© Springer International Publishing Switzerland 2015Ewoud Hondius and André Janssen (eds.)Disgorgement of ProfitsIus Comparatum – Global Studies in Comparative Law810.1007/978-3-319-18759-4_4
4. Disgorgement in Ireland
Trinity College, University of Dublin, House 39, New Square, Dublin 2, Ireland
Ireland is a common law jurisdiction whose private law largely resembles that of England and Wales. Irish law recognises disgorgement as a remedy in a variety of ways. Certain statutes provide for disgorgement of profits wrongfully achieved through intellectual property infringements or stock market abuses. The law of equity has long recognised disgorgement, or liability to account, for breaches of fiduciary duty. In addition, Irish common law allows for disgorgement in both contract and tort scenarios. Domestic case law has envisaged disgorgement for contractual breaches done in bad faith since before the United Kingdom House of Lords introduced disgorgement in Attorney-General v Blake. However, cases of direct disgorgement for breach of contract remain vanishingly rare, resulting in uncertainty about the standard of misconduct required. Disgorgement more commonly occurs in tort cases. The Irish Law Reform Commission has approved the availability of disgorgement in both contract and tort as a means of preventing people from profiting from their wrongdoing. Besides direct recognition of disgorgement, Irish law also contains a number of functional equivalents, including notably the remedial constructive trust. In addition, claims for compensation or exemplary damages may in some cases take account of profits made by the defendant. However, it is not possible to bring class actions in claims for damages and this may erect a practical obstacle to full disgorgement taking place where wrongdoing has affected many victims. Beyond the realm of private law, the Criminal Assets Bureau is an administrative body empowered to strip wrongdoers of the proceeds of criminal activity.
KeywordsDisgorgement in IrelandRestitution for wrongs
is an Assistant Professor in the Law School of Trinity College, University of Dublin.
Ireland is a common law jurisdiction, whose private law has diverged slowly from that of England and Wales since independence in 1922. Consequently, there is a broad similarity between the responses given in Irish courts to cases concerning disgorgement and those articulated in England or other common law jurisdictions, such as Canada. Irish law recognises various pure disgorgement remedies as well as functional equivalents, created by statute, equity and the common law. In this paper, I will consider: statutory disgorgement; equitable account of profits; common law disgorgement damages; constructive trusts; compensation for loss calculated by reference to the defendant’s gain; punitive or exemplary damages, and forfeiture to the State of the proceeds of crime. Distinctive features in this landscape include the recognition of disgorgement damages for certain cases of breach of contract before the English decision in Attorney General v Blake,1 and a liberal application of the new model remedial constructive trust.
Despite the diversity of doctrines connected to disgorgement, the prevention of unjust enrichment through wrongdoing emerges as a unifying objective. The Irish Law Reform Commission examined the issue in 2000. It approved of restitutionary damages as an “important supplement” to compensation in both tort and contract, considering it an interest “well recognised by the law of damages” to ensure that wrongdoers do not profit by their actions.2 It recommended the continued development of disgorgement remedies through case law.
“Account of profits” is the dominant phraseology concerning disgorgement in Irish case law and statute. Terms such as “disgorgement” and “restitutionary damages” appear in a tiny handful of Irish cases, although the latter is the term chosen for the Law Reform Commission Report on the subject.3 “Restitution for wrongs” does not figure.
The language of “account” reflects the historical roots of this form of damages in equity. However, the rationale for various remedies espouses the logic of stripping wrongful gains, so that a transition to the language of disgorgement would not require a change in thinking. If the language were to change, “disgorgement” would be preferable to “restitution” because these cases do not involve handing back to the plaintiff a benefit received from him, but giving to the plaintiff a benefit received from a third party.4
A Rationale Based on Unjust Enrichment
Irish cases consistently explain disgorgement in terms of unjust enrichment.5 The statutory right in intellectual property or market abuse cases is regarded as one instance of the broader right developed in the common law.6 This fits with a conception of unjust enrichment law as designed to remove from the defendant wealth which he should not be entitled to retain.7 Likewise, the Law Reform Commission Report on Aggravated, Exemplary and Restitutionary Damages characterises restitutionary damages as “a particular application of the principle of unjust enrichment, whereby the law can strip away profit wrongfully acquired at the expense of another.”8 Their purpose is not to compensate the plaintiff, but “to restore the position of the defendant, by removing the profits earned by the wrong”9 This objective is also one possible rationale for the common law rules on illegality: to prevent a person benefitting from illegal conduct.10
The Law Reform Commission considers disgorgement damages easier to justify than exemplary damages.11 Because it views the purpose of disgorgement as simply to prevent wrongdoers from profiting from wrongdoing, it says, “the basis of restitutionary damages awards is not in the moral quality of the defendant’s behaviour.”12 This conception implies that a low threshold of misconduct could suffice to trigger disgorgement.
Distinction from Subtractive Unjust Enrichment
Although Irish law clearly views the rationale for disgorgement as a species of unjust enrichment, disgorgement is conceptually distinct from subtractive unjust enrichment. Invoking unjust enrichment to explain disgorgement remedies suggests a broader conception of unjust enrichment which encompasses encroachment or restitution for wrongs.
It is readily apparent why Irish judges relate the concept to unjust enrichment: it is “unjust” to profit from wrongdoing. However, this is “unjust” in a different sense to that in which “unjust” is defined within the English and Irish law of unjust enrichment. In unjust enrichment law, we channel the unjust question through the unjust factors, which generally reflect the impairment of the plaintiff’s consent to a transfer. The defendant’s “wrongfulness” or culpability is not a concern within the unjust factors approach.
Secondly, we require that the enrichment of the defendant be “at the expense of” the plaintiff. This requires a direct transfer from plaintiff to defendant, whereby the value is subtracted from the plaintiff’s assets and added to the defendant’s. When a person profits by encroaching on the rights of the plaintiff, or wrongly attracting to himself a benefit which ought properly have flowed instead to the plaintiff, it might be “at the plaintiff’s expense” in a broader, colloquial sense, that the plaintiff has lost out, but it does not fit the pattern of subtractive enrichment. While restitution for wrongs is certainly contiguous with unjust enrichment, it seems proper within the modern taxonomy of the common law to maintain the distinction between restitution for unjust enrichment and disgorgement of wrongful gains.13
Disgorgement in Irish Law
Statutes provide for disgorgement in cases concerning intellectual property and breaches of share trading rules.
Breach of Copyright
The Copyright and Related Rights Act 2000 provides that the remedies for knowing infringement of copyright include an account of profits.14 The courts also enjoy wide statutory discretion to award such damages as they consider just, including aggravated or exemplary damages.15 The Act’s predecessor made greater express reference to the concept of disgorgement. It envisaged “an account of profits” for unwitting infringements, and identified the benefit gained by the defendant’s infringement as an indicator of when additional damages were needed to offer “effective relief”.16
The case law applying the statute turned on whether, in each case, compensation was an adequate and effective remedy. In Folens v Ó Dubhghaill, an author reused material in breach of the publisher’s copyright: he gained a commercial advantage, but the plaintiff had not lost much money.17 The Supreme Court overturned the award of additional damages under the Copyright Act: such an award was authorised only where necessary to provide an effective remedy, and in the circumstances, an injunction and compensatory damages sufficed. In House of Spring Gardens Ltd v Point Blank Ltd, the Supreme Court upheld an award of disgorgement damages, described as an account of profits, for breach of contract, breach of confidence through misusing confidential information, and infringement of copyright.18
Insider Trading and Market Abuse
The Companies Act 1990 requires a person who commits prohibited insider dealing to compensate other parties to a transaction for their loss, and to account to the company that issued the shares for any profit resulting from the prohibited dealing.19 These orders do not displace any common law liability that may apply; the amounts can be reduced to reflect any other payments ordered by the court. There is similarly statutory provision for disgorgement in cases of market abuse.20 Those who breach the regulations are liable to compensate other parties who trade in shares for the loss they suffer due to price distortion, and to account to the issuing body for any profit acquired by acquiring or selling the instruments.21
Account of Profits: Equitable Disgorgement, But Not Damages
Liability to account for profits requires a person to cede to another the proceeds of certain actions. Account is “an equitable remedy, given in lieu of an order for the payment of damages.”22 Its function is clearly disgorgement: “the defendant is going to be required to disgorge profits made by it in the course of unlawful activity.”23
Sometimes the expression “liability to account as a constructive trustee” is used.24 This means that the liability is analogous to a constructive trust, not that it is a constructive trust: it is personal, not proprietary. Liability to account as a constructive trustee can also be triggered by dishonest assistance in a breach of trust, even though the defendant has not in this case received the misapplied property.25
Both statute and case law expressly distinguish the remedy of an account of profits from damages. In McCambridge Ltd v Joseph Brennan Bakeries, the court refused to allow the defendants, who had breached copyright, to use the lodgement procedure, on the ground that a claim for an account of profits is not an action for damages.26 The plaintiff could not be expected to predict in advance the amount of profits which the defendant would be ordered to pay him, since the remedy of account involves the defendant revealing the amount of his profits.27 However, if it has sufficient information, the court may itself calculate the amount due in an account of profits, rather than ordering the defendants first to make an account and then pay over the resulting amount.28
Disgorgement Damages in the Common Law
Categories of Damages
The Supreme Court has identified three main categories of damages for wrongs: compensatory damages, aggravated damages (compensatory damages increased by reference to the defendant’s conduct),29 and punitive or exemplary damages. Compensatory damages “must always be reasonable and fair and bear a due correspondence with the injury suffered.”30 In principle, damages for breach of contract should be compensatory. The Law Reform Commission does not approve of exemplary damages in contract, as being inconsistent with the nature of contract law.31 It concedes that where the contractual issue is accompanied by a tort or other wrong, the courts can award punitive damages based on the wrong.32 However, Irish case law has also endorsed disgorgement damages, and did so in a breach of contract case. The Law Reform Commission approves of this principle.33
Disgorgement Damages in Contract: Hickey v Roches Stores34
In Hickey v Roches Stores,35 the High Court ruled that there could be disgorgement damages arising from both contractual and tortious wrongs, in cases where the defendant acted in bad faith by calculating and intending to achieve a gain by his wrongdoing.36 The parties contracted for the plaintiffs to sell their drapery products in the defendants’ store. The defendants terminated unlawfully and began selling their own drapery products. Finlay P accepted that, although the general purpose of damages in contract and tort is compensatory, contract damages need not always be strictly limited to compensation. He indicated that the circumstances giving rise to disgorgement could vary between different causes of action.37 He set out a general principle that,
Where a wrongdoer calculated and intended by his wrongdoing to achieve a gain or profit which he could not otherwise achieve and has in that way acted mala fide then irrespective of whether the form of his wrongdoing constitutes a tort or a breach of contract the court should, in assessing damages, look not only at the loss suffered by the injured party by also to the profit or gain unjustly or wrongfully obtained by the wrongdoer.
Where the profits obtained by such a wrongdoer exceed the plaintiff’s loss, “damages should be assessed so as to deprive him of that profit.”
However, emphasising the need for the extent of contractual obligations to be certain, Finlay P carefully circumscribed the availability of disgorgement damages in contract cases to “mala fides”. In this instance he did not apply the disgorgement principle because the defendants’ mala fides were not pleaded: it was not shown that the defendants designed the breach to usurp the goodwill which should have benefited the plaintiffs.
The criterion of mala fides is a “significant limitation”.38 It is not clear what conduct is required. There has never been a case in which Finlay P’s criterion for the award of disgorgement damages has been met.39 Certainly, where a person believes his conduct to be lawful, the Hickey test is not met.40 In Vavasour v O’Reilly, the plaintiff was wrongfully excluded from a jointly-held franchise. 41 He sought “additional damages” based on the defendant’s mala fides as well as compensation. Clarke J accepted that Hickey provides for disgorgement damages, but found that they were only relevant where the defendant gains more from his breach than the plaintiff loses.
The Hickey disgorgement principle predates the English decision in Attorney General v Blake.42 Sometimes in Irish law, domestic innovations are later subsumed by the adoption of similar precedents from England and Wales. Blake is probably part of Irish law, but has not yet been the basis of any decision.43 This is unsurprising, given the paucity of cases in which disgorgement rather than compensation would be appropriate. The relationship between the Hickey and Blake tests for disgorgement is therefore uncertain. The Law Reform Commission considers that the Hickey test is probably broader than Blake.44 Because it views the purpose of disgorgement as simply to prevent wrongdoers from profiting from wrongdoing, the Commission, perhaps surprisingly, argues against the strict circumscription of the disgorgement remedy.45 More case law is needed to delimit the contours of disgorgement damages in Irish common law.
Constructive trusts are an equitable proprietary remedy. In some cases they are pure disgorgement remedies, because a remedial constructive trust may be declared over property which did not originate in the hands of the plaintiff, on grounds of wrongful conduct. In other cases, they are a functional equivalent which, as proprietary remedies, extend to the full measure of any gain received by the defendant, and thereby effect full disgorgement.
Constructive Trusts for Breach of Fiduciary Duty or Knowing Receipt of Trust Property
As in English law, a fiduciary must account to his beneficiary for any advantages he gains by his position.46 This disgorgement required of fiduciaries does not depend on the beneficiary having suffered a loss.47 Constructive trusts also arise where a person receives trust property in breach of trust with either actual or constructive notice of the breach. Ireland’s Supreme Court endorsed the Belmont Finance 48 constructive trust, which responds to the misapplication of corporate assets, in Re Frederick Inns.49
Remedial Constructive Trusts in Ireland
The remedial constructive trust is imposed by law in response to unconscionable conduct. The archetypal example is to prevent a person from benefiting from the proceeds of fraud. The imposition of a constructive trust does not necessarily reflect the continuation of a plaintiff’s pre-existing property right.50 It is a discretionary remedy. Whereas English law has not recognised the new model constructive trust,51 cases such as Murray v Murray 52 and Kelly v Cahill 53 are clear authority that the remedial constructive trust is recognised in Irish law. These trusts are sometimes called a “new model constructive trust”54 or a “remedial constructive trust”.55