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Disgorgement for Unjust Enrichment?

Published online by Cambridge University Press:  27 June 2003

R.B. Grantham  and
C.E.F. Rickett
R.B. Grantham
Affiliation:
The University of Auckland
C.E.F. Rickett
Affiliation:
T.C. Beirne School of Law, The University of Queensland; The University of Melbourne
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Extract

Gain-Based remedies are now often characterised as either “restitution” or “disgorgement”. Restitution is the giving back of wealth received by a defendant from a claimant, which must be given back or restored because it amounts to an unjust enrichment at the claimant’s expense. Disgorgement is the giving up to a claimant of a gain made by a defendant, as a consequence of a wrongdoing committed against the claimant, but received from a third party. This dichotomy presents a difficult problem: what happens if a defendant, who is liable only in unjust enrichment and not in wrongdoing, makes a gain causally related to the unjust enrichment but by receipt from a third party? An answer to this question has important consequences for the coherence of an independent claim in unjust enrichment.

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Articles
Information
The Cambridge Law Journal , Volume 62 , Issue 1 , 01 March 2003 , pp. 159 - 180
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Copyright © Cambridge Law Journal and Contributors 2003

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Footnotes

This paper was originally delivered at a Conference on “The Law of Obligations—Connections and Boundaries” at The University of Melbourne, 21–22 February 2002.

References

1 For elaboration of this point, see R. Grantham and C. Rickett, “On the Subsidiarity of Unjust Enrichment” (2000) 117 L.Q.R. 273 (hereafter G & R, Subsidiarity). This characterisation of unjust enrichment excludes the contested area of receipt of services by a defendant: in most cases, compensation explains a plaintiff's award on the basis of services rendered; and, in any event, services (while beneficial to their recipient) are very difficult to explain juridically as an enrichment (see further, Grantham, R. and Rickett, C., Enrichment and Restitution in New Zealand (Oxford 2000), pp. 2021Google Scholar and 60-63, and chap. 11 (hereafter G & R, Enrichment).

2 See G & R, Enrichment, pp. 43-46; M. McInnes, “Unjust Enrichment: A Reply to Professor Weinrib” [2001] R.L.R. 29; McInnes, M., “The Measure of Restitution” (2002) 52 Univ. Toronto L.J. 163, 186-196Google Scholar. See also Kleinwort Benson Ltd. v. Lincoln City Council [1999] A.C. 349, 406, per Lord Hope; and Regional Municipality of Peel v. R. in Right of Canada [1992] 3 S.C.R. 762, 788, per McLachlin J.

3 See G & R, Enrichment, chaps. 2, 3 and 5.

4 Our concern here is only with restitutionary remedies in respect of unjust enrichment or civil wrongdoing. Remedies having a restitutionary effect that are granted in response to consensual obligations (such as a contract) or that arise in respect of other miscellaneous rights (such as a statutory right to restitution of overpaid taxes) might better be regarded as direct performance of the underlying obligation rather than as secondary remedial rights. Unjust enrichment claims can also, however, be understood as resulting in the performance of the primary obligation, and the exclusion of cases other than wrongs from the present discussion may not be easily justified on substantive grounds.

5 Restoration is usually effected in a personal form (through the imposition of a personal obligation on the defendant to pay a sum of money equivalent to the value of the enrichment received). It may be effected in a proprietary form: see G & R, Enrichment, chap. 18.

6 See Edelman, J., Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Oxford 2002)Google Scholar.

7 See, for example, United Australia Ltd. v. Barclays Bank Ltd. [1941] A.C. 1 (H.L.) (conversion of a cheque); Wrotham Park Estate Co. Ltd. v. Parkside Homes Ltd. [1974] 1 W.L.R. 798 (breach of restrictive covenant); Inverugie Investments Ltd. v. Hackett [1995] 1 W.L.R. 713 (P.C.) (trespass to land); Peter Pan Manufacturing Corp. v. Corsets Silhouette Ltd. [1964] 1 W.L.R. 96 (breach of confidence). See further M. McInnes, “Disgorgement for Wrongs: An Experiment in Alignment” [2000] R.L.R. 516.

8 Generally, see English Law Commission, Aggravated, Exemplary and Restitutionary Damages (L.C. 247, 1997) Part III.

9 See, for example, McGregor, H., “Restitutionary Damages” in Birks, P. (ed), Wrongs and Remedies in the Twenty-First Century (Oxford 1996)Google Scholar, chap. 9. The term is often used loosely to denote a monetary award that is not obviously compensatory, but appears to be directed at removing from a defendant a gain made as a result of wrongdoing. In Attorney General v. Blake [2001] 1 A.C. 268, 284, Lord Nicholls disapproved of this term.

10 See G & R, Enrichment, pp. 470-473. Cf. Attorney General v. Blake [2001] 1 A.C. 268, where “account” was preferred to “disgorgement”.

11 See discussion herein of Edwards v. Lee's Administrators, 96 S.W 2d 1028 (C.A. Kentucky, 1936).

12 See, for example, Penarth Docks Engineering v. Pound [1963] 1 Lloyd's Rep. 359; Ministry of Defence v. Ashman [1993] 66 P. & C.R. 195 (C.A.).

13 Some forms of equitable wrongs may, in substance, also indirectly protect property rights: e.g. knowing receipt.

14 Generally, see Austin, J., Lectures in Jurisprudence (3rd edn., Campbell, (ed.), London 1869), pp. 4447Google Scholar. See also Birks, P., “Obligations, One Tier or Two?” in Stein, P. and Lewis, A. (eds.), Studies in Justinian's Institutes (London 1982)Google Scholar, chap. 3.

15 See G & R, Subsidiarity.

16 The source or basis of the right/duty to restoration lies, in our view, in the principle that noone is to be deprived or his or her property except by consent. This in turn is a manifestation of the liberal socio-political basis of Western society. The various factors which determine when the right/duty arises identify the circumstances in which there has been a transfer of property but where that transfer lacks true consent. Cf. Smith, S., “Justifying the Law of Unjust Enrichment” (2001) 79 Texas L.R. 2177Google Scholar.

17 The (primary) contractual right to performance might also be an exceptional case that defines the response (performance); there is logically no secondary remedial right (“if A's right to performance is not forthcoming, A has a right to performance” makes a nonsense).

18 This “functional” dimension means that issues relevant only to the response itself might quite legitimately be entertained (e.g., valuation of the assets received to assess the measure of the claimant's wealth).

19 See also Birks, P., “Unjust Enrichment and Wrongful Enrichment” (2001) 79 Texas L.R. 1767Google Scholar; M. McInnes, “Restitution, Unjust Enrichment and the Perfect Quadration Thesis” [1999] R.L.R. 118; M. McInnes, “Disgorgement for Wrongs: An Experiment in Alignment” [2000] R.L.R. 516; M. McInnes, “The Measure of Restitution” (2002) 52 Univ, of Toronto L.J. 163. Cf. A. Burrows, “Quadrating Restitution and Unjust Enrichment: A Matter of Principle” [2000] R.L.R. 257.

20 Unjust enrichment might be one of these independent factors, but, used in this context, it cannot bear the same meaning as it does in the context of a claim in autonomous unjust enrichment. P. Birks, “The Law of Unjust Enrichment: A Millennial Resolution” [1999] Singapore J.L.S. 318, 327, describes this as a “tautologous” sense of unjust enrichment. A remedial version of “unjust enrichment” seems both opaque and little more than an attempt to cloak an unfettered discretion with some degree of respectability. It is worth remembering that in the case of equitable remedies, even though they are formally regarded as discretionary, this discretion is governed by well settled rules: see P. Loughlan, “No Right to the Remedy?: An Analysis of Judicial Discretion in the Imposition of Equitable Remedies” (1989) 17 M.U.L.R. 132; and P. Birks, “Rights, Wrongs, and Remedies” (2000) 20 O.J.L.S. 1.

21 See further, below, the discussion of the “passing on” defence.

22 Cases of compulsion (e.g., duress and actual undue influence), which might appear to be concerned with the defendant's impropriety, are actually better understood as cases where the claimant's consent to the relevant transfer is defective because of the way in which it was brought about. The law intervenes because of the effect of the defendant's conduct on the claimant's ability to exercise a free and independent choice. Generally, see G & R, Enrichment, chap. 9.

23 This is the orthodox view of restitutionary liability. It is not, however, without its problems: Smith, S., “Justifying the Law of Unjust Enrichment” (2001) 79 Texas L.R. 2177, 21842193Google Scholar. Strict liability does, however, follow if as suggested above the duty to make restoration is a primary duty.

24 The normative justification of this protection lies in the socio-political commitment to individual autonomy and the protection of property and wealth. See G & R, Subsidiarity.

25 This is not the same case as that discussed in Worthington, S., “Justifying Claims to Secondary Profits” in Schrage, E. (ed.), Unjust Enrichment and the Law of Contract (The Hague 2001), p. 451Google Scholar. In Worthington's example, the £1 coin used to purchase the winning ticket is the property of C at the time of the purchase.

26 Birks, P., “‘At the Expense of the Claimant’: Direct and Indirect Enrichment in English Law” in Johnson, D. and Zimmermann, R. (eds.), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge 2002)Google Scholar, chap. 18, at p. 497.

27 M. McInnes, “ ‘At the Plaintiff's Expense’: Quantifying Restitutionary Relief” [1998] C.L.J. 472, 475. See also M. McInnes, “Unjust Enrichment: A Reply to Professor Weinrib” [2001] R.L.R. 29, 33 and 48-49.

28 M. McInnes, “Disgorgement for Wrongs: An Experiment in Alignment” [2000] R.L.R. 516, 521 (emphasis in original).

29 Virgo, G., The Principles of the Law of Restitution (Oxford 1999), p. 739Google Scholar.

30 M. McInnes, “ ‘At the Plaintiff's Expense’: Quantifying Restitutionary Relief” [1998] C.L.J. 472, 475.

31 Jackman, I., Varieties of Restitution (Sydney 1998), p. 181Google Scholar: “… if there is a requirement that the payment which the plaintiff seeks to recover be ‘at the plaintiff's expense’, it means only that the plaintiff must be the person who made the payment in the first place.”

32 (1989) 1 S.C.R. 1161, 1202. See also Roxborough v. Rothmans of Pali Mall Australia Ltd. (2002) 185 A.L.R. 335, paras. 119-120 and 125-144, per Kirby J. (dissenting); Banque Financière de la Cité v. Parc (Battersea) Ltd. [1999] 1 A.C. 221, 237, per Lord Clyde; Citadel General Assurance Co. v. Lloyds Bank Canada [1997] 3 S.C.R. 805, 824, per La Forest J. Cf. Mason v. New South Wales (1959) 102 C.L.R. 108, 146.

33 See further Woodward, W., “Passing on the Right to Restitution” (1985) 39 U. Miami L.R. 873Google Scholar; Jones, G., Restitution in Public and Private Law (London 1991), pp. 2837Google Scholar and 46-47.

34 Indeed, discussion of the defence in Goff, R. and Jones, G., The Law of Restitution (6th edn., London 2002), pp. 677679Google Scholar, is in a chapter titled “Money Paid to the Revenue or to a Public Authority Pursuant to an Ultra Vires Demand”. See also comments of Lord Goff in Woolwich Equitable Building Society v. IRC (No. 2) [1993] A.C. 70, 177-178; and Kirby J. in Roxborough v. Rothmans of Pall Mall Australia Ltd. (2002) 185 A.L.R. 335, paras. 119-120 and 125-144. Passing on is well-established in civil law systems: see, for example, Les Files de Jules Bianco SA v. Directeur General des Douanes (Cases 331(85 etc) [1989] 3 C.M.L.R. 36; Amministrazione dello Stalo v. SpA san Giorgio [1983] E.C.R. 3595; Hans Just IjS v. Danish Ministry for Fiscal Affairs (Case 68/79) [1981] E.C.R. 501; European Communities v. Italian Republic (case 104(86) [1988] E.C.R. 1799; and B. Rudden and W. Bishop, “Gritz and Quellmehl: Pass it On” (1981) 6 E.L.R. 243.

35 Kleinwort Benson Lid. v. South Tyneside MBC [1994] 4 All E.R. 972; Kleinwort Benson Lid. v. Birmingham City Council [1997] Q.B. 380. See further Rose, F., “Passing On” in Birks, P. (ed.), Laundering and Tracing (Oxford 1995), chap. 10, at p. 262Google Scholar. In New Zealand, see Equilicorp Industries Group Lid. (In Statutory Management) v. The Crown (Judgment No. 47) [1998] 2 N.Z.L.R. 481, 641-644.

36 [1997] Q.B. 380.

37 Ibid., p. 394 per Saville L.J.; cf. p. 393 per Evans L.J.

38 Ibid., p. 395 per Saville L.J., p. 400 per Morritt L.J. Note, however, the confusion in the decision as to whether the defence was being ruled out entirely, or could be applied in “public law cases”: see p. 393 per Evans L.J.

39 (2002) 185 A.L.R. 335. See also Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1994) 182 C.L.R. 51.

40 Ibid., paras. 22-29. Their Honours referred to the conscientiousness of the defendant's retention of the funds as against the plaintiff, and suggested that the superior claim of the plaintiff rested on the fact that the defendant “has no title to retain the moneys” (para. 27). This suggests the essence of the unconscientiousness is the defendant's suggestion as to passing on. Gummow J. also rejected passing on on a similar basis (para. 69: “unconscientious conduct of the defendant in refusing to account to the plaintiff”).

41 Ibid., para. 16. See also the lengthy concurring judgment of Gummow J., especially at paras. 70-75 and 90-100 See R. Grantham, “Restitutionary Recovery Ex Aequo et Bono” [2002] Singapore J.L.S. 388.

42 See McInnes, M., ‘“Passing On’ in the Law of Restitution: A Re-consideration” (1997) 19 Sydney L.R. 179, 181Google Scholar.

43 Birks, P., “ ‘At the Expense of the Claimant’: Direct and Indirect Enrichment in English Law” in Johnson, D. and Zimmermann, R. (eds.), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge 2002), chap. 18, at p. 501Google Scholar.

44 Ibid., p. 509.

45 [1997] Ch. 159.

46 Had Mrs. Jones obtained “ownership” of the money, the claimant's claim would have been in unjust enrichment. Would the claimant then have recovered the profit made by the speculation? That is the very question at issue in this paper, which the Court of Appeal did not answer.

47 See Goss v. Chilcott [1995] 1 N.Z.L.R. 263 (N.Z.C.A.) (dealt with as a claim in contractual debt); cf. [1996] A.C. 788 (P.C.) (dealt with as a claim in unjust enrichment). Interestingly, the Court of Appeal made no mention of a well established separate cause of action in debt, which, in effect, adopts a property rationale.

48 See National Bank of New Zealand Ltd. v. Waitaki International Processing (NI) Ltd. [1999] 2 N.Z.L.R. 211, 226 (N.Z.C.A.).

49 For discussion, G & R, Enrichment, pp. 30-41.

50 See G & R, Enrichment, chap. 3, for the parameters of the debate and citation of the relevant literature.

51 [2000] 1 A.C. 102. For comment, see R. Grantham and C. Rickett, “Tracing and Property Rights: The Categorical Truth” (2000) 63 M.L.R. 905. See P. Birks, “Property, Unjust Enrichment, and Tracing” [2001] C.L.P. 231, for Birks’ argument that Foskett does not stand for what their Lordships therein clearly said it stood for. See also A. Burrows, “Proprietary Restitution: Unmasking Unjust Enrichment” (2001) 117 L.Q.R. 412.

52 Lords Steyn and Hope dissented on the narrow, though difficult, point of when the funds were mixed. Their Lordships did not, however, differ as to the nature of tracing or the nature of the claimants’ claim as one to vindicate their equitable title.

53 Lords Browne-Wilkinson, Hoffmann and Millett.

54 [2000] 1 A.C. 102, 109.

55 “Absolute” was used by Lord Browne-Wilkinson to indicate that no discretion was involved.

56 [2000] 1 A.C. 102, 127.

57 Ibid., p. 127.

58 Ibid.

59 Cf. the (unconvincing and unsustainable) argument by A. Burrows, “Proprietary Restitution: Unmasking Unjust Enrichment” (2001) 117 L.Q.R. 412.

60 Cf. Worthington, S., “Justifying Claims to Secondary Profits” in Schrage, E. (ed.), Unjust Enrichment and the Law of Contract (The Hague 2001), p. 451Google Scholar, who argues that a claimant who owns an asset can only sustain a claim to the profits inherent in a substitute asset acquired in exchange for the initial asset on the basis that he or she can establish a positive duty in the defendant possessor of the substitute asset, owed to the claimant (to invest the asset on behalf of the claimant or to refrain from making a profit from a relationship with the claimant). Worthington argues that neither a property rights nor an unjust enrichment analysis is sustainable to justify an automatic claim to the profits from substitute assets.

61 96 S.W. 2d 1028 (C.A. Kentucky, 1936).

62 Birks, P., “ ‘At the Expense of the Claimant’: Direct and Indirect Enrichment in English Law” in Johnson, D. and Zimmermann, R. (eds.), Unjustified Enrichment: Key Issues in Comparative Perspective (Cambridge 2002), chap. 18, at p. 510Google Scholar (footnotes omitted).

63 See discussion in G & R, Enrichment, pp. 30-32.

64 This analysis does not necessarily exclude the possibility of some (remedial) recognition of the defendant's expertise, etc., in bringing the profit to fruition. See also K. Barker, “Riddles, Remedies, and Restitution: Quantifying Gain in Unjust Enrichment Law” [2001] C.L.P. 255.

65 The case law and literature on change of position is enormous and growing. Our view on change of position is found in G & R, Enrichment, pp. 333-362; and in Grantham, R. and Rickett, C., Restitution—Commentary and Materials (Wellington 2001), pp. 404442Google Scholar.

66 We assume here that this position has been established on the evidence and that such other legal tests as are relevant have been met. The hypothetical is aimed therefore at one issue only, there being no other impediments or distractions.

67 [1991] 2 A.C. 548.

68 Ibid., p. 579.

69 (1992) 175 C.L.R. 353. For Canada: Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd. (1975) 55 D.L.R. (3rd) 1 (S.C.C.). For New Zealand: National Bank of New Zealand Ltd. v. Waitaki International Processing (NI) Ltd. [1999] 2N.Z.L.R. 211.

70 Ibid., p. 385, per Mason C.J., Deane, Toohey, Gaudron and McHugh JJ. (emphasis in original).

71 Birks, P., “Change of Position: The Nature of the Defence and its Relationship to Other Restitutionary Defences” in McInnes, M. (ed.), Restitution: Developments in Unjust Enrichment (Sydney 1996), chap. 3, at p. 51Google Scholar; Dawe, J., “The Change of Position Defence in Restitution” (1994) 52 Univ. Toronto Faculty of Law Rev. 275Google Scholar.

72 See, for example, Goss v. Chilcott [1996] A.C. 788, 798-799 (P.C.). See also Philip Collins Lid. v. Davis [2000] 3 All E.R. 808 (H.C.); Derby v. Scottish Equitable pic [2001] 3 All E.R. 818; National Westminster Bank pic v. Somer International (UK) Ltd. [2002] 1 All E.R. 198 (C.A.); and Dextra Bank and Trust Co. Ltd. v. Bank of Jamaica [2002] 1 All E.R. (Comm.) 193 (P.C).

73 Logically, a defence works by denying one or other aspect of the cause of action. Thus, change of position must operate upon either the reason for restoration, or the defendant's enrichment.

74 If the claim in unjust enrichment has its foundations in “equitable notions”, then of course the existence of a change of position defence is supported not by appeal to a defendant's right to show that the claimant has not established, as against the defendant himself, the component parts of the unjust enrichment claim, but by appeal to more general and freefloating considerations permitted by a wider discretion. See, for example, the position in Canada (discussed by M. McInnes, “The Canadian Principle of Unjust Enrichments; Comparative Insights in the Law of Restitution” (1999) 37 Alberta L.R. 1). See also Kleinwort Benson Ltd. v. Lincoln City Council [1999] 2 A.C. 349, 408, per Lord Hope (unjust enrichment as absence of legal cause or legal ground).

75 See Edelman, J., Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Oxford 2002), pp. 3839Google Scholar, 90-91 and 106-107.

76 Cf. K. Barker, “Riddles, Remedies, and Restitution: Quantifying Gain in Unjust Enrichment Law” [2001] C.L.P. 255, esp. 290ff.

77 See the trend illustrated by Roxborough v. Rothmans of Pall Mall Australia Ltd. (2002) 185 A.L.R. 335. See R. Grantham, “Restitutionary Recovery Ex Aequo et Bono” [2002] Singapore J.L.S. 388.

78 See further McInnes, M., “The Measure of Restitution” (2002) 52 Univ. Toronto L.J. 163, 196202Google Scholar.