Account of profits, contracts and equity Justin Gleeson SC and James Watson* In 1944 George Blake joined the British Secret Service where he signed a contract promising not to disclose secret information. Among many other wrongs, he breached that contract when, from 1951, he became an agent for the Soviet Union, supplying secrets. He was discovered, imprisoned, and in 1966 escaped to Moscow. In 1990 he published an autobiography, including in the United Kingdom for which he was to be paid royalties. In about 1997 the Crown commenced proceedings to intercept the royalties. In Attorney-General v Blake [2001] 1 AC 268, the House of Lords determined that Blake was in breach of his 1944 contract and, on restitutionary principles, he was required to account for the profits made from the breach of contract. In this article the account at common law and in equity, restitution and Blake are considered. It is contended that, although not addressed by the Lords, the case called for an application of the equitable remedy of an account. There is Chancery authority for the analysis, and Blake is (and negative covenant cases ought to be) explicable on those authorities. INTRODUCTION Like tracing and contribution, the account has its origins in the earliest developments of the law. Like contribution,1 the account has been appropriated to equity and today is often described as a purely equitable remedy.2 In fact the account is well established both at common law, and as a remedy in equity. In both jurisdictions, the account remedies the (deemed) better right or title of the plaintiff to a sum of money in the hands of the defendant. However, at common law the account was overtaken in part by money had and received, and the remainder then run over by contract. The result was that for some cases which might previously have called on the account, damages came to prevail.3 In Chancery, within its exclusive jurisdiction, the account was “always available if an account was necessary to give effect to his equitable rights”.4 Chancery also made the account available as a remedy for breach of common law rights, although precisely which common law rights could be remedied by an equitable account was never finally determined. Amidst all of this, in Attorney-General v Blake [2001] 1 AC 268, the House of Lords determined that an account of profits could lie in exceptional circumstances as a remedy for a breach of contract. The Lords reached this conclusion by applying a “restitutionary” analysis to contract, largely without consideration of the separate and remedial purpose of equity. It should be noted at the outset that it is not intended in this article to make any point about the availability or desirability of fusion of law and equity.5 However, it is contended that the result obtained in Blake might be one that would have obtained in Chancery in any event. This article first considers the development of the account; the related but relatively recent development of a unified “restitution”; and whether, and if so how, an account can be included as a term of a contract. The article then considers the context of Blake; the speeches of Lord Hobhouse * Barristers, New South Wales Bar. 1 Burke v LFOT Pty Ltd (2002) 209 CLR 282 at 38. 2 See, eg Dal Pont GE and Chalmers DRC, Equity & Trusts in Australia (3rd ed, Lawbook Co, Sydney, 2004) p 90. 3 See n 17. 4 Meagher R, Heydon D and Leeming M, Meagher, Gummow & Lehane’s Equity Doctrine & Remedies (4th ed, Butterworths, Australia, 2002) p 870; Glover J, Equity, Restitution & Fraud (Butterworths, Australia, 2004) p 404. 5 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 at [15]ff; cf [132]ff; see also “Current Issues” (2005) 79 ALJ 73; Edelman J and Degeling S, “Fusion: The Interaction of Common Law and Equity” (2004) 25 Aust Bar Rev 195. © 676 (2005) 79 ALJ 676 Account of profits, contracts and equity (dissenting) and Lord Nicholls for the majority; English case law subsequent to Blake; and the reception of Blake in Australia. Finally, it is contended that, although not addressed by the Lords, there is authority in Chancery which supports the making available of an account upon a contract. It is the thesis in this part that equity may make the account available in circumstances where on a true analysis of a bargain, and pursuant to the expectation of the parties, the defendant has submitted to being an accounting party. This lies in equity’s jurisdiction to act in aid of legal rights.6 It is perhaps a long way of establishing that equity will not suffer a wrong without a remedy7 although it is still necessary to establish (and something of the length of this article is directed towards establishing) the suitability of the particular remedy for that wrong. Where the problem lies The starting proposition is that parties are entitled to organise their duties and responsibilities to each other as they wish. Where those duties were expressed in contract, the common law came to construe bargains strictly, and recognise only damages for breach.8 Equity developed an altogether different philosophy, both in terms of looking to the true bargain between the parties and, in cases where damages were inadequate,9 enforcing the bargain specifically, or by injunction. In some cases, however, damages and injunction alone could be insufficient. A hard example is this. P contracts with D for consideration. Among the provisions in the contract D promises not to do a thing, Y. The doing of Y will not harm P financially, but it is a condition of reaching any agreement that D promises not to do that thing. Shortly after, D quietly goes about doing Y. D makes a profit. P suffers no direct financial loss (in the sense of some diminution of assets). On one view, P has lost the opportunity to negotiate a relaxation of the covenant with D. However, for these purposes P is adamant (and both parties understood) that no agreement would ever have been made without the stipulation, and P would never have relaxed that covenant. On the facts: (a) P has suffered no financial loss; (b) P has not in any real sense lost an opportunity to bargain, because P never would have bargained; but (c) P was not able to obtain an injunction to enforce the promise because Y was done without P’s knowledge. At common law, this ultimately may be merely unfortunate.10 However, to leave the matter there would be to subvert the true intention and expectations of the parties. The undertaking given by D may be pointless where it is both incapable of sounding in damages, and the remedy available to P (injunction) is in the hands of D to subvert. The question is, then, how does the law, and then equity, respond? Damages and account In Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1970) 122 CLR 25, Windeyer J explained, speaking in the context of trade mark infringement (at 32 [17]): The distinction between an account of profits and damages is that by the former the infringer is required to give up his ill-gotten gains to the party whose rights he has infringed: by the latter he is required to compensate the party wronged for the loss he has suffered. The two computations obviously yield different results, for a plaintiff’s loss is not to be measured by the defendant’s gain, nor the defendant’s gain by the plaintiff’s loss … If a plaintiff elects to take an inquiry as to damages the loss to him of profits which he might have made may be a substantial element of his claim ... But what a plaintiff might have made had the defendant not invaded his rights is by no means the same thing as what the defendant did make by doing so. Windeyer J’s dicta apprehends (arguably) three different measures of compensation. The orthodox is first, compensation for the plaintiff’s loss; and secondly an account of the profits made by 6 See Meagher et al, n 4, pp 10-11 on “concurrent” and “auxiliary”. 7 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 at [205], [224]; see also Meagher et al, n 4, p 85. 8 Butler PA, “Mistaken Payments, Change of Position and Restitution” in Finn PD (ed), Essays on Restitution (Law Book Co, 1990) p 89. 9 See Spry ICF, Equitable Remedies (Lawbook Co, 2001) p 60; see also Aitken L, “When are Damages an Adequate Remedy?” (2004) 78 ALJ 544. 10 But laissez-faire, better for society. (2005) 79 ALJ 676 677 © Justin Gleeson SC and James Watson the defendant as a result of her, his or its infringement. The question raised incidentally, but critically, by Blake, was whether the cases revealed a third type of compensation, being damages assessed by the defendant’s gain. The third point is the one which has taken hold in the few cases subsequently applying Blake in England; and is probably the principal point of dissatisfaction with Blake in subsequent cases in Australia. This issue is noted below, although only to distinguish it for the purposes of this article from the making available of an account. ACCOUNT, RESTITUTION AND CONTRACT CLAUSES It is perhaps surprising that there does not appear to be any authoritative definition of the “account”. In the cases, the account refers collectively to two related matters.11 First, the account refers to the entitlement of a plaintiff to have a defendant account for (disgorge) money in her, his or its hands.