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Sender:
Jason Neyers
Date:
Thu, 27 Mar 2003 10:49:57 -0500
Re:
Hendrix/disgorgement

 

Dear All,

I want to echo Lionel's point that I do not think that gain-based or non-loss based damages for breach of contract (whether in the reasonable use-value measure or full disgorgement measure) need to be understood in policy terms, such as deterrence, at all. In other words, that cases like Blake and Hendrix (which I still have to work through) can be understood as manifestations of corrective justice. The argument, which is of course still tentative, is as follows:

1. The right to property includes, to use the civilian expression, the right to the use, fruits, and abuse (destruction/sale) of the property

2. In general, violations of property rights usually take two forms: (a) an unauthorized use which leaves the property intact (which allows for traditional compensation or the reasonable use value damages); (b) an authorized sale through which the property cannot be returned (which allows for traditional compensation or the sale price received by the wrongdoer).

3. It is plausible to view all of the remedies give in (a) and (b) as vindicating the right of the property owner since the right to property includes the right to this gain (the use and fruits), see Weinrib's Restitutionary Damages as CJ. The wrongdoer, or other wrongdoers, might be deterred because of these awards but that is merely the flip side of the gain-based award whose purpose is to undo the violation of the rights of the plaintiff. [In any event, the award might not deter this wrongdoer, or other wrongdoers, given the likelihood of detection in the future but the courts do not routinely increase the award on this basis, an increase which would be in line with the deterrence rationale].

4. The question then is: When can a contractual right be treated as if it were a property right? A "judicial consensus" seems to be emerging that a contractual right can be thus treated when the court would have given an injunction or ordered specific performance, see e.g., Bank of America Canada v Clarica Trust, (2002), 211 DLR (4th) 385 (SCC) and the cases cited in Waddams, The Law of Damages, 3rd ed, (Toronto: Canada Law Book, 1997) at §9.200. Why? Because in those types of cases, only the giving of the actual thing promised, rather than a payment of money, will undo the violation of the plaintiff's right (i.e. compensate them) when the defendant refuses to perform.

5. Assuming that in cases of SP/injunction a contractual right to performance will be treated as if the plaintiff has actual ownership of the thing promised, the question then becomes which type of property interference has the defendant committed (on the facts of the particular case) by breaching the contract. Is it more like a sale-type infraction which leads to the profits from the sale (a plausible interpretation of Blake), or is it more like a use-type infraction which leads to reasonable user-damages (which from the description thus far, seems like a plausible interpretation of Hendrix).

6. Thus, non-loss based damages should be available for breaches of contract (in rare circumstances) but the court does not have a discretion (or sliding scale) to award whatever it feels like on the facts of a given case. They can only award those damages that undo the wrong represented by the breach in the particular circumstances.

 

Jason

--
Jason Neyers
Assistant Professor of Law
Faculty of Law
University of Western Ontario
N6A 3K7
(519) 661-2111 x. 88435

Hanoch Dagan wrote:

Dear all:

I tend to agree with Steve that Peter, Jamie, Steve & I are basically in agreement on Hendrix and that some of our conversation is based on confusion. Peter indeed pointed out to my own misunderstanding -- for which I apologize -- with regard to what he means by uncompensable loss.

To my defense I can say (for what it's worth) that some other courts and commentators do make a case for disgorgement in contract by referring to the promisor's profits as a "solution for undercompensation."

I am also not sure that the term "uncompensable loss" best describes the types of cases Peter refers to (although again, once we agree on the substance, I am not that much concerned with terminological disputes). If I understand him correctly, in addition to the category of fiduciaries (and alike: Blake...), Peter refers to the same types of cases Allan Farnsworth addressed in his "Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract." (94 Yale L.J. 1339 (1985)), namely: cases in which, as a result of the breach, the promisee is left with a skimped performance and no opportunity to use her return performance to attempt to obtain a substitute (the typical example Farnsworth gives is of a case of a contractor who secretly substitutes cheaper materials for the more expensive ones contracted for: because in such cases courts usually limit the promisee's recovery to the diminution in value of the structure, which may be far less than the cost of reconstruction, the breach leaves the promisee with no opportunity to purchase the performance she desired).

Farnsworth claimed -- and I agree -- that the potential advantage of disgorgement in deterring breach in these cases he defines as abuse of contract outweigh their administrative costs, and that (for that reason) contractual parties are likely to endorse a rule that assures promisees against skimped performance. He suggested -- and I agree again -- to call this category of cases "abuse of contract."

Hanoch

Hanoch Dagan
Affiliated Overseas Professor
University of Michigan School of Law
625 South State Street
Ann Arbor, MI 48109-1215
(734) 647-7352 (o)
(734) 764-8309 (fax)


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