Chancery law

Contractual claims for accounts of profitsAttorney-General v Blake, (2000) 3 WLR, 625

The House of Lords has made a significant change to the general principles of contract law by holding that when damages are an inadequate remedy the court could require a defendant to account for the benefits received from a breach of contract notwithstanding that the claimant has suffered no loss.

George Blake, the former member of the Secret Intelligence Service who defected to the former Soviet Union, wrote an autobiography in breach of his contractual obligations.

This case concerned the Attorney-General's claim for Blake to account for the profits from the book.

The ordinary rule is that damages are measured by claimants' losses not defendants' gains.

The common law has made exceptions to this rule, for example for trespass or wrongful detention of goods and equitable claims for an account of profits occur in cases of passing off and breach of confidence: but Surrey County Council v Brodero Homes Ltd [1993] 1 WLR 1361 was authority that contractual damages are confined to recoupment of loss.

There, a vendor sold land subject to a covenant that the land would not be developed without permission and the purchaser developed the land without permission.

Merely nominal damages were awarded on the grounds that the vendor had suffered no loss.

Only in the first instance decision Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798), where a covenant similar to that in Brodero Homes existed, was the claimant awarded part of the developer's profit.The House of Lords has now held that the Wrotham Park approach should be followed in preference to the Brodero Homes approach.

In the leading judgment Lord Nicholls stated that 'the plaintiff's interest in performance [of the contract] may make it just and equitable that the defendant should retain no benefit from his breach of contract...

It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise'.

On the application of this doctrine.

Lord Nicholls stated: 'A useful general guide, although not exhaustive, is whether the claimant 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.'

The dissenting judgment of Lord Hobhouse warns of the potentially far-reaching consequences for commercial law which flow from this decision.

The other judges did not deal with the important issue of the extent to which commercial parties could rely on this case.

In the Court of Appeal ([1998] Ch 439, 457) Lord Woolf had suggested that an account of profits might be ordered in contractual cases of either 'skimped' performance or where a defendant obtains profit by doing the very thing he contracted not to do.

However, Lord Nicholls considered that ordinary damages would be the appropriate remedy for skimped performance, and that the latter category is defined too widely to assist.

This case leaves many questions unanswered.

For example, could a vendor who breaches a contract by selling goods to a higher bidder be forced to account for his profit? Also, when should only part of the profits flowing from the breach be recoverable? Until such issues are determined by the appeal courts litigators will be facing a mass of contractual claims for accounts.