‘Second Sale’ Cases
The ‘second sale’ cases arise when a vendor sells property, goods or services to a purchaser, but the vendor then breaches his contract with the purchaser to sell the item more profitably to a third party.1 Substitutability assists in ascertaining when disgorgement damages will be available: that is, it depends on where the subject matter of the contract sits on the spectrum: from fungible property, goods or services at one end of the spectrum (which a claimant can easily procure from elsewhere) to unique property, goods or services at the other end of the spectrum (which cannot be procured from elsewhere).2 However, it will be seen that even if a particular good is fungible in nature and ordinarily easily obtainable courts will order specific performance if there is a particular reason why it would be impossible or difficult for the claimant to procure it from elsewhere. Courts may also order specific performance if damages are impossible to ascertain.
Courts already routinely use principles of substitutability when deciding whether or not to award specific performance or (in some circumstances) an injunction to restrain a breach of negative covenant. In Adderley v Dixon, Leach V-C explained the principles of specific performance as follows:
Courts of Equity decree the specific performance of contracts, not upon any distinction between realty and personalty, but because damages at law may not, in the particular case, afford a complete remedy. Thus a Court of Equity decrees performance of a contract for land, not because of the real nature of the land, but because damages at law, which must be calculated upon the general money value of land, may not be a complete remedy to the purchaser, to whom the land may have a peculiar and special value. So a Court of Equity will not, generally, decree specific performance of a contract for the sale of stock or goods, not because of their personal nature, but because damages at law, calculated upon the market price of the stock or goods, are as complete a remedy to the purchaser as the delivery of the stock or goods contracted for; inasmuch as, with the damages, he may purchase the same quantity of the like stock or goods.3
Specific performance will be ordered in circumstances where the claimant is unable (or finds it very difficult) to procure a substitute performance. Because the claimant will not be placed in a position as if the contract had been performed by an award of damages, she is justified in compelling the defendant to perform the contract. The law with regard to disgorgement damages does not require an entirely new way of thinking: it is a logical and coherent extension of principles already tried and tested in awards of specific relief. Thus, in analysing the case law, this chapter will consider the circumstances in which a court is prepared to say that the particular subject matter of a contract is not substitutable. Most of the cases which establish these principles involve awards of specific performance or injunctions to restrain a breach of covenant.
However, in some ‘second sale’ scenarios, courts have been prepared to award disgorgement damages – most commonly for second sales of land, but also for goods and shares in a limited number of cases. Substitutability explains why courts have chosen to do so. Unfortunately, the courts are not always transparent about what is occurring in these cases. For example, in Lake v Bayliss4 and Bunny Industries Ltd v FSW Enterprises Pty Ltd,5 the courts concealed an award of disgorgement damages for second sale of real property behind a constructive trust analysis. Even in Luxe Holding Limited v Midland Resources Holding Limited,6 a recent case involving a second sale of shares in a private company, the court still found it necessary to obscure its conclusion behind a constructive trust analysis, and rejected the argument that the claimant was entitled to disgorgement damages pursuant to Attorney-General v Blake.7 One of the few ‘second sale’ cases which is transparent about awarding disgorgement damages for breach of contract is the Israeli Supreme Court Case, Adras Building Material v Harlow & Jones GmbH.8 Unfortunately in Adras the court did not make a factual finding as to the substitutability of the subject matter of the contract. If it had done so, the decision might have been justifiable.
Substitutability indicates that the circumstances in which a court will award disgorgement damages for a ‘second sale’ will be rare. In most commercial contracts, the subject matter of the contract is substitutable, and thus compensatory damages will be adequate. Where compensatory damages are inadequate, and the subject matter of the contract is non-substitutable, the court will award specific performance by preference. It is only when specific performance is impossible and the defendant has made a profit from the second sale that disgorgement damages will potentially be available. One area where courts should perhaps have increasing recourse to disgorgement damages is in cases involving the ‘second sales’ of services. If the services of the defendant are unique, disgorgement damages recognise the claimant’s interest in their performance, but do not restrain the liberty of the defendant to provide the services for others. Award of the remedy therefore offers a more balanced approach to the issue than current approaches.
This chapter also discusses the theory of ‘efficient breach’, and concludes that, despite initial appearances, the theory does not rule out recognition of disgorgement damages for breach of contract as long as substitutability is added to the analysis. Nonetheless, it suffers from certain fatal flaws which mean that it does not fully fit with the reality of contract law, and thus should not be accepted in any event.
The subject matter of the ‘second sale’ contracts can be broken down into land, chattels and goods, shares and stock, and services. I will consider each category in turn.
II ‘Second Sale’ Cases
A Contracts for Sale of Land
Land has been ‘accorded a unique status as a symbol of the self and as a resource closely linked to personal freedom, rank and power.’9 It has a ‘peculiar and special value’,10 and therefore, it is intrinsically non-substitutable. Specific performance of contracts for sale of land will usually be ordered.
However, a majority of the Canadian Supreme Court has cast doubt in obiter dicta on the presumption that contracts for sale of land are necessarily specifically performable. Semelhago v Paramadevan11 did not raise the issue of specific performance of a contract for sale of land directly. After the contract of sale was breached, the claimant elected to take damages instead of specific performance, and the issue was the way in which those damages were to be calculated. Sopinka J, who delivered the majority judgment, said:
While at one time the common law regarded every piece of real estate to be unique, with the progress of modern real estate development this is no longer the case. Residential, business and industrial properties are all mass-produced much in the same way as other consumer products. If a deal falls through for one property, another is frequently, though not always, readily available.
It is no longer appropriate, therefore, to maintain a distinction in the approach to specific performance as between realty and personalty. It cannot be assumed that damages for breach of contract for the purchase and sale of real estate will be an inadequate remedy in all cases. The common law recognized that the distinction might not be valid when the land had no peculiar or special value . . . [His Honour here cited Adderley v Dixon (1824) 1 Sim & St 607, 57 ER 239]12
His Honour went on to state:
Specific performance should, therefore, not be granted as a matter of course absent evidence that the property is unique to the extent that its substitute would not be readily available13
As Professor Chambers has argued, these dicta misunderstand the reasoning behind specific performance, because ‘[a]lthough the purchaser might be able to find other land with similar features, it [is] simply not possible to obtain the same land from another vendor.’14 The availability of specific performance should not hinge on the availability of a substitute performance which is ‘good enough’ or ‘90 per cent of what the claimant wanted’. Damages cannot be an adequate response where a claimant is unable to get a full and proper substitute for the benefit for which she bargained. Land is intrinsically non-substitutable, as compared to $100 notes or shares or grains of rice. Each plot of land will have its own specific attributes which mean that the plot is not, and can never be identical with another plot, even if it is a part of an apartment block or a development where all the apartments are similar.15
Chambers highlights the three central problems with Semelhago, being a resultant lack of equality in the way in which courts treat claimants,16 uncertainty created by the new rule,17 and unintended consequences for the way in which equitable proprietary interests are found to arise from specifically enforceable contracts to create those interests.18
Semelhago can be contrasted with the Australian case, Pianta v National Finance & Trustees Ltd. In that case, Barwick CJ suggested that specific performance will be ordered regardless of whether a property was purchased for the purposes of a real estate development or a personal home.19 This conclusion must be preferred – there is no possibility of true substitute performance where land is concerned. As Sir Garfield Barwick said in dissent in Loan Investment Corp of Australasia v Bonner, ‘No two pieces of land can be identically situated on the surface of the earth. When a buyer purchases a parcel, no other piece of land, or the market value of the chosen land can be considered . . . a just substitute for the failure to convey the selected land.’20
Therefore, where the subject matter of a contract is land and the vendor has entered into a profitable ‘second sale’ with a third party, substitutability suggests that the breaching party should disgorge any profit made (subject to discretionary considerations).
In fact, even prior to Blake, English and Australian courts were prepared to force a breaching vendor to disgorge his profit to the purchaser. The two examples of this are Lake v Bayliss21 and Bunny Industries.22 In each case the vendor made a contract of sale of certain land with the purchaser, but then, unbeknown to the purchaser, the vendor entered into a more profitable contract of sale with a third party. The land was ultimately conveyed to the third party, and specific performance was no longer available. In Lake v Bayliss the matter was further complicated by the fact that the vendor contracted to convey the land to the purchaser in return for the purchaser withdrawing two legal claims against her.
In each case, the vendor was said to be a trustee of the proceeds of sale and had to account for them (subject to the purchaser providing the requisite consideration).23 Effectively, the vendor was forced to disgorge his or her profits to the purchaser.
Lake v Bayliss and Bunny Industries have been explained as cases where profit must be disgorged because of the constructive trust which is said to arise upon execution of the contract of sale (before settlement occurs).24 The vendor is said to hold the property on constructive trust for the purchaser because the contract is specifically enforceable.25 But the trust analogy is unsatisfactory, as noted in Lysaght v Edwards by Sir George Jessel MR.26 The vendor cannot be considered to be a bare trustee. The vendor is not subject to a fiduciary duty of loyalty to the purchaser, nor does the vendor have any active duties to perform other than to preserve the property and to perform the contract of sale. Indeed, whether a constructive trustee can be said to be a fiduciary at all is controversial. The vendor maintains some beneficial interest in the asset as he is entitled to possession of the property until transfer, and holds a security interest over the property to ensure payment of the purchase price via a vendor’s lien. Further, the purchaser’s interest corresponds only to the proportion of the purchase price paid. Sir Thomas Plumer MR in Wall v Bright27 described the vendor as ‘in progress towards’ bare trusteeship. A vendor will only become a bare trustee when the whole of the purchase moneys are paid and the vendor is bound by contract to convey.
The Australian High Court questioned the authority of Lysaght v Edwards in Tanwar Enterprises Pty Ltd v Cauchi.28 Tanwar said in obiter that where a purchaser had failed to pay the full purchase price by the time specified, there was no equitable interest arising as a result of the entry into a contract for sale of land.29 Therefore, the purchaser could not found a right to relief against forfeiture on the basis that it had forfeited an equitable interest in the land. Similarly, US courts have rejected the constructive trust analysis.30
Chambers has argued that the High Court in Tanwar may have been unduly hasty in concluding that a constructive trust does not arise upon entry into a specifically performable contract for sale of land, as the questions then arise – what interest does the purchaser have, and how can she protect her interest if it is not proprietary?31 Thus it has been argued that it would be too unsettling to the law to conclude a constructive trust does not arise upon entry into a specifically enforceable contract of sale. As Dr Elias has noted, constructive trusts are imposed for a variety of reasons, including the aim of perfecting the parties’ intentions.32 The constructive trust arising pursuant to a specifically enforceable contract of sale could be said to arise from the court’s desire to perfect the intention of the parties, as the vendor has indicated he will transfer the property to the claimant, and the court seeks to recognise that commitment in the best way it can.33
It is clear that some kind of equitable proprietary interest must arise upon entry into specifically enforceable contracts of sale of interests in land, and there are sound reasons for this. Tanwar throws the baby out with the bath water by jettisoning both the constructive trust analysis and, with it, the purchaser’s equitable proprietary interest. It may be, however, that the interest which arises is better analysed as some other kind of equitable proprietary interest whereby the vendor becomes obligated to transfer the property to the purchaser, rather than being constrained within a constructive trust analysis because of the well-known difficulties with it.
The constructive trust analysis of contracts for sale of land is particularly problematic in second sale cases. The constructive trust is said to arise from the fact that the contract for sale of land is specifically enforceable. The purchaser can compel the vendor to convey the property to her, and thus she is regarded as having a beneficial interest in the property. In both Lake v Bayliss and Bunny Industries the contract of sale was no longer actually specifically enforceable, because the land had been conveyed to a third party. Nonetheless, in each case the court was prepared to find that the vendor was liable to account by virtue of the constructive trust. It could be argued that while the vendor no longer holds the land on constructive trust, the claimant has the right to trace the beneficial interest from the land to the money as a result of the breach of the constructive trust. This analysis is attractive, but the difficulty with it is that the vendor is not a bare trustee. The vendor maintains some beneficial interest in the land after the contract of sale has been entered into, being entitled to possession of the property until transfer and a right to the value of the property through the payment of the purchase price via a vendor’s lien.34 It is not clear that full fiduciary obligations arise from the constructive trust arising from a specifically enforceable contract of sale because the vendor is not obliged to act wholly in the purchaser’s interests, and thus the basis for tracing in equity may be problematic if the fiduciary requirement is insisted upon.35 A counter-argument may be that there is at the very least a duty of loyalty in respect of honouring the contract of sale, and that this is enough to satisfy the fiduciary requirement.
In an attempt to bypass the difficulties of the constructive trust analysis American scholars have analysed the remedies arising from these second sale cases as a form of expectation damages rather than disgorgement damages.36 There is said to be an implied term in contracts for the sale of a commodity that the vendor will not seek out or accept offers from others who wish to pay more, and the buyer pays an implicit premium for that promise. It is argued that where a ‘second sale’ situation occurs and a vendor is forced to disgorge his profits, this is not disgorgement but a form of expectation damages, because the purchaser has paid for the right to any profit gained by the vendor pursuant to the implied term. The difficulty with this analysis is that, like the constructive trust analysis, it involves a fiction: namely, that the parties agreed that if the vendor sold to someone else the purchaser would be entitled to the profit made by the vendor. Professor Eisenberg, who advocates the above interpretation, then argues that disgorgement damages should be awarded where the promisee would have been awarded specific performance before the promisor’s wrongful action put the remedy beyond reach.37
It is better to avoid fictions altogether. In Blake, when discussing Lake v Bayliss, Lord Nicholls considered the constructive trust analysis was unnecessary where one was attempting to effect disgorgement of profits arising from a second sale; the claimant could merely have relied on the breach of contract and disgorgement damages arising from the breach.38 This analysis of the basis for disgorgement is preferable to an analysis based on the existence of a constructive trust because it is more transparent and straightforward. These cases award disgorgement for breach of contract because the subject matter of the contract was not substitutable and specific performance was no longer available.
B Contracts for Sale of Goods or Chattels
Where contracts for sale of goods or chattels involve a good or chattel that can easily be obtained elsewhere, the general principle is that damages will be adequate compensation for non-performance.39 However, a good or chattel may be non-substitutable if it is unique or because the claimant cannot easily procure the chattel or good from elsewhere.40 Thus, in Falcke v Gray, Kindersley V-C said:
If in a contract for chattels damages will be a sufficient compensation, the party is left to that remedy. Thus if a contract is for the purchase of a certain quantity of coals, stock, &c., this Court will not decree specific performance, because a person can go into the market and buy similar articles, and get damages for any difference in the price of the articles in a Court of law. But if damages would not be a sufficient compensation, the principle, on which a Court of Equity decrees specific performance, is just as applicable to a contract for the sale and purchase of chattels, as to a contract for the sale and purchase of land.
In the present case the contract is for the purchase of articles of unusual beauty, rarity and distinction, so that damages would not be an adequate compensation for non- performance; and I am of opinion that a contract for articles of such a description is such a contract as this Court will enforce; and, in the absence of all other objection, I should have no hesitation in decreeing specific performance. [Emphasis added]41
Sometimes a good or chattel may be non-substitutable because the defendant is particularly well situated to meet the claimant’s needs, and the claimant could not quickly get a substitute performance.42 In North v The Great Northern Railway Company, where the defendant had contracted to sell 54 coal wagons to the claimant, Stuart V-C said:
There can be no doubt that, on the statements in the bill, the Plaintiff’s trade being such as it is, the coal waggons were of special value to him, in order to carry on his business. The sudden sale of those waggons, without which the trade could not be conducted, must necessarily have inflicted serious injury by the interruption of his trade.
It is not answer to say that it is possible to state a sum of money which would have been sufficient compensation for the injury. The Court looks at the circumstances of the case with reference to the right to the specific thing. It cannot be pretended that the Plaintiff could have got, on a sudden, fifty-four other coal waggons fit for his business as readily and promptly as he could have purchased fifty-four tons of coal or fifty-four bushels of wheat. [Emphasis added]43
In some circumstances, although a good or chattel is generally substitutable, it may be unavailable because of particular circumstances at that time.44 For example, in Howard Perry,45 members of the National Union of Railwaymen had refused to transport steel in a gesture of solidarity with striking steelworkers. The claimants were steel stockholders, and had consignments of steel waiting to be delivered in two of the defendant’s depots. The steel could not be kept for a long period of time because it would harden and become unmalleable and would be unworkable for the claimants’ purposes. The defendants would not allow the claimants to collect the steel from the depots themselves. Accordingly, the claimants sought delivery up of the goods pursuant to the contract. Megarry V-C said:
If a plaintiff can easily replace the goods detained by purchasing their equivalent on the market, then the payment of damages out of which the price of the equivalent may be paid is adequate compensation to the wronged plaintiff, and there is little or no point in making an order for the delivery of the goods. Far better to let the plaintiff fend for himself with the defendant’s money.
In normal times, the steel here in dispute might indeed be in this category; but these times are not normal, and at present steel is obtainable on the market only with great difficulty, if at all. If the equivalent of what is detained is unobtainable, how can it be said that damages are an adequate remedy? They plainly are not. Mr Irvine observed that at present ‘steel is gold,’ and one can see what he meant. Yet even that may not do justice to his cause, since as far as I know gold is still available on the open market to those who pay the price. [Emphasis added]46
Indeed, in the United States, courts have awarded punitive damages for breach of contract where the defendant contracted to supply oil to the claimant, and then breached the contract, knowing that the claimant’s business would fail because it would be unable to gain a substitute performance.47
In other circumstances, there may be an instalment contract to supply goods and services over a long period of time.48 This is not substitutable because a complex contract cannot be replaced with an identical deal. For example, in Eastern Rolling Mill Co v Michlovitz the defendant had contracted with the claimants to sell them scrap steel for a period of five years. The contract provided that the claimants were to accept delivery of the steel as it accumulated, and the price for both pressed bundled sheet steel and crop end scrap respectively was to be $3 a ton less than the quoted price in ‘Iron Age’, a publication which contained the Philadelphia market prices for steel. The defendant purported to terminate the contract after the manager of the defendant died some months into the five-year contract. The claimants sought specific performance of the contract. The Court of Appeals of Maryland said:
The goods which the parties here had bargained for were not procurable in the neighborhood, and, moreover, they possessed a quality and concentrated weight which could not have been secured anywhere within the extensive region covered by the ‘Philadelphia Market.’ In addition, the delivery of the scrap at Baltimore was one of the valuable incidents of the purchase. It follows that the right to these specific goods is a consideration of great importance, and this and the difficulty of securing scrap of the same commercial utility are factors making for the inadequacy of damages.
The scrap is not to be delivered according to specified tonnage, but as it accumulates, which in the past has been at the rate of one and two, and occasionally three, carloads of scrap a day, so the quantities vary from quarter to quarter. If the plant should cease to operate or suffer an interruption, there would be no scrap accumulating for delivery under the contracts, and its deliveries would end or be lessened. Neither are the prices for the scrap constant during the period of the contracts, but change from quarter to quarter according to the quotations of two specified materials on the Philadelphia market whose quarterly prices are accepted as the standards upon which the contract prices are quarterly computed. The contracts run to September 30, 1932. By what method would a jury determine the future quarterly tonnage, the quarterly contract price, and quarterly market price during these coming years? How could it possibly arrive at any fair ascertainment of damages? Any estimate would be speculative and conjectural, and not, therefore, compensatory. It follows that the defendant’s breach of its contracts is not susceptible of fair and proper compensation by damages; and that to refuse to compel the defendant to do merely what it bound itself to do, and to remit the plaintiffs to their action at law, is to permit the defendant to relieve itself of the contracts and to force the plaintiffs to sell their profits at a conjectural price. To substitute damages by guess for due performance of contract could only be because ‘there’s no equity stirring.’ [Emphasis added]49
Indeed, the US Uniform Commercial Code deems certain long-term requirement contracts to be unique.50 Section 2-716(1) states, inter alia, that ‘[s]pecific performance may be decreed if the goods are unique or in other proper circumstances.’ Comment 2 to §2-716 expands upon this:
Specific performance is no longer limited to goods which are already specific or ascertained at the time of contracting. The test of uniqueness under this section must be made in terms of the total situation which characterizes the contract. Output and requirements contracts involving a particular or peculiarly available source or market present today the typical commercial specific performance situation, as contrasted with contracts for the sale of heirlooms or priceless works of art which were usually involved in the older cases. However, uniqueness is not the sole basis of the remedy under this section for the relief may also be granted ‘in other proper circumstances’ and inability to cover is strong evidence of ‘other proper circumstances.’
The Israeli Supreme Court has awarded disgorgement damages for a ‘second sale’ of goods in Adras.51 The defendant, Harlow, a German company, entered into a contract of sale with the claimant, Adras, an Israeli company. The contract provided that the defendant would supply the claimant with 7000 tons of iron at a price of 570 German marks per ton. There was a delay in delivery because of the Yom Kippur war in October 1973, but 5025 tons were eventually shipped to the claimant in early 1974. On 8 April 1974, the defendant told the claimant that it had to sell the remaining iron because of high storage costs. In fact the price of iron had spiked, and the defendant proposed to profit by selling the iron to a third party. The claimant demanded that the defendant supply the remaining 1925 tons of iron due under the contract. Instead, the defendant sold the iron in Hamburg for a profitable price of 804.70 German marks per ton. The claimant did not obtain an alternative supply of iron on the market, and sued to recover damages for breach of contract pursuant to the Sale (International Sale of Goods) Law 1971 (Israel)52 and to recover the profit made by the defendant in respect of the sale of the remaining iron. At a previous hearing the Supreme Court had held that the claimant had never terminated the contract, and therefore the claimant had failed to prove any loss.53
A majority of the Supreme Court of Israel54 found that the claimant was entitled to recover the profit made by the defendant. In his judgment Barak J raised the second sale of land cases where disgorgement is said to arise because of a constructive trust in Anglo-American law. Barak J said:
The injured party has a right not only to compensation for breach of contract, but also to specific performance . . . Therefore, under Israeli law, a buyer in a contract of sale is entitled to receive the subject-matter of the sale, and an enrichment of the seller which infringes this right is an unjust enrichment at the buyer’s expense. . . . When there is a contract for the sale of a horse, the buyer has a right to receive the horse, not damages for non-delivery. If the seller receives a benefit from selling the horse to a third party, he . . . takes from the buyer a right to which the buyer is entitled.55
Barak J says that the claimant has a prima facie right to disgorgement damages because the injured party has a right under Israeli law to specific performance which is not subject to the court’s discretion.56 However, where a claimant has a ‘substitutable’ product, it would presumably not much matter to the claimant whether she gained damages allowing her to purchase the product on the market or specific performance of the contract itself.57 Because of the non-discretionary specific performance provisions, the court did not consider whether Adras could have procured a substitute performance.58
Adras is very reminiscent of Howard Perry mentioned above, which also involved a contract for delivery of steel. Megarry V-C was prepared to grant specific performance of the contract. It was pivotal to his Honour’s decision that, although ordinarily the claimants would easily be able to purchase equivalent steel on the market, British steelworkers were on strike at that time and so steel was only obtainable with great difficulty (and presumably at great expense).59
It has been suggested that Adras represents a dangerously broad approach to awarding disgorgement damages.60 The result of Adras was correct, but with respect the decision could not be justified because of the lack of a factual finding as to the substitutability of the iron.61 The result would have been justifiable if the court had found that the Yom Kippur War had prevented Adras from procuring a substitute performance.62 Substitutability would have provided a coherent limitation on the Adras decision.
If it is merely difficult to procure a substitute performance, and specific relief is no longer available, then disgorgement damages should also be available. For example in Dougan v Ley, where the claimant sought to specifically enforce a contract to obtain a taxi licence, it was still possible for the claimant to procure taxi licences which were the subject matter of the breached contract, albeit with some difficulty.63 The court was prepared to award specific performance. However, if specific performance was unavailable, but the defendant had sold the taxi licence to a third party for an amount exceeding the price payable by the claimant, then disgorgement damages should be available in the absence of relevant bars to relief.
C Contracts for Shares and Stock
Generally, shares in a public company are substitutable since they will usually be available on the open market. A court will not order specific performance for a contract for the sale of shares or stock.64 But this will not be the case with shares in a private company. Moreover, even in the case of shares in a publicly quoted company, there will not always be an adequate market for a particular share or stock, so that damages will be rendered an inadequate or inappropriate remedy.65 In Duncuft v Albrecht,66 a case involving a contract of sale for certain shares in a railway company, Shadwell V-C said:
Then the only question is whether there has been any decision, from whence you can extract a conclusion that the Court will not decree a specific performance of an agreement for the sale of such shares? Now, I agree that it has been long since decided that you cannot have a bill for the specific performance of an agreement to transfer a certain quantity of stock. But, in my opinion, there is not any sort of analogy between a quantity of 3 per cents. or any other stock of that description (which is always to be had by any person who chooses to apply for it in the market), and a certain number of railways shares of a particular description; which railway shares are limited in number, and which, as has been observed, are not always to be had in the market. [Emphasis added.]67
In other circumstances, the market price for shares might be uncertain or there may be a risk that requiring the claimant to purchase the shares with damages will prejudice the claimant or a third party. In these circumstances, a court will also order specific performance.68
Luxe69 involves a second sale of shares in a private company. One would expect that the case would be easily resolved upon an application of the principles espoused in Blake but unfortunately this was not the case. The case arose when, on 4 May 2010, Midland Resources Holding Limited (‘Midland’) entered into an agreement with Luxe Holding Limited (‘Luxe’) to sell shares in 20 companies. However, Midland purported to pull out of the contract because it had found another buyer through a Russian investment bank, Troika Dialog (‘Troika’). Luxe proceeded to seek specific performance of the contract of sale and an injunction preventing the sale of the shares to Troika, but Midland sold the shares to Troika on 24 May 2010 before the matter came before Mann J on 26 May 2010. Luxe brought three claims: a proprietary claim under the specifically enforceable contract, a claim for disgorgement of profits made by the second sale to Troika and a claim to compensatory damages between the difference in value of the shares and the contract price.
Roth J first considered the availability of a proprietary claim, and noted that ‘it is well established that an agreement for the sale of the shares in a private company, like an agreement for the sale of land, entitles the purchaser to specific performance.’70 Luxe argued that it had an equitable proprietary interest in the shares pursuant to the specifically enforceable contract of sale.71 Despite the problems of a constructive trust analysis (particularly in a second sale context) which have been noted above, Roth J concluded that Luxe had a very good arguable case that it had a proprietary interest in the proceeds of sale to Troika, subject to the paying the purchase price under the contract of sale. However, Roth J found that Luxe was not entitled to an account of profits pursuant to Blake because the contract of sale was not an exceptional case. His Honour stated:
The [contract for the sale of shares] is an ordinary commercial contract and this is a case of breach of a nature not unfamiliar in business affairs: the seller of goods breaks his contract to deliver because he takes advantage of a more attractive offer available elsewhere. There is no reason in principle why as a matter of contract the ordinary, compensatory measure of damages should not apply.72
It is unfortunate that Roth J did not have regard to principles of substitutability when drawing this conclusion. If the shares were such that they were readily available elsewhere, and compensatory damages were adequate to compensate for their loss, then the contract of sale should not have been specifically enforceable, and the constructive trust analysis could not apply in the first place. However, it does not seem that this was the case. Later in the judgment, Roth J noted that counsel for Midland observed that there was no open market value for the shares, and it was difficult to calculate compensatory damages.73 The conclusion that Luxe had an equitable proprietary interest in the shares directly contradicts the later conclusion that compensatory damages are adequate. If the former was the case, Luxe should have been awarded disgorgement damages. Courts are still exceptionally confused about the applicability of principles in Blake, as the analysis in Luxe shows.
D Contracts of Services