventional rule’ mentioned above, by seeking to go further than mere compensation.

 

Traditional area of restitutionary damages

In light of the remedies already available for breaches, however, it is difficult to envisage a place for restitutionary damages within the law of contracts. In fact, I would argue that restitution, when introduced into the contractual context, is something of a legal fiction, one that cannot be reconciled with other core doctrines in the field. Lord Hobhouse’s dissenting opinion in Attorney General v Blake,[10] brings this doctrinal conflict to light. He argued that restitution is analogous to property; it concerns wealth or advantage, which ought to be returned or transferred by the defendant to the claimant. Restitution is more appropriate within the context of trusts or property law, since these rights survive against a broader class of people and are often proprietary in nature.[11] A violation of property rights results in a loss to the claimant’s undivided ownership, possession or use of said property right, since the very nature of property entails the exclusion of certain others from its use. It is here that restitution has its proper place in redirecting wealth that has been unjustly appropriated. The tort of trespass, for example, establishes the notion that a person who has used another person’ss property for his own purposes without the latter’s permission, is liable to pay a fee for this use, even if no harm is done to the land.[12] Wrotham Park Estate Co Ltd v Parkside Homes Ltd[13] was decided with this notion in mind. In this case, which concerned the defendant’s breach of a restrictive covenant, Brightman J. awarded the restitutionary remedy of a partial ‘account of profit’ to the claimant, as a “just substitute for a mandatory injunction … such sum as might reasonably have been demanded by the plaintiffs from Parkside as a quid pro quo for relaxing the covenant”.[14] The damages were awarded even in light of the fact that the breach of covenant did not devalue the dominant tenement, rather, it was the nature of the property right violated in the course of contractual breach, which justified a remedy of restitution. Lord Nicholls in Attorney General v Blake went further to suggest that even as a case of restitution, Wrotham Park Estates stood as a ‘solitary beacon’, and its principle was not generally applicable to contractual breaches. This is because the case was decided under the statutory authority of the now repealed Lord Cairns’s Act (the Chancery Amendment Act 1858), which granted the Court of Chancery power to award damages in lieu of an injunction. Courts in other jurisdictions such as Canada and the United States seem to have maintained this distinction with more consistency, and continue to allow for disgorgement for a breach of contract only if there is a concomitant breach of trust, fiduciary duty or property rights, as in the case of Snepp v United State.[15]

 

Attorney General v Blake and the use of restitutionary damages for contractual breach

English courts seem to have adopted a similar view to Canada and the United States, prior to the case of Attorney General v Blake, and often forged some relationship (fictional or otherwise) of trust between the claimant and defendant, in order to justify an award of restitution within the domain of contracts. Attorney General v Blake is the first instance where the courts stretched restitutionary damages for a pure contractual breach, as it was considered exceptional. This case concerned an MI6 secret service agent who signed an Official Secrets Act contract, as part of the terms of his employment. Under this contract, he was sworn to secrecy and enjoined not to reveal confidential information about his work with the agency. Blake purportedly breached these terms when he published a book about his disloyal activities towards the service, thus committing the very act which he contracted not to do. The award of restitution against Blake and his publishers came after a period of time had lapsed, and the agency and government did not take adequate steps to prevent the publication of the book, although they were aware of it.

Those who defend an award of restitutionary damages  for the breach in the above case, argue that it is justified by the principle that a ‘wrongdoer must not profit from his wrongdoing’. The majority of the House in Attorney General v Blake adopted a similar line of reasoning, stressing the fact that Blake had deliberately committed repeated breaches of his contractual undertaking and had “caused untold and immeasurable damage to the public interest”.[16] It is not here disputed that Blake’s actions were unjust, and had they been sanctioned in a timely manner, could have carried criminal liability. However, the moralistic stance adopted by the House of Lords is not justified within contract law for some crucial reasons. First, it is generally accepted that within the law of contracts, the parties deal with one another at “arm’s length”, seeking out the best bargain in a given situation. Unlike relations of trust, contractual bargains are commenced in a market driven by self-interest, as market individualists would argue. If the parties in question are of equal bargaining power, the law does not seek intervene in a bargain entered into freely, even if it turns out to be a bad one. To this end, English common law does not recognise a general doctrine of unconscionability. The law has rather been developed to sanction specific contractual terms that are unfair as in the case of Unfair Contract Terms Act 1977, but it does not censure the enterprise of the astute and perspicacious businessman. Yet, this is precisely what the moralistic justification seeks to do.

 

The problemata of restitutionary damages in contracts

Lord Hobhouse, in his eloquent dissent, stressed that Attorney General v Blake was thus decided in bad faith. It was a final desperate attempt of the Government and agency to right a wrong, which they had neglected to act upon using the ordinary recourse of criminal prosecution. This decision haphazardly extends the remedy of restitution into an area where it does not have an adequate foundation, since contracts do not in the first place confer an exclusive or proprietary right on the parties that enter into them. Ordering a disgorgement or account of profits in an instance of a pure contractual relationship actually creates new wealth for the claimant, where none existed before. Had the defendant usurped any property rights of the claimant’s, the claim would have been more suitable under the law of torts, not contracts. But without the requisite harm or loss incurred, restitution seems more punitive than compensatory when awarded for a breach of contract. It punishes those who, by using seemingly underhanded methods, have gained a profit in the course of business, even where no loss has been caused and no explicit laws have been broken. Not only does this run counter to the essence of contractual dealings, it undermines the basic tenet of freedom of contracts. Namely, one is generally free to decline or undercut performance in search of a “better deal”, provided that she then becomes liable to compensate the other party for any loss incurred.[17] By abandoning the general compensatory nature of damages and introducing restitution as a remedy, the courts risk creating greater uncertainty and thus discouraging commercial activity. This dangerous expansion of the remedy should be seen as a bad precedent as such, for it violates the fundamental assumptions of contracts without necessarily achieving the aim of equitable redistribution of wealth.

 

Conclusion

In conclusion, a question of recognising restitutionary damages within contract law invariably converges on a question of sanctioning punitive measures in this field. In the context of restitution for wrongs, the injustice does not lie in causing harm or loss to the claimant, for the remedy is available without proof that the wrong has made him worse off.[18] It lies in the defendant being enriched by unjust means, and at the expense of the claimant. I argue that it is not necessary to punish the defendant for such actions beyond nominal damages. In the event of loss, the ordinary remedies of compensatory damages or equitable remedies suffice to deal with the impact of breach. This is so, because contract law is fundamentally a law of markets, governed by mutual self-interests. Restitution hinders the workings of this market by penalising parties that have managed to get a “better deal” than that which was bargained for, and it introduces uncertainties into the field of contract law. I stand behind Lord Hobhouse’s dissenting opinion as such, when he states that contractual obligations are correctly understood as being the obligation to perform or pay damages for failing to do so.[19] This ought to be the full scope of liability in contracts. Further punitive measures such as restitution should therefore be avoided.

 

Nina Anana

King’s College London