© 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_19
19. Disgorgement of Profits in South African Law
University of Stellenbosch, Private Bag XI, 7602 Matieland, South Africa
University of Cape Town, Cape Town, South Africa
Various branches of South African law could apply when illegal conduct or a wrong has resulted in a profit, gain, benefit or enrichment on the side of the defendant, and it has to be established to what extent such a profit must be surrendered or ‘disgorged’. In this report the focus is mainly on private and commercial law, and especially on the role the laws of delict and unjustified enrichment could play in ensuring the disgorgement of illegal profits. The first part of the report sets out relevant principles of private law, and especially of the laws of delict and unjustified enrichment, while the second part focuses on specific fact patterns or cases that are potentially concerned with such disgorgement. The concluding section evaluates the current position and potential directions South African law could take.
KeywordsDisgorgementProfitsSouth Africa lawIllegal conductWrongGainUnjustified enrichment
Head of the Department of Private Law and Professor in Private law, University of Stellenbosch.
Deputy Vice-Chancellor (Research and Academic Affairs) and Professor of Law, University of Cape Town.
Introduction: Definition of Theme; Branches of Law Applicable
The central theme of this report is how South African law deals with situations where illegal conduct or a wrong (often amounting to a delict or tort) has resulted in a profit, gain, benefit or enrichment on the side of the defendant, and especially to what extent such a profit must be surrendered or ‘disgorged’. As the General Reporter’s Questionnaire points out, various branches of law and instruments could apply in these situations. South African law amply illustrates this proposition. In the context of public law, for example, provisions of criminal law and administrative law may impose a variety of sanctions or punishments, leading effectively to the neutralisation of the illegal profit.1 But here the focus will mainly be on private and commercial law, and especially on the role the laws of delict and unjustified enrichment (but also certain statutory provisions that cannot specifically be classified) could play in ensuring the disgorgement of illegal profits.
The South African experience bears out the general observation in the Questionnaire that the relevant remedies are generally latent, in the sense that it is not readily apparent that they could be applied to cases of profiting as a consequence of illegal conduct. More specifically, South African law has not adopted the conceptual apparatus, favoured by some in the common-law context,2 whereby a strong distinction is drawn between the term ‘compensatory’ damages, which is aimed at making good a loss, and ‘gain-based’ damages (or some functionally equivalent term), which focuses on the defendant’s gain. South African law does use the concept ‘restitutionary damages’, but only in limited contexts. These include cases where contractual consent has been obtained in an improper manner3 or where there has been breach of contract,4 and the award of ‘restitutionary’ damages is aimed at restoring the parties in their previous positions. It would further be rather confusing in the South African context to refer to a remedy primarily aimed at disgorging profits as a remedy of “disgorgement damages”, given the traditionally close association the word “damages” has to compensating a loss, rather than disgorging a gain.
The report is divided into two parts. The first part sets out some general principles of private law, and especially of the laws of delict and unjustified enrichment, in regard to the disgorgement of illegal profits. The second part in turn focuses on specific fact patterns or cases that are potentially concerned with such disgorgement. Against the background of these overviews, the concluding section evaluates the current position and potential directions South African law could take.
General Principles of the Laws of Delict and Unjustified Enrichment
Often, when a legal problem lies at the periphery of two or more established fields of law, its solution is hampered by the uncertainty of which area provides its true home and by the fact that ‘the core assumptions of the dogmatic structure of each field can be expected to begin to show their imperfections more clearly the further one moves from the centre’.5 Hugh Collins has remarked that when courts or legislators create practical solutions to problems that do not fall within established legal doctrine, jurists typically ‘seek ways to refine or revise the rules of subsystems in order to restore formal rationality’.6 In South Africa, parliament and the courts (applying and interpreting the common law) have indeed produced disgorgement responses or the functional equivalent to certain instances of improper profit-taking. However, insufficient doctrinal analysis has been devoted to the issue, and thus there is as yet no generally accepted theoretical map of this area of our law. But there is also a further problem: many instances that would be the subject of a surrender order in other legal systems escape this sanction in our system simply because the South African courts have been immobilised by doctrinal uncertainty. This means that the purpose of scholarly analysis of this issue in South Africa should be both to bring doctrinal order and to provide guidance on whether the gaps should be filled, and if so, how this should happen.
As will appear from the discussion below of the specific instances that involve disgorgement of profits, South African law has developed remedies that in effect erase improper profits mostly by way of statutory interventions7 or in the law of delict,8 while the law of unjustified enrichment has contributed little in this area, although it has the greatest potential to do so if the courts were to be sufficiently bold in reworking certain fundamental principles.
Two signposts send those looking for the home of the disgorgement of illegal profits in South Africa into no-man’s-land: on the one hand, the law of delict in South Africa rests on the fundamental precept, as formulated in Montres Rolex SA v Kleynhans 9 ‘that the commission of a delictual act entitles the injured party [only] to compensation from the wrongdoer for calculable pecuniary loss actually sustained or likely to be sustained in consequence of the wrong’.10 In other words, the South African law of delict is able to remedy improper gains that also involve a loss on the part of the plaintiff (as the discussion of the actio ad exhibendum and the condictio furtiva below will show),11 but it does not contemplate the annulment of improper gains that do not involve loss on the part of the plaintiff.12 On the other hand, the law of unjustified enrichment has as one of its most basic principles that an enrichment claim can neither exceed the defendant’s enrichment nor the plaintiff’s impoverishment – the so-called ‘double-cap’ or ‘double-ceiling’ rule. Therefore, if the plaintiff has suffered no impoverishment, as is often the case where illegal profits are made, the law of enrichment cannot provide a remedy.13 In both areas of law the real issue is the requirement of a loss.
There has been nothing in this country as vigorous as the English-law debate which has resulted in the now-dominant view that draws a firm distinction between restitution of an unjust enrichment and restitution of a wrong,14 nor is there the even older certainty of German law that the reversal of a profit resulting from an Eingriff (invasion) of another’s rights is part of the law of unjustified enrichment.15 There is, however, some awareness of the fact that the different sections of South African law that deal with (or could deal with) disgorgements of profits are insufficiently co-ordinated to allow a principled approach to when and how illegal profits should be reversed. Thus, already in Montres Rolex SA v Kleynhans 16 Seligson AJ, while denying the remedy of account of profits as being contrary to the basic principles of our law of delict, acknowledged that it is unsatisfactory that there is no remedy available to deal with the problem:
All this is not to say that the policy of preventing the unjust enrichment of the infringer at the expense of the trade mark proprietor has nothing to commend it. On the contrary, it would be an inequitable result if the deliberate infringer is able to retain the profits made from the unlawful use of the plaintiff’s trade mark in circumstances where such profits do not represent the plaintiff’s actual loss.
He held that there should be an ‘innovative fashioning of a remedy in our law to deal with the situation where an infringer clinches, by filching the trade marks of another, sales which the latter would probably not have made’, but he did not see himself able to refashion the law to accommodate such a remedy.17
Since this case there has been some academic analysis of the problem in Montres Rolex and similar situations. Mr Justice Deon van Zyl, commenting on the case, thought that the law of delict was a more promising site for the development of this kind of remedy than the law of unjustified enrichment:
There is certainly a need for an equitable remedy to enable a plaintiff to claim benefits unjustly acquired by a defendant, without the plaintiff having been impoverished or having otherwise suffered damages as a result of such acquisition. Pauw has suggested (in (1980) 97 SALJ 221 at 224.) that Aquilian liability may be extended to provide for the recovery of wrongfully acquired benefits. The action would be delictual, although it would closely approach an enrichment action directed at the recovery of unjustly acquired benefits.18
The law of delict can confidently be described as one of the most dynamic parts of South African law and it has time and again proved itself to be adaptable to the circumstances of the day. Over time, English law, Scots law, German law and modern Dutch law have all been used to mould the received Roman-Dutch law of delict into a modern, flexible and progressive system. Why judges are more activist in certain areas of the law and not others is a difficult question to answer, but there can be no doubt that South African judges have consistently been bold in developing the law of delict. The law of delict therefore appears to be the area where our law is most likely to come up with an answer to the present conundrum. However, the problem is that for the law of delict to reverse improper gains would require, on the one hand, the abandonment of one of its most basic tenets, namely that it is aimed at making good harm suffered by the plaintiff,19 and, on the other, an investigation into fault on the part of the defendant, which is not appropriate to this kind of claim.20
Others have thought that the law of unjustified enrichment can and should be adapted, by relaxing the double-cap/ceiling rule to allow the reversal of improperly acquired benefits by taking from another or by invading the rights of others.21 Unlike the law of delict, change in the law of unjustified enrichment in South Africa has happened only in small, incremental steps. Even the creation of the conceptual apparatus for a general enrichment action in McCarthy Retail v Shortdistance Carriers 22 has not brought anything along the lines of the dramatic advances that we have become accustomed to see in the law of delict. So no-one would say that the odds are in favour of the desired remedy being fashioned in this area of the law. Yet, ironically, since the very business of the law of unjustified enrichment is to strip away benefits that are being unjustifiably retained, this is precisely where the remedy should be created.23 It is true that the double-ceiling rule is a long-standing rule in the law of enrichment, but it is a pragmatic rule, the relaxation of which would not do any violence to the fundamental precepts of this area of law. Relaxing the double-ceiling rule would merely require that appropriate rules would have to be fashioned to determine the quantum of the enrichment in these cases24 – and this would not be too difficult, as the experience in many other legal systems demonstrates. At present, because the law requires both the defendant to have been enriched and the plaintiff to have been impoverished, the measure of enrichment across the board is stated simply as being the defendant’s enrichment or the plaintiff’s impoverishment, whichever is the lesser. This would still remain the case outside of enrichment through invasion of rights, but in the latter case one could make use of devices such as reasonable rental fees and other market-related standards to determine the measure by which the defendant has been enriched.25
It is clear that any private-law remedy (be it in delict or in enrichment) should not amount to punishment. Thus Midgley and Van der Walt26 remark that ‘people who face the prospect of punishment are accorded certain procedural safeguards … [and therefore] punitive damages in delict may very well be unconstitutional’. That would also be true of any enrichment remedy that purports to punish. But the mere fact that a particular remedy strips away a profit does not place it in the category of punishment. On the contrary, for a private-law system to have an appropriate set of remedies to reverse profits obtained through the invasion of the rights of others contributes to its ability to fulfil its role of dispensing corrective justice. Thus Jules Coleman states in an early contribution:
In my view, corrective or compensatory justice is concerned with the category of wrongful gains and losses. Rectification, in this view, is a matter of justice when it is necessary to protect a distribution of holdings (or entitlements) from distortions which arise from unjust enrichments and wrongful losses. The principle of corrective justice requires the annulments of both wrongful gains and losses.27
The law of unjustified enrichment is not entirely explicable in terms of corrective justice, but there can be little doubt that this concept lies at the heart of this area of South African law, and that enrichment law should accordingly be developed in such a way by the courts that it achieves compensatory justice as perfectly as possible. This means that whenever a court identifies an instance where a gain is unjustified – as it did in Montres Rolex – it has a duty to fashion a remedy to restore equality; it is not good enough to identify that which must be corrected without also creating a remedy where none exists. After all, South African law does not proceed, as Roman law did, from the position of ubi remedium, ibi ius; rather its stance is ubi ius, ibi remedium.
Any private-law remedy for reversing an unjustified gain that results from invading the right of another should be such that it ensures that both plaintiff and defendant receive what they deserve – there must be, in Hanoch Dagan’s words – ‘correlativity between the defendant’s liability and the plaintiffs entitlement, as well as between the plaintiff’s entitlement and the remedy’.28 The basic principle of correlativity in corrective justice insists that the defendant should not have to give up more than that by which he or she has been enriched; but at the same time it also insists that the plaintiff should not receive more than the injustice suffered requires. In instances of enrichment other than those induced by wrongdoing, the imbalances that have arisen are appropriately corrected by ordering the economic loss, the impoverishment that the plaintiff has actually suffered, to be repaid. But where the injustice is embodied in someone being enriched by, for example, arrogating to him- or herself the right to use another’s property without permission, or by publishing private information about that other person, the resulting imbalance cannot be restored by using this measure, since the plaintiff would not necessarily have suffered any economic loss. To determine what exactly the plaintiff is entitled to claim necessitates a consideration of the social values that the law wishes to advance in the particular situation.
In some cases, ordering the disgorgement of the whole profit will be necessary to repair the disturbed equilibrium. Thus, in a case of the unauthorized publication for gain of private information concerning a celebrity, only an order to pay to the wronged party the whole profit that emanated from that publication will be appropriate – anything less would effectively mean that the publisher could give itself a licence to exploit the publicity value of the celebrity at a discount rate.29 In other cases it would not be appropriate to order the whole profit to be disgorged. For instance, in cases where there is exploitation of a resource in circumstances where it is likely that that permission would have been given if it had been sought, a reasonable licence fee (fair market value) would restore the balance between the parties,
Dagan comments as follows on these two measures:
The profits measure reflects and reverses a breach of the plaintiff’s entitlement to control the resource, while the fair market value reflects and reverses a breach of her entitlement to the well-being embodied by the resource. The claims to control and well-being … entail the applicable measures of recovery in the very strict way the correlativity thesis requires. Thus, in order for control to be respected, the resource holder must be entitled to the infringer’s profits. (Deterrence is thus an entailment of the entitlement to control, which is intrinsic, rather than extrinsic, to the parties’ relationship.) And once an infringement has occurred, nothing but the restitution of profits can rectify it. On the other hand, where the only legitimate claim of the plaintiff respecting the resource is to the well-being which it embodies, she is entitled to the fair market value of its use or alienation, and even an intentional circumvention of the market should not trigger any additional recovery.30
The precise ambit of the remedies that should be available can be determined only in the context of the situations where they are or might be required. We will now proceed to consider the specific instances in which disgorgement of profits is recognised or could be recognised in South African law.
Specific Cases Potentially Involving Disgorgement of Profits
Infringing the Right to Use, Consume or Dispose of Corporeal Property
It is well-established in South African law that a broad range of rights may be held with respect to corporeal property. These include the right to use, consume or dispose of it. Where another person gains by infringing such a right, the holder of the right is provided with a variety of remedies, some of which could directly or indirectly oblige the infringing party to surrender these gains.
Profiting by Using Property31
Certain special cases of gaining through use of property could give rise to statutory relief. For example, legislation imposing formal requirements for the sale of land allows the seller under a formally invalid contract to recover reasonable compensation for the occupation, use or enjoyment the purchaser may have had of the land.32 The statutory relief also concerns cases where the use may have been lawful at the time, but subsequently has to be accounted for. Thus, where a consumer exercises a statutory right to return the goods, consumer legislation entitles the supplier to charge a reasonable amount for the use of the goods.33
Under the South African common law, infringing the right to use may entitle the holder of the right to a delictual claim for damages arising from not being able to use the property.34 Such a claim is aimed at compensating for the plaintiff’s loss, rather than at disgorging the defendant’s actual gain (although the amount may often be the same, for example if the defendant’s gain was not paying the same rental which the owner would have earned).
South African law awards other remedies aimed at making the defendant account for his gain, but generally these remedies operate ‘indirectly’, by way of deducting or setting-off an amount for use from an enrichment claim that the defendant in turn has against the plaintiff. For example, an owner whose property has been improved without authorisation may deduct an amount for use from the improver’s enrichment claim.35 And when a transfer is made in fulfillment of an invalid sale, the seller may set off the enrichment of the purchaser through the use of the merx against the purchaser’s claim for repayment.36 It is only rarely that a ‘direct’, independent enrichment claim is awarded, for example where property is occupied after termination of a lease with the previous landlord, and no agreement has been concluded with the new owner.37
However, there are some indications that South African law may in future develop to be more willing to award an enrichment claim if a person’s property is used by another who has no right to do so.38 Such a claim would have to meet the general requirements for enrichment liability, and would have to be quantified in accordance with the principles governing the measure of enrichment claims. As mentioned above in the section on “General Principles of the Laws of Delict and Unjustified Enrichment”, it may be necessary to reconsider whether to adhere to the general requirement that the plaintiff had to be impoverished, and whether the claim should be measured by applying the double ceiling rule, which limits its ambit to the lesser of the plaintiff’s impoverishment and the defendant’s enrichment. The classic example is the situation where a person is enriched by staying for free in another’s house without permission, and thereby infringes the owner’s right to occupy the house, but the owner cannot prove that he suffered impoverishment or loss. It especially remains to be resolved when the defendant’s enrichment should be measured in terms of a reasonable rental, and when the defendant might be obliged to disgorge actual gains derived from using the property. As indicated in the section on “General Principles of the Laws of Delict and Unjustified Enrichment” above, a reasonable rental might be the more appropriate measure to adopt in this instance.
Profiting by Consuming Property39
The main forms of relief when gains are obtained by infringing the right to consume property are also delictual in nature. If someone wrongfully and culpably consumes another’s property in the knowledge of the owner’s title or claim, the owner may claim delictual damages with the actio ad exhibendum.40 If the person who consumed the property obtained it through theft, the owner could be entitled to the condictio furtiva, which is also regarded as a delictual remedy in South African law (despite a name which suggests it is an enrichment claim), but the measure is more generous, since it is the highest value of the property since the theft.41
These delictual claims are only available if the enriched was at fault. If the plaintiff is unable to establish fault, an enrichment remedy could be awarded even if the defendant was enriched by consuming another’s property without being entitled to do so; the appropriate enrichment action is the condictio sine causa specialis.42 This action was for example awarded in Greenhills Producers (Pty) Ltd (in Liquidation) v Benjamin, 43 where the plaintiff gave the defendants possession of farm land for grazing in terms of a joint venture agreement and the agreement was subsequently terminated, but the defendants remained in occupation in good faith, and were enriched through continuing to use the land for grazing. The enrichment claim is not available where property was received in good faith and for value, and was then consumed.44 It has been expressly held that South African law has not received the doctrine of conversion of English law, whereby even the innocent ‘consumer’ for value could be liable.45
Profiting by Disposing of Property46
The delictual remedies considered above in the context of illegal consumption are also relevant to illegal disposal of property: the actio ad exhibendum applies when one person knowingly disposes of another’s property,47 whereas a thief who disposes of another’s property (and a complicit third party),48 may also have to face the condictio furtiva.49 These remedies could indirectly serve to compel a party who profited by disposing of the property to surrender these gains to pay the damages claim.
However, a delictual claim would fail in the absence of fault. It may again be convenient to resort to a remedy based on unjustified enrichment (presumably the condictio sine causa specialis) to strip the defendant of his gain, even if there was no fault on his side.50 For example, in Union Government (Minister of Agriculture) v Lombard, 51 government employees took buchu from Lombard’s farm, and sold it in good faith to a third party; it was held that the government was liable to the extent to which it had benefited, and that it could not be allowed to enrich itself at Lombard’s expense. Unfortunately, the application of such an enrichment claim is quite complex: it requires differentiation between a variety of defendants, whose positions vary depending on whether they were given possession by the owner, took possession from the owner, or obtained it from a third party, and whether they gave value in return.52 This is one of the areas in which the uncodified, civil-law based South African law of unjustified enrichment is least developed.
Infringing Intellectual Property Rights53
South African law recognises various statutory remedies that arise from illegally infringing intellectual property rights, such as trademarks, copyright, patents or designs. These include statutory claims for damages or for a reasonable royalty in lieu of damages,54 but not for the disgorgement of actual profits. At best, there may be an indirect ‘skimming off’ of profits to pay these claims. It is only in cases of copyright infringement that courts are statutorily empowered to award a claim which could target the defendant’s actual profits. This is an exceptional claim for additional damages, which courts may award as they may deem fit; they have to be satisfied that effective relief would not otherwise be available to the plaintiff, having regard, in addition to all other material considerations, to the flagrancy of the infringement and ‘any benefit shown to have accrued to the defendant by reason of the infringement’.55 The quoted part of the provision indicates that the claim for additional damages could achieve the effect of forcing the disgorgement of the defendant’s actual profits.
It is a matter of statutory interpretation to determine to what extent further common-law remedies are available beyond these statutory sources of relief in cases of infringing intellectual property rights. As mentioned in the introduction, South African courts have refused to recognise the English practice of allowing a plaintiff in an action for infringement of a trade mark (or passing-off) to choose between asking for ‘an inquiry as to damages’ or ‘an account of profits’.56 This refusal is not a problem as long as the statutory protection against infringement is adequate. Often the plaintiff would be satisfied with a claim for damages or a reasonable royalty in lieu of damages.
However, if the plaintiff seeks to strip the enriched of actual profits, the only statutory protection, as indicated above, is provided in cases of copyright infringement. In other cases of infringement of intellectual property rights, the plaintiff would have to rely on the common law, but the options are not promising. The law of delict would be inappropriate inasmuch as it is aimed at compensating actual losses, rather than disgorging profits.57 The law of unjustified enrichment is, in principle, more appropriate for this goal, but it presents the plaintiff with the formidable obstacles outlined in the section on “General Principles of the Laws of Delict and Unjustified Enrichment