Account of Profits (remedies) PDF

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Summary

notes for account of profits
( available where there has been a significant profit made)...

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ACCOUNT OF PROFITS Nature of the remedy The objective of account of profits is to take away from (disgorge) the gain made by a defendant from a breach of a primary right of the plaintiff. Pursuant to an order for account of profits, the defendant is required to account to the plaintiff for any profits made as a consequence of the breach of an equitable principle or a common law right. To ensure compliance, the order is supervised by the court.  

the breach of an equitable right such as a breach of a fiduciary duty or the breach of a common law or statutory right such as the infringement of intellectual property rights.

No fixed or rules can be prescribed for the sort of case where an account of profits might be an appropriate remedy for a breach of contract. The court will have regard to all circumstances, including the subject matter of the contract, the purpose of the contract, the circumstantial the breach, the consequences of the breach and the circumstantial in which relief is being sought. The remedy is therefore restitutionary in nature, since the objective is:  to force the defendant to disclose any profit made as a result of the wrongful activity and then  to transfer such profits to the plaintiff. Accordingly, after the account of profits has been complied with, the court will declare that those profits are held by the defendant on constructive trust for the plaintiff. > Finally, the court will make a consequential order which requires the defendant to transfer the profits to the plaintiff.

COMPONENTS There are therefore 2 components to the award: 1.

2.

Technical – the disclosure by the defendant of the profit and loss related to the wrongful activity, to enable the court to determine the net gain. This usually involves the production by the defendant of his/her/its accounts and financial records. Restorative – by an order of the court the defendant is stripped of the gain, which goes to the plaintiff: Colbeam Palmr Ltd v Stock Affiliates Pty Ltd (1968) (Windeyer J). a. An award of damages is not concerned with profit made by the wrongdoer but with the loss sustained by the innocent party;

REQUIREMENTS 1. The BREACH of a common law right, an equitable principle/right, or a statutory right, although not all breaches of primary rights will merit this remedy. 2. The ELECTION (choice) by the plaintiff between account of profits and any other remedy available. 3. DISCRETIONARY FACTORS exercised by the court in considering factors such as available defences, the conduct of the defendant etc.

BREACH OF A PRIMARY RIGHT AT COMMON LAW Traditionally, account of profits is seen primarily as an equitable remedy, available in its exclusive jurisdiction against defendants who have breached equitable principles and/or the rights of the plaintiff. There is, therefore, a question as to whether the court will award account of profits in cases where the defendant has breached a common law right. Instances which the court has ordered an account for such breaches, Chapter 26. For example:  Where a tenant for life at law has committed legal waste, an account may be useful it if is unclear what the tenant has done  Where there are mutual counts involving debits and credits on both sides between the disputant parties: Foley v Hill (1848)  Where the claim for damages at law is so complex that it would be unjust or unsafe to make an award: O’Connor v Spaight (1804)

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Where a contract of employment exists which has a confidentiality clause, a court may order an account where the agency transactions are numerous and the employer cannot ascertain the true position without full discovery: Phillips v Phillips (1852)

In the examples above, the account of profits is arguably merely an aid to establishing the extent of the defendant’s default and/or the indebtedness of the parties, rather than a remedy per se. Attorney General v Blake [2001] FACTS: B had been employed as an intelligence office by the British Government from 1944 to 1961. As part of his contractual obligations, on being employed, B was required to sign the UK Official Secrets Act. At some time during his later years of employment, B became a spy for the USSR. He was caught, tried and imprisoned for 42 years. He escaped and fled to Moscow. In the 1980’s he wrote his autobiography, which became a best seller in the UK 1990. The AG, representing the UK Government, claimed an account of profits based upon a breach of confidence and breach of contract. B’s contract had included an enduring duty of confidentiality HELD: The House of Lords departed from the traditionally held rule that account would not be awarded for breach of contract and ordered both B and his publisher to account for all sums due and owing to Blake. Lord Nicholls (Goff, Steyn and Browne-Wilkinson LL concurring) that: There seems to be no reason, in principle, why the court must in all circumstances rule out an account of profit as a remedy for breach of contract. I prefer to avoid the unhappy expression ‘restitutionary damages’. Although it may seem strange that the H of L should award account of profit rather than damages for breach, the decision is comprehensible in the light of the following:  The UK Government had not suffered any measurable pecuniary loss as a result of B’s breach of contract, therefore damages would have been nominal, at best. Exemplary damages could have been awarded, given the breach of statute, but this would not necessarily have stripped B of his gain. Account of profit yielded a financial remedy.  There was a breach of confidentiality by B, which, as an equitable principle, was subject to an equitable remedy. The House of Lords went on to qualify the decision by pointing out that account of profit should only be awarded in the most exceptional circumstances and where the plaintiff has ‘a legitimate interest in preventing the defendant’s profit-making activity and, hence, depriving him of his profit’ 285.

Hospitality Group Pty Ltd v ARU (2001) it was stated that ‘It would be inconsistent with the current principles laid down by the High Court to confer a windfall on the plaintiff under the guise of damages for breach of contract’. The approach above is explainable by the fact that in Australian courts the award of damages is concerned with redressing the loss suffered by the plaintiff, not in stripping the gain made by the defendant: Colbeam, above.

BREACH OF EQUITABLE RIGHTS/PRINCIPLES Exclusive Jurisdiction Breach of FIDUCIARY DUTY An account of profits acts to deprive the defendant of the benefit of his/her wrongdoing. It is not dependent upon the plaintiff having sustained a loss, nor is it necessary for the defendant to have acted mala fide. Therefore, a fiduciary who makes a profit by acting in breach of a fiduciary duty must give up that profit, notwithstanding that the other party to the relationship could not have themselves, made the profit: Boardman v Phipps [1967] 2 AC 46. A breach of a fiduciary duty is one in which the fiduciary either acts with a conflict of interest or takes advantage of an opportunity derived from his or her position as fiduciary to make a profit; Hospital Products Ltd v United States Surgical Corp (1984).

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An account of profits where awarded in the exclusive jurisdiction for the breach of a fiduciary duty will be subject to the same requirement of a causal connection between the breach and the profit as is the case with equitable compensation; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) at [9]. Such connection will depend on the circumstances of the case. An account of profits can be both a personal and proprietary remedy. Personal because the profit, once assessed, can be recovered as a debt from the fiduciary and proprietary in that the account can be secured over the fund constituting the profit by way of constructive trust or equitable lien: Scott v Scott (1962) The profit can even be followed into the hands of a third party who is a volunteer by operation of the doctrine of tracing or even into mixed funds where the fiduciary has mixed the profit with his or her own funds. As to the balance of any mixed account, the fiduciary is presumed to have withdrawn his or her own funds first: In re Hallett’s Estate (1879).

Breach of CONFIDENCE An account of profits may be ordered for a breach of confidence in the exclusive jurisdiction of equity where the obligation of confidence is equitable in nature Gleeson CJ in Australian Broadcasting Corporation v Lenah Games sets out the ELEMENTS of an action for breach of confidence 1) the information must be confidential and 2) such information was imparted in circumstances importing an obligation of confidence 3) There has been or is threatened an unauthorised use of the information to the detriment of the party communicating it Where the obligation of confidence arises from the terms of a contract, the parties can only seek contractual remedies for breach as no equitable duty of confidence

ASSESSMENT The method of calculating the profit may vary according to the nature of the primary right which has been breached by the defendant. 

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When an account has been ordered for a breach of fiduciary duty (fiduciary has acted dishonestly) , the D must account for the whole profit made as a result of the breach: Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975). o However, where the fiduciary has acted bona fide, he/she may be allowed to keep an amount from the profit recognising work and skill in exceptional cases: Boardman and Colbeam, above. o If the profit has been made by the misapplication of trust money, however, the beneficiaries will receive the whole of the profit.

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If a business is acquired and operated in breach of fiduciary duty, an account can either be taken of the particular benefits that flowed from the breach or from the entire business, less amounts for work, skill and expenses in running the business. o The method of assessing the profit will depend upon what best reflects the true measure of profit obtained from the breach of duty.

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When the right breached arises from statute, as in intellectual property cases, the D will be able to deduct costs associated with the manufacture of the infringing goods. o General overheads, such as rent, office expenses etc. are regarded as allowances if the defendant has foregone the opportunity to manufacture other goods: Dart Industries, above.

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Where a profit is made from an infringement of a copyright, trade mark etc. then the profit must be apportioned as to that attributable to the mark unless the entire profit is so attributable; Colbeam Palmer Ltd v Stock Affiliates Pty Ltd and Dart Industries Inc v Décor Corp Pty Ltd.

ELECTION The plaintiff must make a choice between: 1. common law damages OR equitable compensation/damages and 2. an account of profits. The remedies are mutually exclusive, because in equity’s exclusive jurisdiction, the plaintiff would be doubly enriched, whilst in equity’s auxiliary jurisdiction, damages are compensatory, whereas account of profits serves to prevent unjust enrichment

DISCRETIONARY FACTORS Because account of profits is an equitable remedy, the traditional discretionary factors apply. Deductions: Dart Industries Inc v Décor Corp Pty Ltd (1993) 

Where infringing goods were side line of defendant’s business, meaning that making and selling of goods took up unused capacity in D’s business in overheads which would have been incurred regardless of articles being sold/delivered .

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There unused capacity = no deduction allowed as expense occurred either way

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Where there was no unused capacity and defendant has forgone the opportunity to manufacture and sell alternative non-infringing products, it will be appropriate to allow proportional deduction for general overhead expenses

Apportionment 

Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) The profit for which the infringer of a trademark must account is not the profit from selling the article itself but the profit made in selling it under the trademark

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Dart Industries Inc v Decor Corp Pty Ltd (1993)case about the small clip on top of the container that infringed Dart’s Patent.

Was just that part that infringed applied the principle above as sale of container was attributable entirely to use of patent invention

TRACING Tracing is a process that is available both in equity and at common law. It is a remedy which protects both equitable and common law proprietary rights. When a trustee or other fiduciary breaches their fiduciary duties by dealing with trust property as if it were their own (i.e., inconsistently with their equitable obligations respecting the property), then they will be personally liable for any loss or gain arising therefrom. However, if the trustee or other fiduciary is insolvent to the effect that the amount of compensation actually recoverable is less than the amount of unauthorised gain or loss, then the beneficiaries may prefer to pursue a claim against the misused property rather than a merely personal action against the defaulting trustee or fiduciary. Tracing involves following trust property (or funds or other property into which the trust property is converted) through a string of successive owners, and it also allows restitution where the form of the trust property has been altered.  Having ‘traced’ the misused property to its new legal owners, the beneficiary may assert priority over others for repayment in accordance with the general principles of priorities. See Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) regarding equitable priorities.

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RD TRACING TO 3 PARTIES (BARNES V ADDY RULE) If a third party has purchased legal title to property (which has been wrongfully alienated from the trust estate) for good value, bona fide and without notice of the interests of the beneficiary or principle there is NO liability. Meaning it is untraceable. HOWEVER when a third party knowingly assists or knowingly receives property from the fiduciary knowing that it rd was acquired in breach of duty, 3 party will hold any property that he has received on constructive trust for the beneficiary. (Barnes v Addy) The rule in Barnes v Addy is said to have 2 limbs First limb: Knowing receipt cases When a third party, receives property from a fiduciary ‘F’ who is in breach of his duty, the person seeking to claim rd against 3 party (beneficiary) must prove that: 1. 2. 3.

3rd party actually received the property 3rd party knew that the property was being held by F as a result of his position as a fiduciary rd 3 party knew of facts and circumstances that made the transfer of property to him a breach of F’s fiduciary duty.

Then.... The question arises as to what degree of knowledge/notice does the 3rd party need to be liable for the receipt of the property. Any one of the categories below is enough knowledge to be liable. (Baden Delvaux v Societe Generale) (in Australia only first 4 categories used) FIVE CATEGORIES OF KNOWLEDGE OR NOTICE for 3rd party 1. Actual or direct knowledge that the F was acting in breach of duty 2. Wilfully or recklessly ignoring or shutting ones eye to the obvious facts and circumstances 3. Wilfully or recklessly failing to make the enquiries that an honest and reasonable person would make in the circumstances 4. Knowledge of the circumstances that would indicate or suggest to an honest and reasonable person that the fiduciary was acting in breach of duty 5. Knowledge of circumstances that would make a reasonable person suspicious and prompt them to make enquires. Once established that 3rd party received property knowing in breach of fiduciary futy, 3rd party will hold the property on constructive trust for the beneficiary. Second Limb: Knowing assistance cases In order for a 3rd party to be liable under the second limb of Barnes v Addy, 3rd party must: 1. 2. 3. 4.

Know that F is a fiduciary Know that F has developed a dishonest scheme Assist F in some way to put the scheme into effect Have full knowledge that the scheme is being put into effect and that is fraudulent and dishonest.

Then... the degree of knowledge necessary for proving knowing assistance comes within categories of 1 to 3 (Consul Development v DPC) (ABOVE)

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rd *It is not sufficient if 3 party merely suspects that F is acting wrongfully and in breach of his duty (Farah Constructions v Say Dee). Note: Mixed trust property

rd Problems arise when the 3 party has mixed trust property with their own (Re Diplock’s Estate). rd In instances where the money spent has become so mixed and indivisible by the 3 party, it cannot be traced.

In order for the process to be available at common law, the P must show that the defendant received the plaintiff’s property, but it is not necessary for the defendant to have retained it. This is because it is the receipt of the property which is the basis for the liability, and it is irrelevant whether the defendant acted honestly or dishonestly and/or without knowledge of the source of the property: Banque Belge Pour L’Etranger v Hambrouk (1921) In equity, the process is a right or claim and is available to beneficiaries for breach of trust and the objects of a fiduciary duty which has been breached. See also, the rule in Barnes v Addy. At common law… Tracing requires  A pre-existing action at common law (e.g., conversion, fraud);  A clear line of succession to the property in question; and  The property remains ‘identifiable’. the [P] must show that the [D] received the [P]’s money. o

It is not necessary for the [D] to have retained it.

o

It is irrelevant whether the [D] had acted dishonestly or with knowledge of the source of the money (Banque Belge Pour L’Etranger v Hambrouck 1921).

o

Money cannot be traced under CL if it has been mixed with that of others (Agip (Africa) Ltd v Jackson 1992).

Property which is intermixed with other property may nevertheless remain identifiable if it has identifying marks, serial numbers etc. Proceeds of sale of property will not be identifiable if such proceeds are inter-mixed with other funds. In equity… Tracing requires  Breach of fiduciary duty (or possibly an equitable proprietary right);  Clear line of succession to the property contrary to the duty; and  Property remains ‘identifiable’ (more liberal than the common law rule). the remedy is a right to claim is available for beneficiaries for breach of fiduciary/trust.

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o

With trusts, the remedy will be awarded when the trustee has converted trust property for his own use.

o

Money can be traced in equity when a trustee has mixed with their own funds (Re Hallett’s Estate 1880)

o

Tracing is not limited to money, but can also apply to chattels, if the chattel can be distinguished from a group of mixed chattels (Borden (UK) Ltd v Scottish Timber Products Ltd 1981)

o

With fiduciaries, tracing is available when the fiduciary has misappropriated funds for his own use.

o

If a fiduciary purchases something of value with funds obtained by their breach of duty, the beneficiary will be allowed by the court to claim the property

Tracing in equity results in two possible forms of equitable relief: 1.

Order to restore the unmixed money (or property acquired with such money) to the applicant; or

2.

Declaration of charge upon the mixed fund (or property acquired wholly or partly with such fund) in favour of the applicant.

The equitable remedy of tracing, like other equitable rights, ends when the property is acquired by a bona fide purchaser for value wi...