Disgorgement of Profits in Canada




© Springer International Publishing Switzerland 2015
Ewoud Hondius and André Janssen (eds.)Disgorgement of ProfitsIus Comparatum – Global Studies in Comparative Law810.1007/978-3-319-18759-4_16


16. Disgorgement of Profits in Canada



Lionel Smith1, 2   and Jeff Berryman3, 4  


(1)
McGill University, 3690 rue Peel, H3A 1 W9 Montréal, Québec, Canada

(2)
Dickson Poon School of Law, King’s College London, London, UK

(3)
University of Windsor, N9B 3P4 Windsor, ON, Canada

(4)
University of Auckland, Auckland, New Zealand

 



 

Lionel Smith (Corresponding author)



 

Jeff Berryman



Abstract

Canadian law sometimes allows gain-based remedies for certain wrongful acts. There is a strong suggestion that gain-based remedies are available in the common law provinces for torts and perhaps breaches of contract, but the courts have been hesitant. Common law provinces have also been willing to award gain-based remedies for breaches of confidence, in the court’s discretion. In the context of infringements of intellectual property rights, which is federal law, the legislation makes clear that gain-based remedies are available, although again this is in the discretion of the court. In both common law and Quebec civil law, in situations where one person is managing the property or affairs of another in a fiduciary capacity, improper gains must be surrendered, although it is arguable that the law ascribes rights acquired by the manager to the principal as the correct legal implementation of the parties’ relationship, rather than as a remedy for wrongdoing.


Keywords
DisgorgementRestitutionRemediesFiduciary dutiesConfidential informationBreach of contractIntellectual propertyTort



Sir William C. Macdonald Professor of Law, Faculty of Law, McGill University; Professor of Private Law, Dickson Poon School of Law, King’s College London. Lionel Smith acknowledges the assistance of Ludovic Langlois-Thérien.

 


Professor, Faculty of Law, University of Windsor, and of the Faculty of Law, University of Auckland (fractional chair). Jeff Berryman acknowledges the assistance of Juliene Hwang, who was funded by the Law Foundation of Ontario.

 



Introduction


Canada is a federation, with legislative competence shared between the federal Parliament and the ten provincial legislatures.1 Private law belongs mainly to the provincial level.2 One province, Quebec, has a civilian system of private law, derived from the customary French law that was applied during the time that it was a colony of France. The other provinces and the territories have adopted the tradition of English common law.

The Supreme Court of Canada has the role of unifying the common law of Canada across the common law provinces. In this it differs from the Supreme Court of the United States. As far as Quebec civil law is concerned, the Supreme Court of Canada is the highest court of appeal, but since there is only one civilian jurisdiction in Canada, the Court does not have a unifying function.3


Scope


In common law Canada, as in other jurisdictions, there has been academic debate about the relationship between unjust enrichment, in the strict or narrow sense that denotes an independent cause of action, and gain-based remedies for wrongdoing. Some authors argue that gain-based remedies for wrongdoing can be seen as part of the law of unjust enrichment.4 But it is not clear how claims that depend on wrongdoing can, at the same time, somehow be independent of the law of wrongs.5 The majority view, however, is that unjust enrichment claims do not require proof of any wrongdoing; conversely, any claim that does require proof of wrongdoing is not based on unjust enrichment. A remedy will follow, usually compensation, but in at least some cases, disgorgement of gains. And, since such a case is not based on unjust enrichment, it is not necessary to prove the elements of the cause of action in unjust enrichment, elements that include a deprivation of the plaintiff that corresponds to the enrichment of the defendant.6 In other words, disgorgement for wrongdoing (unlike restitution for unjust enrichment) is not related to any loss on the plaintiff’s part. Other commentators therefore argue that gain-based remedies for wrongdoing are an aspect of the law of remedies for these wrongs, and do not form part of the law of unjust enrichment.7 The Supreme Court of Canada has aligned itself with this view.8

In common law Canada, there are different legal techniques for bringing about disgorgement. Some come from the principles developed by the courts of Equity. One of these is called the “accounting of profits”. Some people in fiduciary positions are always required to produce accounts of their management; this is not a remedy for wrongdoing, but is a normal incident of the fiduciary role. Examples would be trustees and agents. Here the obligation to account is primary; it does not arise from wrongdoing but from the relationship and the responsibilities of managing another’s property. However, the courts of equity also developed the possibility of ordering an accounting of profits against a party that was not otherwise required to render an account. In this context, it could be used as a way of taking away profits. The accounting, as such, is subject to judicial supervision and legal principles govern it (for example, as to which expenses are deductible). Once the profit is determined through the accounting, the defendant must surrender it.

Another technique is the constructive trust. All trusts are situations in which one person holds property, but owes an obligation to another person to hold the benefit of that property for the other. If the obligation is undertaken voluntarily, it is an express trust; if it is imposed by law, it is a constructive trust or a resulting trust. Therefore, if the outcome of a wrongful act is that the defendant holds particular property, and the court concludes that he is obliged to hold the benefit of that property for the plaintiff, a constructive trust will be declared.

Still another technique comes only from the common law, in the narrow sense that excludes equity. This used to be called “waiver of tort”, in the old days when pleading was more formal. Here the idea is simply that in relation to some torts, the plaintiff could have a common law remedy measured not by his own loss, but by the defendant’s gain. In the words of the Supreme Court of Canada:

Waiver of tort occurs when the plaintiff gives up the right to sue in tort and elects instead to base its claim in restitution, “thereby seeking to recoup the benefits that the defendant has derived from the tortious conduct”.9

Although the language of “waiver of tort” seemed to have died out, it has recently and strangely been revivified in common law Canada, as will be discussed below.

In Quebec civil law, the split between restitution and disgorgement for wrongdoing is clearer. Unjust enrichment, in the strict sense used by the Civil Code of Québec, is a small and residuary category of the law of obligations.10 There is a set of codal articles on restitution, that do not apply in unjust enrichment cases (as the Code uses the term unjust enrichment) but rather in cases where a juridical act is annulled, or in cases of undue payments.11 Thus in Quebec civil law, there are many situations outside of unjust enrichment in which an obligation to make restitution arises (although many of these would be considered cases of unjust enrichment in other systems, and might be described as unjust enrichment in a wide sense by Quebec jurists). Both of these possibilities clearly stand apart from the law of civil wrongs (responsabilité civile). As we will see below, the Code does provide for gain-based remedies in some situations that are not cases of restitution or unjust enrichment, as the Code uses those terms.

Gain-based remedies for wrongful conduct are sometimes called “disgorgement damages” or “gain-based damages”. The word “damages” has a rather protean connotation in common law.12 However, liabilities arising from accounting are not traditionally called “damages”; the accounting process leads to an amount which is owed, understood as a liquidated debt claim. In Quebec civil law, as is typical in civilian systems more generally, the word “damages” is usually (except in the case of punitive damages, discussed immediately below) tied to the idea of loss.13 The gain-based recourses which are available, and which are discussed below, are not traditionally called damages.

In Canadian common law, punitive damages are available when the defendant has been guilty of “high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.”14 In Quebec civil law, unlike in many civilian systems, punitive damages are available, but not generally: only where they are authorized by a legislative provision.15 The most important examples of such legislative authorization are for breaches of human rights protected by provincial law,16 which take effect in private law, and breaches of consumer law by a merchant.17 Punitive damages are left aside in this report, because they are not primarily about capturing a defendant’s gains, but rather about punishment and deterrence.

Many common law provinces now have civil forfeiture regimes.18 These statutes allow a governmental official to bring a civil proceeding (meaning, a non-criminal proceeding) asking a court to conclude, on a civil standard of proof, that some property is the proceeds of unlawful activity. If the court so concludes, the property is forfeited to the government without the need for criminal charges or convictions. This is clearly a kind of disgorgement for wrongdoing, but this subject is not further addressed in this report, since these civil proceedings are founded on criminal wrongdoing (even if the government does not have to prove, in the ordinary way, the commission of a crime).

The subject of this report is gain-based remedies that arise from wrongdoing, not from unjust enrichment. These are recourses that do not pay attention to any loss the plaintiff might have suffered, but are rather calculated by the gain that the defendant acquired from the wrongful act. The report is also confined to private law remedies.19


Claims Based on Relationships of Loyalty



Common Law: Fiduciary Duties


Common law Canada has been a leader in the development of fiduciary law and the extension of fiduciary relationships into new areas.20 Where fiduciaries acquire profits in the course of performing their duties, the usual remedy is the imposition of a constructive trust over the profits. If necessary, the plaintiff can exercise his claim over the traceable proceeds of the original profits.21 Even if a trust is not possible, for example because the particular property has been dissipated, an account of profits constitutes an alternative remedy; this means that the court inquires into the profits acquired by the defendant, and orders him to pay that amount to the plaintiff. On the other hand, where loss is caused, for example by the non-disclosure of a conflict of interest, the plaintiff may secure an award of equitable compensation for loss caused.22

The gain-based remedies in fiduciary relationships are often described as arising from “breach of fiduciary duties”. However, there is an alternative analysis that has attracted significant support, both from commentators23 and from the courts.24 This is that the correct understanding of the fiduciary’s obligation to give up gains is not a secondary obligation that arises in response to a wrong; rather it is a primary duty, arising out of the relationship, to transfer to the beneficiary any assets acquired in the fiduciary role. This account allows a clear understanding of many of the features of the fiduciary landscape that are otherwise difficult to explain.25 It also helps understand why the law attributes not only unauthorized gains and profits, but (if the principal so chooses) loss-making opportunities.26 All rights, opportunities and information arising in the sphere of fiduciary management are attributed to the principal.27

Regardless of the correct theory, profit-stripping claims against fiduciaries are quite common. The Supreme Court of Canada has recently explored the issues in 3464920 Canada Ltd. v Strother. 28 The plaintiff company operated a successful business that structured tax-assisted film production service opportunities (TAPSF) as an investment vehicle for its clients. The defendant, Strother, a lawyer who worked for the second defendant, the Davis law firm, had been instrumental in creating the appropriate tax instruments. Changes in the tax legislation brought to an end the TAPSF tax shelters. Strother believed that there was no way around the tax changes and he communicated that opinion to the plaintiff, which remained a client of Davis. Within 2 months of Strother’s expressing his opinion to the plaintiff, he learnt of a possible fix from Paul Darc, a former executive of the plaintiff. Together, they formulated a new and successful tax credit scheme. Strother left Davis and went into business with Darc. The new scheme earned Darc and Strother over $64 million in profits.

The plaintiff argued that Strother was obliged to inform it of the new tax scheme that he discovered. The majority held that Strother was in breach of fiduciary duty in that he engaged in a competing business at a time when he was still required under the retainer to advance the business interest of the plaintiff. This conflict compromised Strother’s ability to “zealously” advance the interests of the plaintiff. The majority made it clear that fiduciaries may be required to give up profits even when there has been no loss suffered by the beneficiary; this is tied to the objective of ensuring that the fiduciary is not swayed by personal considerations to act in conflict with the client’s interests. The profits earned by Strother therefore had to be disgorged.29


Quebec Civil Law


The Civil Code of Québec, differently from many civil codes, expressly provides for duties of loyalty, often also regulating conflicts of interest, and it expressly or implicitly provides for gain-based remedies in these situations, sometimes through a requirement of accounting.30 The relationships that are covered by these provisions are similar to those that are fiduciary in the common law: mandate,31 partnership,32 directors of legal persons,33 and administration of the property of another34 (which in Quebec law includes the trust).35

Under the previous Civil Code of Lower Canada, the Supreme Court of Canada held that unauthorized profits acquired by a defendant in the course of acting as a mandatary must be disgorged to the mandator. This was said to flow from the obligation to account that is owed by all mandataries.36 In a more recent case, under the current code, the Superior Court was faced with a faithless real estate agent (mandatary) who had acquired an immovable which the mandator wished to acquire. The Court held that the mandatary could be ordered to transfer the immovable to the mandator.37 The Court relied on art. 2184, which requires a mandatary to render an account, and to return to the mandator anything the mandatary has received in the performance of his duties, even if what he received was not due to the mandator.38 In a subsequent case, the Court of Appeal held that disgorgement in cases of misappropriation of corporate opportunities can be ordered under art. 2146.39 This article forbids a mandatary from using for his own benefit information he obtains in the course of his mandate, and specifically provides for a gain-based remedy in such a case.


Breach of Confidence


Obligations relating to confidential information can arise from contract or fiduciary obligations. But in the common law, there is a free-standing obligation, arising from the equitable tradition, that requires a person to use confidential information only for the purposes for which it was given.40 In Lac Minerals Ltd. v International Corona Resources Ltd.,41 the Supreme Court of Canada held that obligations relating to confidential information are separate from fiduciary obligations. The Court also held that a constructive trust can be imposed to take away the profits of a breach of confidence. More recently, the Court held that there is remedial flexibility in breach of confidence claims: they can lead to constructive trusts, accounting of profits, or compensation for loss.42

Subsequent cases have embraced the remedial flexibility approach adopted by the Supreme Court. The reasons for awarding a proprietary remedy of constructive trust,43 an account of profits,44 or compensatory damages assessed under the principles of equitable compensation45 are not always explicitly articulated but depend upon the factual context. A constructive trust is often justified on the grounds of difficulty in quantifying monetary damages particularly for prospective losses.46 An account of profits is often seen as an alternative to a proprietary remedy, but also is imposed where the breach of confidence relates to information that is “very special”, and where the information is likened to “property” that can only be taken from the “owner” through a consensual exchange.


Breach of Contract and Restrictive Covenant Claims


In common law, it remains controversial whether an account of profits remedy can be given for breach of contract.47 Academic discussion has been generated by the decision of the English House of Lords in Attorney General v Blake. 48 A number of Canadian cases have mentioned Blake as if it would apply in common law Canada.49 However, no Canadian common law decision has applied Blake for breach of contract as such.50 Where there have been other claims in breach of fiduciary duty, breach of confidence, or tort, such relief has been granted in Canada, for the reasons set out in other sections of this report. Similarly, there are cases in Canada that follow the principle enunciated in Wrotham Park Estates v Parkside Homes Ltd., 51 namely, that in the case of the breach of a restrictive covenant over property, damages can be measured on the basis of what a person would negotiate to be released from the performance of the covenant. This measure may represent a percentage of the gains made by the defendant by breaching the restrictive covenant.52

Jostens Canada Ltd. v Gibsons Studio Ltd 53 has come closest to awarding an account of profits for breach of contract. The defendant was the plaintiff’s agent and misappropriated business opportunities to itself. On an appeal regarding the measure of the award, the British Columbia Court of Appeal held that the remedy should be disgorgement of any benefit obtained by the defendant through its wrong. The particular wrong was the breach of the duty of good faith and fidelity; of course, one might observe that an agency relationship is always a fiduciary relationship.

In Huttonville Acres Ltd. v Archer, 54 the defendant was contractually obliged to submit architectural plans and commence building a home in conformity with other terms of the agreement within 120 days of purchasing the land from the plaintiff vendor. The defendant failed to comply with this term and eventually sold the property to a third party, who, ultimately built a home in conformity with the building requirement set out in the agreement. The plaintiff experienced no compensable loss but sought to recover the profits made by the defendant on its resale of the property. The court declined to make any award. The facts did not fit within any criteria where an account of profits had been awarded in the past. There was no fiduciary relationship. The exceptional criteria of Blake were not met. The court declined to award damages based on Wrotham Park, that is, damages set at a fee that a reasonable person would have paid to be released from the restrictive covenant. This was because the plaintiff had delayed in bringing suit and in registering its covenant in the land registry.