© 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_20
20. Disgorgement of Profits in Croatian Law
University of Zagreb, Trg M Tita 3, Zagreb, 10000, Croatia
The general legal basis for disgorgement of profits for infringements of law under Croatian law is lacking. This is especially true for the areas of contract law and tort. The Croatian Code of Obligations provides no provision for disgorgement of profits, nor are there many academic debates on the topic. The function of restitution could be partially fulfilled by some other legal remedies as discussed in the text, such as claims based on unjust enrichment, benevolent intervention in another’s affairs, or claims for damages. However, none of them fully meets the requirements of disgorgement. Some traces of disgorgement of profits could also be found in other areas of Croatian private law with a substantial level of diversity. For instance, in the area of criminal and administrative law, intellectual property rights law, capital market law, unfair competition and unfair commercial practices such traces are more evident. These areas have reacted by developing specific sui generis legal remedies that under certain conditions, might allow skimming off, seizure, transfer or confiscation of unlawful gain. Again, none of them fully meets the requirements of disgorgement of profits. This paper first analyses terminology and conceptual problems of disgorgement of profits under Croatian law, than possible functional equivalents to disgorgement and finally other private law sui generis remedies. In conclusion, the paper offers answers to the question of whether there are any potential underlying reasons to introduce disgorgement remedies into Croatian law, and suggests de lege ferenda proposals.
KeywordsCroatiaDisgorgementDamageBreach of contractRestitutionLicence feePenaltyFreezing and confiscation proceeds of crimeTransfer of business transactionUnjust enrichmentNegotium gestioMandate and fiduciary relationship
is an Assistant Professor of Civil Law at the Faculty of Law, University of Zagreb, Croatia.
The topic of disgorgement entwines two ideas. The first one considers the idea of restitution and skimming off illegally gained profit from the wrongdoer, thus giving it to the injured party. The second one addresses the disgorgement and punishment of the wrongdoer and is based on the idea of corrective justice. The well-known statement that the wrongdoer should not be allowed to profit from the wrong1 only strengthens this idea.
There appears to be little support for the notion that the disgorgement remedy is universally available. Perhaps at first glance, disgorgement is more widely accepted in common law countries, for both equitable and legal wrongs. Some of the examples are breach of fiduciary duties and breach of confidence, but disgorgement is also available for some torts (tortious liability), conversion, trespass to land and passing off.2 Contrary to this disgorgement is not so widely accepted in civil law systems (such as Croatia), mostly due to a different understanding of the fundamental legal concepts as well as due to the civilian concept of damages and unjust enrichment.3 However, some branches of law – such as criminal and administrative law, intellectual property law, capital market law, unfair competition and unfair commercial practices – could sometimes offer similar functional equivalents to disgorgement of profits. This paper discusses the availability of remedies affecting disgorgement of profits under Croatian law. It tries to answer the following questions: Does a coherent theory of disgorgement of profits exist under Croatian law? Is there any legal basis for disgorgement? If not, is there any movement to introduce disgorgement of profits and, if there is such a legal basis, what would be the potential underlying reasons for introducing disgorgement of profits under Croatian law?
Terminology and Conceptual Problems of Disgorgement of Profits Under Croatian Law
Unlike many common law systems where there is more than one kind of damages and disgorgement may be awarded in certain cases in some specific areas of law, such a concept is foreign to Croatian law.4 Maybe terminology is one part of the problem. The term “damage” in Croatian tort law means only the loss suffered by the claimant. Such concept of damage has no function of disgorging the defendant beyond the recovery of the loss the claimant has suffered. The damages fulfil a primarily compensatory function. Thus the difference in the common law concepts of nominal, punitive, compensatory, exemplary or disgorgement damages5 are foreign to Croatian law. This is especially true for the areas of contract law and tort. Maybe a more appropriate term for this topic from the Croatian perspective would be the disgorgement of “profit” or “gain”. Both terms are based on the enlargement of assets of the wrongdoer (defendant), even if such a breach has not led to loss for the victim (claimant).
The traces of disgorgement of profits under Croatian private law can be found in different areas of law. For instance in the area of administrative and criminal law such traces are more evident. However, intellectual property law, competition law, unfair commercial practices law and commercial law offer some sui generis remedies which might allow skimming off, seizure, transfer or confiscation of unlawful gain. Thus, Croatian law offers some “functional equivalents” which do not include all elements of disgorgement of profits, but lead to the results similar to the disgorgement. All of them will be dealt in the text.
Contract Law and Problems of Disgorgement of Profits
The traditional Croatian private law approach is that the relief in the disgorgement of profits is not available for contract law and tort.6 One of the main purposes of Croatian tort law is the compensation of the injured party. According to the Croatian Code of Obligations (hereinafter: CO)7 “A person who causes damage to another person is under obligation to compensate it, unless he proves that such damage as occurred was not his fault” (Art 1045 CO).8 The CO defines “damage” as the diminution of the property/assets of an individual (regular damage), the hindering of its increase (loss of profit),9 or breach of personality rights (non-material damage) (Art 1046 CO). The notion of “damage” should be understood broadly and includes all types of losses. The damage rules are primarily compensatory in character. The situation to be restored is as if the circumstances creating the claim for damages had not occurred.10 Thus the obligation to compensate the injured party (claimant) is completely independent of the gain of the liable party (respondent). For example, in the case of breach of contract, damages are awarded since the breach of contract has caused harm to the claimant, even if the breach has not led to the defendant profiting from the circumstances. Disgorgement works in the opposite way. The disgorgement must be awarded exactly because the breach of contract has caused profit for the defendant, even if such a breach has not led to loss for the claimant. The basis of the claim for disgorgement of profits is independent from the claim for damages or any other claim related to the breach of contract.
The functional difference is also visible in the assessment of damages/ disgorgement. When assessing damages, the court shall calculate the actual diminution of the claimant’s property, either in the form of actual loss or the loss of a future gain.11 The court is obliged to determine the full scope and amount of damage and respective compensation. Bearing in mind the slight differences between contractual, extra-contractual liability and pre-contractual liability,12 the general rule follows the “principle of full compensation”, as one of the main principles of Croatian tort law.13
In the case of breach of personality rights, such as the case of damage of reputation caused by mass media,14 intellectual property law infringements,15 or competition law infringements16 the court may apply a more “normative” approach. The court may take into account the damage to someone’s morality or integrity, duration and intensity of physical, emotional or psychological pain and fear, as well as other elements relevant to the circumstances of the case. The case law for both kinds of damage is well developed in Croatia.17 Contrary to this, when assessing disgorgement of profits, the court should only take into account the value of profit accruing to the defendant. It is in no relation to the damage suffered by the injured party. Moreover disgorgement of profits could be claimed even if the injured party suffered no damage at all. Although an award for damages often forces the defendant to disgorge profits resulting from the breach, it is not always so. An award for damages creates the opportunity for profit taking, but the amount of damages need not be equal to the defendant’s gain.
One possibility for disgorgement of illegally gained profits could be extracted from the rules on pre-contractual liability and gain-based damages. Croatia is one of the few legal systems whose law clearly regulates pre-contractual liability.18 The party that has entered into negotiations, contrary to the principle of good faith and without the real intention to conclude a contract, is liable for the damage caused to the other party by such behaviour.19 Another example is the pre-contractual liability for damage which arises from the breach of any other duties in connection with negotiations, such as the obligation to preserve the secrecy of information obtained during the negotiations.20 In other words, if one party uses the classified information it gained knowledge of during the negotiation for its own profit, the injured party may claim damages and the profit gained by using such classified information.21 This is a new provision introduced in the Croatian Code of Obligations in 2005. At the moment, there is no case law on the issue, but the legislature argued that such provision was introduced as an instrument “of combat against unfair competition”.22
At the moment, there are no significant academic or legal discussions on the topic of introducing disgorgement of profits (damages) into Croatian tort law. One reason is probably based on the argument of a “civilian legal tradition” and well-developed case law on damages. In foreign legal literature, there are discussions on the pros and cons of introducing this remedy, especially for breach of contract.23 Some of the arguments against such a legal remedy are that many of the breaches (especially contract breaches) are innocent. Thus in each individual case the court should be obliged to determine the bad faith of the wrongdoer. Such uncertainty in each individual case may cause uncertainty of the system as a whole. Another argument against disgorgement is that it would influence the behaviour of the parties. It would “undermine the principle that the victim of a breach of contract has a duty to mitigate loss”.24 On the contrary, the theory of efficient breach argues pro disgorgement in contract law. The theory argues that there is a positive value in structuring the law of damages to facilitate contract breaches that will lead to efficient behaviour. However, there have been many criticisms of the theory which, as of today, has still not been widely accepted. Another argument in favour of disgorgement derives from the famous sentence that “the wrongdoer should not be allowed to profit from his wrong…”25 This is an idea based on the concept of justice and the protection of some types of fiduciary duties, breach of confidence and some tortious wrongdoings. The latter is only partially supported by the famous Blake case26 in the context of breach of contract.27 Unfortunately, such debate on disgorgement of profits for breach of contract is not present in Croatian contract law.
Possible Functional Equivalents?
Croatian law, in particular the Code of Obligations, does not accept disgorgement of profit as such. However, there are some remedies which may functionally lead to results similar to disgorgement. One remedy could derive from the rules on unjust enrichment. If someone makes a profit by infringing someone else’s rights the claimant, under certain conditions, might ask for restitution of such gain. The Croatian Code of Obligations thus allows restitution based on unjust enrichment. “If one person is enriched on the account of another person without legal grounds for doing so, such as the contract, the decision of a court or any other competent body or the provisions of the law, or in “any other manner” including his own performance, the enriched party is under a duty to make restitution” (Art 1111(1) CO). This duty also exists if the legal grounds later lapse, or if the result intended to result from those efforts in accordance with the contents of the legal transaction does not occur. The wording “enrichment on the account of another person” includes gain of a “certain profit” (Art 1111(2) CO). The claim is based on restitution of such enrichment or profit.28 Croatian law does not require that enrichment should derive from unlawful or illegal action, nor that the enrichment is wrong. The law does not even require that the enriched person acts male fide (in bad faith). However, this distinction is relevant when deciding on the range of the claim for restitution. Generally, the enriched person (recipient) must return everything he gained without legal ground to do so, including fructus and interests. The bona fide recipient is under an obligation to return interests from the moment the claim for restitution has been filed, and the male fide (bad faith) recipient is under obligation from the moment he actually obtained a profit (Art 1115 CO).29
Under the claim for unjust enrichment, the cause of action requires the claimant to prove the following: (1) that there has been enrichment to the defendant; and (2) a corresponding deprivation to the claimant (that is a transfer of wealth from the claimant to the defendant); (3) a clear causal link between enrichment of the defendant and deprivation of the claimant; (4) that there were no legal ground for such a transfer of wealth, or that the legal ground later lapsed; and (5) the enrichment must not be a commitment of a tort (delict), because then the tort law and not the law on unjust enrichment will be applicable.30
The assumption of causal link is one of the most difficult to prove in the course of proceedings. At the same time, this is one of the most important analytical distinctions to disgorgement of profits. The claim in unjust enrichment depends on the proof of one person’s enrichment on the account of another. The defendant must return what he gained (restitution), and if that is not possible the defendant must pay the value of the unjust enrichment with interests and fructus. On the other hand, disgorgement of profits is based on the idea of restitution (like unjust enrichment), but does not require corresponding deprivation to the claimant’s wealth. No causal link is required. These two claims are interdependent of each other. Thus, the restitution remedy based on the unjust enrichment is possible, but very limited regarding application on the disgorgement of profits. It allows restitution of illegally gained profit only under the five assumptions discussed above. The case law is also very limited on this question.31
Spurious Negotium Gestio
Negotium gestio or benevolent intervention in another’s affairs could be another instrument of restitution of profits, but only in limited cases. Under regular benevolent intervention in another’s affairs, one person (gestor) conducts a transaction for another person (principal) “without being instructed by him or otherwise entitled towards him in such a way as to protect or to preserve the interests of the principal” (Art 1121 CO).32 The gestor is actually performing the intervention not for his own benefit, but for the benefit of the principal. The reasons for such intervention could be various, and are not legally relevant. Under Croatian law, in the case of regular benevolent intervention in another’s affairs, the profit is made on the account of the principal (not the gestor). For the simple reason that the gestor made no profit, there is no valid legal basis for skimming off the profit from the gestor.
However, restitution of profit could be possible in the case of “spurious” negotium gestio under Article 1128 of the Croatian Code of Obligations. Here, the gestor performs another person’s business “knowing that it is not his own, and knowing that he is not entitled to do so, with the purpose of illegally gaining profits for himself”. There must be a clear intention of unlawful gain and proof of fraudulent behaviour.33 As a consequence, the gestor is under an obligation to report and submit his accounts to the principal. At the same time, the principal is entitled to claim the reimbursement of everything the gestor gained while performing such business.34 Because spurious negotium gestio is at the same time commitment of a tort (delict) – causing damage to the principal alternatively to the claim for restitution of profit – the principal may require damages for tort.35 This remedy might thus functionally allow disgorgement of illegally gained profit from a gestor gained on the account of the principal. Although not much has been written on the topic,36 Croatian case law acknowledges the existence of this instrument. The Appellate Court found that the person renting a property of another person, knowing this to be the business of another person, with the aim to gain profit for himself, must submit and transfer his accounts to the principal in accordance with the rules on spurious benevolent intervention in another’s affairs.37
Mandate Relationship and Related Relationships
The relationship arising from the mandate could be another instrument functionally allowing restitution of unlawful gained profits. There are several rules that might allow this. Under a contract on mandate (contractus mandati), by accepting a mandate “the mandatary agrees to carry out a transaction entrusted to him by the principal (mandator) for the account of the principal. The mandatary is entitled to receive a reward for his work, although the parties may agree differently” (Art 763(1–2) CO). One of the main obligations of the mandatary is to submit his accounts and hand over or transfer to his principal “everything he received” during the performance of the mandate and from carrying out the business, no matter whether or not this gain was agreed with the principal.38 The same rule applies for the contract of commission.39 In legal theory, the wording “everything he received” is interpreted very broadly. This obligation could consist of the transfer of all documents the mandatary received (contracts, documentation, money, certain items etc.), but also the transfer of any monetary claims and obligations (including interest in cases of delay), and any rights obtained from a third party.40 A broader interpretation of this provision may functionally allow the transfer of profit the mandatary gained illegally during the performance of the principal business. Here German jurisprudence allows the disgorgement of a certain percentage (provision) from the contract or even a bribe from the mandatary.41 Unfortunately, a Croatian court took no position on the issue, nor was this a topic of discussion in academia.
Another rule concerns deviation from the strict instructions of a principal. If a mandatory exceeds his mandate without the previous consent of the principal, he will be liable for such action.42 In accordance with Croatian law the mandatary will be treated as the gestor, and the respective rules on negotium gestio will apply.43 As a consequence, the principal is entitled to claim the reimbursement of everything the mandatary (now gestor) gained, including the profit.44 However, the mandatary will not be regarded as gestor entirely, but only in the part where his actions deviated or exceeded his mandate.45 Even here, there is no clear legal basis for the disgorgement of profits, but the broader interpretation of the rules of the Croatian Code of Obligations could allow for a similar functional effect.46 Since a mandate relationship is one element of an agreement of representation, power of attorney, proxy statement, procurator statement etc., these provisions are applicable mutatis mutandis on the deviation duties arising out of these legal relationships.47
Other Private Law Sui Generis Remedies
Commercial Law – Transfer/Subrogation of a Gain or a Business Transaction, Breach of Fiduciary Duties
The Croatian Commercial Code48 might, in certain cases, allow the transfer of unlawfully gained profit. This instrument mostly arises from the relationship between members of a company and their fiduciary duties. Under the provisions of the Croatian Commercial Code (hereinafter: CC), “any member of a public limited company (“javno trgovačko društvo”) may not, without the explicit approval of other members, enter into business transactions or perform any other business activity outside the registered business activities of that company for his own or for a third party’s account, nor is such member allowed without approval of the others to participate in another public limited company” (Art 76(1) CC). If the member fails to do so, and violates such obligation, the other members of the public limited company may claim damages, or alternatively they may claim to take over – for the company’s account – the transaction entered into by the member of the company for his private account. But, more importantly, according to the wording of the Croatian Commercial Code, the members of the company may claim a transfer of “everything he gained” from the business transaction with third persons, and/or to subrogate “any legal right” he should have gained from the business transaction with a third person.49 In this respect, the Croatian Commercial Code might functionally allow the transfer of unlawfully gained profits of one member of a public limited company into company’s account. The limitation period for mentioned claims is 3 months from the moment at which the company became aware of the business transaction in question (subjective time limit), and 5 years from the conclusion of such transaction (objective time limit).50
Similar rules exist for members of the board of directors of a joint-stock company (“dioničko društvo”, Art 248 CO), and for members of the board of directors of a limited liability company (“društvo s ograničenom odgovornošću”, Art 429 CO). If one member of a board of directors – without the approval of the board and outside the scope of authorisation – enters into a business transaction with a third person for his own or for a third party’s account, the company may claim damages. Alternatively, the company may claim the transfer of “everything he gained” from a business transaction with a third person, or to subrogate “any legal right” he should have gained from the business transaction with a third person.51 The limitation period is equal to that for a public limited company 3 months from the moment at which the company became aware of the conclusion of the business transaction in question, and 5 years from the conclusion of such transaction.52 The identical rules apply in the case of an action of a member of the executive board of a limited liability company.53
The Croatian Commercial Code calls this remedy “restriction on competition”.54 From the point of legal classification, this remedy constitutes transfer of the unlawful gain, or more precisely subrogation of the gain and/or the entire legal transaction (business) concluded with a third person into company’s account. Since it allows the transfer of unlawful profit to the company as the injured party, functionally it might serve the same purpose as the disgorgement of profits. The Croatian High Commercial Court confirmed that under the provisions on “restriction on competition”, the company itself is to be the only party entitled to claim the transfer of illegally gained profit into its own account.55
Competition Law and Unfair Commercial Practices – Administrative and Criminal Offence Measures/Fines
Under the strong influence of European legislation, and in particular the need to protect Article 101 and Article 102 of the Treaty on the Functioning of the European union,56 the Croatian legislature introduced new sui generis remedies which might allow skimming off of unlawful gain in the area of competition law and unfair commercial practices. Provisions of the Croatian Unfair Competition Act (hereinafter: UCA)57 “prohibit all agreements between two or more independent undertakings, decisions by associations of undertakings and concerned practices, which have as their objective or effect the distortion of competition in the relevant market” (Art 8(1) UCA). The Croatian Competition Agency58 is empowered to impose measures for the removal of adverse effect of the prohibited agreements and other activities which infringe competition, as well as impose certain fines in accordance with UCA.59 Such measures are partly administrative and partly criminal offences. The objective of these measures is to ensure effective competition and the protection of Articles 101 and 102 of the Treaty on the Functioning of the EU, to sanction infringements of the law, to eliminate the consequences of anticompetitive behaviour, and to deter undertakings from engaging in unfair commercial practices.60 The administrative-criminal offence fines are divided into three categories: fines for severe infringements, for less severe infringements, and for other infringements of the law.61 The first two categories allow the Agency to skim off between 1–10 % of profit (net turnover) in the last year, calculated in accordance with the official financial statements of the party in the proceedings.62 The third category concerns monetary fines which relate to other infringements of an undertaking that is not a party to the proceedings, and this category is not relevant for disgorgement.63