Restitution & Wrongs
Cases
United Australia Ltd v. Barclays Bank Ltd
[1941] AC 1
Viscount Simon LC: . Thequestion to be decided in this appeal is whether the proceed ings against M. F. G., carried on up to the point that they in fact reached, constitute a valid ground of defence for the respondent bank and so relieve it in the present action from a liabil ity, which would otherwise certainly attach to it, to repay to the appellant company the sum of 1900/. of which they had been deprived and which they have not received from any other source.
The view taken by the Courts below is that the appellant company, by bringing their action against M. F. G., elected to ‘waive the tort’ and thereby became irrevocably committed, even against a different defendant, to the view that Emons was, as he professed to be, duly autho rised as the appellant company’s agent to deal with the cheque as he did. If so, the Bank’s deal ing with the cheque was not tortious and the present action would fail.
The House has now to decide whether the Courts below are right in holding that the appel lants are barred from recovering judgment against the bank because they previously instituted proceedings, on the basis of’waiving the tort’ against M. F. G., when those proceedings never produced any judgment or satisfaction in ‘the plaintiff’s favour. This question may be conve niently dissected by first asking whether there would be any such bar even if the present action was an action in tort against M. F. G. If a remedy in tort would remain open against the same defendant, then there certainly cannot have been any conclusive election which could prevent an action against a different defendant who had previously not been sued at all.
There is, as far as I can discover, no reported case which has ever laid it down as matter of decision that when the plaintiff ‘waives the tort’ and starts an action in assumpsit, he then and there debars himself from a future proceeding based on the tort. It would be very remarkable if it were so. ‘The fallacy of the argument,’ as Lord Ellenborough said in Hunter v. Prinsep,1 ‘appears to us to consist in attributing more effect to the mere form of this action than really belongs to it. In bringing an action for money had and received, instead of trover, the plaintiff does no more than waive any complaint, with a view to damages, of the tortious act by which the goods were converted into money, and takes to the neat proceeds of the sale as the value of the goods.’ When the plaintiff ‘waived the tort’ and brought assumpsit, he did not thereby elect to be treated from that time forward on the basis that no tort had been committed; indeed, if it were to be understood that no tort had been com mitted, how could an action in assumpsit lie? It lies only because the acquisition of the defen dant is wrongful and there is thus an obligation to make restitution.
The true proposition is well formulated in the Restatement of the Law of Restitution pro mulgated by the American Law Institute, 525, as follows: ‘A person upon whom a tort has been committed and who brings an action for the benefits received by the tortfeasor is sometimes said to “waive the tort.” The election to bring an action of assumpsit is not, however, a waiver of tort but is the choice of one of two alternativi: remedies.’ Contrast with this, instances of true waiver of rights, e.g., waiver of forfeiture by receiving rent.
If, under the old forms of procedure, the mere bringing of an action while waiving the tort did not constitute a bar to a further action based on the tort, still less could such a result be held to follow after the Common Law Procedure Act, 1852, and the Judicature Act, 1875. For It ii now possible to combine in a single writ a claim based on tort with a claim based on assump1it, and it follows inevitably that the making of the one claim cannot amount to an election which bars the making of the other. No doubt, if the plaintiff proved the necessary facts, he could be required to elect on which of his alternative causes of action he would take judgment, but that has nothing to do with the unfounded contention that election arises when the writ is issued. There is nothing conclusive about the form in which the writ is issued, or about the claims made in the statement of claim. A plaintiff may at any time before judgment be permitted to amend.
The substance of the matter is that on certain facts he is claiming redress either in the form of compensation, i.e., damages as for a tort, or in the form of restitution of money to which he is entitled, but which the defendant has wrongfully received. The same set of facts entitles the plaintiff to claim either form of redress. At some stage of the proceedings the plaintiff must elect which remedy he will have. There is, however, no reason of principle or convenience why that stage should be deemed to be reached until the plaintiff applies for judgment.
So far, I have been discussing what is the true proposition oflaw when the second action is brought against the same defendant. In the present case, however, the action which is said to be barred by former proceedings against M. F. G. is not an action against M. F. G. at all, but an action against Barclays Bank. I am quite unable to see why this second action should be barred by the plaintiff’s earlier proceedings against M. F. G. In the first place, the tort of con version of which the bank was guilty is quite a separate tort from that done byM. F.G. M.F. G.’s tort consisted in taking the cheque away from the appellants without the appellants’ authority; that tort would have equally existed ifM. F. G., instead of getting the cheque cleared through the bank, had kept it in its own possession. The bank’s tort, on the other hand, con sisted in taking a cheque, which was the property of the appellants,and without their authority using it to collect money which rightly belonged to the appellants. M. F. G. and the bank were not joint tortfeasors, for two persons are not joint tortfeasors because their independent acts cause the same damage.
It follows that the earlier proceedings against M. F. G. could provide the present respondents with no defence, unless as a result of them the plaintiffs had received satisfaction for their loss.
Lord Atkin I do not propose to discuss at any length the histqry of the claim in indebitatus assumpsit, and the cases through which that history has been t’raced. Very much learning has been devoted to this subject, and lawyers are indebted to Professor Ames, Sir William Holdsworth, and Professor Winfield for the light they have thrown upon the subject in well known works: and I should not like to omit the work of Mr. R. M. Jackson on ‘The History of Qµasi-Contract in English Law,’ published in 1936 in the Cambridge Studies in English Legal History, from which I have derived assistance. There is also what I hope I may respectfully call a valuable contribution to the discussion in the articles recently published by my noble and learned friend Lord Wright on Sinclair v. Brougham,2 and a review of the AmericanRestatement of the Law of Restitution at 1 to 65 of Legal Essays and Addresses published in 1939. I have myself consulted most of the cases referred to in these works with the exception of the cases from the Year Books which I have accepted from the authors.
The story starts with the action of debt which was not necessarily based upon the exiaten1 of a contract, for it covered claims to recover sums due for customary duea, pontlti• for breaches of by-laws, and the like. The action of debt had its drawbacks, the chiefbein1 that cht defendant could wage his law. There followed the application of the action on the assumpsit to debt. ‘The defendant being indebted then promised.’ At first there must be an express promise; then the Courts implied a promise from an executory contract: Slade’s case.3 Slade’s case was not a claim in indebitatus assumpsit, but the principle was applied, and it became unnecessary to prove an express promise in those cases. Then the action was allowed in respect of cases where there was no contract, executory or otherwise, as in the cases where debt would have lain for customary fees and the like; and by a final and somewhat forced appli cation to cases where the defendant had received money of the plaintiff to which he was not entitled. These included cases where the plaintiff had intentionally paid money to the defen dant, e.g., claims for money paid on a consideration that wholly failed and money paid under a mistake: cases where the plaintiff had been deceived into paying money, cases where money had been extorted from the plaintiff by threats or duress of goods. They also included cases where money had not been paid by the plaintiff at all but had been received from third persons, as where the defendant had received fees under colour of holding an office which in fact was held by the plaintiff: and finally cases like the present where the defendant had been wrongfully in possession of the plaintiff’s goods, had sold them and was in possession of the proceeds. Now to find a basis for the actions in any actual contract whether express or to be implied from the conduct of the parties was in many of the instances given obviously impossible. The cheat or the blackmailer does not promise to repay tu the person he has wronged the money which he has unlawfully taken: nor does the thief prbmise to repay the owner of the goods stolen the money which he has gained from selling the goods. Nevertheless, if a man so wronged was to recover the money in the hands of the wrongdoer, and it was obviously just that he should be able to do so, it was necessary to create a fictitious contract: for there was no action possible other than debt or assumpsit on the one side and action for damages for tort on the other. The action of indebitatus assumpsit for money had and received to the use of the plaintiff in the cases I have enumerated was therefore supported by the imputation by the Court to the defen dant of a promise to repay. The fiction was so obvious that in some cases the judge created a fanciful relation between the plaintiff and the defendant. Thus in cases where the defendant had wrongly sold the plaintiff’s goods and received the proceeds it was suggested in some cases, not in all, that the plaintiff chose to treat the wrongdoer as having sold the goods as his agent and so being under an implied contract to his principal to repay. Even here in the relatively more recent cases where this explanation is given by Grose J in King v. Leith4 and Marsh v. Keating5 by Park] in delivering the opinion of the judges in the House of Lords the wrongdoer had in fact in both cases purported to sell the goods as the agent of his principal. But the fic tion is too transparent. The alleged contract by the blackmailer and the robber never was made and never could be made. The law, in order to do justice, imputed to the wrongdoer a promise which alone as forms of action then existed could give the injured person a reasonable remedy. But while it was just that the plaintiff in such cases should be able to recover the money in the possession of the other party, he was not bound to exercise this remedy: in cases where the money had been received as the result of a wrong he still had the remedy of claiming damages for tort in action for trespass, deceit, trover, and the like. But he obviously could not compel the wrongdoer to recoup him his losses twice over. Hence he was restricted to one of the two remedies: and herein as I think arose the doctrine of ‘waiver of the tort.’ Having recovered in contract it is plain that the plaintiff cannot go on to recover in tort. Transit in rem judicatam. The doctrine has thus alternatively been said to be based on election: i.e., election between two remedies and the stage at which this election takes place was the subject of discussion in the argument in the present case. I will treat of election later. But at present I wish to deal with the waiver of the tort which is said to arise whenever the injured person sues in contract for money received. If the plaintiff in truth treats the wrongdoer as having acted as his agent, overlooks the wrong, and by consent of both parties is content to receive the proceeds this will be a true waiver. It will arise necessarily where the plaintiff ratifies in the true sense an unauthorized act of an agent: in that case the lack of authority disappears, and the correct view is not that the tart is waived, but by retroaction of the ratification has never existed. But in the ordinary cut the plaintiff has never the slightest intention of waiving, excusing or in any kind of way palliadn1 the tort. Ifl find that a thief has stolen my securities and is in possession of the proceeds, when I sue him for them I am not excusing him. I am protesting violently that he is a thief and becauae of his theft I am suing him: indeed he may be in prison upon my prosecution. Similarly with the blackmailer: in such a case I do not understand what can be said to be waived. The man hu my money which I have not delivered to him with any real intention of passing to him the prop erty. I sue him because he has the actual property taken: and I suggest that it can make no dif ference if he extorted a chattel which he afterwards sold. I protest that a man cannot waive a wrong unless he either has a real intention to waive it, or can fairly have imputed to him such an intention, and in the cases which we have been considering there can be no such intention either actual or imputed. These fantastic resemblances of contracts invented in order to meet requirements of the law as to forms of action which have now disappeared should not in these days be allowed to affect actual rights. When these ghosts of the past stand in the path of just ice clanking their media:val chains the proper course for the judge is to pass through them undeterred.
Concurrently with the decisions as to waiver of tort there is to be found a supposed application of election: and the allegation is sometimes to be found that the plaintiff elected to waive the tort. It seems to me that in this respect it is essential to bear in mind the distinction between choosing one of two alternative remedies, and choosing one of two inconsistent rights. As far as remedies were concerned, from the oldest time the only restriction was on the choice between real and personal actions. If you chose the one you could not claim on the other. Real actions have long disappeared: and, subject to the difficulty of including two causes of action in one writ which has also now disappeared, there has not been and there certainly is not now any com pulsion to choose between alternative remedies. You may put them in the same writ: or you may put one in first, and then amend and add or substitute another. On the other hand, if a man is entitled to one of two inconsistent rights it is fitting that when with full knowledge he has done an unequivocal act showing that he has chosen the one he can not afterwards pursue the other, which after the first choice is by reason of the inconsistency no longer his to choose Itherefore think that on a question of alternative remedies no ques
tion of election arises until one or other claim has been brought to judgment. Up to that stage the plaintiff may pursue both remedies together, or pursuing one may amend and pursue the other: but he can take judgment only for the one, and his cause of action on both will then be merged in the one. This seems to me to be the decision of both Lord Russell of Killowen CJ and of Vaughan Williams LJ in Rice v. Reed:6 and I cannot agree with the dictum of A. L. Smith LJ that to bring an action for money had and received waives the tort.In the present case, therefore, I find that the plaintiffs were at no stage in the proceedings they took against M. F. G. Trust called to make an election, and, if it were necessary so to hold, in fact made no election, to claim in contract and not to claim in tort: and the foundation of the defendant’s defence disappears. But I think it necessary to add that even if the tort had been waived, or the plaintiff had made any final election against M. F. G. Trust, Ld., I fail to see why that should have any effect upon their claims against the bank. If a thief steals the plain tiff’s goods worth 5001. and sells them to a receiver for 501. who sells them to a fourth party for 400/., ifl find the thief and he hands over to me the 50/. or I sue him for it and recover jud1- ment I can no longer sue him for damages for the value of the goods, but why should that preclude me from suing the two receivers for damages.
Lord Romer: A person whose goods have been wrongfully converted by another has a choice of two remedies against the wrongdoer. He may sue for the proceeds of the convenlon as money had and received to his use, or he may sue for the damages that he has sustained by the conversion. If he obtains judgment for the proceeds, it is certain that he is precluded from thereafter claiming damages for the conversion. But, in my opinion, this is not due to his hav ing waived the tort but to his having finally elected to pursue one of his two alternative reme dies. The phrase ‘waive the tort’ is a picturesque one. It hasa pleasing sound. Perhaps it was for these reasons that it was regarded with so much affection by the old Common Lawyers, one of whom, indeed, was moved to break into verse upon the subject. But with all respect to their memories,I firmly believe that the phrase was an inaccurate one if and so far as it meant that the tortious act was affirmed. What was waived by the judgment was not the tort, but the right to reco8ver damages for thetort. As was said by Lord Ellenborough in the case of Hunter v. Prinsep ‘in bringing an action for money had and received, instead of trover, the plaintiff does no more than waive any complaint, with a view to damages, of the tortious act by which the goods were converted into money, and takes to the neat proceeds of the sale as the value of the goods.’ The plaintiff in no way affirms the tortious act so as to treat it as having beena right fulone. As has been pointed out by the Lord Chancellor the action of assumpsit would not lie if it were to be understood that no tort had been committed.
Lord Porter delivered a concurring speech. Lord Thankerton concurred.
Phillips v. Homfray
(1883) 24 Ch. D 439
Bowen and Cotton L JJ: … The Plaintiffs’ claim out of which the 2nd and 3rd inquiries spring isa claim to be compensated for the secret and tortious use made by the deceasedR. Fothergill and others during his lifetime of the underground ways and passages under the Plaintiffs’ farm for the purpose of conveying;the coal and ironstone of R. Fothergill and his co trespassers. The judgment of Mr Justice Pearson as to these two inquiries is based upon the view that this description of claim did not a\>ate upon R. Fothergi//’s death, but was capable of being prosecuted against the assets in the hands of his executrix. That it is in forma claim in the nature ofa claim for trespass, the damages for which were to be measured by the amount of wayleave which the Defendants would have had to pay for permission to use the Plaintiffs’ ways and passages, cannot be disputed. But Mr Justice Pearson was of opinion that this was one of the class of cases in which a deceased man’s estate remained liable for a profit derived by it out of his wrongful acts during his lifetime. The learned Judge founded his opinion upon cer tain language of Lord Mansfield in the case of Hambly v. Trott,1 to the effect that, so far as the act of the offender had been beneficial to himself, his assets ought to be answerable. We have therefore to consider, in the first place, what is the true limit and meaning of the rule thaat per sonal action dies upon a defendant’s death, and whether there is, or can be, in the circumstances raised by the case, a profit received by his assets, which the Plaintiffs can follow.
The only cases in which, apart from questions of breach of contract, express or implied,a remedy fora wrongful act can be pursued against the estate of a deceased person who has done the act, appear to us to be those in which property, or the proceeds or value of property, belong ing to another, have been appropriated by the deceased person and added to his own estate or moneys. Insuch cases, whatever the original form of action, it is in substance brought to recover property, or its proceeds or value, and by amendment could be made such in form as well as in substance. In such cases the action, though arising out of a wrongful act, does not die with the person. The property or the proceeds or value which, in the lifetime of the wrongdoer, could have been recovered from him, can be traced after his death to his assets, and recaptured by the rightful owner there. But it is not every wrongful act by which a wrongdoer indirectly benefits that falls under this head, if the benefit does not consist in the acquisition of property, or its proceeds or value. Where there is nothing among the assets of the deceased that in law or in equitybelongs_to the plaintiff, and the damages which have been done to him are unliquidated and uncertain, the executors of a wrongdoer cannot be sued merely because it was worth the wrongdoer’s while to commit the act which is complained of, and an indirect benefit may have been reaped thereby Itseems to us that Lord Mansfield [in Hambly v. Trott] does no more
than indicate that there is a class of cases in which assumpsit can be brought againsta wrong doer to recover the property he has taken or its proceeds or value, and that in such cases the action will survive against the executor. In the illustration given by him of the horse, he does not mean that an action for the use and hire of a horse wrongfully taken will always lie again1t an executor, but that it will lie whenever a similar action would have lain against the wrongdoer himself. The case he puts is the case of a horse taken and restored, not of a horse taken and held under an adverse claim, and we are not prepared to say that, if absolutely nothing appeared in evidence except that a horse was taken and was afterwards brought back again, the owner might not recover for the use and hire of the horse on the hypothesis of an implied contract to pay for him The e true test to be applied in the present case is whether the Plaintiffs’ claim against the deceased R. Fothergill, in respect of which inquiries 2 and 3 were directed in his lifetime, belongs to the category of actions ex delicto, or whether any form of action against the execu tors of the deceased, or the deceased man in his lifetime, can be based upon any implied con tract or duty. In other words, could the Plaintiffs have sued the deceased at law in any form of action in which ‘Not guilty’ would not be the proper plea? If such alternative form of action could be conceived it must be either an action for the use, by the Plaintiff’s permission, of the Plaintiff’s roads and passages, similar in principle, though not identical, with an action for the use and occupation of the Plaintiffs’ land. Or it must be in the shape of an action for money had and received, based upon the supposition that funds are in the hands of the executors which properly belong in law or in equity to the Plaintiffs.Actions in which the owners of goods wrongfully sold were held entitled to waive the tort, and to recover in assumpsit for the proceeds, had become familiar to the common law as far back as towards the end of the 17th century: see Lamine v. Dorre
The difficulties of extending the above principle to the present case appear to us insuperable. The deceased, R. Fothergill, by carrying his coal and ironstone in secret over the Plaintiffs’ roads took nothing from the Plaintiffs. The circumstances under which he used the road appear to us to negative the idea that he meant to pay for it. Nor have the assets of the deceased Defendant been necessarily swollen by what he has done. He saved his estate expense, but he did not bring into it any additional property or value belonging to another person.
It remains to be considered whether there is any equitable doctrine which can extend or vary the above rules of the common law. We can see none. An action for account will only, under such circumstances, lie where the defendant has something in his hands representing the plain tiffs’ property or the proceeds or value of it. But if there were any such it could be recovered at law as well as in equity….
Baggallay LJ It has hardly been disputed on the present appeal that a remedy for a wrongful act can be pursued against the estate of a deceased person by whom the act has been committed, when property, or the proceeds of property, belonging to another have been appro priated by the deceased person, in other words that the action in such cases, though arising out of a wrongful act, does not die with the person; but it has been urged that the principle thus enunciated is limited to cases in which property, or the proceeds of property, have been appro priated by the deceased person, and that it does not apply to a case in which the deceased per son has derived any other benefit from his wrongdoing than property or the proceeds of property, and in particular that it does not apply to a case in which the benefit derived has not been in the form of an actual acquisition of property, but of a saving of expenditure which must otherwise have been incurred by the wrongdoer, as in the present case, in which, for the pur pose of the present argument, it must be assumed that by the use by the Defendants, for the carriage of their minerals, of the roads and passages under the Plaintiffs’ farm, there was a sav ing to them of an expenditure which they must otherwise have incurred.
Speaking with much diffidence, as my views in this respect differ from those of my col leagues, I feel bound to say that I cannot appreciate the reasons upon which it is insisted that although executors are bound to account for any accretions to the property of their testator derived directly from his wrongful act, they are not liable for the amount or value of any other benefit which may be derived by his estate from or by reason of such wrongful act. I can find nothing in the language used by Lord Mansfield [in Hambly v. Trott] that can support this view. On the contrary, when classifying the actions which survive against an executor by reason of the causes of action, he includes among such causes of action ‘gain or acquisition by the testa tor by the work and labour or property of another,’ and he in no respect limits or qualifies the nature or character of the ‘gain’ referred to. A gain or acquisition to the wrongdoer by the work and labour of another does not necessarily, if it does at all, imply a diminution of the property of such other person Upon the whole, I have come to the conclusion that the causes of action which were the foundation of the decree made in the present suit, and to which I deem it unnecessary to more particularly refer, were such as, within the rule in Hambly v. Trott, to entitle the Plaintiffs to maintain their suit against Mrs Fothergill as the executrix of the deceased Defendant R. Fothergill in respect of the subject-matter of the second and third inquiries directed by the decree. Whether the proceedings which the Plaintiffs have adopted for the pur pose of enforcing their rights are in form such as to entitle Mrs Fothergill to succeed in her appeal is a question the consideration of which I will postpone until after I have referred to some cases in equity which appear to me to have an important bearing upon it, but as to some of which the views formed by me in some respects differ from those expressed in the judgment of my colleagues. ,
[After referring to cases in equity, Baggallay LJ cbntinued:] a Court of Equity will give effect to a demand against the estate of a deceased person in respect of a wrongful act done by him, if the wrongful act has resulted in a benefit capable of being measured pecuniarily, and if the demand is of such a nature as can be properly entertained by the Court. The principles thus acted upon by Courts of Equity are in accordance with the conclusions enunciated by Lord Mansfield with reference to actions at common law which survive or die on account of the cause of action; but as regards those actions which at common law,survive or die on account of the form of action, Courts of Equity will not permit the justice of the case to be defeated by reason of the techni calities of particular procedure. That the demand of the Plaintiffs in this suit was one proper to be made in a Court of Equity cannot be disputed; the decree is conclusive on this point. Upon the question whether the wrongful act resulted in a benefit to the estate of the wrongdoer I think the proper inquiry is that suggested by Sir Thomas Plumer in Marquis of Lansdowne v. Dowager of Lansdowne, ‘Did the wrongdoer derive any benefit from the wrong done by him, or was it a naked injury by which his estate was in no way benefited?’ My answer to that inquiry, as applied to the circumstances of the present case, is that the estate of the Defendant R. Fothergill was benefited by the wrongful user by the Defendants of the roads and passages under the Plaintiffs’ farm….
Bracewell v. Appleby
[1975] Ch. 408, Chancery Division
Graham J: I come now to the question of relief. As already stated, I am unwilling in the circumstances to grant an injunction, but as, in my judgment, the plaintiffs have established their legal right, and by reason of the Chancery Amendment Act 1858 (Lord Cairns’ Act) they can ask for, and the court can grant, damages in lieu of an injunction. The defendant accepted that such was the position ifl was thus far in the plaintiffs’ favour. After consideration I propose to approach the question of damages and assess the amount, which I was requested to do by both parties, along the same lines as those followed by Brightman J in Wrotham Park Estate Co. Ltd v. Parkside Homes Ltd (1974] l WLR 798, 812 ff. It seems to me that the defendant must be liable to pay an amount of damages which in so far as it can be estimated is equivalent to a proper and fair price which would be payable for the acquisition of the right of way in question. In dealing with the case before him, Brightman J said, at 815:
‘In my judgment a just substitute for a mandatory injunction would be such a sum of money as might reasonably have been demanded by the plaintiffs from Parkside as a quid pro quo for relaxing the covenant.’
Then, after rejecting the approach which aimed at obtaining half or a third of the development value, he went on:
‘I think that in a case such as the present a landowner faced with a request from a devel oper which, it must be assumed, he feels reluctantly obliged to grant, would have first asked the developer what profit he expected to make from his operations.’
The profit in that case was large, being of the order of £50,000 and in the end the damages were assessed at £2,500, being 5 per cent of the profit.In the present case, the plaintiffs, for amenity reasons, did not want an extra house built in the cul-de-sac and I think it is right to regard them also as ‘reluctant,’ just as Brightman J did in the case of the plaintiffs before him.
Stoke on Trent CC v W&J Wass Limited
[1988] 1WLR 1406
Nourse LJ.: .. The levying of an unla,wful rival market is a tort. Whether it should properly be categorised asa nuisance or a trespa$s is probably not a question ofimportance. The better view must be that it isa nuisance. The general rule is that a successful plaintiff in an action in tort recovers damages equivalent to the’ loss which he has suffered, no more and no less. If he has suffered no loss, the most he can recover are nominal damages. A second general rule is that where the plaintiff has suffered loss to his property or some proprietary right, he recovers dam ages equivalent to the diminution in value of the property or right. The authorities establish that both these rules are subject to exc«;ptions. These must be closely examined, in order to see whether a further exception ought to be made in this case.
…..
AsI understand these authorities, their broad effect is this. In cases of trespass to land and patent infringement and in some cases of detinue and nuisance the court will award damages in accordance with what Nicholls LJ has aptly termed ‘the user principle.’ On an analogous prin ciple, ina case where there was a breach of a restrictive covenant the court has, in lieu ofa per manent mandatory injunction to restore the breach, awarded damages equivalent to the sum which the plaintiffs might reasonably have demanded for a relaxation of thecovenant. But it is only in the last-mentioned case and in the trespass cases that damages have been awarded in accordance with either principle without proof of loss to the plaintiff. In all the other cases, the plaintiff having established his loss, the real question has not been whether substantial damages should be awarded at all, but whether they should be assessed in accordance with the user prin ciple or by reference to the diminution in value of the property or right. In other words, those other cases are exceptions to the second, but not to the first, of the general rules statedabove.
Dothe authorities support an award of damages in accordance with the user principle where an unlawful rival market has caused no loss to the market owner? In other words, is this case to be governed by the principle of the trespass cases and that of the Wrotham Park case?
The latter decision is in my opinion one which stands very much on its own. The conclusion of BrightmanJ may,I think, be more fully explained as follows. An injunction is frequently granted to enforce an express negative covenant, especially a restrictive covenant affecting land, without proof of loss to the plaintiff. Injunctions could therefore and would have been granted in that case but for the social and economic reasons against ordering the demolition of 14 houses. If injunctions had been granted, the loss to the defendant purchasers would have been enormous. If, on the other hand, injunctions were not granted and no damages were ….the purchasers would have been left in undisturbed possession of the correspondingly
mous fruits of their wrongdoing. Accordingly, if the plaintiffs had not been awarded. substantial damages, justice manifestly would not have been done. If this analysis is correct, the practical result of the Wrotham Park decision was something akin to an award of exemplary damages for breach of contract, albeit that their amount bore no relation to the loss which would have been suffered by the defendant purchasers if they had had to demolish their hotell. In saying this, I do not wish to suggest that that case was wrongly decided. Indeed, I regard the result as having been entirely appropriate and I see no reason why it should not serve as a prece dent for other cases of the same kind. I merely wish to emphasise that it stands a long way away from the present problem and does not assist in its solution.
On a superficial view, the trespass cases present a greater difficulty. In trespass the defendant makes an unlawful use of the plaintiff’s land. Similarly, it can be said that in levying an unlaw ful rival market the defendant makes an unlawful use of the plaintiff’s right to hold his own market, which, at any rate in the case of a franchise market, is an incorporeal hereditament. Ought it to make all the difference that in the first case the unlawful use is a physical one? This is a formidable line of argument, but I think that it is unsound. If the way-leave cases are put on one side, it seems to me that the trespass cases really depend on the fact that the defendant’s use of the plaintiff’s land deprives the plaintiff of any opportunity of using it himself. And even on the assumption, which may be correct, that the broad view of Denning LJ in the Strand Electric case [1952) 2 @ 246 is a correct view of the law, the same can be said of an unlawful detention of the plaintiff’s chattel. On the other hand, an unlawful use of the plaintiff’s right to hold his own market does not deprive him of the opportunity of holding one himself. Such indeed has been the state of affairs in the present case. If of course the plaintiff can show that he has thereby suffered loss, nobody would suggest that he ought not to receive substantial damages. But why should he receive them when he has been able to hold his own market and has suffered no loss from the defendant’s?
It is characteristic of the development of the common law that the invention and increasingly
extended application of the user principle should appear to have come about by accident rather than by design. Thus it seems from the interlocutory observations of the members of this court in Whitwham’s case [1896) 2 Ch. 538, 539, 540, 541 that they were initially resistant to the prin ciple of the way-leave cases. But they saw in it a basis for the just decision of that case, and once it had been so decided the application of the principle to analogous states of affairs, for exam ple the wrongful detention of chattels, seems to have been a perfectly natural development. However, in a process of development it is sometimes necessary to stand back from the author ities and to ask not simply where they have come to, but where, if a further extension is made, they may go next.
Although I would accept that there may be a logical difficulty in making a distinction between the present case and the way-leave cases, I think that if the user principle were to be applied here there would be an equal difficulty in distinguishing other cases of more common occurrence, particularly in nuisance. Suppose a case where a right to light or a right of way had been obstructed to the profit of the servient owner but at no loss to the dominant owner. It would be difficult, in the application of the user principle, to make a logical distinction between a obstruction and the infringement of a right to hold a market. And yet the application of that principle to such cases would not only give a right to substantial damages where no loss had been suffered but would revolutionise the tort of nuisance by making it unncccsury to loss. Moreover, if the principle were to be applied in nuisance, why not in other tortl w. defendant’s wrong can work to his own profit, for example in defamation? As propni, rule in trespass and some other areas, the way-leave cases have done good service.their genus is peculiar, so ought their procreative powers to be exhausted. These considerations have led me to conclude that the user principle ought not to be applied to the infringement of a right to hold a market where no loss has been suffered by the market owner.If loss caused by the diversion of custom from one market to the other had been proved, I would have agreed with Nicholls LJ that the general rule ought to apply, so that the council would have recovered damages equivalent to the diminution in value of their right through the loss of stallage, tolls and so forth. But I rest my decision in this case on the simple ground that where no loss has been suffered no substantial damages of any kind can be recovered. Otherwise we would have to allow that the right to recover nominal damages for disturbance of a same day market without proof of loss had become one to receive substantial damages on top. If we had to allow that, why not also in the case of an other day market where no loss had been proved? It is possible that the English law of tort, more especially of the so-called ‘proprietary torts,’ will in due course make a more deliberate move towards recovery based not on loss suffered by the plaintiff but on the unjust enrichment of the defendant: see Goff and Jones, The Law of Restitution, 3rd edn. (1986), 612-14. But I do not think that that process can begin in this case and I doubt whether it can begin at all at this level of decision.
Nicholls LJ: It is an established principle concerning the assessment of damages that a person who has wrongfully used another’s property without causing the latter any pecuniary loss may still be liable to that other for more than nominal damages. In general, he is liable to pay, as damages, a reasonable sum for the wrongful use he has made of the other’s property. The law has reached this conclusion by giving to th’e concept of loss or damage in such a case a wider meaning than merely financial loss calculated by comparing the property owner’s financial posi tion after the wrongdoing with what it would have been had the wrongdoing never occurred. Furthermore, in such a case it is no answer for the wrongdoer to show that the property owner would probably not have used the property himself had the wrongdoer not done so. In The Mediana (1900] AC 113, I 17, Earl ofHalsbury LC made the famous observation that a defen dant who had deprived the plaintiff of ont of the chairs in his room for 12 months could not
diminish the damages by showing that the plaintiff did not usually sit upon that chair or that there were plenty of other chairs in the room.
What is in issue on this appeal is a novel application of this principle (which, for convenience, I shall call ‘the user principle’). Heretofore that principle has been applied to the use of land. In 1896 Lindley LJ in Whitwham v. Westminster Brymbo Coal and Coke Co. [1896] 2 Ch. 538, 542, observed that if one man trucks on rails over another man’s land it does not do any harm whatever, and there is no pecuniary damage, but that the law was ‘now settled.’ He stated the principle thus, at 541-2: ‘if one person has without leave of another been using that other’s land for his own purposes, he ought to pay for such user.’
The user principle has also been applied to chattels: Strand Electric and Engineering Co. Ltd v. Brisford Entertainments Ltd [1952) 2 Q!3 246. But the principle is not confined to the physi cal use of another’s property. The same principle has been applied in relation to incorporeal property, in particular patents.In the present case the council seeks to extend the user principle by applying it to a case of disturbance of market rights…
Thceommon law … isconstantly being developed and adapted as social conditions change, and novelty by itself is not an answer to the present claim. Indeed, for some time I was attracted by the analogy between infringement of a patent and infringement of a market right. The argu ment is to the following.effect. The owner of a market right has a legal monopoly in respect of the holding of a market within a certain area. If, for the purpose of assessment of damages on the user principle, infringement of a patent is to be regarded as the invasion and abstraction by the infringer of the property which consists of the monopoly of the patented articles granted to the patentee, as Lord Shaw observed in the passage I have cited from the Watson, Laidlaw case, so also is the disturbance of a m,irket right to be regarded as the invasion and abstraction of the property which consists of the monopoly of th-eholding of a market in the place in question. In other words, if the infringement of a patent is to be regarded as the wrongful user of the prop erty comprised in the patent, then by parity of reasoning the disturbance of a market right may properly be regarded as the wrongful user of the property comprised in the market right. If, in the one instance, damages may be awarded on the user principle in a suitable case, so may they be in the other instance.
I have, however, concluded that the analogy is unsound and that the application of the user principle in the case of the disturbance of a market right would not accord with the basic prin ciples applicable to that cause of action. A market right confers a monopoly, as does a patent, but the protection which the law affords to the owner of a market right is limited to protecting him against being disturbed in the enjoyment of his right. If an unauthorised market is held without disturbing the lawful market, the owner of the lawful market has no remedy, either for damages or otherwise. In such an event there is no place for an award of damages to be assessed on the user principle. Thus, for example, if and so long as the owner of the market right is cur rently not exercising or seeking to exercise his right, and is not holding a market at all, he has no cause of action against a person holding an unauthorised market, for in such a case he is not being disturbed in the enjoyment of his market right….
Disturbance may exist in fact or, in the case of a ‘same day’ market, be presumed as a matter of law. In the case of an ‘other day’ market, where disturbance exists in fact the remedies which the law provides are (a) an injunction and (b) damages to compensate for the disturbance. Again I can see no scope for the application of the user principle. If, on the one hand, the unau thoriseQ, other day market has caused and is causing no loss, either of stallage or of tolls or under any of the other heads of loss which may affect the owner of a market right, there is no cause of action. There is, in that event, no question of applying the user principle. If, on the other hand, the owner of the market right does sustain loss under one or more of those heads, damages must surely be commensurate with the quantum of the loss so sustained. The dam ages will correspond, so far as the court can fairly assess them, to the amount of the loss flow- . ing to the owner of the market right from the respects in which he has in fact been damnified in his enjoyment of that right by the holding of the unauthorised, other day market. Again, there would be no place for awarding, by application of the user principle, damages in a sum greater than the amount of that loss.
If I am right so far, and the user principle does not fit into the scheme of things thus far, it would be curious in the extreme if nonetheless the user principle could be invoked in the case of a same day market where in fact no loss exists under any of the recognised heads of loss.
I can see no justification for introducing such an anomaly into the law. The owner of a mar ket right has a cause of action in the case of a same day market even though the unauthorised market has not in fact caused him any loss. Despite the absence of loss, an injunction may be granted…. Indeed the remedy of an injunction may be peculiarly appropriate in such a case precisely because damages will not be an adequate remedy. But, in my view, to award dam ages on the user principle in such a case in respect of the period prior to the grant of an injunc tion would lead to the owner of the market right obtaining a greater measure of relief than would be justified by the nature of his right.
For the future injunctive relief would, rightly, prevent the unauthorised market from being held, but as to the past he would obtain, under the guise of damages, a sum to compensate him for disturbance when, in fact, there had been none. It may be anomalous today that, in the CUI of a same day market, the owner of the market right has a cause of action at all in respect of an unauthorised market which in fact causes no disturbance to the lawful market. But, whether r this is anomalous or not, I see no justification for departing from what hitherto bu Ion, accepted at the law, namely, that where there is in fact no loss sustained under any of the recognised heads, of stallage .and so forth, the owner of the market right has a cause of actrion in respect of a same day market but his claim for damages is confined to nominal damages. I say nothing about a cfaim for exemplary damages or whether, if such a claim had in this case, it would have been well-founded. Certainly the defendant’s’ conduct In holding their market despite the plaintiffs’ objections, is not conduct calculated to attract much sympathy. But for the reasons I have sought to state, I have to part company from the judge’s conclusion that, although the plaintiffs had suffered no loss under any of the normal heads of loss, damages should be assessed by reference to a notional licence fee for the period from April 1984 to 4 March 1987, being the date of his order.
The plaintiffs also placed some reliance on the decision of Brightman J in Wrotham Park Estate Co. Ltd v. Parkside Homes Ltd [1974) l WLR 798. I do not think that decision takes the matter any further so far as the present case is concerned. That case concerned an award of damages for breach of a restrictive covenant in lieu of a mandatory injunction. It is far removed from the present case. Wherever precisely the boundary, separating causes of action in which the user principle will be applied from those in which it will not, is to be drawn, for the reasons I have sought to state above that principle, in my view, has no application to a cause of action for disturbance of a market where, for the pre-injunction period during which the unauthorised market was held, the unauthorised market did not in fact disturb the lawful market.
Colbeam Palmer Ltd v. Stock Affiliates Pty Ltd
(1968) 122 CLR 25
Windeyer .J:..Thpleaintiff whose mark has been infringed can choose between damages or an account ofprofits. Hecannot have both. They are alternative remedies.Thdisetinction between an account of profits and damages is that by the former the infringer is required to give up his ill-gotten gains to the party whose rights he has infringed: by the lat ter he is required to compensate the party wronged for the loss he hassuffered. The two com putations canobviously yield different results, for a plaintiff’s loss is not to be measured by the defendant’s gain, nora defendant’s gain by the plaintiff’s loss. Either may be greater, or less, than the other. Ifa plaintiff elects to take an inquiry as to damages the loss to him of profits which pe might have made may be a substantial element of his claim: see Mayne onDamages, 11thedn. (1946), 71note. But what a plaintiff might have made had the defendant not invaded his rights is by no means the same thing as what the defendant did make by doing so.I need not elaborate the distinction between a defendant’s profits and a plaintiff’s loss. It has been explained often enough-very clearly in the article ‘Equity’ by Professor Hanbury in Halsbury’s Laws of England, 3rd edn., vol. 14, 524-5. The aspect which is significant for the present case, in which the plaintiff has chosen an account of profits in lieu of damages, is the extent to which the amount recoverable by the plaintiff depends upon whether the account is to be taken from the date when the defendant became aware of the plaintiff’s registered trade mark, or from some earlier date when the defendant was in fact infringing it. As to the facts,I am satisfied that the defendant did not know before 30th August 1965 that the plaintiff was the proprietor of the name Craftmaster as a registered trade mark inAustralia. I accept the evidence of Mr Winstock. He was, I thought, a truthful, but cautious and some whatreticent, witness. It may be that he did not before August 1965 make all the inquiries that a more prudent person in his position might have made, and that he was, as he says, in that sense remiss. Buta lack of diligence in inquiry does not tum ignorance into knowledge. Dishonesty is not to be inferred from lack of care. This is not a case of ‘wilful blindness’, the expression used in another context to describe a deliberate abstaining from inquiry from fear of what inquiry might reveal. Moreover for the defendant’s ignorance before the end ofAugust 1965 of the plaintiff’s registered trade mark the plaintiff must take some responsibility, bccauliC it did not earlier assert its rights. I reject the defendant’s contention that theplaintiff’sdila toriness amounts to laches altogether barring its rights to an account. Nevertheless1 think it is a a circumstance to be considered with the rest of the evidence to determine when defendant first became aware of the trademark.
It was suggested that the defendant’s profit should be measured by the difference between the amount it received for painting sets bearing the trade mark and the amount it had paid to obtain the.m… But in the case of a registered trade mark, infringement consists in the unau thorized use of the mark in the course of trade in relation to goods in respect of which it is registered. The profit for which the infringer of a trade mark must account is thus not the profit he made from selling the article itself but, as the ordinary form of order shews, the profit made in selling it under the trade mark [T]he account of profits retains the characteristics of its
origin in the Court of Chancery. By it a defendant is made to account for, and is then stripped of, profits he has made which it would be unconscionable that heretain. These are profits made by him dishonestly, that is by his knowingly infringing the rights of the proprietor of the trade mark. This explains why the liability to account is still not necessarily coextensive with acts of infringement. The account is limited to the profits made by the defendant during the period when he knew of the plaintiff’s rights. So it was in respect of common law trademarks. So it still is in respect of registered trade marks: Ede/sten v. Edelsten (1863) I De GJ& S 185; S/azenger (S Sons v. Spalding (S Bros. (1910] I Ch 257; Moet v. Couston (1864) 33 Beav 578.I think that it follows that it lies upon a plaintiff who seeks an account of profits to establish that profits were made by the defendant knowing that he was transgressing the plaintiff’s rights.
For the reasons I have given, I consider that the account of profits for which the plaintiff asked ought not to go further back than 30th August 1965….
No case was cited which supported the claim made for the plaintiffs that the defendant must account for the whole of the profit which it made by selling painting sets in fact marked Craftmaster and there is much to the contrary. Using the words of the common order for an account, the defendant must account for profits made in selling painting sets under the name Craftmaster-that means such profit as was attributable to the wrongful use of themark. And that is not necessarily at all the same as the profit made by the sale of goods bearing the mark.
The reason for that is clear enough. A trade mark is in its nature something apart and distinct from the goods in relation to which it is to be used…
What the defendant must account for is what it made by its wrongful use of the plaintiffs’ property. The plaintiffs’ property is in the mark, not in the paintingsets. The true rule,I con sider, is thaat person who wrongly uses another man’s industrial property-patent, copyright, trade mark-is accountable for any profits which he makes which are attributable to his use of the property which was not his….
Halifax Building Society v. Thomas
[1996] 2 WLR 63
Peter Gibson LJ: This appeal gives rise to an interesting point oflaw. Where there has been a mortgage fraud, can the mortgagee, misled by fraudulent misrepresentations into makinga mortgage advance, not only enforce its rights as a secured creditor to sell the mortgaged property and recover what it is owed but also, having recovered in full, take any surplus on the sale after the discharge of the mortgage? …
Mr Waters for the society has argued on this appeal, as he did before the judge, that the soci ety is entitled as against Mr Thomas to retain the surplus for its own benefit on the principle of unjust enrichment. That principle was defined in the American Law Institute, Restatement of theLaw, Restitution (1937), section I as being that ‘A person who has been unjustly enriched at the expense of another is required to make restitution to the other.’ An overview of the law in this area is to be found in the statement of Lord Goff of Chieveley in Attorney-Genera/v. Guardian Newspapers Ltd (No 2) [1990] I AC 109,286:
‘That there are groups of cases in which a man is not allowed to profit from his own wrong, is certainly true. An important section of the law of restitution is concerned with cases in whicha defendant is required to make restitution in respect of benefits acquired through his own wrongful act-notably cases of waiver of tort; of benefits acquired by certain criminal acts; of benefits acquired in breach of a fiduciary relationship; and, of course, of ben efits acquired in breach of confidence. The plaintiff’s claim to restitution is usually enforced by an account of profits made by the defendant through his wrong at the plain tiff’s expense.’
Mr Waters accepts, as he must, that the surplus does not represent property which the soci ety has lost. Accordingly it cannot rely on the principle of subtractive unjust enrichment, to use the language of Professor Peter Birks QC in his influential work, An Introduction to the Law of Restitution (1985). Instead it relies on the broad principle of restitution for wrongs: Mr Thomas has been enriched at the society’s expense in the sense that he has gained by committing a wrong against the society. Thereby the liOCiety seeks a remedy enabling it ‘to obtain restitution of a benefit gained by the tortfeasor from a tortious act in circumstances where he has suffered little or no loss:’ Goff (S Jones, The Law of Restitution, 4th edn. (1993),. Mr Waters puts the society’s case in each of two ways: that Mr Thomas should be required to account to the society on the basis of the application of the doctrine of waiver of tort, alter natively as the beneficiary of a constructive trust of the surplus, and that, if entitled to retain the surplus for its own benefit as against Mr Thomas, it need not pay it over to the CPS. He lays emphasis on the fact that the surplus represents a profit from a fraud. He submits that it would be offensive to basic concepts of justice if a fraudster were to be allowed to take that profit and, whilst he accepts that in the present case the confiscation order has avoided that offensive result, he submits that the respective entitlements of the society and Mr Thomas must be looked at in the first place without regard to the confiscation order.
[Having dismissed the argument that a liability to account would be secured by the mortgage, Peter Gibson LJ continued:] But in any event is the claim for an account in the circumstances of the present case a valid one? Mr Waters frankly acknowledges that there is no English authority that goes so far. Indeed he accepts that there is no English authority to support the proposition that a wrongdoing defendant will be required to account for a profit which is not based on the use of the property of the wronged plaintiff. Cases where a fiduciary is required to account for a profit are plainly distinguishable from the facts of the present case. So too is the one author ity cited by Mr Waters of an action for an account which was not based on the use of the prop erty of the plaintiff, the decision of the US District Court for the Southern District of New York, Federal Sugar Refining Co. v. United States Sugar Equalization Board (1920) 268 F 575. In that case a buyer contracted to purchase from the plaintiff, the defendant procured the buyer to break that contract and purchase from itself instead, and the plaintiff’s claim to recover from the defendant the profit made on the sale was upheld on demurrer. Mr Waters’s difficulty is that the society’s only interest was that of a secured creditor who has fully recovered all that it was entitled to recover under the mortgage.Attractively though Mr Waters has argued the point, I remain wholly unpersuaded that in the circumstanea:es of the present case the law should accord a restitutionary remedy to a secured creditor who has elected not to avoid the mortgage but to affirm it and has received full satis faction thereunder. To my mind there is an inconsistency between a person being such a cred itor and yet claiming more than that to which he is contractually entitled and which he has already fully recovered. Once the creditor has so elected and recovered in full, I do not see why the law should come to his aid to allow him to make a further claim. In In re Simms; Ex pane Trustee [1934] Ch. 1 this court refused to allow a trustee in bankruptcy, who had elected to treat a receiver as a tortfeasor for converting to his own use the chattels of a bankrupt, to recover the profits made by the receiver as money had and received. The authority of that case is weakened by the reliance by this court on the now exploded implied promise theory, but I note that it ia still cited in textbooks: see, for example, Chitty on Contracts, 27th edn. (1994), vol. 1, 1437, pua. 2 52, and it serves to illustrate that not every action for an account of profits from a wrons doer, even where there has been use of the plaintiff’s property, will be allowed, and that It may be barred when there has been an election for another remedy.
Further I am not satisfied that in the circumstances of the present case it would be right to treat the unjust enrichment of Mr Thomas as having been gained ‘at the expense of’ the society, even allowing for the possibility of an extended meaning for those words to apply to cases of non-subtractive restitution for a wrong. There is no decided authority that comes anywhere near to covering the present circumstances. I do not overlook the fact that the policy of law is to view with disfavour a wrongdoer benefiting from his wrong, the more so when the wrong amounts to fraud, but it cannot be suggested that there is a universally applicable principle that in every case there will be restitution of benefit from a wrong. As Professor Birks says (An Introduction to the Law of Restitution, 24): ‘there are some circumstances in which enrichment by wrongdoing has to be given up. That is, the wrong itself is not always in itself a sufficient factor to call for restitution.’ On the facts of the presdtt case, in my judgment, the fraud is not in itself a sufficient factor to allow the society to require Mr Thomas to account to it.
[Peter Gibson LJ then moved on to consider the constructive trust argument:] Again in the present case there is the difficulty that the society, having affirmed the mortgage, remained only a secured creditor. I cannot accept that the wrongdoing of the mortgagor can translate the mort gagee into the owner of the entire beneficial interest in the property when the mortgage has not been set aside. That appears to have been the view too of Hoffmann J in another case of mort gage fraud, Chief Constable of Leicestershire,v. M [1989] 1 WLR 20, 21, where he said:
‘None of the lenders have made any claim by way of constructive trust or otherwise to the profits made on the houses bought with their money. They have preferred to affirm the advances and enforce their rights under the mortgages.’
In Lister (S Co. v. Stubbs (1890) 45 Ch. D 1 this court considered the case of a servant who received a bribe. Lindley LJ said, at 15, that the relationship between the plaintiff employers and the defendant servant in respect of that bribe’is that of debtor and creditor; it is not that of trustee and cestui que trust. We are asked to hold that it is-which would involve consequences which, I confess, startle me.’
That decision has been subjected to much criticism and was disapproved by the Privy Council in Attorney-General for Hong Kong v. Reid [1994) 1 AC 324 on the basis that it was inconsistent with basic principles of equity affecting the conduct of a fiduciary. In Daly v. Sydney Stock Exchange Ltd (1986) 160 CLR 371, 379 Gibbs CJ refused to accept that money lent by an investor to a firm in a fiduciary relationship with him should be treated as subject to a con structive trust. He said that the reasons of Lindley LJ in the Lister case, 45 Ch.D 1 appeared to him to be ‘impeccable when applied to the case in which the person claiming the money has simply made an outright loan to the defendant.’ In the present case there was no fiduciary rela tionship between Mr Thomas and the society in respect of the mortgage but merely that of debtor and secured creditor.
English law has not followed other jurisdictions where the constructive trust has become a remedy for unjust enrichment. As is said in Snell’s Equity, 29th edn. (1990), 197: ‘In England the constructive trust has in general remained essentially a substantive institution; ownership must not be confused with obligation, nor must the relationship of debtor and creditor be converted into one of trustee and cestui que trust.’
In considering whether to extend the law of constructive trusts in order to prevent a fraud ster benefiting from his wrong, it is also appropriate to bear in mind that Parliament has acted in recent years (notably in Part VI of the Criminal Justice Act 1988) on the footing that with out statutory intervention the criminal might keep the benefit of his crime. Moreover, Parliament has given the courts the power in specific circumstances to confiscate the benefit rather than reward the person against whom the crime has been committed. I bear in mind the wise comment of Hoffmann J in Chief Constable of Leicestershire v. M [1989] I WLR 20, 23:
ples.’
Accordingly I would reject the argument based on constructive trust. No other argument is put forward by the society for defeating the title of Mr Thomas to the surplus immediately before the confiscation and charging orders made by the C.P.S. or for defeating those orders. For these reasons I would dismiss this appeal.
Wrotham Park Estate Co. Ltd v. Parkside Homes Ltd
[1974]1 WLR 798
Brightman J: … I turn to the consideration of the quantum of damages. I was asked by the parties to assess the damages myself, should the question arise, rather than to direct an inquiry. The basic rule in contract is to measure damages by that sum of money which will put the plain tiff in the same position as he would have been in if the contract had not been broken. From that basis, the defendants argue that the damages are nil or purely nominal, because the value of the Wrotham Park Estate as the plaintiffs concede is not diminished by one farthing in con sequence of the construction of a road and the erection of 14 houses on the allotment site. If, therefore, the defendants submit, I refuse an injunction I ought to award no damages in lieu. That would seem, on the face of it, a result of questionable fairness on the facts of this case. Had the offending development been the erection of an advertisement hoarding in defiance of protest and writ, I apprehend (assuming my conclusions on other points to be correct) that the court would not have hesitated to grant a mandatory injunction for its removal. If for social and economic reasons, the court does not see fit in the exercise of its discretion, to order demolition of the 14 houses, is it just that the plaintiffsishould receive no compensation and that the defen dants should be left in undisturbed possess:On of the fruits of their wrongdoing? Common sense would seem to demand a negative answer to this question. A comparable problem arose in wayleave cases where the defendant had trespassed by making use of the plaintiff’s under ground ways to the defendant’s profit but without diminishing the value of the plaintiff’s prop erty. The plaintiff, in such cases, received damages assessed by reference to a reasonable wayleave rent. This principle was considered and extended in Whitwham v. Westminster Brymbo Coal and Coke Co. (1896) 2 Ch. 538. For six years the defendant wrongfully tipped colliery waste onto the plaintiff’s land. At the trial the defendant was directed to cease tipping and give up possession. The question then arose what damages should be awarded for the wrongful act done to the plaintiff during the period of the defendant’s unauthorised user of the land. The
official referee found that the diminution in the value of the plaintiff’s land was only £200, but that the value of the plaintiff’s land to the defendant in 1888 for tipping purposes for six years was some £900. It was held that the proper scale of damages was the higher sum on the ground that a trespasser should not be allowed to make use of another person’s land without in some way compensating that other person for the user.
A like principle was applied by the House of Lords in a Scottish case, Watson, Laidlaw €1 Co. Ltd v. Pott, Cassels and Williamson (1914) 31 RPC 104. A patentee elected to sue an infringer for damages rather than for an account of profits. Part of the infringement had taken place in Java. There was evidence that the patentee could not have competed successfully in that island.
It was submitted that no damages ought to be awarded in respect of the Java infringement. Lord Shaw said at 119-120:
‘It is at this stage of the case, … that a second principle comes into play. It is not exactly the principle of restoration, either directly or expressed through compensation, but it is the principle underlying price or hire. It plainly extends-and I am inclined to think not infrequently extends-to patent cases. But, indeed, it is not confined to them. For wher ever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as I say, either of price or of hire. If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish or without his knowledge, rides or drives it out, it is no answer to A for B to say: “Against what loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is the better for the exercise.” I confess to your Lordships that this seems to me to be pre cisely in principle the kind of question and retort which underlay the argument of the learned counsel for the appellants about the Java trade in such cases it appears to me that the correct and full measure is only reached by adding that a patentee is also entitled, on the principle of price or hire, to a royalty for the unauthorised sale or use of every one of the infringing machines in a market which the infringer, if left to himself, might not have reached. Otherwise, that property which consists in the monopoly of the patented articles granted to the patentee has been invaded, and indeed abstracted, and the law, when appealed to, would be standing by and allowing the invader or abstractor to go free.’
The same principle was applied in detinue in Strand Electric and Engineering Co. Ltd v. Brisford Entertainments Ltd [1952) 2 QJl 246. The defendant came into possession of portable switchboards which were part of the stock-in-trade of the plaintiff. The defendant used them for its own profit for 43 weeks. The trial judge, Pilcher J, ordered the return of the switchboards and awarded damages. The damages took into account the fact that if the defendant had not wrongfully retained the switchboards the plaintiff would be unlikely to have hired out every one for the full period of 43 weeks. It was held by the Court of Appeal that the plaintiff was enti tled to recover as damages the full market rate of hire for the whole period of detention. It will be sufficient to read these extracts from the judgment of Denning LJ, at 253:
‘In assessing damages, whether for a breach of contract or for a tort, the general rule is that the plaintiff recovers the loss he has suffered, no more and no less. This rule is, however, often departed from.’
He then gave examples and continued: ‘The question in this case is: What is the proper measure of damages for the wrongful detention of goods? Does it fall within the general rule that the plaintiff only recovers for the loss he has suffered or within some other, and if so what, rule? It is strange that there is no authority upon this point in English law; but there is plenty on the analogous case of detention ofland. The rule is that a wrongdoer, who keeps the owner out of his land, must pay a fair rental value for it, even though the owner would not have been able to use it him self or to let it to anyone else. So also a wrongdoer who uses land for his own purposes without the owner’s consent, as, for instance, for a fair ground, or as a wayleave, must pay a reasonable hire for it, even though he has done no damage to the land at all: Whitwham
v. Westminster Brymbo Coal and Coke Co. [1896] 2 Ch. 538. I see no reason why the same principle should not apply to detention of goods. If a wrongdoer has made use of goods for his own purposes, then he must pay a reasonable hire for them, even though the owner has in fact suffered no loss. It may be that the owner would not have used the goods him self, or that he has a substitute readily available, which he used without extra cost to him self. Nevertheless the owner is entitled to a reasonable hire. If the wrongdoer had asked the owner for permission to use the goods, the owner would be entitled to ask for a reasonable remuneration as the price of his permission. The wrongdoer cannot be better off because he did not ask permission. He cannot be better off by doing wrong than he would be by doing right. He must therefore pay a reasonable hire.’
The point was further considered in Penarth Dock Engineering Co. Ltd v. Pounds (1963] I Lloyd’s Rep. 359 by Lord Denning MR sitting as a judge of the Qµeen’s Bench Division. The defendant had contracted to buy a floating dock and to remove it from the plaintiff”sdock premises. The defendant defaulted in the removal of the purchase. The plaintiff, however, hid suffered no damage, since the dock premises had become disused. The plaintiff claimed a mandatory injunction and damages. It was held that the plaintiff was entitled to damages at a rate per week representing a reasonable berthing charge.
The facts of the cases I have mentioned are a long way from the facts of the case. Should I, as invited by the plaintiffs, apply a like principle to a case where the Parkside, in defiance of protest and writ, has invaded the plaintiffs’ rights in order to financial profit for itself? In Leeds Industrial Co-operative Society Ltd v. Slack [1924) AC 851 Lord Sumner said, at 870:
‘no money awarded in substitution can be justly awarded, unless it is at any rate designe to be a preferable equivalent for an injunction and therefore an adequate substitute for it.’
This was said in a dissenting speech but his dissent did not arise in the context of that observation.
In the present case I am faced with the problem what damages ought to be awarded to the plaintiffs in the place of mandatory injunctions which would have restored the plaintiffs’ rights. If the plaintiffs are merely given a nominal sum, or no sum, in substitution for injunctions, it seems to me that justice will manifestly not have been done.
As I have said, the general rule would be to measure damages by reference to that sum which would place the plaintiffs in the same position as if the covenant had not been broken. Parkside and the individual purchasers could have avoided breaking the covenant in two ways. One course would have been not to develop the allotment site. The other course would have been for Parkside to have sought from the plaintiffs a relaxation of the covenant. 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. In my j:.idgment a just substitute for a mandatory injunction would be such a sum of money as might reasonably have been demanded by the plaintiffs from Parkside as a quid pro quo for relaxing the covenant. The plaintiffs submitted that that sum should be a substantial proportion of the.development value of the land. This is currently put at no less than £10,000 per plot, i.e. £140,000 on the assumption that the plots are undevel oped. Mr Parker gave evidence that a half or a third of the development value was commonly demanded by a landowner whose property stood in the way of a development. I do not agree with that approach to damages in this type of case. I bear in mind the following factors:
(I) The lay-out covenant is not an asset which the estate owner ever contemplated he would have either the opportunity or the desire to turn to account. It has no commercial or even nui sance value. For it cannot be turned to account except to the detriment of the existing residents who are people the estate owner professes to protect.
(2) The breach of covenant which has actually,taken place is over a very small area and the impact of this particular breach on the Wrotham Park Estate is insignificant. The validity of the covenant over the rest …..is unaffected.
I think that in a case such as the present a landowner faced with a request from a developer which, it must be assumed, he feels reluctantly obliged to grant, would have first asked the devel oper what profit he expected to make from his operations. With the benefit of foresight the devel oper would, in the present case, have said about £50,000 for that is the profit which Parkside concedes it made from the development. I think that the landowner would then reasonably have required a certain percentage of that anticipated profit as a price for the relaxation of the covenant, assuming, as I must, that he feels obliged to relax it. In assessing what would be a fair percentage I think that the court ought, on the particular facts of this case, to act with great moderation. For it is to be borne in mind that the plaintiffs were aware, before the auction took place, that the land was being offered for sale as a freehold building land for 13 houses, and they knew that they were not going to consent to any such development. They could have informed the Potters Bar Urban District Council of their attitude in advance of the auction, or could have given the like informa tion to Parkside prior to completion of the contract for sale. In either event it seems highly unlikely that Parkside would have parted with its £90,000, at any rate unconditionally. I think that damages must be assessed in such a case on a basis which is fair and, in all the circumstances in my judgment a sum equal to five per cent of Parkside’s anticipated profit is the most that is fair. I accordingly award the sum of £2,500 in substitution for mandatory injunctions. I think that this amount should be treated as apportioned between the 14 respective owners or joint owners of the plots and Parkside (as the owner of the road) in I/15th shares, so that the damages awarded will be £166 odd in each case. In fact, I apprehend that by virtue of the arrangement between Parkside and the insurance office the entirety of the £2,500 will ultimately be recoverable from Parkside, so that the apportionment does not have any reasl ignificance.
Surrey County Council v. Bredero Homes Ltd
[1993] 1 WLR 1361,
DillonJ Thplaeintiffs seek damages. They have never sought an interim injunction to restrain the defendant from developing the land otherwise than in accordance with the first planning permission. They never sought an injunction at the trial requiring the defendant to pull down the completed houses. They recognised that there was never any practical possibil ity of such an injunction being granted. There was a formal amendment of the relief sought at the trial to raise in form a claim for an injunction, but that was not pursued. The plaintiffs have merely sought damages which have been described as ‘damages at common law,’ as opposed to damages in equity under the Chancery Amendment Act 1858 (21& 22 Viet.c. 27) (Lord Cairns’s Act). The plaintiffs accept that they have not suffered any damage at all of the nature of damage to adjoining property owned or occupied by them. What they claim as damages is essentially the profit made by the defendant by breaking the covenants and building 77 houses and not just 72-or, since the plaintiffs wish to be modest in their demands in putting forward a somewhat revolutionary development of the law of damages, such a part of the profit as would reflect the reasonable premium that the defendant should have paid them for contractual per
mission by way of relaxation of the covenants to build the 77 houses rather than 72. Indeed, the plaintiffs say, and I have no reason to doubt, that their sole purpose in imposing the covenants at all-to commence and pursue the development to its completion inaccordance with the first planning permission-was that the defendant would have to apply for and pay for a relaxation if it wanted to build anything more. It is, of course, clear that had thecontracts been worded otherwise there could have been provision for the payment by the defendant of anaddl• tional price ofa specified amount, or an amount fixed by an appropriate formula, for each txtn house or bungalow, if the defendant or its successors in title built more than 72 houses or bungalows on the land within a specified period, but that is not the contract that WU macla, putting forward the claim for damages with which we are concerned, the plaindf1’1 rtl strongly on the decision of Brightman J in Wrotham Park Estate Co. Ltd v.P11rl,,
[1974) 1 WLR 798, to which I shall have to come.The starting point, however, in my judgment is that the remedy at common law for a breach of contract is an award of damages, and damages at common law are intended to compensate the victim for his loss, not to transfer to the victim if he has suffered no loss the benefit which the wrongdoer has gained by his breach of contract. Thus it is stated in Chitty on Contracts, 26th edn. (1989), vol. I, 1116, para. 1771:
‘Damages for a breach of contract committed by the defendant are a compensation to the plaintiff for the damage, loss or injury he has suffered through that breach.’
Similarly, Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co. Ltd v. Underground Electric Railways Co. of London Ltd [1912] AC 673, 689, said: ‘The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; .. .’ Lord Wilberforce in Johnson v. Agnew [1980] AC 367, 400, said: ‘The general principle for the assess ment of damages is compensatory …’ Each of these three statements is accompanied by a statement to the effect 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. That follows the wording of the statement of the rule of the common law by Parke Bin Robinson v. Hannan (1848) 1 Ex. 850, 855. That rule has been referred to in argument in the present case as the ‘conventional’ rule Every
student is taught that the basis of assessing damages for breach of contract is the rule in Hadley v. Baxendale (1854) 9 Ex. 341, which is wh lly concerned with the losses which can be com pensated by damages. Such damages may, in .an appropriate case, cover profit which the injured plaintiff has lost, but they do not cover an award, to a plaintiff who has himself suffered no loss, of the profit which the defendant has gained for himself by his breach of contract.
In the field of tort there are areas where the law is different and the plaintiff can recover in respect of the defendant’s gain. Thus in the field of trespass it is well established that if one per son has, without leave of another, been using that other’s land for his own purposes he ought to pay for such user. Thus even ifhe had done no actual harm to the land he was charged for the user of the land. This was applied originally in wayleave cases where a person had without authority used his neighbour’s land for passage: see, for instance, Jegon v. Vivian (1871) LR 6, Ch. App. 742 and Phillips v. Homfray (1871) LR 6 Ch. App. 770. The same principle was applied where the defendant had trespassed by tipping spoil on the plaintiff’s land: Whitwham v. Westminster Brymbo Coal and Coke Co. [1896] 2 Ch. 538. The same principle was applied to patent infringement by the House of Lords in Watson, Laidlaw (S Co. Ltd v. Pott, Cassels and Williamson (1914) 31 RPC 104. The infringer was ordered to pay by way of damages a royalty for every infringing article because the infringement damaged the plaintiff’s property right, that is to say, his patent monopoly. So in a case of detinue the defendant was ordered to pay a hire for chattels he had detained: Strand Electric and Engineering Co. Ltd v. Brisford Entertainments Ltd [1952] 2 Q!3 246. Those cases do not apply in the present case as the defen dant has made no use of any property of either plaintiff.
The cases have been taken still further in some fields of tort particularly concerned with intel lectual property, where it is well established that the plaintiff can choose to have either damages or an account of profits made by the defendant by his wrongful acts: see, for instance, Lever v. Goodwin (1887) 36 Ch. D I, 7, per Cotton LJ. This is in line with the long-established common law doctrine of waiving the tort. The liability in the present case is solely in contract and not in tort.
I come then to the Wrotham Park case.
The difficulty about the decision in the Wrotham Park case is that in Johnson v. Agnew [1980] AC 367, 400G, Lord Wilberforce, after citing certain decisions on the scope and basis of Lord Cairns’s Act which were not cited ‘to Brightman J, stated in the clearest terms that on the balance of those authorities and on principle he found in the Act no warrant for the court awarding dam ages differently from common law damages. Sir William Goodhart [Counsel for the plaintiffs] submits that it follows from that analysis by Lord Wilberforce in Johnson v. Agnew that the dam ages awarded by Brightman J in the Wrotham Park case were indeed damages assessed on recog nised common law principles which should, so he says, be applied in the present case.
I doubt, however, whether that does follow from Lord Wilberforce’s analysis in Joh,uMI v, Agnew. As I read his judgment, Brightman J was not seeking to analyse the scope or basil of court’s jurisdiction under Lord Cairns’s Act. He merely concluded that, as Parliament had expressly empowered the court to grant damages in lieu of an injunction, Parliament must have intended that in every case the court must be able to award such damages as would achieve a fair result between the parties and would not be limited to awarding nominal damages only. He sought to apply that conclusion. That involves a conclusion by the judge that Lord Caims’s Act effected a substantive change in the law of damages and was not a merely procedural statute as Johnson v. Agnew has held. It is unnecessary to refer further in this judgment to the Wrot/ram Park case since that was under Lord Cairns’s Act and stands or falls by that; whereas, the pres
ent case is not, and makes no pretence of being, under that Act.
I should however mention in passing that we were referred to a number of cases where the measure of damages chosen by Brightman J in the Wrotham Park case was applied by other judges, for instance, Bracewell v. Appleby [1975] Ch. 408; Carr-Saunders v. Dick McNeil Associates Ltd [1986] 1 WLR 922 and Griffiths v. Kingsley-Stubbs (unreported), 3 June 1986;
Court of Appeal (Civil Division) Transcript No 506 of 1986. All those were cases where the plaintiff’s cause of action lay in tort, either trespass or nuisance, and the defendant had inter fered with the plaintiff’s property rights. The decisions and awards of damages are amply jus tified by the common law principles in tort of the wayleave cases and Whitwham v. Westminster Brymbo Coal and Coke Co. [1896] 2 Ch. 538 already mentioned.
Given that the established basis of an award of damages in contract is compensation for the plaintiff’s loss, as indicated above, I have difficulty in seeing how Sir William Goodhart’s sug gested common law principle of awarding the plaintiff who has suffered no loss the gain which the defendant has made by the breach of contract is intended to go. Is it to apply, for instance, to shipping contracts or contracts of employment or contracts for building works?
Sir William suggested, in his and Mr Weatherill’s skeleton argument, that the conventional measure fails to do justice and a different measure should be applied where the following con ditions are satisfied. (a) The breach is deliberate, in the sense that the defendant is deliberately doing an act which he knows or should know is plainly or arguably in breach of contract. (b) The defendant, as a result of the breach, has profited by making a gain or reducing a loss. (c) At the date of the breach it is clear or probable that damages under the conventional measure will either be nominal or much smaller than the profit to the defendant from the breach. (d) If the profit results from the avoidance of expenditure, the expenditure would not have been eco nomically wasteful or grossly disproportionate to the benefit which would have resulted from it. He suggested in the skeleton argument that the underlying principle might be that the con ventional measure of damages might be overridden in certain circumstances by the rule that no one should benefit from his deliberate wrongdoing.
In the course of his submissions Sir William limited his formulation and, while retaining conditions (a), (b) and (c), substituted for condition (d): ‘Damages for loss of bargaining power can be awarded if, but only if, the party in breach could have been restrained by injunction from committing the breach of contract or compelled by specific performance to perform the con tract. Where no such possibility existed there was no bargaining power in reality and no right to damages for loss of it. Hence damages for loss of bargaining power cannot be awarded where there is, for example, a contract for the sale of goods or generally a contract of employment.’
I find difficulty with that because in theory every time there is a breach of contract the injured party is deprived of his ‘bargaining power’ to negotiate for a financial consideration a variation of the contract which would enable the party who wants to depart from its terms to do what h, wants to do. In addition it has been held in Walford v. Miles (1992] 2 AC 128 that an agreement to negotiate is not an animal known to the law and a duty to negotiate in good faith ii unwork• able in practice, and so I find it difficult to see why loss of bargaining or negotiatin1 power should become an established factor in the assessment of damages for breach of contract,
Beyond that, since we are looking for the measure of damages at common law for breach of contract apart from Lord Cairns’s Act, I do not see why that should vary, depending on whether the party in breach could or could not have been restrained by injunction from com mitting the breach or compelled by specific performance to perform the contract. Injunction and specific performance were not remedies in the common law courts and were granted by the court of chancery, which, before Lord Cairns’s Act, had no power to award damages, just because the common law remedy of damages was not an adequate remedy.
We were referred, in the course of Sir William’s argument, to a number of other cases and, in particular, to passages in the judgment of Sir Robert Mcgarry V-C in Tito v. Waddell (No 2) [1977] Ch. 106 and to the decision of this court in Stoke on Trent City Council v. W f.SJ.
Wass Ltd [1988] 1 WLR 1406. In the latter case this court upheld the general principle that in tort a plaintiff recovered damages equivalent to the loss he had suffered and held also that the ‘user’ principle in the wayleave cases and Whitwham v. Westminster Brymbo Coal and Coke Co. [1896] Ch. 538 should not be extended to cover infringement of a market right of the plaintiff council by the holding by the defendant of an unauthorised market where the plaintiff could not show he had suffered any actual loss by the infringement. What was sought in that case was damages calculated by reference to a notional licence fee that the plaintiff council might have charged for permitting the defendant’s infringement but that was refused. I need not refer to the cases further.
AsI see it, therefore, there never was in the present case, even before the writ was issued, any possibility of the court granting an injunction to restrain the defendant from implementing the later planning permission. The plaintiffs’ only possible claim from the outset was for dam ages only, damages at common law. The plaintiffs have suffered no damage. Therefore on basic principles, as damages are awarded to compensate loss, the damages must be merely nominal. For these reasons, which substantially accord with those of Ferris}, I would dismiss this appeal.
Steyn LJ: I agree. The issue in this appeal was defined by Sir William Goodhart, appearing for the plaintiffs, as the correct measure of damages in a case where the following three circum stances are satisfied. (a) There has been a deliberate breach of contract, (b) the party in breach has made a profit from that breach and (c) the innocent party is in financial terms in the same position as if the contract had been fully performed. It is an important issue with considerable
implications for the shape of our law of obligations’, and I therefore add a few remarks of my own.
Dillon LJ has reviewed the relevant case law. It would not be a useful exercise for me to try to navigate through those much travelled waters again. Instead, it seems to me that it may possibly be useful to consider the question from the point of view of the application of first principles.An award of compensation for breach of contract serves to protect three separate interests. The starting principle is that the aggrieved party ought to be compensated for loss of his posi tive or expectation interests. In other words, the object is to put the aggrieved party in the same financial position as if the contract had been fully performed. But the law also protects the neg ative interest of the aggrieved party. If the aggrieved party is unable to establish the value ofa loss of bargain he may seek compensation in respect of his reliance losses. The object of such an award is to compensate the aggrieved party for expenses incurred and losses suffered in reliance on the contract. These two complementary principles share one feature. Both are pure compensatory principles. If the aggrieved party has suffered no loss he is not entitled to be compensated by invoking these principles. The application of these principles to the present case would result in an award of nominal damages only.
There is, however, a third principle which protects the aggrieved party’s restitutionary inter est. The object of such an award is not to compensate the plaintiff for a loss, but to deprive the defendant of the benefit he gained by the breach of contract. The classic illustration is a claim for the return of goods sold and delivered where the buyer has repudiated his obligation to pay theprice. It is not traditional to describe a claim for restitution following a breach of contract as damages. What matters is that a coherent law of obligations must inevitably extend its pro tection to cover certain restitutionary interests. How far that protection should extend is the essence of the problem before us. In my view Wrotham Park Estate Co. Ltd v. Parkside Homes Ltd [1974) 1 WLR 798 is only defensible on the basis of the third or restitutionary principle: see MacGregor on Damages, 15th edn. (1988), 12-13, para. 18 and Professor P. B. H. Birks, ‘Civil Wrongs: A New World,’ Butterworth Lectures (1990-1), 55, 71.
The plaintiffs’ argument that the Wrotham Park case can be justified on the basis of a loss of bargaining opportunity is a fiction. The object of the award in the Wrotham Park case was not to compensate the plaintiffs for financial injury, but to deprive the defendants of an unjustly acquired gain. Whilst it must be acknowledged that the Wrotham Park case represented a new development, it seems to me that it was based on a principled legal theory, justice and sound policy. In the defendant’s skeleton argument some doubt was cast, by way of alternative sub mission, on the correctness of the award of damages for breach of covenant in the Wrotham Park case. In my respectful view, it was rightly decided and represents a useful development in our law. In Tito v. Waddell (No 2) [1977) Ch. 106, 335c-336c, Sir Robert Mcgarry V-C interpreted the Wrotham Park case and Bracewell v. Appleby [1975] Ch. 408, which followed the Wrotham Park case, as cases of invasion of property rights. I respectfully agree. The Wrotham Park case is analogous to cases where a defendant has made use of the aggrieved party’s property and thereby save expense: see Penarth Dock Engineering Co. Ltd v. Pounds [1963) 1 Lloyd’s Rep. 359. I readily accept that ‘property’ in this context must be interpreted in a wide sense. I would also not suggest that there is no scope for further development in this branch of the law.
But, in the present case, we are asked to extend considerably the availability of restitutionary remedies for breach of contract. I question the desirability of any such development. The acceptance of the plaintiffs’ primary or alternative submission, as outlined by Dillon LJ, will have a wide-ranging impact on our commercial law. Even the alternative and narrower sub mission will, for example, cover charterparties and contracts of affreightment where the rem edy of a negative injunction may be available. Moreover, so far as the narrower submission restricts the principle to cases where the remedies of specific performance and injunction would have been available, I must confess that that seems to me a bromide formula without any ratio nale in logic or commonsense. Given a breach of contract, why should the availability of a resti tutionary remedy, as a matter oflegal entitlement, be dependent on the availability of the wholly different and discretionary remedies of injunction and specific performance? If there is merit in the argument I cannot see any sense in restricting a compensatory remedy which serves to pro tect restitutionary interests to cases where there would be separate remedies of specific perfor mance and injunction designed directly and indirectly to enforce payment.
For my part I would hold that if Sir William Goodhart’s wider proposition fails the narrower one must equally fail. Both submissions hinge on the defendant’s breach being deliberate. Sir William invoked the principle that a party is not entitled to take advantage of his own wrong doing. Despite Sir William’s disclaimer it seems to me that the acceptance of the propositions formulated by him will inevitably mean that the focus will be on the motive of the party who committed the breach of contract. That is contrary to the general approach of our law of con tract and, in particular, to rules governing the assessment of damages. In my view there are also other policy reasons which militate against adopting Sir William’s primary or narrower submission. The introduction of restitutionary remedies to deprive cynical contract breakers of the fruits of their breaches of contract will lead to greater uncertainty in the assessment of damages in commercial and consumer disputes. It is of paramount impon• ance that the way in which disputes are likely to be resolved by the courts must be readily predictable. Given the premise that the aggrieved party has suffered no loss, is auch a draanadc:
extension of restitutionary remedies justified in order to confer a windfall in each cases on the aggrieved party? I think not. In any event such a widespread availability of reatitutionary remedies will have a tendency to discourage economic activity in relevant situations. In a range of cases such liability would fall on underwriters who have insured relevant liability risks.
Inevitably underwriters would have to be compensated for the new species of potential claims. Insurance premiums would have to go up. That, too, is a consequence which mitigates against the proposed extension. The recognition of the proposed extension will in my view not serve the public interest. It is sound policy to guard against extending the protection of the law of obligations too widely. For these substantive and policy reasons I regard it as undesirable that the range of restitutionary remedies should be extended in the way in which we have been invited to do so.
The present case involves no breach of fiduciary obligations. It is a case of breach of contract. The principles governing expectation or reliance losses cannot be invoked. Given the fact of the breach of contract the only question is whether restitution is an appropriate remedy for this wrong. The case does not involve any invasion of the plaintiffs’ property interests even in the broadest sense of that word, nor is it closely analogous to the Wrotham Park position. I would therefore rule that no restitutionary remedy is available and there is certainly no other remedy available. I would dismiss the appeal.
Rose LJ: I agree. I also agree with the reasons given in both the previous judgments.A feature which to my mind is capable of distinguishing the present case from Wrotham Park Estate Co. Ltd v. Parkside Homes Ltd [1 74] 1 WLR 798 is not just that damages were sought there in equity and here in contract at common law, but the different conduct of the respective plaintiffs in response to the breach of covenant.
In the Wrotham Park case the plaintiffs objected to building works in breach of covenant as soon as they learnt of them and, within .a month, issued a writ seeking restraining and manda tory injunctions. They would not have granted any relaxation of the covenants even if this had been sought. From first to last they objected to what the defendants did. I find it unsurprising that in consequence Brightman J awarded them substantial damages in equity as an alternative to a mandatory injunction. He did so in order to achieve a just result: see [1974] 1 WLR 798, 815D.
In the present case, from first to last the plaintiffs have neither objected nor wished to object to what the defendant has done. The fact that the second plaintiff granted planning permission for development in breach of the covenant is immaterial, for it had to comply with its statutory duties as planning authority. Having written to the defendant in December 1982 drawing atten tion to the covenant and indicating a willingness to discuss its variations, the second plaintiff did nothing to seek to enforce the covenant for the very good reason that it did not wish to do so, there being no harm to its adjoining land. The plaintiffs issued their writ seeking damages over five years later in March 1988. It seems to me that that history of events is fatal to the plaintiffs’ attempted reliance on the Wrotham Park case, where, in my respectful view, Brightman} correctly answered the particular question which confronted him. It is, in my judg ment, wholly unlikely that he would have given the same answer if in that case the plaintiffs’ response to the defendants’ breach of covenant had been that of the plaintiffs in the present case. Equitable relief, whether by way of injunction or damages in lieu, would, as it seems to me, have been inconceivable.
In the light of what Lord Wilberforce said in Johnson v. Agnew [1980] AC 367, 400B-G, I see no reason why in the present case the plaintiffs should be in any stronger position as to dam ages because they are suing the original covenantor rather than a successor who bought with notice of the covenant. Accordingly, and for the reasons given by Dillon and Steyn L JJ, I too, would dismiss this appeal.
Jaggard v. Sawyer
[1995] 1 WLR 269
Sir Thomas Bingham MR … Instead of injunction [the judge] awarded the plaintiff damages. He asked himself what the defendant might reasonably have paid for a right of way and the release of the covenant. He held that the defendant would have been prepared to pay not less than £6,250. Split among the nine residents (excluding those in No. 5), that total yielded £694.44 per resident. That is the sum (with interest) which he awarded the plaintiff.
[After refe”ing to a number of cases, including Wrotham Park Estate v. Parkside Homes Ltd, Bracewell v. Appleby and Surrey CC v. Bredero Homes Ltd, the Master of the Rolls continued:] The court’s approach to restitutionary damages in [the Bredero] case has provoked some regretful comment (see Professor Birks, ‘Profits of Breach of Contract’ (1993) 109 LQR 518), and it may be, as suggested (see 520) that these judgments will not be the last word on that sub ject. But the court plainly treated the case as one not falling under the principles derived from Lord Cairns’s Act. I cannot, however accept that Brightman J’s assessment of damages in the Wrotham Park case was based on other than compensatory principles. The defendants had com mitted a breach of covenant, the effects of which continued. The judge was not willing to order the defendants to undo the continuing effects of that breach. He had therefore to assess the damages necessary to compensate the plaintiffs for this continuing invasion of their right. He paid attention to the profits earned by the defendants, as it seems to me, not in order to strip the defendants of their unjust gains, but because of the obvious relationship between the prof its earned by the defendants and the sum which the defendants would reasonably have been willing to pay to secure release from the covenant. I am reassured to find that this is the view taken of the Wrotham Park case by Sir Rober Megarry V-C in Tito v. Waddell (No 2) [1977] Ch. 106, 335, when he said:
‘Brightman J resolved the difficult question of the appropriate quantum of damages by holding that the plaintiffs should recover 5 per cent of the defendants’ expected profit from their venture. In Bracewell v. Appleby, Graham J applied the same principle where the right in question was not a consent under a restrictive covenant, but an easement of way. I find great difficulty in seeing how these cases help Mr Macdonald. If the plaintiff has the right to prevent some act being clone without his consent, and the defendant does the act without seeking that consent, the plaintiff has suffered a loss in that the defendant has taken without paying for it something for which the plaintiff could have required pay ment, namely, the right to do the act. The court therefore makes the defendant pay what he ought to have paid the plaintiff, for that is what the plaintiff has lost. The basis of com putation is not, it will be observed, in any way directly related to wasted expenditure or other loss that the defendant is escaping by reason of an injunction being refused: it is the loss that the plaintiff has suffered by the defendant not having observed the obligation to obtain the plaintiff’s consent. Where the obligation is contractual, that loss is the loss caused to the plaintiff by the breach of contract.’
I can see no reason why a judge should not assess damages on the Wrotham Park basis when he declines to prevent commission of a future wrong.
The judge considered the value of the injury to the plaintiff’s right as capable of being estimated in money. He based himself on the Wrotham Park approach. In my view he was justified. He valued the right at what a reasonable seller would sell it for. In situa tions of this kind a plaintiff should not be treated as eager to sell, which he very probably is not. But the court will not value the right at the ransom price which a very reluctant plaintiff might put on it. I see no error in the judge’s approach to this aspect.
The only argument pressed on damages was that the only damages properly awardable on compensatory principles would have been nominal and that therefore an injunction should have been granted. As already indicated, I think that the Wrotham Park approach was appropriate even on pure compensatory principles and the judge followed it correctly.
Millett LJ: It is necessary to notice the observations of Steyn LJ in Su”ey County Council v. Bredero Homes Ltd [1993] 1 WLR 1361, 1369:
‘In my view Wrotham Park Estate Co. Ltdv. Parkside Homes Ltd [1974]1 WLR 798 is only defensible on the basis of the third or restitutionary principle … The plaintiffs’ argument that the Wrotham Park case can be justified on the basis of a loss of bargaining opportunity is a fiction.’
I find these remarks puzzling. It is plain from his judgment in the Wrotham Park case that Brightman J’s approach was compensatory, not restitutionary. He sought to measure the dam ages by reference to what the plaintiff had lost, not by reference to what the defendant had gained. He did not award the plaintiff the profit which the defendant had made by thebreach, but the amount which he judged the plaintiff might have obtained as the price of giving its con sent. Theamount of the profit which the defendant expected to make wasa relevant factor in that assessment, but that was all.
Both the Wrotham Park and Bredero Homes cases (unlike the present) were concerned with a single past breach of covenant, so that the measure of damages at common law and under the Act was the same. Prima facie the measure of damages in either case for breach ofa covenant not to builda house on neighbouring land is the diminution in the value of the plaintiff’s land occasioned by the breach. One element in the value of the plaintiff’s land immediately before the breach is attributable to his ability to obtain an injunction to prevent thebuilding.·Clearly a defendant who wished to build would pay for the release of the covenant, but only so long as the court could still protect it by the grant of an injunction. The proviso isimportant. It is the ability to claim an injunction which gives the benefit of the covenant much of its value. If the plaintiff delays proceedings until it is no longer possible for him to obtain an injunction, he destroys his own bargaining position and devalues his right. The unavailability of the remedy of injunction at one and the same time deprives the court of jurisdiction to award damages under the Act and removes the basis for awarding substantial damages at commonlaw. For this reason,I.take the view that damages can be awarded at common law in accordance with the approach adopted in the Wrotham Park case, but in practice only in the circumstances in which they could also be awarded under the Act.
This may be what Steyn LJ had in mind when he said that the loss of bargaining opportunity was a fiction. If he meant it generally or in relation to the facts which obtained in the Wrotham Park case, then I respectfully disagree. But it was true in the circumstances of the case before him, and not merely for the reason given by Rose LJ (that the plaintiffs did not object to the extra houses and would have waived the breach for a nominal sum). The plaintiffs did not bring the proceedings until after the defendant had sold the houses and was no longer sus ceptible to an injunction. The plaintiffs had thereby deprived themselves of any bargaining position. Unable to obtain an injunction, they were equally unable to invoke the jurisdiction to award damages under Lord Cairns’s Act. No longer exposed to the risk of an injunction, and having successfully disposed of the houses, the defendant had no reason to pay anything for the release of thecovenant. Unless they were able to recover damages in accordance with restitu tionary principles, neither at common law nor in equity could the plaintiffs recover more than nominal damages.
In the present case the plaintiff brought proceedings at a time when her rights were still capable of being protected by injunction. She has accordingly been able to invoke the court’s juris diction to award in substitution for an injunction damages which take account of the future as well as thepast. Inmy view there is no reason why compensatory damages for future trespasses and continuing breaches of covenant should not reflect the value of the rights which she has lost, or why such damages should not be measured by the amount which she could reasonably have expected to receive for their release.In my judgment the judge’s approach to the assessment of damages was correct on the fact and in accordance with principle.
Regal (Hastings) Ltd v. Gulliver
[1942] 1 All ER 378
Viscount Sankey: The appellants say they are entitled to succeed: (i) because the respondents secured for themselves the profits upon the acquisition and sale of the shares in Amalgamated by using the knowledge acquired as directors and solicitors respectively of Regal and by using their said respective positions and without the knowledge or consent of Regal; (ii) because the doctrine laid down with regard to trustees is equally applicable to directors and solicitors Inmy view, the respondents were in a fiduciary position and their liability to account does not depend upon proof of ma/a fides. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to pro tect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust. The earlier cases are concerned with trusts of specific property: Keech v. Sandford,1 per Lord King, LC. The rule, however, applies to agents, as, for example, solicitors and direc tors, when acting in a fiduciary capacity.
I will deal first with the respondents, other than Gulliver and Garton…..Itwas argued that it would have been a breach of trust for the respondents, as directors of Regal, to have invested more than £2,000 of Regal’s money in Amalgamated, and that the transaction would never have been carried through if they had not themselves put up the other £3,000. Be it so, but it is impossible to maintain that, because it would have been a breach of trust to advance more than £2,000 from Regal and that the only way to finance the matter was for the directors to advance the balance themselves, a situation arose which brought the respon dents outside the general rule and permitted them to retain the profits which accrued to them from the action they took. At all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company to do so, and, by reason of their position and actions, they made large profits for which, in my view, they are liable to account to the company.
I now pass to the cases of Gulliver and Garton. Their liability depends upon a careful exam ination of the evidence. Gulliver’s case is that he did not take any shares and did not make any profit by selling them Inthese circumstances, and bearing in mind that Gulliver’s evidence was accepted, it is clear that he made no profits for which he is liable to account. The case made against him rightly fails, and the appeal against the decision in favour should be dismissed.Garton’s case is that in taking the shares he acted with the knowledge and consent of Regal, and that consequently he comes within the exception to the general rules as to the liability of the person acting in a fiduciary position to account for profits…. In these circumstances, and bearing in mind that
this evidence was accepted, it is clear that he took the shares with the full knowledge and con sent of Regal and that he is not liable to account for profits made on their sale. The appeal against the decision in his favour should be dismissed.
The appeal against the decision in favour of the respondents other than Gulliver and Garton should be allowed.
Lord Russell The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of of bona fides; or upon such questions or considerations as whether the profit would or shouldotherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.
The leading case of Keech v. Sandford is an illustration of the strictness of this rule of equity in this regard, and of how far the rule is independent of these outside considerations. A lease of the profits of a market had been devised to a trustee for the benefit of an infant. A renewal on behalf of the infant was refused. It was absolutely unobtainable. The trustee, finding that it was impossible to get a renewal for the benefit of the infant, took a lease for his own benefit. Though his duty to obtain it for the infant was incapable of performance, nevertheless he was ordered to assign the lease to the infant, upon the bare ground that, if a trustee on the refusal to renew might have a lease for himself, few renewals would be made for the benefit of cestuis que trust. Lord King, LC, said, at 62:
This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that thf rule should be strictly pursued, and not in the least relaxed . One other case in equity may be referred to in this connection, viz., Exp. James,2 decided by Lord Eldon, LC. That was a case of a purcha.se of a bankrupt’s estate by the solicitor to the commission, and Lord Eldon, LC, refers to the doctrine thus, at 345:
This doctrine as to purchases by trustees, assignees, and persons having a confidential character, stands much more upon general principles than upon the circumstances of any individual case. It rests upon this: that the purchase is not permitted in any case however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth .in much the greater number of cases.
Let me now consider whether the essential matters, which the plaintiff must prove, have been established in the present case. As to the profit being in fact made there can be no doubt. The shares were acquired at par and were sold three weeks later at a profit of £2 16s. Id. per share. Did such of the first five respondents as acquired these very profitable shares acquire them by reason and in course of their office of directors of Regal? In my opinion, when the facts are examined and appreciated, the answer can only be that they did.
In the result, I am of opinion that the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason and only by reason of the fact that they were directors of Regal and in the course of the execu tion of that office, are accountable for the profits which they have made out of them. The equi table rule laid down in Keech v. Sandford and Exp. James, and similar authorities applies to them in full force. It was contended that these cases were distinguishable by reason of the fact that it was impossible for Regal to get the shares owing to lack of funds, and that the directors in taking the shares were really acting as members of the public. I cannot accept this argument. It was impossible for the cestui que trust in Keech v. Sandford to obtain the lease, nevertheless the trustee was accountable. The suggestion that the directors were applying simply as mem bers of the public is a travesty of the facts. They could, had they wished, have protected them selves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting. In default of such approval, the liability to account must remain. The result is that, in my opinion, each of the respondents Bobby, Griffiths, Bassett and Bentley is liable to account for the profit which he made on the sale of his 500 shares in Amalgmated. The case of the respondent Gulliver, however, requires some further consideration, for he has raiseda separate and distinct answer to the claim. he says: ‘I never promised to subscribe for shares in Amalgamated. I never did so subscribe. I only promised to find others who would be willing to subscribe. I only found others who did subscribe. The shares were theirs. They were never mine. They received the profit. I received none of it.’ If these are the true facts, his answer seemscomplete. The evidence in my opinion establishes his contention….
There remains to consider the case of Garton. He stands on a different footing from the other respondents in that he was not a director of Regal. He was Regal’s legal adviser; but, in my opinion, he hasa short but effective answer to the plaintiffs’ claim. He was requested by the Regal directors to apply for 500 shares. They arranged that they themselves should each be responsible for £500 of the Amalgmated capital, and they appealed, by their chairman, to Garton to subscribe the balance of £500 which was required to make up the £3,000. In law his action, which has resulted in a profit, was taken at the request of Regal, andI know of no prin ciple or authority which would justify a decision that a solicitor must account for profit result ing froma transaction which he has entered into on his own behalf, not merely with the consent, but at the request of his client….
Lord Wright The important question of principle brought into issue by the decisions of Wrottesley, J, and the Court of Appeal call for determination. That question can be briefly stated to be whether an agent, a director, a trustee or other person in an analogous fiduciary position, whena demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person. The most usual and typical case of this nature is that of principal andagent. Therule in such cases is compendiously expressed to be that an agent must account for net profits secretly (that is, without the knowledge of his principal) acquired by him in the course of his agency. The authorities show how manifold and various are the applications of the rule. It does
not depend on fraud or corruption.
The courts below have held that it does not apply in the present case, for the reason that the purchase of the shares by the respondents, though made for their own advantage, and though the knowledge and opportunity which enabled them to take the advantage came to them solely by reason of their being directors of the appellant company, was a purchasewhich, in the cir cumstances, the respondents were under no duty to the appellant to make, and wasa purchase which it was beyond the appellant’s ability to make, so that, if the respondents had not made it, the appellant would have been no better off by reason of the respondents abstaining from reap ing the advantage for themselves. With the question so stated, it was said thaat ny other decision than that of the courts below would involve a dog-in-the-manger policy. What the respondents did, it was said, caused no damage to the appellant and involved no neglect of the appellant’s interests or similar breach of duty. However, I think the answer to this reasoning is that, both in law and equity, it has been held that, if a person in a fiduciary relationship makesa secret profit out of the relationship, the court will not inquire whether the other person is damnified or has losat profit which otherwise he would have got. The fact is in itself a fundamental breach of the fiduciary relationship. Nor can the court adequately investigate the matter in most easel, The facts are generally difficult to ascertain or are solely in the knowledge of the person whoi1 beingcharged. They are matters of surmise; they are hypothetical because the inquiryisu to what would have been the position if that party had not acted as he did, or what he mighth1v done if there had not been the temptation to seek his own advantage, if, in short,interest thad not conflicted with duty. Thus, in Keech v. Sandford, a case in which the fiduciary rcladonlhl was that of trustee and cestui que trust, the trustee was held liable to assign alease totheInfant cestui que trust, though the lessor had refused to renew to the infant. Lord King, LC: said
This may seem hard, that the trustee is the only person of all mankind who might not have the lease.It did not matter that the infant could not himself have got it and that he was not damaged by the trustee taking it for himself. One reason why the rule is strictly pursued is given by Lord Eldon in Exp. James, at 345:
… no court is equal to the examination and ascertainment of the trust in much the greater number of cases. In Parker v. McKenna a most instructive case, the rule is so admirably stated by James, LJ, that I cannot resist repeating his language, though my noble and learned friend Lord Russell of K.illowen, in his speech just delivered, which I have had the opportunity of reading in print, and with which I agree completely, has already quoted it to your Lordships. The words of James, LJ, which I emphasise, are [124, 125]: … that the rule is an inflexible rule and must be applied inexorably by this court which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that. The italics are mine. I need not multiply citations to the same effect or illustrations of the dif ferent circumstances in which the rule has been applied….
The analysis of the facts in the present cas-ewhich has been made by Lord Russell of K.illowen shows clearly enough that the opportunity and the knowledge which enabled the four respondents to purchase the shares came to them simply in their position as directors of the appellant company. Wrottesley, J, clearly so held. He said at the outset of his judgment:
There is no doubt they (the respondents) did take up in their own names shares which only after a few days and certainly only after a week or two they were able to sell at a very large profit indeed. There is no doubt that it was only because they were directors and solicitor respectively of the plaintiff company that this stroke of fortune came in their way.
He decided against the appellant company because he fixed his attention on his view that the appellant suffered no loss by the respondents’ conduct, instead of fixing attention on the cru cial fact that the respondents made a secret profit out of their agency. I do not think that any different view was taken on this aspect of the case by the Court of Appeal, or that it was ques tioned by that court that the opportunity of making the profits came to the four respondents by reason of their fiduciary position as directors. The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not pro vide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company could not avail itself of it; but Lord King, LC, faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity. It is, however, not true that such a person is absolutely barred, because he could by obtaining the assent of the sharehold ers have secured his freedom to make the profit for himself. Failing that, the only course open is to let the opportunity pass. To admit of any other alternative would be to expose the princi pal to the dangers against which James, LJ, in the passage I have quoted uttered his solemn warning. The rule is stringent and absolute, because ‘the safety of mankind’ requires it to be absolutely observed in the fiduciary relationship. In my opinion, the appeal should be allowed in the case of the four respondents.In the case of the other two respondents, I agree with Lord Russell of K.illowen that the appeal should be dismissed for the several reasons which he has given in regard to each of them. These appeals turn on issues of evidence and fact, and I do not desire to add to what has fallen from my noble and learned friend.
Boardman v. Phipps
[1967] 2 AC 46
LordCohen.:.. The respondent became critical of the action of the appellants, and on March 1, 1962, issued the writ in this action claiming (1) that the appellants held 5/18ths of the above mentioned 21,986 shares as constructive trustees for the respondent and (2) an account of the profits made by the appellants out of the said shares.He based his claim on an allegation that the information as to the said shares and the opportunity to purchase the same and the shares when purchased were assets of the testator’s estate and that the appellants were accountable to him for 5/18ths of the profit made by them in breach of their fiduciary duty. The appellants denied any breach of duty and alleged that the purchase of the shares personally and for their own benefit was made with the knowledge and consent of the plaintiff.
The action was tried by Wilberforce J and on March 25, 1964, he made an order declaring that the appellants held 5/18ths of the 21,986 ordinary shares in the company as constructive trustees for the plaintiff and directed an account of the profits which had come to the handl of the appellants and each of them from the said shares and an inquiry as to what sum ii proper to be allowed to the appellants or either of them in respect of their or his work and lkill In obtainingth.e shares and the said profits. From this order the appellants appealed to the Court of Appeal, who dismissed the appeal. The ratio decidendi of the trial judge is conveniently summed up in the following from the judgment in the Court of Appeal of Pearson LJ, where he said:’ … the defendants were acting with the authority of the trustees and were making ample and effective use of their position as representing the trustees and wielding the power of the trustees, who were substantial minority shareholders, to extract from the directors of the company a great deal of information as to the assets and resources of the company; and
… this information enabled the defendants to appreciate the true potential value of the company’s shares and to decide that a purchase of the shares held by the director’s group at the price offered would be a very promising venture. The defendants made their very large profit, not only by their own skill and persistence and risk-taking, but also by mak ing use of their position as agents for the trustees. The principles stated in Regal (Hastings) Ltd v. Gulliver are applicable in this case.’
In the present case had the company been a public company and had the appellants bought the shares on the market, they would not, I think, have been accountable. But the company is a pri vate company and not only the information but the opportunity to purchase these shares came to them through the introduction which Mr Fox gave them to the board of the company and in the second phase when the discussions related to the proposed split-up of the company’s undertaking it was solely on behalf of the trustees that Mr Boardman was purporting to nego tiate with the board of the company. The questidn is this: when in the third phase the negotiations turned to the purchase of the shares at £4 10s. a share, were the appellants debarred by their fiduciary position from purchasing on their•own behalf the 21,986 shares in the company without the informed consent of the trustees and the beneficiaries?
Wilberforce J and, in the Court of Appeal, both Lord Denning MR and Pearson LJ based their decision in favour of the respondent on the decision of your Lordships’ House in Regal (Hastings) Ltd v. Gulliver. [He considered the case and continued:] [Counsel for the appellants] argued that the present case is distinguishable. He puts his argument thus. The question you ask is whether the information could have been used by the principal for the purpose for which it was used by his agents? If the answer to that question is no, the information was not used in the course of their duty as agents. In the present case the information could never have been used by the trustees for the purpose of purchasing shares in the company; there fore purchase of shares was outside the scope of the.appellant’s agency and they are not accountable.
This is an attractive argument, but it does not seem to me to give due weight to the fact that the appellants obtained both the information which satisfied them that the purchase of the shares would be a good investment and the opportunity of acquiring them as a result of acting for certain purposes on behalf of the trustees. Information is, of course, not property in the strict sense of that word and, … it does not necessarily follow that because an agent acquired information and opportunity while acting in a fiduciary capacity he is accountable to his principals for any profit that comes his way as the result of the use he makes of that infor mation and opportunity. His liability to account must depend on the facts of the case. In the present case much of the information came the appellants’ way when Mr Boardman was act ing on behalf of the trustees on the instructions of Mr Fox and the opportunity of bidding for the shares came because he purported for all purposes except for making the bid to be act ing on behalf of the owners of the 8,000 shares in the company. In these circumstances it seems to me that the principle of the Regal case applies and that the courts below came to the right conclusion.
That is enough to dispose of the case but I would add that an agent is, in my opinion, liable to account for profits he makes out of trust property if there is a possibility of conflict between his interest and his duty to his principal. Mr Boardman would not have been able to give unprejudiced advice if he had been consulted by the trustees and was at the same time negoti ating for the purchase of the shares on behalf of himself and Torn Phipps. In other words, there was, in my opinion a possibility of conflict between his interest and his duty.
I desire to repeat that the integrity of the appellants is not in doubt. They acted with com plete honesty throughout and the respondent is a fortunate man in that the rigour of equity enables him to participate in the profits which have accrued as the result of the action taken by the appellants in March, 1959, in purchasing the shares at their own risk. As the last paragraph of his judgment clearly shows, the trial judge evidently shared this view. He directed an inquiry as to what sum is proper to be allowed to the appellants or either of them in respect of his work and skill in obtaining the said shares and the profits in respect thereof. The trial judge con cluded by expressing the opinion that payment should be on a liberal scale. With that observa-
tion I respectfully agree.
LordHodson. The proposition of law involved in this case is that no person standing ina fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of
the other person. This information was obtained on behalf of the trustees, most of it at a time during the his tory of the negotiations when the proposition was to divide the assets of the company between two groups ofshareholders. This object could not have been effected withouta reconstruction of the company and Mr Boardman used the strong minority shareholding which the trusteees held, that is to say, 8,000 shares in the company, wielding his holding as a weapon to enable him to obtain the information of which he subsequently made use.
As to this it is said on behalf of the appellants that information as such is not necessarily property and it is only trust property which is relevant. I agree, but it is nothing to the point to say that in these times corporate trustees, e.g., the Public Trustee and others, necessarily acquirea mass of information in their capacity of trustees for a particular trust and cannot be held liable to account if knowledge so acquired enables them to operate to their own advantage, or to that of other trusts. Each case must depend on its own facts and I dissent from the view that infor mation is of its nature something which is not properly to be described as property. We are aware that what is called ‘know-how’ in the commercial sense is property which may be very valuable as anasset. I agree with the learned judge and with the Court of Appeal that the con fidential information acquired in this case which was capable of being and was turned to account can be properly regarded as the property of the trust. It was obtained by Mr Boardman by reason of the opportunity which he was given as solicitor acting for the trustees in the negoti ations with the chairman of the company, as the correspondence demonstrates. The end result was that out of the special position in which they were standing in the course of the negotia tions the appellants got the opportunity to make a profit and the knowledge that it was there to be made.
Regal (Hastings) Ltd v. Gulliver differs from this case mainly in that the directors took up shares and made a profit thereby, it having been originally intended that the company should buy these shares. Here there was no such intention on the part of the trustees. There is noIndi cation that they either had the money or would have been ready to apply to the court for tion enabling them to do so. On the contrary, Mr Fox, the active trustee and an accountanlW concerned himself with the details of the trust property, was not prepared to •sreeI trustees buying the shares and encouraged the appellants to make the purchase. This does not affect the position. As Keech v. Sandford shows, the inability of the trust to purch: difference to the liability of the appellants, if liability otherwise exists. Thedl1dnctlon facts as to intention to purchase shares between this case and Regal (Hastifffl) LI, V, is not relevant. The company (Regal) had not the money to apply for the shaes upon which the profit was made. The directors took the opportunity which they had presented to them to buy the shares with their own money and were held accountable. Mr Fox’s refusal as one of the trustees to take any part in the matter on behalf of the trust, so far as he was concerned, can make no difference. Nothing short of fully informed consent which the learned judge found not to have been obtained could enable the appellants in the position which they occupied having taken the opportunity provided by that position to make a profit for themselves.
The confidential information which the appellants obtained at a time when Mr Boardman was admittedly holding himself out as solicitor for the trustees was obtained by him as repre senting the trustees, the holders of 8,000 shares of Lester & Harris. As Russell LJ put it:’The substantial trust shareholding was an asset of which one aspect was its potential use as a means of acquiring knowledge of the company’s affairs, or of negotiating allocations of the company’s assets, or of inducing other shareholders to part with their shares.’
Whether this aspect is properly to be regarded as part of the trust assets is, in my judgment, immaterial. The appellants obtained knowledge by reason of their fiduciary position and they cannot escape liability by saying that they were acting for themselves and not as agents of the trustees. Whether or not the trust or the benefici;iries in their stead could have taken advantage of the information is immaterial, as the authorities clearly show. No doubt it was but a remote possibility that Mr Boardman would ever be asked by the trustees to advise on the desirability of an application to the court in order that the trustees might avail themselves of the informa tion obtained. Nevertheless, even if the possibility of conflict is present between personal inter est and the fiduciary position the rule of equity must be applied.I agree with the decision of the learned judge and with that of the Court of Appeal which, in my opinion, involves a finding that there was a potential conflict between Boardman’s position as solicitor to the trustees and his own interest in applying for the shares. He was in a fiduciary position vis-a-vis the trustees and through them vis-a-vis the beneficiaries. For these reasons in my opinion the appeal should be dismissed; but I should add that I am in agreement with the learned judge that payment should be allowed on a liberal scale in respect of the work and skill employed in obtaining the shares and the profits therefrom.
Lord Guest: … Itake the view that from first to last Boardman was acting in a fiduciary capac ity to the trustees In saying this I do not for one moment suggest that there was anything dishonest or underhand in what Boardman did. He has ‘obtained a clean certificate below and I do not wish to sully it. But the law has a strict regard for principle in ensuring that a person in a fiduciary capacity is not allowed to benefit from any transactions into which he has entered with trust property. If Boardman was acting on behalf of the trust, then all the information he obtained became trust property. The weapon which he used to obtain this information was the trust holding. And I see no reason why information and knowledge cannot be trust property.
Applying [the] principles [of Regal (Hastings) Ltd v. Gulliver] to the present case I have no hesitation in coming to the conclusion that the appellants hold the Lester & Harris shares as constructive trustees and are bound to account to the respondent. It is irrelevant that the trustees themselves could not have profited by the transaction Inthe present case the knowledge and information obtained by Boardman was obtained in the course of the fiduciary posi tion in which he had placed himself. The only defence available to a person in such a fiduciary position is that he made the profits with the knowledge and assent of the trustees. It is not con tended that the trustees had such knowledge or gave such consent.
Boardman and Tom Phipps placed themselves in a special position which was of a fiduciary character in relation to the negotiations with the directors of Lester & Harris relating to the trust shares. Out of such special position and in the course of such negotiations they obtained the opportunity to make a profit out of the shares and knowledge that the proftt was there to be made. A profit was made and they are accountable accordingly.
Jaggard v Sawyer & Anor
[1994] EWCA Civ 1
Giving judgment, Sir Thomas Bingham MR said: On January 26 1993 Judge Jack QC, sitting in Weymouth County Court, refused the plaintiff, Mrs Jaggard, injunctions to restrain continuing acts of trespass and breaches of covenant and awarded her damages in lieu. The plaintiff says the judge should have granted injunctions. This appeal requires the court to consider the principles on which judges should act when deciding whether to grant injunctions or to award damages in lieu.
The judge found the facts very fully in his judgment, which is reported in [1993] 1 EGLR 197, so no more than a brief summary of the facts is called for.
In Maiden Newton, in Dorset, there is a road, Bull Lane, which runs very roughly in an east-west direction. Off it to the north is a cul-de-sac known as Ashleigh Avenue. This is about 50 yds long and the roadway (excluding the pathway where there is one) is about 15 ft wide. The cul-de-sac was developed in about 1959. There were 10 houses. Nos 1 to 4 lined the western side of the close (on the left as viewed from Bull Lane). Nos 7 to 10 lined the eastern (right hand) side. At the far (or northern) end of the cul-de-sac were a semi-detached pair of houses, nos 5 and 6.
When Ashleigh Avenue was being developed and plots sold, covenants were given and taken in the same terms in each case, so as to bind and confer benefits on all the original owners and their successors against and in favour of each other. The avenue was a private road and there was conveyed to each of the original owners not only the numbered plot on which his house was or was to be built, but also the area of roadway immediately in front of that plot, up to the centre of the roadway.
Two of these standard mutual covenants are in issue in this case and I quote them:
(c) No house or building to be erected on any part of the said land shall be used as or for a hotel tavern clubhouse or for the sale of wines spirits ale or beer (for consumption either on or off the premises) or as a hospital or as a place of amusement or resort or as a caravan site or in any manner calculated or likely to be a nuisance or cause annoyance to the Vendors or adjoining owners or residents or the neighbourhood or in any manner otherwise than as a private residence only and no part of the said land which is unbuilt upon shall be used otherwise than as a private garden.
(d) The Vendors having constructed the said roadway known as Ashleigh Avenue and having laid the sewer therein as aforesaid the Purchasers and their successors in title shall keep the said roadway in good repair to the half width thereof abutting on the property hereby conveyed and consisting of the portion of the said roadway coloured [blue] on the said plan
In 1980 the plaintiff and her husband (who has since died) bought and moved into 1 Ashleigh Avenue. In May 1987 the defendants, Mr and Mrs Sawyer, bought and moved into no 5, the house at the north-western end of the avenue. They were a young married couple. Their first child was born in August 1987. Their house had only two bedrooms and they wanted more room. Their first idea was to build on. Then they thought of building a separate house in the garden of no 5. They applied for planning permission in April 1988. But the plaintiff organised a petition to oppose the grant of planning permission and all but one of the other residents in the avenue supported her. The petition referred to the fact that the avenue was a private road, for the use of residents of the 10 existing houses. Planning permission was refused, apparently because there was not enough room to accommodate a second house on the plot of no 5.
The defendants had to think again. An alternative solution presented itself. Immediately to the west of Ashleigh Avenue was 13 Bull Lane. This was a property fronting on Bull Lane. Its garden ran northwards, parallel with Ashleigh Avenue, contiguous with the gardens of 1, 2, 3, 4 and 5 Ashleigh Avenue. The owner of 13 Bull Lane was willing to sell a plot of land at the far, northern, end of the garden, abutting on 5 Ashleigh Avenue. The defendants were willing to buy, subject to obtaining planning permission. Their plan was to build a new house, 5A Ashleigh Avenue, on this plot. They proposed that a strip of land, part of the garden of 5 Ashleigh Avenue adjoining its boundary with no 4, should be used as a driveway into no 5A, giving it access to Ashleigh Avenue.
The defendants applied for planning permission to develop no 5A in this way and it was granted. But not without opposition. The plaintiff and others made clear their objection to the development, based both on the restrictive covenants and the fact that Ashleigh Avenue was a private roadway. These objections did not prevail. The plot of no 5A was duly conveyed to the defendants. Building work began on June 14 1989.
The judge made a number of relevant findings on the period between the grant of planning permission and the completion of the building work:
(1) The defendants made no secret of their intentions. In May 1989 Mr Sawyer visited the plaintiff and told her that he was going ahead and would start building soon.
(2) On a number of occasions between February and May 1989 Dorset County Council expressed the opinion that Ashleigh Avenue was a public, not a private, road. Not until July 1990 did the county council change their view. But change it they did and before the judge it was common ground that the road was private, as the plaintiff and other residents had all along contended.
(3) The defendants were advised that there might be a problem about access. The judge found (at p198F of the report) that:
Mr Sawyer was aware of the covenants regarding the no 5 land and that he could not build on that land. He does not seem to have appreciated that there might be a problem in using part of the no 5 land as a driveway for no 5A
And Mr Sawyer was no doubt encouraged by the county council’s view that Ashleigh Avenue was not a private road.
(4) The plaintiff persisted in her view, shared by other residents, that the proposed development of no 5A would be a breach of covenant, entitle the occupier to no right of way over Ashleigh Avenue and involve acts of trespass if the occupier used the avenue for access. On June 13 1989 (the day before work began) solicitors instructed by the plaintiff and others made these points to Mr Sawyer at 5 Ashleigh Avenue and wrote:
We must therefore ask you to discontinue forthwith any development or proposed development on you[r] land failing which we will be asked to take proceedings in the appropriate court for an injunction to restrain you from developing the land.
On June 21 the same solicitors, acting on behalf of the plaintiff and two other named residents, wrote again, this time to the defendants’ solicitors, emphatically stating that access to no 5A via Ashleigh Avenue would be a trespass and further stating that an interlocutory injunction would be sought if work were not stopped pending application to the court for a declaration. On July 4 1989 the plaintiff’s solicitors wrote to the defendants’ solicitors again: in this letter reference was made to Bracewell v Appleby [1975] Ch 408*, a case (discussed below) in which damages were awarded in lieu of an injunction and the letter continued:
We are giving further consideration to the possibility of seeking an injunction and will be taking our clients’ instructions as to that, but we do anticipate that in any event we shall be instructed to seek the alternative remedy that we have advised our clients is available to them.
This point was repeated in much the same terms in another letter a week later.
(5) No application for interlocutory relief was made to the court by the plaintiff or anyone else. The plaintiff says that she instructed her solicitors to apply for an interlocutory injunction and they did not do so. But it is not suggested that the defendants knew of these instructions.
(6) To mitigate the nuisance which builders’ traffic would otherwise have caused to the residents of Ashleigh Avenue, the defendants negotiated a temporary arrangement with the owner of an industrial estate lying to the north of the avenue and adjoining no 5A. This arrangement gave the builders access to the building site without using Ashleigh Avenue. There was some discussion between Mr Sawyer and the owner of the industrial estate about permanent access, but the negotiation was not pursued. Nor at the trial was it contended that there was any access to no 5A otherwise than via Ashleigh Avenue and the judge proceeded on the basis that the only access was via Ashleigh Avenue (p199C of the report).
(7) In July 1989 a further child was born to the defendants. Living in no 5, they were somewhat cramped.
(8) Proceedings were issued on August 10 1989. By then the walls and roof of the new house at no 5A were well advanced.
(9) The differences between the plaintiff and those who shared her view and the defendants gave rise to much ill feeling.
The building of no 5A was completed in December 1989 at a total cost to the defendants (including the purchase of the land) of just under £ 76,000. Two months later the defendants sold no 5, reserving access to no 5A, and moved into no 5A. But the atmosphere locally was so bad that in December 1991 they moved out of no 5A and into another house elsewhere. They let no 5A.
The action came on for hearing before Judge Jack on May 21 1992 and he viewed the site before the hearing began. The hearing continued on May 22 and July 24. On July 30 the judge sent his written judgment to the parties, but he did not formally give judgment until January 26 1993.
The judgment
The judge held (and it is no longer in dispute):
(1) that Ashleigh Avenue is a private road;
(2) that use of the avenue for access to no 5A involved trespass on land owned by the plaintiff, unless confined to the half of the roadway outside her house which she did not own, and necessarily involved trespass on land owned by other residents of the avenue who had not chosen to sue;
(3) that use of part of the land originally forming part of the garden of no 5 as a driveway giving access to no 5A involved a breach of covenant (c) quoted above;
(4) that the court may refuse to grant an injunction sought to restrain continuing trespass and breaches of covenant and may in such cases award damages in lieu under section 50 of the Supreme Court Act 1981.
The major question before the judge was whether he should, on the facts and on the authorities, exercise his discretion to grant injunctions or whether he should award damages in lieu. He made findings relevant to his decision, which I should quote (at pp198M to 199B of the report):
It was urged on me that Mr and Mrs Sawyer developed no 5A with the idea of making a quick profit and moving on. I do not accept that. They badly needed a bigger home, Maiden Newton was genuinely convenient for them. No doubt in the atmosphere of the property market of 1988 and 1989 they also hoped that they would do well financially out of the exercise, and it may be that they talked unwisely to some of the residents about that. Mr Sawyer told me that it was still his desire to live in no 5A. In view of what has happened I am more doubtful of that.
I reject the allegation that Mr Sawyer simply intended to go ahead regardless of the legal position. I find that he believed that the road was public in reliance on the county surveyor’s firm view. I do not think that he appreciated the problem of the covenant and the driveway through the no 5 land. I think that he might have shown more care in the investigation of his position. I put that down to his inexperience in a complicated situation. At the important stage in 1989 he was receiving legal advice and it was not suggested, let alone established, that the advice was that he had no right to do what he intended.
Mrs Jaggard was asked for her reasons for bringing the action and for now pressing the case for an injunction. She answered that she felt that Mr Sawyer was proceeding in defiance of the law and she wanted the law upheld. She was concerned about the additional traffic which no 5A brought to Ashleigh Avenue. I note here that there was no evidence suggesting that it was any more than the light traffic one would expect from the addition of an 11th house. Mrs Jaggard was concerned also that Mr Sawyer would not be contributing to the maintenance of the road. He has always been willing to do so. I find that the reason which weighs with Mrs Jaggard is that Mr Sawyer should not be permitted to behave as she thinks that he has.
In declining to grant injunctions the judge was particularly influenced (see p202B of the report) by
the conduct of the plaintiff and of the defendants and their reasons for acting as they have, the failure of the plaintiff to apply for interlocutory relief, the particular nature of the trespass and of the relevant land, and the fact that if an injunction is granted no 5A will have no access.
Instead of injunctions, he awarded the plaintiff damages. He asked himself what the defendants might reasonably have paid for a right of way and the release of the covenant (pp202F and 203D of the report). He held that the defendants should have been prepared to pay not less that £ 6,250. Split among the nine residents (excluding those in no 5), that total yielded £ 694.44 per resident. That is the sum (with interest) which he awarded the plaintiff.
The plaintiff challenges the judge’s decision, contending that the judge was wrong in effect to license a continuing invasion of her property rights. She had made her legal position (now held to be the correct legal position) plain from the outset. It was for the defendants to resolve any doubt about the legal position by seeking declaratory relief and the plaintiff should not be penalised for having failed to seek interlocutory relief. The defendants took a chance and having been held to be in the wrong had no claim on the court’s indulgence. Access to no 5A was, anyway, possible without trespassing on the plaintiff’s land if traffic were confined to the half of the roadway outside the plaintiff’s house which was more distant from it. Properly calculated, the damages in this case were nominal and that was an additional reason on the authorities for granting injunctions.
The defendants support the decision of the judge, essentially for the reasons which he gave.
In choosing between these submissions, we have derived the greatest help from the able argument of Mr Richard Drabble, instructed by the Attorney-General as an amicus at a time when it was thought the plaintiff would not be represented.
The law
In considering the legal issues in this case, I should acknowledge at the outset my debt to an illuminating article by Professor Jolowicz: ‘Damages in Equity – A Study of Lord Cairns’ Act’ [1975] CLJ 224.
Historically, the remedy given by courts of common law was damages. These afforded retrospective compensation for past wrongs. If the wrongs were repeated or continued, a fresh action was needed. Courts of equity, in contrast, were able to give prospective relief by way of injunction or specific performance. A mandatory injunction would require the defendant to observe a legal obligation or undo the effects of a past breach of legal obligation. A negative injunction would restrain a defendant from committing breaches of legal obligation in future. But these courts could not award damages. This anomaly was mitigated by the Common Law Procedure Act 1854, which gave courts of common law a limited power to grant equitable relief as well as damages. It was further mitigated by Lord Cairns’ Act (the Chancery Amendment Act 1858) which gave the Court of Chancery the power to award damages.
Section 2 of Lord Cairns’ Act provided:
In all Cases in which the Court of Chancery has Jurisdiction to entertain an Application for an Injunction against a Breach of any Covenant, Contract, or Agreement, or against the Commission or Continuance of any wrongful Act, or for the specific Performance of any Covenant, Contract, or Agreement, it shall be lawful for the same Court, if it shall think fit, to award Damages to the Party injured, either in addition to or in substitution for such Injunction or specific Performance, and such Damages may be assessed in such Manner as the Court shall direct.
This enabled the Chancery Court on appropriate facts to award damages for unlawful conduct in the past as well as an injunction to restrain unlawful conduct in the future. It also enabled the Chancery Court to award damages instead of granting an injunction to restrain unlawful conduct in the future. Such damages can only have been intended to compensate the plaintiff for future unlawful conduct the commission of which, in the absence of any injunction, the court must have contemplated as likely to occur. Despite the repeal of Lord Cairns’ Act, it has never been doubted that the jurisdiction thereby conferred on the Court of Chancery is exercisable by the High Court and by county courts.
The authorities show that there were, not surprisingly, differing approaches to the exercise of this new jurisdiction. In the leading case of Shelfer v City of London Electric Lighting Co Ltd [1895] 1 ChD 287, the operations of the defendant electricity company caused structural damage to a house and nuisance to its occupier. The owner and occupier sought relief by way of injunction. The trial judge refused injunctive relief and awarded damages. His decision was reversed by the Court of Appeal, which roundly rejected the view that wrongs should be permitted to continue simply because the wrongdoer was able and willing to pay damages. But the authority is chiefly notable for the guidance given by A L Smith LJ on the circumstances in which damages may properly be awarded in lieu of an injunction. The passage in his judgment at pp322 to 323 has been cited very frequently, but must be cited again:
Many judges have stated, and I emphatically agree with them, that a person by committing a wrongful act (whether it be a public company for public purposes or a private individual) is not thereby entitled to ask the Court to sanction his doing so by purchasing his neighbour’s rights, by assessing damages in that behalf, leaving his neighbour with the nuisance, or his lights dimmed, as the case may be.
In such cases the well-known rule is not to accede to the application, but to grant the injunction sought, for the plaintiff’s legal right has been invaded, and he is prima facie entitled to an injunction.
There are, however, cases in which this rule may be relaxed, and in which damages may be awarded in substitution for an injunction as authorized by this section.
In any instance in which a case for an injunction has been made out, if the plaintiff by his acts or laches has disentitled himself to an injunction the Court may award damages in its place. So again, whether the case be for a mandatory injunction or to restrain a continuing nuisance, the appropriate remedy may be damages in lieu of an injunction, assuming a case for an injunction to be made out.
In my opinion, it may be stated as a good working rule that —
(1) If the injury to the plaintiff’s legal rights is small,
(2) And is one which is capable of being estimated in money,
(3) And is one which can be adequately compensated by a small money payment,
(4) And the case is one in which it would be oppressive to the defendant to grant an injunction: —
then damages in substitution for an injunction may be given.
There may also be cases in which, though the four above-mentioned requirements exist, the defendant by his conduct, as, for instance, hurrying up his buildings so as if possible to avoid an injunction, or otherwise acting with a reckless disregard to the plaintiff’s rights, has disentitled himself from asking that damages may be assessed in substitution for an injunction.
It is impossible to lay down any rule as to what, under the differing circumstances of each case, constitutes either a small injury, or one that can be estimated in money, or what is a small money payment, or an adequate compensation, or what would be oppressive to the defendant. This must be left to the good sense of the tribunal which deals with each case as it comes up for adjudication. For instance, an injury to the plaintiff’s legal right to light to a window in a cottage represented by £ 15 might well be held to be not small but considerable; whereas a similar injury to a warehouse or other large building represented by ten times that amount might be held to be inconsiderable. Each case must be decided upon its own facts; but to escape the rule it must be brought within the exception. In the present case it appears to me that the injury to the Plaintiff is certainly not small, nor is it in my judgment capable of being estimated in money, or of being adequately compensated by a small money payment.
Many later cases have turned on the application of this good working rule to the particular facts of the case before the court. This case may be said to do the same.
In Leeds Industrial Co-operative Society Ltd v Slack [1924] AC 851 doubts about the scope of Lord Cairns’ Act were dispelled. At p857 Viscount Finlay said:
The power given is to award damages to the party injured, either in addition to or in substitution for an injunction. If the damages are given in addition to the injunction they are to compensate for the injury which has been done and the injunction will prevent its continuance or repetition. But if damages are given in substitution for an injunction they must necessarily cover not only injury already sustained but also injury that would be inflicted in the future by the commission of the act threatened. If no injury has yet been sustained the damages will be solely in respect of the damage to be sustained in the future by injuries which the injunction, if granted, would have prevented.
The claim for an injunction in Kelsen v Imperial Tobacco Co (ofGreat Britain and Ireland) Ltd [1957] 2 QB 334 arose out of the infringement by the defendants of the plaintiff’s airspace by erection and maintenance of an advertising sign above the plaintiff’s shop. McNair J did not doubt his discretion to award damages in lieu of an injunction if he saw fit. He regarded the injury to the plaintiff’s rights as small and the damages, if capable of being estimated at all, as nominal. He did not regard the grant of an injunction as oppressive to the defendants. He granted an injunction. He proceeded on the express assumption that, if he did not grant an injunction and the defendants’ tortious conduct continued, it would be open to the plaintiff to seek further damages in a later action. It does not appear to have been contemplated that the measure of damage could be based on the reasonable fee which the plaintiff could require to permit exhibition of the sign, although the judge was very much alive to the commercial considerations underlying the dispute: see p347.
Woollerton & Wilson Ltd v Richard Costain Ltd [1970] 1 WLR 411 involved a trespass into the plaintiff’s airspace by the jib of the defendant’s crane. No damage was done. But Stamp J regarded the absence of damage as a reason for, not against, the grant of an injunction and held that A L Smith LJ’s working rule did not apply in cases of trespass founding a claim for nominal damages only. On the facts, however, he thought it right to suspend the operation of the injunction for a period which would enable the defendants to finish the job for which the crane was required. This decision cannot, in my view, be supported. The working rule formulated by A L Smith LJ cannot be limited in the way suggested; and the fact that a plaintiff has suffered only nominal damage cannot in common sense be a reason for confining his remedy to an injunction if the court is then, by suspending the injunction, to deny him any remedy at all.
In Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 a developer built a number of houses in breach of a covenant restraining him from building save in accordance with a lay-out plan submitted and approved by the plaintiffs. The plaintiffs issued proceedings claiming an injunction shortly after the building work began, but did not seek interlocutory relief and all the houses were complete by the date of trial. The plaintiffs then sought a mandatory injunction requiring demolition of the houses built in breach of covenant. Brightman J refused to grant such an injunction. He said (at p810H):
Mr Newsom submitted, and I accept, that it is no answer to a claim for a mandatory injunction that the plaintiffs, having issued proceedings, deliberately held their hand and did not seek the assistance of the court for the purpose of preserving the status quo. On the other hand, it is, in my view, equally true that a plaintiff is not entitled ‘as of course’ to have everything, pulled down that was built after the issue of the writ. The erection of the houses, whether one likes it or not, is a fait accompli and the houses are now the homes of people. I accept that this particular fait accompli is reversible and could be undone. But I cannot close my eyes to the fact that the houses now exist. It would, in my opinion, be an unpardonable waste of much needed houses to direct that they now be pulled down and I have never had a moment’s doubt during the hearing of this case that such an order ought to be refused. No damage of a financial nature has been done to the plaintiffs by the breach of the lay-out stipulation. The plaintiffs’ use of the Wrotham Park Estate has not been and will not be impeded. It is totally unnecessary to demolish the houses in order to preserve the integrity of the restrictive covenants imposed on the rest of area 14. Without hesitation I decline to grant a mandatory injunction. But the fact that these houses will remain does not spell out a charter entitling others to despoil adjacent areas of land in breach of valid restrictions imposed by the conveyances. A developer who tries that course may be in for a rude awakening.
Brightman J did not confine the plaintiffs to nominal damages. He concluded (at p815D) that a just substitute for a mandatory injunction would be such a sum of money as might reasonably have been demanded by the plaintiffs from the developer as a quid pro quo for relaxing the covenant.
Facts almost indistinguishable from the present came before the court in Bracewell v Appleby [1975] Ch 408. In that case, as in this, the plaintiffs voiced their objection before building work began, but did not issue proceedings until after. Application was made for an interlocutory injunction, but not until after the new house had been finished and then it was refused. At trial the plaintiffs sought an injunction which Graham J was unwilling to grant. He acknowledged that an injunction would not require the new house to be pulled down, but it would make it uninhabitable. Instead, he awarded damages in lieu, holding (in accordance with the approach of Brightman J in Wrotham Park) that the defendant should be liable to pay an amount of damages which in so far as it could be estimated would be equivalent to a fair and proper price payable for the acquisition of the right of way in question: p419D.
In John Trenberth Ltd v National Westminster Bank Ltd (1979) 39 P & CR 104* Walton J echoed doubts already expressed in Charrington v Simons & Co Ltd [1971] 1 WLR 598† at p603 about the correctness of Stamp J’s suspension of the injunction granted in Woollerton & Wilson, but asserted with emphasis that the absence of damage, far from being a reason why an injunction should not be granted, was the very reason why it should: p107.
It was the unlawful parking of vehicles in their yard which founded the plaintiffs’ claim for relief in Patel v W H Smith (Eziot) Ltd [1987] 1 WLR 853. The Court of Appeal held that prima facie a landowner whose title is not in issue is entitled to an injunction to restrain trespass on his land whether or not the trespass harms him: p858E. But the court accepted that there would be exceptional circumstances in which the court would not think it appropriate to grant an injunction: pp859D and 863C.
Trespass to the plaintiffs’ airspace by crane jibs was again the ground of complaint in Anchor Brewhouse Developments Ltd v Berkley House (Docklands) Developments Ltd (1987) 38 BLR 82. Founding himself on Woollerton & Wilson, John Trenberth and Patel, Scott J held that prima facie, and in the absence of special circumstances, the plaintiffs were entitled to an injunction. He held that there were no such circumstances and so held that the plaintiffs were entitled ‘as of course’ to injunctions to restrain continuing trespass: p105. He described Bracewell v Appleby as ‘an odd case’ (p101) and said:
I find some difficulty with Bracewell v Appleby mainly because, as it seems to me. the learned judge regarded the damages he was awarding as a once and for all payment. But it was, as I see it. not within the power of the judge to produce that result. Whether or not an injunction were granted, the defendant’s use of the right of way would, after the judgment as well as before, represent trespass unless and until he were granted a right of way. The judge could not by an award of damages put the defendant in the position of a person entitled to an easement of way. So assuming, which is not clear from the case, that there had not been some agreement by the plaintiffs to treat the damages as entitling the defendant to a right of way, the defendant’s subsequent use of the private road would have constituted a continuing trespass. A succession of further actions for damages could have been brought. In those circumstances it seems to me very difficult to justify the withholding of the injunction. By withholding the injunction the court was allowing a legal wrong to continue unabated. Nonetheless Mr Moss is entitled to refer to the case as one in which an injunction was refused.
I, for my part, find some difficulty in these observations of Scott J. It is of course true that the court cannot, on an application of this kind, revoke a covenant or grant the defendant a right of way. But if the court, in exercise of its jurisdiction derived from Lord Cairns’ Act, instead of granting the plaintiff an injunction to restrain the defendant’s apprehended future unlawful conduct, awards the plaintiff damages to compensate him for that conduct, it seems to me that a succession of future actions based on that conduct would, if brought, be dismissed or struck out, since a plaintiff could not complain of that for which he had already been compensated.
Mention should finally be made of Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361*. Two local authorities sold land to a development company. It had planning permission to build 72 houses and covenanted to carry out the development in accordance with that planning permission. In breach of covenant the company built 77 houses. The trial judge held that the local authorities were entitled to nominal damages only. The Court of Appeal upheld that decision. Fundamental to the judgment of Dillon LJ, as I read it, is his conclusion that the plaintiffs had never sought an injunction but only common law damages, not damages in equity under Lord Cairns’ Act: see pp 1364A and 1368G. It therefore followed that since the plaintiffs’ damages were to be assessed on ordinary common law principles and since they could show no damage, only nominal damages could be awarded. The learned lord justice questioned whether Wrotham Park was consistent with Johnson v Agnew [1980] AC 367†, but thought it unnecessary to reach a conclusion since Wrotham Park was a case falling under Lord Cairns’ Act and the case before the court was not: p1367B. He was not willing to countenance the possibility of awarding, as common law damages, the gain which the defendant had earned by his breach of contract: p1367E.
Steyn LJ agreed. He reviewed the familiar bases of compensatory damages in contract, based on loss of bargain and costs incurred: p1369B. He then referred to a third principle protecting the innocent party’s restitutionary interest, observing that Wrotham Park was ‘only defensible on the basis of the third or restitutionary principle’: p1369F. The plaintiffs’ argument that Wrotham Park could be justified on the basis of a loss of bargaining opportunity was, in his view, a fiction: p1369G.
The object of the award in the Wrotham Park case was not to compensate the plaintiffs for financial injury, but to deprive the defendants of an unjustly acquired gain.
The lord justice was unwilling to extend the range of restitutionary remedies as the court had been invited to do: p1370H.
Rose LJ agreed with both the preceding judgments, but gave a brief judgment of his own distinguishing Wrotham Park on the ground that damages had there been sought in equity whereas the only claim for damages in the instant case was at common law: p 1371C–G.
The court’s approach to restitutionary damages in this case has provoked some regretful comment (see Professor Birks: ‘Profits of Breach of Contract’ (1993) 109 LQR 518) and it may be (as suggested: p520) that these judgments will not be the last word on that subject. But the court plainly treated the case as one not falling under the principles derived from Lord Cairns’ Act. I cannot, however, accept that Brightman J’s assessment of damages in Wrotham Park was based on other than compensatory principles. The defendants had committed a breach of covenant, the effects of which continued. The judge was not willing to order the defendants to undo the continuing effects of that breach. He had therefore to assess the damages necessary to compensate the plaintiffs for this continuing invasion of their right. He paid attention to the profits earned by the defendants, as it seems to me, not in order to strip the defendants of their unjust gains, but because of the obvious relationship between the profits earned by the defendants and the sum which the defendants would reasonably have been willing to pay to secure release from the covenant. I am reassured to find that this is the view taken of Wrotham Park by Megarry V-C in Tito v Waddell (No 2) [1977] Ch 106 at p335D when he said:
Brightman J resolved the difficult question of the appropriate quantum of damages by holding that the plaintiffs should recover 5 per cent of the defendants’ expected profit from their venture. In Bracewell v Appleby, Graham J applied the same principle where the right in question was not a consent under a restrictive covenant, but an easement of way.
I find great difficulty in seeing how these cases help Mr Macdonald. If the plaintiff has the right to prevent some act being done without his consent, and the defendant does the act without seeking that consent, the plaintiff has suffered a loss in that the defendant has taken without paying for it something for which the plaintiff could have required payment, namely, the right to do the act. The court therefore makes the defendant pay what he ought to have paid the plaintiff. for that is what the plaintiff has lost. The basis of computation is not, it will be observed, in any way directly related to wasted expenditure or other loss that the defendant is escaping by reason of an injunction being refused: it is the loss that the plaintiff has suffered by the defendant not having observed the obligation to obtain the plaintiff’s consent. Where the obligation is contractual, that loss is the loss caused to the plaintiff by the breach of contract.
I can see no reason why a judge should not assess damages on the Wrotham Park basis when he declines to prevent commission of a future wrong.
The present case
The judge recognised that a plaintiff who can show that his legal right will be violated by the defendant’s conduct is prima facie entitled to the grant of an injunction. He accepted that the court will only rarely and reluctantly permit such violation to occur or continue. But he held that this case fulfilled the four tests laid down by A L Smith LJ in Shelfer to bring this case within the exception. The real question in this appeal is whether that judgment is sustainable.
(1) He regarded the injury to the plaintiff’s right as small. This is, in my view, so. It is not suggested that the increase in traffic attributable to the existence of no 5A will be other than minimal, or that the cost of keeping up the road will be significantly increased. The defendants have in any event offered throughout to contribute to the cost of upkeep and are willing, if a draft is tendered to them, to execute a deed binding themselves by the same covenants as other residents of the avenue. It is not suggested that the driveway to no 5A impairs the visual amenity of the plaintiff’s house or affects its value. There is of course a violation of the plaintiff’s strict legal right, but that will be so in any case of this kind.
(2) The judge considered the value of the injury to the plaintiff’s right as capable of being estimated in money. He based himself on the Wrotham Park approach. In my view, he was justified. He valued the right at what a reasonable seller would sell it for. In situations of this kind a plaintiff should not be treated as eager to sell, which he very probably is not. But the court will not value the right at the ransom price which a very reluctant plaintiff might put on it. I see no error in the judge’s approach to this aspect.
(3) The judge held that the injury to the plaintiff’s legal right was one which could be adequately compensated by a small money payment. I agree, and I do not think this conclusion can be faulted.
(4) The judge concluded that in all the circumstances it would be oppressive to the defendants to grant the injunctions sought. Most of the argument turned on this condition and in particular on the significance which the judge attached to the plaintiff’s failure to seek interlocutory relief.
It is important to bear in mind that the test is one of oppression, and the court should not slide into application of a general balance of convenience test. But oppression must be judged as at the date the court is asked to grant an injunction, and (as Brightman J recognised in Wrotham Park) the court cannot ignore the reality with which it is then confronted. It is relevant that the plaintiff could at an early stage have sought interlocutory relief, which she would seem very likely to have obtained; but it is also relevant that the defendants could have sought a declaration of right. These considerations are not decisive. It would weigh against a finding of oppression if the defendants had acted in blatant and calculated disregard of the plaintiff’s rights, of which they were aware, but the judge held that this was not so, and the plaintiff’s solicitors may be thought to have indicated that damages would be an acceptable remedy. It was suggested that an injunction restraining trespass on the plaintiff’s roadway would not be oppressive since the occupiers of no 5A could use the other half of the roadway outside the plaintiff’s house, but this would seem to me unworkable in practice, a recipe for endless dispute and a remedy which would yield nothing of value to the plaintiff. It was suggested that the occupiers of no 5A could be restrained from using the driveway over the land formerly part of no 5 for vehicular access, while access on foot would be permitted. But this, as it seems to me, would impose inconvenience and loss on the occupier and owner of no 5A without upholding the plaintiff’s right or yielding any practical benefit to her. As section 84 of the Law of Property Act 1925 makes clear, restrictive covenants cannot be regarded as absolute and inviolable for all time. The judge was, in my view, entitled to hold on all the facts before the court at trial that the grant of an injunction would be oppressive to the defendants and I share that view.
The only argument pressed on damages was that the only damages properly awardable on compensatory principles would have been nominal and that therefore an injunction should have been granted. As already indicated, I think that the Wrotham Park approach was appropriate even on pure compensatory principles and the judge followed it correctly.
One cannot but regret that this dispute among neighbours should have escalated as it has. Having heard the argument in full it would be futile to deny the plaintiff the leave to appeal and the extension of time which she seeks. But I am of the clear opinion that the appeal must be dismissed.
Kennedy LJ agreed and did not add anything.
Also agreeing, Millett LJ said: This appeal raises yet again the questions: what approach should the court adopt when invited to exercise its statutory jurisdiction to award damages instead of granting an injunction to restrain a threatened or continuing trespass or breach of a restrictive covenant? and if the court accedes to the invitation on what basis should damages be assessed?
Before considering these questions, it is desirable to state some general propositions which are established by the authorities and which are, or at least ought to be, uncontroversial.
1. The jurisdiction was originally conferred by section 2 of the Chancery Amendment Act 1858, commonly known as Lord Cairns’ Act. It is now to be found in section 50 of the Supreme Court Act 1981. It is a jurisdiction to award damages ‘in addition to, or in substitution for, an injunction or specific performance’.
2. The principal object of Lord Cairns’ Act is well known. It was described by Turner LJ in Ferguson v Wilson (1866) 2 Ch App 77 at p88. It was to enable the Court of Chancery, when declining to grant equitable relief and leaving the plaintiff to his remedy at law, to award the plaintiff damages itself instead of sending him to the common law courts to obtain them. From the very first, however, it was recognised that the Act did more than this. The jurisdiction of the Court of Chancery was wider than that of the common law courts, for it could give relief where there was no cause of action at law. As early as 1863, Turner LJ himself had recognised the potential effect of Lord Cairns’ Act. In Eastwood v Lever (1863) 4 De GJ & SM 114 he pointed out that the Act had empowered the courts of equity to award damages in cases where the common law courts could not. The Act, he said, was not ‘confined to cases in which the plaintiff could recover damages at law’. Damages at common law are recoverable only in respect of causes of action which are complete at the date of the writ; damages for future or repeated wrongs must be made the subject of fresh proceedings. Damages in substitution for an injunction, however, relate to the future, not the past. They inevitably extend beyond the damages to which the plaintiff may be entitled at law. In Leeds Industrial Co-operative Society Ltd v Slack [1924] AC 851 the House of Lords confirmed the jurisdiction of the courts to award damages under the Act in respect of an injury which was threatened but had not yet occurred. No such damages could have been awarded at common law.
3. The nature of the cause of action is immaterial; it may be in contract or tort. Lord Cairns’ Act referred in terms to ‘a breach of any covenant, contract or agreement, or against the commission or continuance of any wrongful act’. The jurisdiction to award damages in substitution for an injunction has most commonly been exercised in cases where the defendant’s building has infringed the plaintiff’s right to light or where it has been erected in breach of a restrictive covenant. Despite dicta to the contrary in Woollerton & Wilson Ltd v Richard Costain Ltd [1970] 1 WLR 411 there is, in my opinion, no justification for excluding cases of threatened or continuing trespass on the ground that trespass is actionable at law without proof of actual damage. Equitable relief, whether by way of injunction or damages under Lord Cairns’ Act, is available because the common law remedy is inadequate; but the common law remedy of damages in cases of continuing trespass is inadequate not because the damages are likely to be small or nominal, but because they cover the past only and not the future.
4. The power to award damages under Lord Cairns’ Act arises whenever the court ‘has jurisdiction to entertain an application’ for an injunction or specific performance. This question must be determined as at the date of the writ. If the court would then have had jurisdiction to grant an injunction, it has jurisdiction to award damages instead. When the court comes to consider whether to grant an injunction or award damages instead, of course, it must do so by reference to the circumstances as they exist at the date of the hearing.
5. The former question is effectively one of jurisdiction. The question is whether, at the date of the writ, the court could have granted an injunction, not whether it would have done: City of London Brewery Co v Tennant (1873) 9 Ch App 212. Russell LJ put it neatly in Hooper v Rogers [1975] Ch 43 at p48 when he said that the question was ‘whether the judge could have (however unwisely) made a mandatory order’. There have been numerous cases where damages under Lord Cairns’ Act were refused because at the date of the writ it was impossible to grant an injunction or specific performance: for one well-known example, see Lavery v Pursell (1888) 39 ChD 508. The recent case of Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361 appears to have been a case of this character.
6. It is not necessary for the plaintiff to include a claim for damages in his writ. As long ago as 1868 Lord Chelmsford LC held that damages may be awarded under Lord Cairns’ Act ‘though not specifically prayed for by the bill, the statute having vested a discretion in the judge which he may exercise when he thinks the case fitting without the prayer of the party’: Betts v Neilson (1868) 3 Ch App 429 at p441. It would be absurd as well as misleading to insist on the plaintiff including a claim for damages in his writ when he is insisting on his right to an injunction and opposing the defendant’s claim that he should be content to receive damages instead. By a parity of reasoning it is not, in my opinion, necessary for a plaintiff to include a claim for an injunction to order to found a claim for damages under the Act. It would be absurd to require him to include a claim for an injunction if he is sufficiently realistic to recognise that in the circumstances he is unlikely to obtain one and intends from the first to ask the court for damages instead. But he ought to make it clear whether he is claiming damages for past injury at common law or under the Act in substitution for injunction.
7. In Anchor Brewhouse Developments Ltd v Berkley House (Docklands) Developments Ltd (1987) 38 BLR 82 at p87 Scott J granted an injunction to restrain a continuing trespass. In the course of his judgment, however, he cast doubt on the power of the court to award damages for future trespasses by means of what he described as a ‘once and for all payment’. This was because, as he put it, the court could not by an award of damages put the defendant in the position of a person entitled to an easement; whether or not an injunction were granted, the defendant’s conduct would still constitute a trespass; and a succession of further actions for damages could accordingly still be brought. This reasoning strikes at the very heart of the statutory jurisdiction; it is in marked contrast to the attitude of the many judges who from the very first have recognised that, while the Act does not enable the court to licence future wrongs, this may be the practical result of withholding injunctive relief; and it is inconsistent with the existence of the jurisdiction, confirmed in Leeds Industrial Co-operative Society Ltd v Slack, to award damages under the Act in a quia timet action. It is, in my view, fallacious because it is not the award of damages which has the practical effect of licensing the defendant to commit the wrong, but the refusal of injunctive relief. Thereafter the defendant may have no right to act in the manner complained of, but he cannot be prevented from doing so. The court can, in my judgment, properly award damages ‘once and for all’ in respect of future wrongs because it awards them in substitution for an injunction and to compensate for those future wrongs which an injunction would have prevented. The doctrine of res judicata operates to prevent the plaintiff and his successors in title from bringing proceedings thereafter to recover even nominal damages in respect of further wrongs for which the plaintiff has been fully compensated.
It has always been recognised that the practical consequence of withholding injunctive relief is to authorise the continuance of an unlawful state of affairs. If, for example, the defendant threatens to build in such a way that the plaintiff’s light will be obstructed and he is not restrained, then the plaintiff will inevitably be deprived of his legal right. This was the very basis upon which before 1858 the Court of Chancery had made the remedy of injunction available in such cases. After the passing of Lord Cairns’ Act many of the judges warned that the jurisdiction to award damages instead of an injunction should not be exercised as a matter of course so as to legalise the commission of a tort by any defendant who was willing and able to pay compensation. In Shelfer v City of London Electric Lighting Co Ltd [1895] 1 ChD 287 Lindley LJ said at p315:
But in exercising the jurisdiction thus given attention ought to be paid to well settled principles; and ever since Lord Cairns’ Act was passed the Court of Chancery has repudiated the notion that the Legislature intended to turn that Court into a tribunal for legalizing wrongful acts; or in other words, the Court has always protested against the notion that it ought to allow a wrong to continue simply because the wrongdoer isable and willing to pay for the injury he may inflict.
And in Cowper v Laidler [1903] 2 Ch 337 Buckley J said at p341:
The Court has affirmed over and over again that the jurisdiction to give damages where it exists is not so to be used as in fact to enable the defendant to purchase from the plaintiff against his will his legal right to the easement.
Mrs Jaggard is, therefore, in good company when she says in her skeleton argument (prepared when she was acting in person):
What the judge has in effect done in his judgment is to grant Mr and Mrs Sawyer a right of way in perpetuity over my land for a once and for all payment. I do not understand how the court can have power to produce such a result as it effectively expropriates my property … Ashleigh Avenue is a private roadway and the judge has turned it into a public highway. Surely he does not have jurisdiction to do this?
It will be of small comfort to her to be told that the jurisdiction is undoubted, though it is to be exercised with caution. What does need to be stressed, however, is that the consequences to which Mrs Jaggard refers do not result from the judge’s exercise of the statutory jurisdiction to award damages instead of an injunction, but from his refusal to grant an injunction. Lord Cairns’ Act did not worsen the plaintiff’s position, but improved it. Thenceforth, if injunctive relief was withheld, the plaintiff was not compelled to wait until further wrongs were committed and then bring successive actions for damages; he could be compensated by a once and for all payment to cover future as well as past wrongs. Of course, the ability to do ‘complete justice’ in this way made it easier for the courts to withhold the remedy of an injunction, and it was therefore necessary for the judges to remind themselves from time to time that the discretion to withhold it, which had existed as well before 1858 as after it, was to be exercised in accordance with settled principles; that a plaintiff who had established both a legal right and a threat to infringe it was prima facie entitled to an injunction to protect it; and that special circumstances were needed to justify withholding the injunction.
Nevertheless references to the ‘expropriation’ of the plaintiff’s property are somewhat overdone, not because that is not the practical effect of withholding an injunction, but because the grant of an injunction, like all equitable remedies, is discretionary. Many proprietary rights cannot be protected at all by the common law. The owner must submit to unlawful interference with his rights and be content with damages. If he wants to be protected he must seek equitable relief and he has no absolute right to that. In many cases, it is true, an injunction will be granted almost as of course; but this is not
always the case and it will never be granted if this would cause injustice to the defendant. Citation of passages in the cases warning of the danger of ‘expropriating’ the plaintiff needs to be balanced by reference to statements like that of Lord Westbury LC in Isenberg v East India House Estate Co Ltd (1863) 3 De GJ & SM 263 at p273 where he held that it was the duty of the court not
by granting a mandatory injunction, to deliver over the Defendants to the Plaintiff bound hand and foot, in order to be made subject to any extortionate demand that he may by possibility make, but to substitute for such mandatory injunction an inquiry before itself, in order to ascertain the measure of damage that has been actually sustained.
When the plaintiff claims an injunction and the defendant asks the court to award damages instead, the proper approach for the court to adopt cannot be in doubt. Clearly the plaintiff must first establish a case for equitable relief, not only by proving his legal right and an actual or threatened infringement by the defendant, but also by overcoming all equitable defences such as laches, acquiescence or estoppel. If he succeeds in doing this, he is prima facie entitled to an injunction. The court may nevertheless in its discretion withhold injunctive relief and award damages instead. How is this discretion to be exercised? In a well known passage in Shelfer v City of London Electric Lighting Co at pp322–3 A L Smith LJ set out what he described as ‘a good working rule’ that:
(1) If the injury to the plaintiff’s legal rights is small,
(2) And is one which is capable of being estimated in money,
(3) And is one which can be adequately compensated by a small money payment,
(4) And the case is one in which it would be oppressive to the defendant to grant an injunction: —
then damages in substitution for an injunction may be given.
Laid down just 100 years ago, A L Smith LJ’s check-list has stood the test of time; but it needs to be remembered that it is only a working rule and does not purport to be an exhaustive statement of the circumstances in which damages may be awarded instead of an injunction.
Reported cases are merely illustrations of circumstances in which particular judges have exercised their discretion, in some cases by granting an injunction, and in others by awarding damages instead. Since they are all cases on the exercise of a discretion, none of them is a binding authority on how the discretion should be exercised. The most that any of them can demonstrate is that in similar circumstances it would not be wrong to exercise the discretion in the same way. But it does not follow that it would be wrong to exercise it differently.
The outcome of any particular case usually turns on the question: would it in all the circumstances be oppressive to the defendant to grant the injunction to which the plaintiff is prima facie entitled? Most of the cases in which the injunction has been refused are cases where the plaintiff has sought a mandatory injunction to pull down a building which infringes his right to light or which has been built in breach of a restrictive covenant. In such cases the court is faced with a faitaccompli. The jurisdiction to grant a mandatory injunction in those circumstances cannot be doubted, but to grant it would subject the defendant to a loss out of all proportion to that which would be suffered by the plaintiff if it were refused, and would indeed deliver him to the plaintiff bound hand and foot to be subjected to any extortionate demands the plaintiff might make. In the present case, as in the closely similar case of Bracewell v Appleby [1975] Ch 408, the plaintiff sought a prohibitory injunction to restrain the use of a road giving access to the defendant’s house. The result of granting the injunction would be much the same; the house would not have to be pulled down, but it would be rendered landlocked and incapable of beneficial enjoyment.
In the cases of oversailing cranes and other trespasses to the plaintiff’s airspace, on the other hand, the court has not been faced with a similar fait accompli. The grant of an injunction would merely restore the parties to the same position, with each of them enjoying the same bargaining strength, that they had enjoyed before the trespass began. Goodson v Richardson (1874) 9 Ch App 221 was a case of this character. The defendant, being desirous of laying pipes for the supply of water to some houses which he had built, applied to the local highways board for permission to lay the pipes in the soil under the highway. Permission was granted, but he was expressly told that this was subject to the rights of the adjoining owners. He made no approach to the adjoining owners, of whom the plaintiff was one, but began to lay pipes in the soil of their land, whereupon the plaintiff brought prompt action for an injunction. The court granted an injunction, regarding the case as a deliberate and unlawful invasion by one man of another man’s land for the purpose of a continuing trespass, to the gain and profit of the trespasser, without the consent of the owner of the land. The injunction required the pipes to be removed; but this involved relatively little cost and could hardly be considered oppressive. The defendant had acted with his eyes open and the injunction merely restored him, after a little expenditure on his part, to the position he was in at the start.
In considering whether the grant of an injunction would be oppressive to the defendant, all the circumstances of the case have to be considered. At one extreme, the defendant may have acted openly and in good faith and in ignorance of the plaintiff’s rights, and thereby inadvertently placed himself in a position where the grant of an injunction would either force him to yield to the plaintiff’s extortionate demands or expose him to substantial loss. At the other extreme, the defendant may have acted with his eyes open and in full knowledge that he was invading the plaintiff’s rights, and hurried on his work in the hope that by presenting the court with a fait accompli he could compel the plaintiff to accept monetary compensation. Most cases, like the present, fall somewhere in between.
In the present case, Mr and Mrs Sawyer acted openly and in good faith and in the not unreasonable belief that they were entitled to make use of Ashleigh Avenue for access to the house that they were building. At the same time, they had been warned by Mrs Jaggard and her solicitors that Ashleigh Avenue was a private road, that they were not entitled to use it for access to the new house, and that it would be a breach of covenant for them to use the garden of no 5 to gain access to no 5A. They went ahead, not with their eyes open, but at their own risk. On the other hand, Mrs Jaggard did not seek interlocutory relief at a time when she would almost certainly have obtained it. She should not be criticised for that, but it follows that she also took a risk, viz: that by the time her case came for trial the court would be presented with a fait accompli. The case was a difficult one, but in an exemplary judgment the learned judge took into account all the relevant considerations, both those which told in favour of granting an injunction and those which told against, and in the exercise of his discretion he decided to refuse it. In my judgment, his conclusion cannot be faulted.
Having decided to refuse an injunction and to award Mrs Jaggard damages instead, the judge had to consider the measure of damages. He based them on her share of the amount which, in his opinion, Mrs Jaggard and the other residents of Ashleigh Avenue could reasonably have demanded as the price of waiving their rights. In this he applied the measure of damages which had been adopted by Brightman J in WrothamPark Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798, a case which has frequently been followed. It would not be necessary to consider this matter further but for the fact that in the recent case in this court of Surrey County Council v Bredero Homes Ltd doubts were expressed as to the basis on which this measure of damages could be justified and whether it was consistent with the reasoning of Lord Wilberforce in Johnson v Agnew [1980] AC 367. It is, therefore, necessary to examine those cases further.
In Surrey County Council v Bredero Homes Ltd the plaintiffs claimed damages from the original covenantor, a developer, for breach of a restrictive covenant against building more than 72 houses, and sought to measure the damages by reference to the additional profit which the defendant had made by building the extra houses. Their claim to substantial damages failed. The case is not authority on the proper measure of damages under Lord Cairns’ Act, since (as Dillon LJ made clear at p1367C) the plaintiffs’ claim was for damages at common law and not under the Act. Unfortunately, he did not make it clear why this was so. At p1364A–B he said:
The plaintiffs therefore seek damages. They have never sought an interim injunction to restrain the defendant from developing the land otherwise than in accordance with the first planning permission. They never sought an injunction at the trial requiring the defendant to pull down the completed houses. They recognised that there was never any practical possibility of such an injunction being granted.
If this is to be understood as meaning that the plaintiffs were confined to their remedy at law because they had not included a claim to an injunction in the writ, or because there never was any practical possibility, whether at the date of the writ or at the date of the trial, of obtaining an injunction, then I cannot agree with it. But examination of the facts stated in the headnote reveals that the defendant had disposed of all the houses on the estate before the plaintiffs commenced proceedings, and that the purchasers were not joined as parties. Any claim to damages under Lord Cairns’ Act must have failed; at the date of the writ the court could not have ordered the defendant to pull down the houses, since this was no longer something which was within its power to do.
Unfortunately, however, Dillon LJ cast doubt on the correctness of the measure of damages which had been adopted by Brightman J in Wrotham Park Estate Co Ltd v Parkside Homes Ltd,a case which was decided under Lord Cairns’ Act. At p1366H he said:
The difficulty about the decision in the Wrotham Park case is that in Johnson v Agnew [1980] AC 367, 400G Lord Wilberforce, after citing certain decisions on the scope and basis of Lord Cairns’s Act which were not cited to Brightman J, stated in the clearest terms that on the balance of those authorities and on principle he found in the Act no warrant for the court awarding damages differently from common law damages.
Johnson v Agnew concerned a contract for the sale of land. The vendor obtained a decree of specific performance with which the purchaser failed to comply. The vendor’s mortgagees then sold the land. The vendor was compelled to return to the court and ask it to dissolve the decree and award her damages instead. At first instance she was refused damages, but in this court she was awarded damages under Lord Cairns’ Act by reference to the value of the land at the date when specific performance became impossible. An appeal by the purchaser to the House of Lords failed. Before the House of Lords neither party argued that the measure of damages under Lord Cairns’ Act differed from the measure of damages at common law: see [1980] AC pp379B–C; p387A, F. The vendor placed no reliance on the wording of section 2 of the Act which provided that damages might be assessed ‘in such manner as the Court shall direct’ which, as Lord Wilberforce explained, referred only to procedure. Where the parties differed was whether the damages, whether at common law or under the Act, had invariably to be measured by reference to the value of the land ascertained at the date of the breach of contract.
In the course of his speech Lord Wilberforce (at p400E–F) referred to the view expressed by Megarry J in Wroth v Tyler [1974] Ch 30 that the words ‘in substitution for a decree of specific performance’ allowed the court to assess damages under the Act as on the date when specific performance could have been ordered, that is to say as at the date of the judgment of the court, and said that if that was intended to establish a different basis from that applicable at common law then he could not agree with it.
This statement must not be taken out of context. Earlier in his speech Lord Wilberforce had clearly recognised that damages could be awarded under Lord Cairns’ Act where there was no cause of action at law, and he cannot have been insensible to the fact that, when the court awards damages in substitution for an injunction, it seeks to compensate the plaintiff for loss arising from future wrongs, that is to say, loss for which the common law does not provide a remedy. Neither Wroth v Tyler nor Johnson v Agnew was a case of this kind. In each of those cases the plaintiff claimed damages for loss occasioned by a single, once and for all, past breach of contract on the part of the defendant. In neither case was the breach a continuing one capable of generating further losses. In my view, Lord Wilberforce’s statement that the measure of damages is the same whether damages are recoverable at common law or under the Act must be taken to be limited to the case where they are recoverable in respect of the same cause of action. It cannot sensibly have any application where the claim at common law is in respect of a past trespass or breach of covenant and that under the Act is in respect of future trespasses or continuing breaches of covenant.
Accordingly, I am of opinion that the judge was not precluded by the decision of the House of Lords in Johnson v Agnew from adopting the measure of damages which he did. It is, however, necessary to notice the observations of Steyn LJ in Surrey County Council v Bredero Homes Ltd (supra)at p1369F where he said:
In my view Wrotham Park Estate Co Ltd v Parkside Homes Ltd …isonly defensible on the basis of the third or restitutionary principle … The plaintiffs’ argument that the Wrotham Park case can be justified on the basis of a loss of bargaining opportunity is a fiction.
I find these remarks puzzling. It is plain from his judgment in the Wrotham Park case that Brightman J’s approach was compensatory, not restitutionary. He sought to measure the damages by reference to what the plaintiff had lost, not by reference to what the defendant had gained. He did not award the plaintiff the profit which the defendant had made by the breach, but the amount which he judged the plaintiff might have obtained as the price of giving its consent. The amount of the profit which the defendant expected to make was a relevant factor in that assessment, but that was all.
Both the Wrotham Park and Bredero Homes cases (unlike the present) were concerned with a single past breach of covenant, so that the measure of damages at common law and under the Act was the same. Prima facie the measure of damages in either case for breach of a covenant not to build a house on neighbouring land is the diminution in the value of the plaintiff’s land occasioned by the breach. One element in the value of the plaintiff’s land immediately before the breach is attributable to his ability to obtain an injunction to prevent the building. Clearly a defendant who wished to build would pay for the release of the covenant, but only so long as the court could still protect it by the grant of an injunction. The proviso is important. It is the ability to claim an injunction which gives the benefit of the covenant much of its value. If the plaintiff delays proceedings until it is no longer possible for him to obtain an injunction, he destroys his own bargaining position and devalues his right. The unavailability of the remedy of injunction at one and the same time deprives the court of jurisdiction to award damages under the Act and removes the basis for awarding substantial damages at common law. For this reason, I take the view that damages can be awarded at common law in accordance with the approach adopted in Wrotham Park, but in practice only in the circumstances in which they could also be awarded under the Act.
This may be what Steyn LJ had in mind when he said that the loss of bargaining opportunity was a fiction. If he meant it generally or in relation to the facts which obtained in the Wrotham Park case, then I respectfully disagree. But it was true in the circumstances of the case before him and not merely for the reason given by Rose LJ (that the plaintiffs did not object to the extra houses and would have waived the breach for a nominal sum). The plaintiffs did not bring the proceedings until after the defendant had sold the houses and was no longer susceptible to an injunction. The plaintiffs had thereby deprived themselves of any bargaining position. Unable to obtain an injunction, they were equally unable to invoke the jurisdiction to award damages under Lord Cairns’ Act. No longer exposed to the risk of an injunction, and having successfully disposed of the houses, the defendant had no reason to pay anything for the release of the covenant. Unless they were able to recover damages in accordance with restitutionary principles, neither at common law nor in equity could the plaintiffs recover more than nominal damages.
In the present case Mrs Jaggard brought proceedings at a time when her rights were still capable of being protected by injunction. She has accordingly been able to invoke the court’s jurisdiction to award, in substitution for an injunction, damages which take account of the future as well as the past. In my view, there is no reason why compensatory damages for future trespasses and continuing breaches of covenant should not reflect the value of the rights which she has lost, or why such damages should not be measured by the amount which she could reasonably have expected to receive for their release.
In my judgment, the judge’s approach to the assessment of damages was correct on the facts and in accordance with principle. I would dismiss the appeal.
Appeal dismissed.
Intrum Justitia BV v. Legal and Trade Financial Services Ltd.
[2005] IEHC 190
JUDGMENT of O’Sullivan J. delivered the 10th of June, 2005
Introduction
The plaintiff is a Dutch Company located at the Hague and carries on the business of credit management and debt collection.
The defendant is an English Company located in Lancashire and carries on a similar business.
By agreement dated 11th October, 2004, the plaintiff agreed to purchase the entire issued share capital of an Irish subsidiary of the defendant (Legal and Trade Collections (Ireland) Limited) for a purchase price of €2.15 million of which 90% was paid on closing. Prior to entering into the agreement the plaintiff had conducted a comprehensive due diligence process.
The agreement provided for delivery of Completion Accounts not later than four weeks following the completion date, that was not later than Monday 8th November, 2004. These accounts were to comprise the un-audited balance sheet and un-audited profit and loss account for the period from the last accounts date to
1st October, 2004. This exercise would have included a reconciliation of the defendant’s client’s accounts which was of significance to the plaintiff because these had come under particular scrutiny in the course of the due diligence process and some concern had been raised in relation to them.
Embezzlement comes to light
The financial director of the defendant was Mr. Colin Thorpe and he worked from the defendant’s Ashtown Gate premises in Dublin. The chief accountant of the defendant was Mr. Ronald Whitehead and he was based in the United Kingdom. At the end of October and the beginning of November, 2004, he was in Dublin working on the Completion Accounts. In particular he was working on the provision of a reconciliation between the client account balance in the nominal ledger and the balance in the CUBS, which was a computerised system operated by the defendant to administer the debts on behalf of the companies’ clients. In the early afternoon of Tuesday 2nd November, 2004, Ronald Whitehead had made a comparison between the nominal ledger and the control account and found a discrepancy in the order of €457,000. He had a subsequent discussion with Colin Thorpe who at that point confessed that he had been embezzling money from the defendant for a period of almost three years from the beginning of 2002 to feed a gambling habit.
Following his confession Colin Thorpe was emotionally upset and Ronald Whitehead took some time to quiet him down and to persuade him to contact Price Waterhouse Cooper, the company’s auditors, in an attempt to clarify the method and extent of the embezzlement. Mr. Whitehead also contacted his superiors in the United Kingdom and it was agreed that Paul Anslow, the Chief Financial Officer would come from England to Dublin the following day, which he did. That following day, Wednesday 3rd November was spent checking references and the system with the result that a figure of €453,000 approximately appeared to be the extent of the embezzlement. That exercise took all of Wednesday 3rd November, 2004, and on the morning of Thursday 4th November, Mr. Anslow contacted Mr. Biggam of the plaintiff who had been made a Director of the Ashtown Gate Company after completion of the agreement. Mr. Biggam immediately informed Mr. John Easdon who was Regional Managing Director of the plaintiff for the UK and Ireland and who was just returning from Zurich Airport. He arranged to come over to Dublin the next morning, Friday 5th November. He did so and having contacted his solicitors, Mr. Biggam and Mr. Easdon interviewed Colin Thorpe on the morning of Friday 5th November.
At that time they were concerned at the delay which had elapsed between Colin Thorpe’s confession in the early afternoon of the previous Tuesday and their being informed only on the morning of Thursday 4th. At the interview Colin Thorpe told Messrs. Easdon and Biggam what he had been doing since his confession and that he had wanted to go to the police. After meeting Mr. Thorpe, Mr. Easdon suspended him pending an investigation. He then contacted Mr. Anslow and Ronald Whitehead at around lunchtime on Friday 5th November. The big concern in Mr. Easdon’s mind at that point was why there had been a delay between Colin Thorpe’s confession and his being informed. He therefore asked Mr. Anslow and Mr. Whitehead to give their account of what had happened since Colin Thorpe’s confession.
At this time the defendant’s auditors, Price Waterhouse Coopers, were busy working on the finalisation of the Completion Accounts which were due to be delivered not later than the following Monday 8th November. Mr. Easdon asked that this activity cease for the duration of his conversation with Mr. Anslow and Mr. Whitehead and this was done. At the end of that conversation they had confirmed the account given by Colin Thorpe. Mr. Easdon said that he was “somewhat reassured” and that he was happy to let the auditors back in to complete their work and said so. In fact as transpired in evidence that Price Waterhouse Coopers were contacted on that Friday afternoon but had redeployed their personnel and did not have them available to continue work that Friday or indeed the following Monday.
The early correspondence
It will be recalled that Clause 4.5 of the agreement required furnishing by the defendant of Completion Accounts (as defined) on or before Monday 8th November, 2004. On that date a document was sent by Mr. Anslow, Chief Financial Officer of the defendant, which stated that “…we and our professional advisors need access to the premises at Ashtown Gate in order to access the records and have further discussions with senior management to carry out the investigation to the fullest extent possible. Until we are allowed to carry out fully our investigation, you will appreciate that the Completion Accounts can only be regarded as provisional.”
The letter went on to say that the writer was not able to present at that time the full reconciliation between the client account balance in the nominal ledger and the balance in CUBS.
On the same day, Monday 8th November, the plaintiff wrote to Geoffrey Ognall, Chairman of the defendant, saying that the disclosures were serious and had a fundamental impact on the share purchase agreement and that the integrity of all financial information provided to date was now open to question and that the magnitude of the problem was at that time unclear. The letter went on the say that it was of the utmost importance that the defendant immediately provide a complete account of all information known to the defendants them concerning deficiencies and financial irregularities in the accounts of the defendant. All rights were reserved.
On the next day, Tuesday 9th, Mr. Ognall wrote to the plaintiff stating that the plaintiff’s approval of further access with professional advisors was required to the records of the company and to senior management. The letter asked as a matter of urgency to be told how the defendant would be allowed to conduct the further investigations in relation to embezzlement. On the next day, Wednesday 10th, the plaintiff wrote asserting that the documents provided did not constitute Completion Accounts as defined by the contract and that the information did not fully identify the extent of the embezzlement, and therefore the defendant had not complied with the share purchase agreement. The letter stated that the plaintiff was currently considering the implication of the defendant’s failure and would respond to the points raised in early course. All rights were reserved.
On the following day, Thursday 11th November, the defendant wrote reiterating that the company and its advisors no longer had access to the records of the company and the company was therefore unable to produce the Completion Accounts. The defendant went on to suggest that the parties work together with an expert as defined in the agreement to assist in investigating the embezzlement and finalising the Completion Accounts. A letter of the same date from the plaintiff reasserts the question mark over all financial information and states that the plaintiff is unable to take any formal or contractual steps in relation to the target company but suggests without prejudice cooperation between the parties in relation to the governance thereof. It requested that the defendant countersign a letter in acknowledgement of their agreement. A further letter of the same day and in reply states the defendant was not in a position to countersign the correspondence but did undertake to cooperate fully in all investigations necessary to resolve the matter including to cooperate fully in assisting and preparing the completion accounts with the assistance of a duly designated independent expert.
On the following day, Friday 12th November, the plaintiff responded asserting that the defendant’s position appeared designed to advance the defendant company’s interest rather than resolving the matter in a way satisfactory to the plaintiff, complaining that the defendant’s position appears not to take into account the interest of third parties, pointing out that the implementation of Clause 4.5 was only of historical interest since no Completion Accounts had been provided and asserting that the defendant’s proposal would not be appropriate and further that the impact of the misappropriation of funds could not be considered to be limited to the question of the amount of money missing. It concluded with a statement that the plaintiff was prepared to consider any proposal the defendant might have to make but not one which was limited to the financial question of the misappropriated funds but, rather, one which would have to be accompanied by offers of indemnity to the appropriate extent.
On Tuesday 16th November, the defendant replied, refuting the allegations of self-interest and enclosing a report, admittedly incomplete because of the limited time available to investigate, and reasserting that they no longer had access to Colin Thorpe who had been suspended and that its accountants had been asked to no longer access the records. The report in turn was furnished under cover of a front page stating that it was incomplete by virtue of the fact that the defendant was not able to continue its investigation due to the suspension of Mr. Thorpe and the plaintiff company’s permitting no further access by the defendant to the records of the company. The defendant did not accept any responsibility for the accuracy of the information contained therein.
The report is clearly largely based on information which had been supplied by Colin Thorpe and is therefore based on information supplied approximately two weeks before the date of the report itself. The report includes also the reconciliation between the CUBS reports showing the actual amount of cash due to clients and the client funds creditor balance in the nominal ledger. The total amount of embezzlement is shown at €453,415.55.
On the next day, Wednesday 17th November, the defendant wrote in response, apparently, to telephone conversations on the previous day stating that the defendant was in full agreement with the plaintiff’s proposal to appoint KPMG as an independent expert within the terms of the Chairperson’s agreement in order to agree the Completion Accounts and that their decision would be final and binding. If there was to be a reduction in the purchase price the defendant stated it would comply with the mechanism set out in the agreement. The defendant stated it could give an indemnification and undertaking to compensate outside the terms of the share purchase agreement “when we do not know the possible extent of such an undertaking”. Surprise is expressed at the request for “a blanket indemnity, given that there has been an inconclusive and insufficient investigation into the matter” and the letter points out that the defendant cannot be responsible for transactions during the ownership of the plaintiff or for acts of third parties.
The response to this letter was a long letter on Friday 18th November, accusing the defendant of an opportunistic distortion of the proposal which was misrepresented in the defendant’s letter. The letter went on to reiterate the defendant’s misrepresentation of its financial position and to assert that the value of the transaction was entirely undermined and that the true financial position was unknown. Completion Accounts had not been furnished or other appropriate information which would enable the plaintiff to assess the full impact of the defendant’s misrepresentation. KPMG’s initial advice was that the defendant company would require a full forensic audit before any view could be taken on the true position of the accounts. The plaintiff did not know whether the defendant was solvent. The defendant is accused of not responding to the opportunity to cooperate in the interests of the company or to make a proposal. Accordingly the plaintiff rescinded the contract of 11th October, 2004, on the grounds that the defendant had very substantially misrepresented to the plaintiff the financial position of the company.
They say that had they known of the embezzlement beforehand they would under no circumstances have concluded the agreement and that the misrepresentation goes to the very heart of the deal. It is added “the ease with which you appear to have discovered this matter after completion is a cause for serious concern”. The consequences of rescission are then spelled out in relation to an interim continuation of the plaintiff’s directors pending replacement by the defendant and an assertion that the directors will report to the defendant as owner of the company and run it to the defendant’s account. The defendant must pass a resolution changing the name of the company from the plaintiff’s name to the defendant’s name. The entire purchase price must be returned.
Comment on this correspondence
The impression given by this correspondence is that each of the parties was adopting somewhat confusing if not self-contradictory positions. For example, the defendant was offering to cooperate but when faced with an indemnity which was too wide simply refused rather than returning with an appropriately by narrow indemnity; again, the defendant is seeking to operate the contract provisions in relation to an independent expert at a time when those provisions had no application. More fundamentally the defendant asserted more than once that the plaintiff had withdrawn permission to the defendant’s accountants to access the books of the defendant company when the true position was that such withdrawal had operated only for a short period of some hours on the afternoon of Friday 5th November. Thereafter on that day and on Monday 8th, the defendant’s accountants were asked by the defendant to assist in the finalisation of the Completion Accounts but had not the personnel to do it.
On the plaintiff’s side, as well however, the correspondence is initiated with a question raised over the integrity of all the financial information but notwithstanding this their letter of 8th November, states that it is of the utmost importance that the defendant immediately provide a complete account of all information known to the defendant concerning the deficiencies and irregularities in question. Again, at no stage does the correspondence point out that the defendant’s assertion that neither they nor their accountants have access to the books and records of the defendant company is incorrect. It is not clear what purpose the information requested as of the utmost importance in the plaintiff’s letter of 8th November, (the date for furnishing the Completion Accounts) would serve given that the deadline would have passed when same was furnished and indeed given that there was a serious question mark over all information that could be given. There were telephone calls between the principals before the defendant’s letter of 17th November, apparently in the context of some kind of agreed accountancy exercise but the defendant’s letter of that date was met with complete rejection on the basis that the defendant had apparently deliberately misunderstood those conversations. This was accompanied by the decision to rescind.
There seems to have been no real meeting of minds in this early, pre-solicitor, correspondence and indeed a certain amount of protecting of self-interest on both sides. There may well have been a lack of communication between the individuals on the defendant’s side in relation to access to the books and, quite possibly, the same on the side of the plaintiff.
The correspondence passed thereafter into the hands of the solicitor and the pleadings were initiated on 19th November, 2004.
The pleadings and submissions
In the pleadings the plaintiff claimed rescission of contract based on (a) fraudulent misrepresentation, (b) misrepresentation whether negligent or otherwise, (c) mistake and, (d) in addition damages for breach of contract. Before dealing with the latter three, I note that the allegation of fraudulent misrepresentation was withdrawn, but only when the plaintiff submitted its written legal submissions in mid April, 2005. This allegation was presumably first alluded to in the plaintiff’s letter of 18th November, 2004, which said “the ease with which you appear to have discovered this matter after completion is a cause for serious concern”.
Insofar as it is appropriate to refer to the remainder of the evidence, I propose to do so in the context of considering the submissions made in relation to the issues of misrepresentation, mistake and breach of contract and, finally, the question of damages.
The defendant counterclaims for specific performance of the agreement with an appropriate adjustment to the purchase price.
Misrepresentation
The plaintiff’s claim in this regard is founded on an e-mail sent by Geoffrey Ognall, Chairman of the defendant, to Ken Hanson Financial Director of the plaintiff on 14th May, 2004, before the commencement of the due diligence process which referred to the fact that the defendant had “no skeletons in the cupboard” and a further e-mail sent on 22nd June, 2004, in the middle of the due diligence process which indicated that all the key financial factors had been showed by the defendant. In evidence Mr. Easdon said that there was a difference between the parties in relation to the need to have what he described as “quite a rigorous and thorough due diligence” and the defendant’s anxiety to complete the transaction by the end of June. He said “the comment was that such an extensive due diligence is not necessary because there is nothing wrong with this company, you won’t find anything wrong with this company etc.”
In cross-examination it was put to Mr. Easdon that the representation about no skeletons in the cupboard and from Mr. Ognall in May of 2004, did not make any difference in how sparing or how thorough he was going to be in the due diligence process that ensued and he agreed. He said “No, that is right”. The second e-mail, which was on 22nd June, was in the course of the due diligence process. It was put to him again that nothing changed in the way that the due diligence was being carried out as a result of those words in the e-mail, and again Mr. Easdon said, “That’s right, yes.”
The evidence from Mr. Ognall was that he made the representations and intended them to be acted upon but in light of the foregoing evidence in my opinion the probability is that the defendant did not rely on those representations at all. Mr. Ognall explained that he was somewhat impatient and wanted to get the contract signed soon and was impatient with the thorough going due diligence process and made the representations in that context. It had no effect clearly from the replies of Mr. Easdon. The plaintiff went ahead with the thorough due diligence process and in my opinion on the balance of probabilities relied upon the information provided from that process which continued on unchanged despite the making of these representations.
I accept that in this context the representations do not have to be the main or paramount consideration in the mind of the representee but it is also true that they must be part of the underlying basis upon which the representee proceeds. There is no real sense, in my opinion, in which those representations were relied on or formed part of the underlying basis on which the plaintiff proceeded given that the due diligence process continued on in exactly the same way after they were made as before. The plaintiff relied on Gahan v. Boland (Unreported, High Court, Murphy J., 21st January, 1983) which establishes that an innocent representation made in good faith and with no intention to mislead can nonetheless entitle the representee to a rescission of the contract. In that case, however, the representation to the effect that a proposed major road would not affect the representee’s purchase of his home and paddock was not, as I understand the judgment, overtaken or replaced by any other specific representation or information on the same point. In the present case it is clear that the plaintiff relied on the financial information thrown up by its own thorough and rigorous due diligence process for the purpose of informing itself as to the financial situation of the defendant company. I would therefore hold that the plaintiff is not entitled to rescission or indeed to any relief in the context of the misrepresentations because it did not rely on them.
Mistake
On reflection I have to say that I have doubts as to whether this is a case of true mistake as known to the law of contract at all.
The parties entered into an agreement which contains warranties by the defendant as vendor as to the accuracy and reliability of the financial information known to the parties at the time. These warranties are numerous and comprehensive and it is clear that they are wide enough to cover the situation that has arisen in the present case. Both parties clearly thought at the time that the accounts and financial information presented a true picture, and in that sense, of course, were mistaken as to the actual situation, but they also included by agreement warranties from the defendant intended to deal with a situation where their view of the account might not turn out to be the case. They acknowledged, in other words, that their current state of knowledge might be incomplete or inaccurate and came to an agreement as to which of them should bear the consequences if such should prove to be the case. Mistake in contract law concerns a situation where the parties think they know the true facts and proceed upon the basis of their erroneous assumption without even suspecting that their assumptions might be wrong, quite a different thing from the situation of the parties in the present case who thought they knew the true financial circumstances of the company but contemplated at the same time that their information may be misleading and proceeded to agree what was to happen if that should prove to be the case. No body suggests a contract of insurance is based on a mistake just because the parties cannot identify the event which it is intended to deal with.
Furthermore if, contrary to the above, it is correct to subject the circumstances of the present case to an analysis driven by the traditional law of mistake in contract cases, and that this analysis could, therefore, result in a conclusion that the plaintiff company is entitled to rescission, by reason of the fact that the parties did not appreciate the true financial picture, then in my view such a result would be anomalous given the situation that the same parties have addressed the possibility that the accounts might not present a true picture and in arranging what is to happen in such an event have agreed that rescission would not be available to the plaintiff. This latter position arises because the contract provides at Schedule 6, Clause 7 that:-
“No breach or breaches of any of the warranties, specific warranties or the deed of indemnity shall give rise to any right on the part of the purchaser to rescind this agreement after completion.”
The case was argued, notwithstanding the above, by counsel for both parties upon the basis that there had been a mutual mistake, namely that both parties at the time of entering the agreement made the mistake of thinking that there had been no embezzlement, and in deference to the submissions of counsel I will deal with their arguments in what follows.
In doing so however, and particularly in the context of a submission that the purchaser did not get substantially what he bargained for, it is necessary that I reach some view as to the extent of the embezzlement.
The extent of the embezzlement
The evidence is that just before Colin Thorpe confessed to embezzlement, Ronald Whitehead had identified a “discrepancy” in the order of €457,000 when he was doing the reconciliation of the client accounts. This figure was shown subsequently to have been substantially correct when with Colin Thorpe’s assistance the matter was gone into in detail and a discrepancy of €453,415.55 was identified, which was reassuringly close to Mr. Whitehead’s own calculation.
It was further established in evidence that the method of fraud, which briefly involved Colin Thorpe forging the signature of John Cahill, the Financial Director of the defendant company, on cheques which required two signatures namely his own and that of John Cahill and presenting them as bona fide cheques payable to clients, cashing them, and subsequently manipulating the books and records of the company to disguise the fraudulent transaction.
In particular, Colin Thorpe was able to identify the cheques in the fraudulent category by reference to secret and otherwise meaningless annotations in the IT software recording these transactions and which are all referenced in the report furnished by the defendant to the plaintiff on 16th November, 2004.
A further point was made in the hearing before me that given that the life of a cheque in this country is six months, if there were any further fraudulent transactions they would have “come out in the wash” in the intervening six months and that it is unlikely now that further fraudulent transactions will emerge.
As a matter of probability and on the basis of the information proved in court in my view the extent of Colin Thorpe’s fraud is likely to be in the order of €457,000. There are three aspects which seem to me relevant in reaching this conclusion: in the first place that was the estimate of the discrepancy reached independently by Ronald Whitehead; secondly, Colin Thorpe had his own secret way of identifying the fraudulent cheques and using this identification his estimate of the extent of the fraud is strikingly close to Ronald Whitehead’s estimate and thirdly, for what it is worth, there has been no evidence of further discrepancies other than those disclosed by Colin Thorpe in the intervening six months.
In reaching the foregoing conclusion, I am of course conscious that no forensic audit had been done. The company has been under the control of the plaintiff since the fraud was discovered. By its letter of 11th November, the plaintiff wrote to Geoffrey Ognall “…until we have clarified the true financial position of the company, we are unable to take any formal or contractual steps in relation to it.”
The un-contradicted evidence of all relevant witnesses has been that once there is evidence of embezzlement such as in the present case it is essential that the company must do an appropriate audit. There may be issues as to how far such an audit should go, and I will return to this aspect later in my judgment, but in my opinion this was a case where the good management of the company required some level of forensic audit and indeed it is clear that the plaintiff was advised by KPMG initially that the defendant would require “a full forensic audit” before any view could be taken on the impact of (the defendant company’s failure to disclose) the true financial position of the company (See the company’s letter of 18th November).
Such an audit was not undertaken nor was any exercise done so far as I am aware by the plaintiff company whether by way of a sampling audit as suggested by Mr. Derek Donohue or otherwise.
I think it is necessary to reach some view of the extent of the embezzlement in order to consider the submissions of the parties in the context of mistake, and in particular in the context of an issue as to whether the purchaser did or did not get substantially what he bargained for. I must, however, reach my conclusion as to the extent of the embezzlement in the absence of definitive information.
Having considered such evidence as is available in my opinion the effect of the fraud does not mean that the subject matter of the share purchase agreement is essentially different from the one contracted for. Accordingly the plaintiff would not be entitled on the basis of mistake to rescission under common law as identified in Bell v. Lever Bros [1932] AC 161. Nor is this a case where the misapprehension (to the effect that there had been no embezzlement) was fundamental to the agreement (which included the wide ranging warranties already discussed and an agreement that their breach would not give rise to rescission). Accordingly the plaintiff would not be entitled to rescission in equity as identified in Solle v. Butcher [1950] 1 K.B. 671 and as applied in this country by Costello J. (as he then was) in O’Neill v. Ryan [1992] 1 I.R. 166 672 at p. 185.
Of course I acknowledge that the plaintiff company’s witnesses said that if they had known in advance of the embezzlement, they would not have entered the agreement. This does not prove, however, that therefore the effect of the embezzlement was fundamental, anymore than an insured driver’s assertion that he would not have driven on the day of the accident had he known of it beforehand means that he did not need insurance. This was an agreement to buy shares in a company with specific objectives in mind and the plaintiff company’s evidence referred to has to be seen in context.
The evidence is that the “drivers” for the purchase of these shares were the plaintiff company’s desire to acquire the very good client base including some blue chip clients of the defendant, and its good employees and in particular, John Cahill the Managing Director, to improve the company’s position in the Irish market and to receive the disclosed revenue stream, enhanced by the synergies that would become operative when the two companies were merged together.
It is also clear from the evidence that the merging process has been put on hold since the discovery of Colin Thorpe’s embezzlement but that notwithstanding this the revenue stream has remained as predicted, and that John Cahill remains employed at the Ashtown Gate premises albeit not as Managing Director. One or two clients have transferred from the Ashtown Gate (erstwhile defendant) company’s business to the plaintiff’s own English subsidiary business at Park West and that the one or two clients who have ceased doing business have done so for reasons other than those related to the embezzlement. Of course it is true that the embezzlement has not become public knowledge and that when it does many clients may become concerned as has happened apparently in England to a subsidiary of the plaintiff company’s where a non-fraudulent discrepancy was discovered and which caused considerable upset and loss to that company.
There was further evidence that the clients, particularly the blue chip clients such as banks, of a company engaged in debt collection on behalf of those clients will be particularly sensitive to the publication of financial impropriety within the debt collecting company. They can only be reassured, it is said, by a full forensic audit which establishes that none of their own monies were taken, that none of their clients had complained about being asked to discharge bills already paid and that there was a clear and reliable identification of the extent of the embezzlement. Nobody suggested that such an exercise is impossible but there has been widely divergent views as to the cost of such an audit and indeed the specific scope involved.
Once again in this context I am left in the situation where no such audit has taken place and accordingly I must deal with the evidence produced without speculating beyond it.
Given, therefore, that the likelihood is that the extent of the audit is limited to some four hundred and fifty seven thousand euro and that a forensic exercise can be done which will establish with reasonable certainty such extent and can satisfy clients including blue chip clients of the defendant company, and bearing in mind the “drivers” which motivated the plaintiff in acquiring the defendant’s company shares, I do not think that what the plaintiff got in their share purchase agreement was so different from what they contracted for as to qualify for the descriptions in the authorities which justify an entitlement to rescission either at common law or in equity. In other words this is not one of those exceptional circumstances which are extremely limited where rescission as distinct from damages will be granted by a court as identified by Costello J. (as he then was) in O’Neill v. Ryan.
Breach of contract
The plaintiff in its written submission refers to twelve warranties all of which it claims were breached. I will refer to one or two only as follows:-
1. All written information given by or on behalf of the vendor or the company to the purchaser or any shareholder, accountant, lawyer or agent thereof in the course of the due diligence exercise carried out by the purchaser and his professional advisors was, when given and is at the date hereof, true, accurate and complete in all respects.
2. There is no fact or matter which has not been disclosed in writing to the purchaser which rendered the information referred to in paragraph 1 onto or misleading at the date of this agreement.
3. None of the representations or warranties made by the vendor in this agreement or in any document to be delivered by and pursuant hereto or in connection with the transactions contemplated hereby contains any untrue statement of a fact, or omits to state a fact necessary to make any statement or fact contained herein or therein not misleading.
4. All the accounts, books, ledgers, financial and other records of whatsoever kind of the company;
(a) have been fully, properly and accurately kept,
(b) do not contain any material, inaccuracies or discrepancies of any kind,
(c) give a true and fair view of its trading transactions and its financial, contractual and trading position,
(d) the principal accounts are true, complete and accurate in all respects…
It is beyond reasonable argument, as the plaintiff puts it, that there was a breach of these warranties. It is also agreed, however, that no breach or breaches of any of the warranties, shall give rise to any right on the part of the purchaser to rescind the agreement.
Accordingly, the relief to which the plaintiff is entitled, in the absence as I hold, to an order rescinding a contract or to an order declaring it void ab initio, is damages.
The measure of damages
There is a considerable divergence between the parties as to the measure of damages to which the plaintiff is entitled.
It is common case that the plaintiff is entitled to have the amount taken put back into the company.
The defendant in correspondence and argument contended that it was liable also to pay half the costs of whatever audit exercise is necessary to identify the extent of the embezzlement. This proposition seems to have originated from a misunderstanding of the effect of clause 4.5 of the agreement which deals with Completion Accounts. These were to be provided on or before the 8th November. Once Completion Accounts were furnished under the contract, the vendor and purchaser were required to agreement same on or before 15th December, or in default of agreement the purchaser was entitled to serve notice to dispute the Completion Accounts and refer the matter to an independent accountant known as “the expert” to determine the matter at issue and whose determination was agreed to be binding and final. The costs of the expert were to be borne 50% by the vendor and 50% by the purchaser.
None of the foregoing applied, however, because completion accounts were not furnished in accordance with the contract on or before Monday 8th November, or indeed on any date subsequently.
Insofar as the defendant company seeks to rely on the contention put forward in the early correspondence that it was effectively frustrated from doing this by the refusal of the plaintiff company to grant them and their accountants access to the books and records of the company, I hold on the evidence that this is not correct. They were refused access only for a matter of hours on Friday 5th November and thereafter (despite those contentions) had access albeit that that position was not clarified by the plaintiff in its correspondence in response to those contentions.
Accordingly in my view the defendant company will have to pay damages to cover the cost of an appropriate forensic audit. I will return to the question of this at a later point.
The value of the shares
Evidence was given on behalf of the plaintiff by Desmond Peelo the well-known accountant to the effect that on the date of the transaction the value of the shares was nil. He based this on his view that no properly informed purchaser would have bought the shares on that date. This conclusion and opinion was agreed with by Mr. Derek Donohue who was called on behalf of the defendant.
Mr. Peelo went on to say that if the money taken was restored to the company and if a full forensic audit showed that no further monies other than those restored to the company were taken and assuming the cost of the accounting exercise were reimbursed, the entire shareholding in the defendant company might at this point in time have a value approaching the net asset value which was some €600,000.
Evidence was also given by Derek Donohue on behalf of the defendant. In the first place he agreed that at the date of the contract no properly advised purchaser would have bought the shares. He took issue with the conclusion from that fact, however, that the shares were on that date of nil value. He said that they had an unascertained value and went on to say that if an appropriate accounting rectification exercise were conducted and the company was reimbursed the costs thereof and whatever had been taken from the company were restored to it then the value of the company remained unaltered namely at 2.15 million euros. He clarified this by stating that this was the value to the plaintiff as objectively determined by reference to the drivers which motivated its acquisition of the defendant’s shares. It seems to me that Mr. Donohue was talking about “value to the plaintiff” as distinct from “market value” which was what Mr. Peelo was referring to. Indeed in the latter context, Mr. Peelo went on to say further to his opinion referred to above, that his view that the company might have a value approaching it its asset value of €600,000, in the circumstances already identified, meant that there was no value for goodwill. However, he added, things get forgotten “but it takes time and I would certainly think the time is at least a year, if not two years, away”, by which I understand him to mean that the value on the open market in a year or two would be restored to the price paid by the plaintiff.
The plaintiff relied on the Privy Council decision in Lion Nathan Limited v.
C-C Bottlers Limited [1996] 1 WLR 1438. That was a case about the sale of shares in a soft drinks company. The whole of the share capital was sold with a warranty that forecast profits for a number of months into the future had been calculated with all due care – as distinct from a warranty that those profits would be a specified figure. The latter had it been given would have been what Lord Hoffman described as a warranty of quality and if it had been a warranty of quality then “the damages would prima facie have been the difference between what the shares would have been worth if the earnings had been in accordance with the warranty and what they were actually worth”. However in Lion Nathan the breach of warranty was only in relation to the forecast (to the effect that it had been done with all due care) and therefore the damages were the difference between the price agreed on the basis of the forecast as made and the price it would have been had the forecast been properly made.
In the present case the plaintiff submits that the warranties, for example, the warranty that “all written information given by or on behalf of the vendor… was, when given, and is at the date hereof, true, accurate and complete in all respects”, were warranties of quality in Lord Hoffman’s termination so that the measure of damages should be the difference between what the shares would have been worth if those warranties had been adhered to by the defendant and what they were actually worth which the plaintiff contends was nil on the day of the execution of the agreement. Lion Nathan is dealt with in McGregor, McGregor on Damages, 17th Ed. (London, 2003) at para. 24-007.
In my opinion the plaintiff’s contention is correct in principle: the warranties given, and I have cited one example, were warranties of quality in that they warranted that the relevant figures were accurate and true as distinct from the other kind of warranty to the effect that the calculation had been made with all due care. In those circumstances following the Privy Council in Lion Nathan, the measure of damages is prima facie the difference between what the goods as warranted would have been worth and what they were actually worth.
Mr. Connolly S.C. for the defendant has reminded me in the course of hearing, however, that the plaintiff company in this case was under an obligation to mitigate its loss. The company came to court, six months later, claiming that on the day of the contract the shares were worth nil because no one properly advised and aware of the embezzlement would have purchased them on that day. There is evidence also, however, that if a forensic audit were conducted and if whatever sums taken were reimbursed to the company together with the costs of that audit then in time (Mr. Peelo says that this would certainly take at least a year if not two years) then the goodwill might be recovered so that the value as intended would be restored. Mr. Donohue says that the value to the purchaser (based on his objective criteria approach) would be restored on these assumptions without delay. Is it realistic or fair, therefore, to ignore the fact that the plaintiff has not conducted any forensic audit (and the jurisprudence on mitigation of loss establishes that a plaintiff is entitled to the costs of mitigating its loss even if those steps are unsuccessful provided they were reasonable) and simply accept that the plaintiff is entitled to sit idly by in reliance upon its claimed right to rescind the agreement and come to court six months later in unqualified reliance upon a nil valuation as of the date of the agreement itself and no other date regardless of how unfavourable such a stance might be to the defendant?
I do not think so.
Equally, it is difficult to assess damages given the state of the evidence as I have described it. There is a letter but no more than that from KPMG estimating that the cost of a full forensic audit would be of the order of €250,000 to €500,000 and may be more. That is not evidence at all. On the other end of the scale Mr. Donohue says that a sample audit might well establish with sufficient certainty to satisfy clients of the company that the extent of the embezzlement had been determined and that such an audit would cost in the order of €25,000. He expressed strong disagreement with the KPMG estimate referred to above. Furthermore, it seems from a reading of Lion Nathan although it is nowhere stated, that the purchase of the shares in that case was as an investment. If correct, that would distinguish Lion Nathan from the present case where the purpose of the purchase by the plaintiff was driven by the specific commercial considerations referred to above. Insofar as those were the drivers of the agreement there is no indication that any of them has not been delivered although clearly there is a risk that clients may be lost when the circumstances of Colin Thorpe’s embezzlement become common knowledge. That is a risk and no more. There has been no audit and therefore that particular issue has not been tested. It is not even clear whether an audit could have been conducted in time for the hearing. This is therefore a case where it is uncertain whether a loss will be incurred. The plaintiff has not established in evidence whether any audit could have been done prior to the hearing or even whether such an audit as could have been done could have satisfied the appropriate criteria for reassuring clients. I am simply left in the dark on these matters.
The same edition of McGregor on Damages para. 8.015 says that this category (i.e. where it is uncertain whether a loss will be incurred) covers a wide field ranging from gains prevented by the defendant’s wrong to expenses made necessary by that wrong. The uncertainty in the present case relates to the former category namely “gains prevented by the defendant’s wrong”, that is fees earned from clients of the defendant company in the future who by reason of the defendant company’s breach of contract may (when the embezzlement comes to light) make a decision to cease employing the defendant. That is a potential wrong dependant on the activity of the third party, namely the client in question. How do I approach the risk? There is evidence that something similar has happened to a subsidiary company of the plaintiff in the United Kingdom in reasonably comparable circumstances. To some extent the more that is spent on the forensic audit, the more the risk will be reduced that clients will decide to leave.
I do not think the evidence on this aspect of the case, such as it is, establishes as a matter of probability that loss of clients is the natural and direct result of the defendant’s wrong (as distinct from a risk that such might happen). That was the test established in Ratcliffe v. Evans [1892] 2 Q.B. 524, a Court of Appeal case dealing with slander. Rather the present is closer to another early case Chaplin v. Hicks [1911] 2 K.B. 786, also a Court of Appeal case where the plaintiff was one of fifty finalists among six thousand entrants in a competition where the defendant offered engagements as actresses to twelve out of those fifty finalists. The plaintiff was not offered a fair chance of being interviewed in accordance with the advertised rules and twelve prize winners were chosen from amongst the other forty nine. A jury awarded £100 for loss of the chance to the plaintiff. Vaughan Williams L.J. in upholding that award said at p. 792, (having discussed remoteness in a case where the contingencies are too numerous and difficult to deal with):- “I only wish to deny with emphasis that, because precision cannot be arrived at, the jury has no function in the assessment of damages.”
The evidence as presented by the plaintiff in this case leaves me with nothing but the most rudimentary information as to the chance of the loss of customers when Colin Thorpe’s embezzlement is finally published. It is obvious that the more conclusive the forensic audit, the smaller the risk of loss of custom. In those circumstances I would assess by way of general damages under this heading a figure of 5% of the net annual post tax profits of the defendant company as shown in the last fully audited accounts of the company (duly corrected for Colin Thorpe’s embezzlement for that twelve month period) to compensate the plaintiff for the risk that when the embezzlement is made common knowledge some clients may quit the plaintiff. In doing so, I have borne in mind the character of the audit to be provided so far as I know it and also Mr. Peelo’s estimate of the time needed for the recovery of the goodwill of the company.
In regard to the necessary expenditure on the audit I would measure the figure of €25,000 given in evidence by Mr. Donohue as being the only admissible evidence in relation to this cost.
Accordingly the plaintiff is entitled to:
(a) €457,000 to be put back into the company to make up for its direct loss due to the embezzlement of Colin Thorpe,
(b) €25,000 to pay for the necessary audit to identify the extent of that embezzlement,
(c) 5% of the post tax profits of the company for the last duly audited twelve-month period adjusted for the effect during that period of Colin Thorpe’s embezzlement, and
(d) in the event that the forensic audit to be carried out discloses further losses directly due to Colin Thorpe’s embezzlement in excess of €457,000 such further sum to be payable when ascertained.
The defendant is entitled to an order directing specific performance of the agreement with an appropriate adjustment to the purchase price.
Approved: O’Sullivan J.