Attorney General v Blake

I should refer briefly to breach of trust and breach of fiduciary duty. Equity reinforces the duty of fidelity owed by a trustee or fiduciary by requiring him to account for any profits he derives from his office or position. This ensures that trustees and fiduciaries are financially disinterested in carrying out their duties. They may not put themselves in a position where their duty and interest conflict. To this end they must not make any unauthorised profit. If they do, they are accountable. Whether the beneficiaries or persons to whom the fiduciary duty is owed suffered any loss by the impugned transaction is altogether irrelevant. The accountability of the army sergeant in Reading v. Attorney General [1951] AC 507 is a familiar application of this principle to a servant of the Crown.

Damages under Lord Cairns' Act

I must also mention the jurisdiction to award damages under section 2 of the Chancery Amendment Act 1858, commonly known as Lord Cairns' Act. This Act has been repealed but the jurisdiction remains. Section 2 empowered the Court of Chancery at its discretion, in all cases where it had jurisdiction to entertain an application for an injunction or specific performance, to award damages in addition to or in substitution for an injunction or specific performance. Thus section 2 enabled the Court of Chancery, sitting at Lincoln's Inn, to award damages when declining to grant equitable relief rather than, as had been the practice since Lord Eldon's decision in Todd v. Gee (1810) 17 Ves. 273, sending suitors across London to the common law courts at Westminster Hall.

Lord Cairns' Act had a further effect. The common law courts' jurisdiction to award damages was confined to loss or injury flowing from a cause of action which had accrued before the writ was issued....

The measure of damages awarded in this type of case is often analysed as damages for loss of a bargaining opportunity or, which comes to the same, the price payable for the compulsory acquisition of a right. This analysis is correct. The court's refusal to grant an injunction means that in practice the defendant is thereby permitted to perpetuate the wrongful state of affairs he has brought about. But this analysis takes the matter now under discussion no further forward. A property right has value to the extent only that the court will enforce it or award damages for its infringement. The question under discussion is whether the court will award substantial damages for an infringement when no financial loss flows from the infringement and, moreover, in a suitable case will assess the damages by reference to the defendant's profit obtained from the infringement. The cases mentioned above show that the courts habitually do that very thing.

Breach of contract

Against this background I turn to consider the remedies available for breaches of contract. The basic remedy is an award of damages. In the much quoted words of Baron Parke, the rule of the common law is that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position as if the contract had been performed: Robinson v Harman (1848) 1 Ex. 850, 855. Leaving aside the anomalous exception of punitive damages, damages are compensatory. That is axiomatic. It is equally well established that an award of damages, assessed by reference to financial loss, is not always 'adequate' as a remedy for a breach of contract. The law recognises that a party to a contract may have an interest in performance which is not readily measurable in terms of money. On breach the innocent party suffers a loss. He fails to obtain the benefit promised by the other party to the contract. To him the loss may be as important as financially measurable loss, or more so. An award of damages, assessed by reference to financial loss, will not recompense him properly. For him a financially assessed measure of damages is inadequate.

The classic example of this type of case, as every law student knows, is a contract for the sale of land....

An instance of this nature occurred in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 W.L.R. 798. For social and economic reasons the court refused to make a mandatory order for the demolition of houses built on land burdened with a restrictive covenant. Instead, Brightman J. made an award of damages under the jurisdiction which originated with Lord Cairns' Act. The existence of the new houses did not diminish the value of the benefited land by one farthing. The judge considered that if the plaintiffs were given a nominal sum, or no sum, justice would manifestly not have been done. He assessed the damages at five per cent of the developer's anticipated profit, this being the amount of money which could reasonably have been demanded for a relaxation of the covenant.

In reaching his conclusion the judge applied by analogy the cases mentioned above concerning the assessment of damages when a defendant has invaded another's property rights but without diminishing the value of the property. I consider he was right to do so. Property rights are superior to contractual rights in that, unlike contractual rights, property rights may survive against an indefinite class of persons. However, it is not easy to see why, as between the parties to a contract, a violation of a party's contractual rights should attract a lesser degree of remedy than a violation of his property rights. As Lionel Smith has pointed out in his article Disgorgement of the profits of Contract: Property, Contract and 'Efficient Breach' 24 Can. B.L.J. 121, it is not clear why it should be any more permissible to expropriate personal rights than it is permissible to expropriate property rights.

[...]

The Wrotham Park case, therefore, still shines, rather as a solitary beacon, showing that in contract as well as tort damages are not always narrowly confined to recoupment of financial loss. In a suitable case damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained. In the present case the Crown seeks to go further. The claim is for all the profits of Blake's book which the publisher has not yet paid him. This raises the question whether an account of profits can ever be given as a remedy for breach of contract. The researches of counsel have been unable to discover any case where the court has made such an order on a claim for breach of contract. In Tito v. Waddell (No. 2) [1977] Ch. 106, 332, a decision which has proved controversial, Sir Robert Megarry V.-C. said that, as a matter of fundamental principle, the question of damages was 'not one of making the defendant disgorge' his gains, in that case what he had saved by committing the wrong, but 'one of compensating the plaintiff.' In Occidental Worldwide Investment Corpn. v. Skibs A/S Avanti [1976] 1 Lloyd's Rep. 293, 337, Kerr J. summarily rejected a claim for an account of profits when ship owners withdrew ships on a rising market.

There is a light sprinkling of cases where courts have made orders having the same effect as an order for an account of profits, but the courts seem always to have attached a different label. A person who, in breach of contract, sells land twice over must surrender his profits on the second sale to the original buyer. Since courts regularly make orders for the specific performance of contracts for the sale of land, a seller of land is, to an extent, regarded as holding the land on trust for the buyer: Lake v. Bayliss [1974] 1 W.L.R. 1073. In Reid-Newfoundland Co. v. Anglo-American Telegraph Co., Ltd. [1912] AC 555 a railway company agreed not to transmit any commercial messages over a particular telegraph wire except for the benefit and account of the telegraph company. The Privy Council held that the railway company was liable to account as a trustee for the profits it wrongfully made from its use of the wire for commercial purposes. In British Motor Trade Association v. Gilbert [1951] 2 All E.R. 641 the plaintiff suffered no financial loss but the award of damages for breach of contract effectively stripped the wrongdoer of the profit he had made from his wrongful venture into the black market for new cars.

These cases illustrate that circumstances do arise when the just response to a breach of contract is that the wrongdoer should not be permitted to retain any profit from the breach. In these cases the courts have reached the desired result by straining existing concepts. Professor Peter Birks has deplored the 'failure of jurisprudence when the law is forced into this kind of abusive instrumentalism': see (1993) 109 L.Q.R. 518, 520. Some years ago Professor Dawson suggested there is no inherent reason why the technique of equity courts in land contracts should not be more widely employed, not by granting remedies as the by-product of a phantom 'trust' created by the contract, but as an alternative form of money judgment remedy. That well known ailment of lawyers, a hardening of the categories, ought not to be an obstacle: see 'Restitution or Damages' (1959) 20 Ohio L.J. 175.

My conclusion is that there seems to be no reason, in principle, why the court must in all circumstances rule out an account of profits as a remedy for breach of contract. I prefer to avoid the unhappy expression 'restitutionary damages'. Remedies are the law's response to a wrong (or, more precisely, to a cause of action). When, exceptionally, a just response to a breach of contract so requires, the court should be able to grant the discretionary remedy of requiring a defendant to account to the plaintiff for the benefits he has received from his breach of contract. In the same way as a plaintiff's interest in performance of a contract may render it just and equitable for the court to make an order for specific performance or grant an injunction, so the plaintiff's interest in performance may make it just and equitable that the defendant should retain no benefit from his breach of contract.

The state of the authorities encourages me to reach this conclusion, rather than the reverse. The law recognises that damages are not always a sufficient remedy for breach of contract. This is the foundation of the court's jurisdiction to grant the remedies of specific performance and injunction. Even when awarding damages, the law does not adhere slavishly to the concept of compensation for financially measurable loss. When the circumstances require, damages are measured by reference to the benefit obtained by the wrongdoer. This applies to interference with property rights. Recently, the like approach has been adopted to breach of contract. Further, in certain circumstances an account of profits is ordered in preference to an award of damages. Sometimes the injured party is given the choice: either compensatory damages or an account of the wrongdoer's profits. Breach of confidence is an instance of this. If confidential information is wrongfully divulged in breach of a non-disclosure agreement, it would be nothing short of sophistry to say that an account of profits may be ordered in respect of the equitable wrong but not in respect of the breach of contract which governs the relationship between the parties. With the established authorities going thus far, I consider it would be only a modest step for the law to recognise openly that, exceptionally, an account of profits may be the most appropriate remedy for breach of contract. It is not as though this step would contradict some recognised principle applied consistently throughout the law to the grant or withholding of the remedy of an account of profits. No such principle is discernible.

The main argument against the availability of an account of profits as a remedy for breach of contract is that the circumstances where this remedy may be granted will be uncertain. This will have an unsettling effect on commercial contracts where certainty is important. I do not think these fears are well founded. I see no reason why, in practice, the availability of the remedy of an account of profits need disturb settled expectations in the commercial or consumer world. An account of profits will be appropriate only in exceptional circumstances. Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to a breach of contract. It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought. A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant's profit-making activity and, hence, in depriving him of his profit.

It would be difficult, and unwise, to attempt to be more specific....

Lord Woolf, at [1998] Ch 439, 457, 458, also suggested three facts which should not be a sufficient ground for departing from the normal basis on which damages are awarded: the fact that the breach was cynical and deliberate; the fact that the breach enabled the defendant to enter into a more profitable contract elsewhere; and the fact that by entering into a new and more profitable contract the defendant put it out of his power to perform his contract with the plaintiff. I agree that none of these facts would be, by itself, a good reason for ordering an account of profits.

The present case

The present case is exceptional. The context is employment as a member of the security and intelligence services. Secret information is the lifeblood of these services. In the 1950s Blake deliberately committed repeated breaches of his undertaking not to divulge official information gained as a result of his employment. He caused untold and immeasurable damage to the public interest he had committed himself to serve. In 1990 he published his autobiography, a further breach of his express undertaking. By this time the information disclosed was no longer confidential. In the ordinary course of commercial dealings the disclosure of non-confidential information might be regarded as venial. In the present case disclosure was also a criminal offence under the Official Secrets Acts, even though the information was no longer confidential. Section 1 of the Official Secrets Act 1989 draws a distinction in this regard between members of the security and intelligence services and other Crown servants. Under section 1(3) a person who is or has been a Crown servant is guilty of an offence if without lawful authority he makes 'a damaging disclosure' of information relating to security or intelligence. The offence is drawn more widely in the case of a present or past member of the security and intelligence services. Such a person is guilty of an offence if without lawful authority he discloses 'any information' relating to security or intelligence which is or has been in his possession by virtue of his position as a member of those services. This distinction was approved in Parliament after debate when the legislation was being enacted.

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As a footnote I observe that a similar conclusion, requiring the contract-breaker to disgorge his profits, was reached in the majority decision of the United States Supreme Court in Snepp v. United States (1980) 444 U.S. 507. The facts were strikingly similar. A former employee of the Central Intelligence Agency, whose conditions of employment included a promise not to divulge any information relating to the agency without pre-publication clearance, published a book about the agency's activities in Vietnam. None of the information was classified, but an agent's violation of his non-disclosure obligation impaired the agency's ability to function properly. The court considered and rejected various forms of relief. The actual damage was not quantifiable, nominal damages were a hollow alternative, and punitive damages after a jury trial would be speculative and unusual. Even if recovered they would bear no relation to either the government's irreparable loss or Snepp's unjust gain. The court considered that a remedy which required Snepp 'to disgorge the benefits of his faithlessness', was swift and sure, tailored to deter those who would place sensitive information at risk and, since the remedy reached only funds attributable to the breach, it could not saddle the former agent with exemplary damages out of all proportion to his gain. In order to achieve this result the court 'imposed' a constructive trust on Snepp's profits. In this country, affording the plaintiff the remedy of an account of profits is a different means to the same end.

"The ordinary member of the public would be shocked if the position was that the courts were powerless to prevent [Blake] profiting from his criminal conduct."

The answer given by my noble and learned friend does not reflect the essentially punitive nature of the claim and seeks to apply principles of law which are only appropriate where commercial or proprietary interests are involved. Blake has made a financial gain but he has not done so at the expense of the Crown or making use of any property of or commercial interest of the Crown either in law or equity.

My second difficulty is that the reasoning of my noble and learned friend depends upon the conclusion that there is some gap in the existing state of the law which requires to be filled by a new remedy. He accepts that the term "restitutionary damages" is unsatisfactory but, with respect, does not fully examine why this is so, drawing the necessary conclusions.

The cross-appeal has to be determined on the basis that the only civil cause of action which the Crown has against Blake is a bare legal cause of action in contract for breach of contract in that he failed in 1989 to observe the negative undertaking which he gave in 1944. As already observed, it is recognised by Blake that the Crown had at the least a good arguable case for the grant of an injunction against him at that time. In other words it was a breach of contract - breach of a negative undertaking - liable to be restrained by injunction, ie specifically enforced.

But the Crown did not apply for an injunction at the time it would have done some good and quite probably stopped the publication of the book. This is the source of the problems for the Crown in achieving its purpose in bringing these proceedings....

The concepts of restitution and compensation are not the same though they will on occasions fulfil the same need. Restitution is analogous to property: it concerns wealth or advantage which ought to be returned or transferred by the defendant to the plaintiff. It is a form of specific implement. Its clearest form is an order for the return or transfer of property which belongs in law or in equity to the plaintiff. Property includes an interest in property. Then there are rights recognised in equity such as those which arise from a fiduciary relationship. These rights give rise to restitutionary remedies including the remedy of account which, depending on the circumstances, could also derive from a common law relationship such as agency. Then, again, there are the rights now grouped under the heading of the law of restitution or unjust enrichment. These are still truly restitutionary concepts leading to restitutionary remedies. Typically they require the payment of money by the person unjustly enriched to the person at whose expense that enrichment has taken place. In so far as the appropriate remedy is the payment of money or the delivery up of a chattel or goods is concerned the common law could provide it; insofar as it required some other remedy or the recognition of an equitable right, the chancery jurisdiction had to be invoked.

The essential of such rights and their enforcement was the procuring by the courts of the performance by the defendant of his obligations. The plaintiff recovers what he is actually entitled to not some monetary substitute for it. If what the plaintiff is entitled to is wealth expressed in monetary terms, the order will be for the payment of money but this does not alter the character of the remedy or of the right being recognised. He gets the money because it was his property or he was in some other way entitled to it. It is still the enforced performance of an obligation. The same is the case where an injunction is granted or a decree of specific performance or the ordering of an account.

It is this class of rights which the Crown is unable to invoke as a result of the judgment of the Vice-Chancellor upheld by the Court of Appeal. There is no obligation of Blake left to perform or which now can be enforced. That time passed with the failure to apply for an injunction in 1989 or 1990. The Crown has no right to an injunction to stop the payment of the royalty to Blake and procure its payment to the Crown instead. The Crown has no right to the royalty and does not now assert one.

The law, including equity, provides extensive and effective remedies for protecting and enforcing property rights. It is no criticism of the law that they are not available now to the Crown. The Crown does not have the substantive rights to support such remedies.