Accounting for profit for breach of contract: a theoretical and practical justification

© 2010 Dr. Katy Eloise BarnettThe award of the remedy of an account of profits (or ‘disgorgement damages’) for breach of contract is justifiable in some circumstances, and it can be situated within orthodox contract law principle and cases. The primary goal of disgorgement damages is to deter a defendant from unilaterally breaching his contract in certain circumstances. It is important to note that disgorgement damages will not be available for all breaches of contract: the availability of disgorgement depends upon the nature of the plaintiff’s interest in performance of the contractual obligations and the availability of a substitute performance (either through an award of compensatory damages or through an award of specific relief). In addition, disgorgement damages have a punitive rationale. Thus, a defendant will only be deserving of punishment when his breach was advertent. Disgorgement damages are available in two categories of case: the ‘second sale’ cases, where the defendant breaches his contract with the plaintiff to make a more profitable contract with a third party; and the ‘agency problem’ cases, where the defendant promises the plaintiff he will not do a certain thing, and the plaintiff finds it difficult to supervise the performance. Concurrent breach of contract and fiduciary duty cases make up the core of this latter category, but it also encompasses some breach of negative covenant cases. Disgorgement may be full or partial. Awards of so-called or ‘reasonable fee damages’ for breach of contract are best understood as examples of partial disgorgement rather than as ‘restitutionary damages’. Courts award partial disgorgement because typically, specific relief is still possible, but the court does not award it for discretionary reasons. By contrast, in the full disgorgement cases, typically, the defendant has rendered it impossible for the plaintiff to be awarded her right to performance, and thus the deterrent and punitive considerations merit an award at the higher end of the scale. There is an overlap between ‘reasonable fee’ damages and awards for so-called ‘skimped performance’. Ordinarily, however, it will not be necessary to award disgorgement damages for an expense saved because compensatory damages will still be adequate. The primary question for the court in most cases is which measure should be utilised (difference in value or rectification cost). In rare cases, it may be necessary to award disgorgement damages, particularly where compensatory damages are inadequate and the purpose of the contract was to avoid a risk. Equitable bars to relief, such as hardship, laches and acquiescence and ‘clean hands’ should be adopted in relation to disgorgement damages. Similarly, allowances for skill and effort should be applied to disgorgement damages for breach of contract. The justification for this rests on notions of desert (namely, that the plaintiff does not deserve relief and that the defendant does not deserve to be punished) or on notions of mercy (that because of his particular circumstances, the defendant should not have to disgorge his profit)