1

Exploring a New Remedy for Breach of Contract

A Comparative Study on Account of Profits

Raphaël Donkersloot

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LL.M. Thesis - Leiden Law School

Date: December 1, 2014

Name: Raphaël Janszoon Donkersloot

Student number: 0933910

Supervisors: mr. dr. P.C.J. De Tavernier and prof. J. Cartwright

Email: r.j.donkersloot.3@law.leidenuniv.nl

Phone: +31 (0)683222588

Number of words: 14.872

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CONTENTS

1. Introduction / 4

2. The Term ‘Account of Profits’ Explained / 8

3. Account of Profits in Dutch, English and American Law / 10

3.1. Dutch Law / 10

3.1.1. Developments in Legislation / 10

3.1.2. Developments in Case Law / 11

3.1.3. Conclusion / 14

3.2. English Law / 14

3.2.1. Three Traditional Common Law Principles / 15

3.2.2. Developments before Blake / 17

3.2.3. The Decision in Blake / 19

3.2.4. Developments After Blake / 21

3.2.5. Conclusion / 24

3.3. American Law / 25

3.3.1. Restatements as Sources of American Law / 25

3.3.2. §39 Restatement (Third) of Restitution and Unjust Enrichment / 26

3.3.3. Conclusion / 28

3.4. Conclusion / 28

4. Objections Against Account of Profits Examined / 30

4.1. The Remedy Violates the Compensation Principle / 30

4.2. The Remedy Discourages Economic Activity / 33

4.3. The Remedy Has a Punitive Nature / 35

4.4. The Remedy Leads to Uncertainty / 39

4.5. The Remedy Postpones the Problem of Evidence / 40

4.6. Conclusion / 41

5. Conclusion / 42

References / 44

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1. Introduction

Pacta sunt servanda. Contracts must be performed. This is one of the most fundamental

principles in Dutch contract law1 and in many other civil law jurisdictions.

2 On the basis of

this maxim, the primary remedy for breach of contract in Dutch law is specific performance.3

This remedy, codified in article 3:296 section 1 Dutch Civil Code (hereafter: ‘Dutch CC’),

enables a party to get exactly the performance he is entitled to. Next to this remedy, the Dutch

CC offers the promisee multiple other remedies for breaches of the contract: injunction (also

article 3:296 section 1 Dutch CC); damages (article 6:74 Dutch CC); dissolution (article 6:262

Dutch CC) and the right to suspend performance (article 6:262 and 6:263 Dutch CC). Does

this package of remedies sufficiently safeguard the pacta sunt servanda principle? Before

answering this question, consider the following two examples first.

The first example is based on the facts in Ruxley Electronics and Construction Ltd v Forsyth.4

A wants a swimming pool in his garden and B promises him to build one for €20.000. In the

contract it is specifically stipulated that the swimming pool must be 230 centimetres deep.

However, after the constructing work is done, it appears that the depth of the pool is only 205

centimetres. This is clearly a breach of contract, because A has not received the very

performance that he is entitled to under the contract. It is possible that B has obtained a

benefit by this breach of contract; by building a shallow pool B presumably saved some costs

on labour and materials.5 So let us say that B saved €1000 accordingly. Furthermore, after a

professional loss assessment it appears that A has not suffered any loss due to the breach of

contract, or at least, the economic value of the pool has not diminished because of the lower

depth. It is still completely safe to jump and dive into a pool with a depth of 205 centimetres,6

so the breach of contract has not caused any loss of recreational value either. A could of

course ask B to make the pool deeper according to the terms of the contract, but that would

cost B at least €30.000, because it would be necessary to demolish the pool before B can build

a new one. Despite these facts B has still breached the contract. The question now remains:

what remedy could provide an adequate and satisfactory response to this breach of contract?

1 Haas & Jansen 2011, p. 14-15.

2 Note 3 at Section III. – 3:302 Draft Common Frame of References. See also Asser/Hartkamp & Sieburgh 6-II

2013/345 and Asser/Hartkamp & Sieburgh 6-I* 2012/380. 3 Haas & Jansen 2008, p. 11-15.

4 Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 (HL).

5 This is possible, because this issue is not discussed during trial in the Ruxley case. See McGregor 2003, nr. 12-

030. 6 Please visit www.swimming.org for specific information concerning recommended depths of swimming pools.

5

The second example is based on the facts of the decision in HR Doerga/Stichting Ymere.7 A is

the owner of a canalside house in Amsterdam and B is the tenant that is leasing the house. In

the tenancy agreement it is stipulated that B is not allowed to sublease the house to third

parties. B nevertheless breaches the contract by subleasing the house to several students, and

A discovers this 40 months after the breach. At that time, B has made a total profit of €13.800.

The students have not damaged the house by any means, and A has not suffered any loss due

to the breach of contract accordingly. Again, what remedy could provide an adequate and

satisfactory response to the breach of contract?

Specific performance would not be an adequate response in either of the example cases. Such

a remedy would be unreasonable to award in the swimming pool case, because the costs of

performance (€30.000) are significantly higher than the original contract price (€20.000).

Specific performance (or an injunction) cannot be awarded in the subleasing example either,

because such a remedy cannot undo the fact that B has subleased the house for 40 months to

students. Furthermore, it would neither be adequate nor satisfactory to award damages in

either of the cases, because there is no loss. Under common law A would then be entitled to

nominal damages only, which means that A would only receive a token sum of for example

€5. I do not believe he will be satisfied with such an award. The problem remains that B has

breached the contract and that A has not received the (value of the) performance he is entitled

to under the contract, with the existing remedies under Dutch law.

The solution to this problem is rather simple. If a promisor breaches his contract and

accordingly yields a benefit, a court should be able to take away those gains from him if the

existing remedies could not give the promisee (the value of) the performance that he is

entitled to. So in the swimming pool case, A would receive the money B saved by breaching

the contract (€1000) and in the subleasing case, A would receive the profits B was not

allowed to make under the contract (€13.800). Throughout this thesis, multiple other cases

will be discussed in which the only suitable reaction of the law is to strip away the gains made

by the promisee.8

7 HR 18 juni 2010, ECLI:NL:HR:2010:BM0893, NJB 2010, 1407 (Doerga/Stichting Ymere).

8 These cases will mainly be discussed in chapter 3 below.

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The introduction of such a gain based remedy, which I will call ‘account of profits’

throughout this thesis, would have two main benefits which eventually safeguard the pacta

sunt servanda principle.9 First of all, such a remedy would give the promisee an additional

legal action that enables him to obtain (the value of) the performance he is entitled to under

the contract. Such an extension of legal actions is especially useful in the event that the

promisee is only entitled to nominal damages because he cannot prove any loss, and if the

remedies injunction or specific performance are unreasonable to award or cannot take away

the negative effects of the breach that was committed. Secondly, if account of profits would

be available as a remedy, a promisor will be deterred from breaching his contract to make a

profit, because there would not be any incentive to make that profit if it would be taken away

from him afterwards. These are the two reasons to introduce account of profits as a remedy

for breach of contract in Dutch law.

Yet it is already possible under Dutch law to strip a party of the profits he made by breaching

the contract. The legal basis for this is article 6:104 Dutch CC. However, we shall see that

article 6:104 Dutch CC does not provide the promisee an independent remedy. Article 6:104

Dutch CC can only be used as a method of calculating damage in cases where he has

difficulties in proving them.10

Accordingly, a promisee has to suffer at least some lossin order

to get access to article 6:104 Dutch CC.11

This way of using account of profits is not fully

satisfactory if one considers the two abovementioned cases, in which it is practically

impossible for the promisee to show that he suffered any loss as a result of the breach.

Furthermore, the use of article 6:104 Dutch CC does not give the promisee any rights

whatsoever, because the use of this article is subjected to the discretionary power of the

court.12

If account of profits on the other hand would be available as an independent remedy it

would become more accessible and a tangible right for the promisee.

9 These two benefits are also given by the American Law Institute in introducing §39 Restatement of Restitution

and Unjust Enrichment, a section that provides a legal basis to strip a party of his gains in the event of breach of

contract. Please see section 3.3.2 below for more detailed information about this section. 10

See section 3.1 below. 11

HR 24 december 1993, ECLI:NL:HR:1993:ZC1202, NJ 1995, 421, (Waeyen-Scheers/Naus) and HR 18 juni

2010, ECLI:NL:PHR:2010:BM0893, NJB 2010, 1407 (Doerga/Stichting Ymere). These cases will be discussed

in section 3.1.3 below. 12

Spier 1992a, nr. 3.

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Regarding all observations made above, the main proposition in this thesis is the following:

Under Dutch law, account of profits should be available as an independent remedy for

breach of contract - and not just as a method of calculating loss - in cases where other

available remedies cannot sufficiently give the promisee (the value of) the performance

he is entitled to under the contract.

In support of this proposition, I will make a comparison with the laws of England and the

United States, where account of profits has been introduced as an independent remedy for

breach of contract, albeit reluctantly. These introductions went along with extensive debate in

both judicial discussion and academic writing. A similar discourse has not yet taken place

among Dutch lawyers, which makes the comparison with English and American law

particularly useful for finding new arguments in support of the main proposition of this thesis.

The structure of this thesis is the following. First I will explain what is meant by ‘account of

profits’ and why this specific term is used throughout this thesis (chapter 2). Subsequently,

the main development of account of profits will be examined in Dutch, English and American

law, in order to understand the current view of these jurisdictions towards the use of account

of profits as an independent remedy (chapter 3). Finally, the main objections against the use

of account of profits in contract law will be examined (chapter 4), leading to the final

conclusion that Dutch law should introduce account of profits as a new independent remedy

for breach of contract (chapter 5).

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2. The Term ‘Account of Profits’ Explained

Before we discuss the developments of account of profits in several jurisdictions, it is useful

to give a definition of the term first. The term ‘account of profits’ is used in several

textbooks13

and by Lord Nicholls of Birkenhead in the landmark case Attorney General v

Blake,14

but there is no clear, uniform definition of the term. In Dutch, the term ‘account of

profits’ is alternately translated as winstafgifte, 15

winstafdracht,16

or winstafroming17

. A

definition of one of these alternative Dutch terms is given by Van Dam:

‘Onder ‘‘winstafgifte’’ wil ik verstaan: het van de dader afnemen van zijn door een (…)

tekortkoming in de nakoming behaalde winst ten gunste van de benadeelde, ongeacht of de

benadeelde schade heeft geleden als gevolg van de gepleegde inbreuk.’18

Keeping van Dam’s definition in mind, I would propose the following English definition of

account of profits: an alternative remedy that takes away the profits (i.e. net profits and saved

expenditures) a promisor makes by breaching the contract, irrespective of the question

whether the promisee has suffered any loss as a consequence of the breach. This definition

does not only correspond with Van Dam’s definition, but also with the solution as given for

the problem in the two examples as discussed in the introduction. In chapter three we will see

that the same solution is applicable in multiple other cases. In this light, my proposed

definition of account of profits contains three distinctive elements:

(1) Account of profits is an alternative remedy. It can only be awarded if other available

remedies cannot sufficiently ensure that the promisee obtains (the value of) the

performance he is entitled to;

(2) Account of profits is an independent remedy. Its application should not be dependent on

any other remedy for breach of contract. In particular, account of profits should not be

seen as a method of calculating loss, so there is no particular need to show any loss in

order to get access to the remedy;

13

Beatson, Burrows & Cartwright 2010, p. 597; Peel 2011, at 20-011. 14

Attorney General v Blake (Jonathan Cape Ltd, third party) [2001] AC 268, 284. This case will be discussed in

detail in section 3.2.3, below. 15

Van Dam 1992. 16

Van Kogelenberg 2014, p.128-141; Spier 1992a; Spier 1992b; Krans 1999, p. 109-118. 17

Van Boom 2011. 18

Van Dam 1992, p. 185.

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(3) Account of profits can be used to take away both profits and saved expenditures from a

promisor in breach. Thus, the term ‘profits’ includes all sorts of benefits the promisor

could obtain by breaching a contract.

Next to the term ‘account of profits’ the term ‘restitutionary damages’ is frequently used to

describe the same remedy.19

For example, the English Law Commission describes

‘restitutionary damages’ as ‘damages which aim to strip away some or all of the gains made

by a promisor from a civil wrong.’20

According to this commission, a ‘civil wrong’ includes

breach of contract. 21

In that sense, ‘restitutionary damages’ are an alternative term for

‘account of profits’. However, there are two reasons why this alternative term must be

avoided.

First of all, the use of the term ‘restitutionary damages’ leads to confusion with the law of

restitution, in which wrongly obtained benefits have to be ‘restored’ to their ‘proper owner’.22

Considering this, the use of the word ‘restitution’ is inappropriate in examples such as the

ones given in the introduction. We have seen that nothing has been restored or given back to

its proper owner in these cases. In the swimming pool case, it can hardly be argued that A was

the proper owner of the saved costs on labour and materials, or that A was the proper owner

of the rental prices I obtained by entering into a contract with students.

Additionally, the term ‘restitutionary damages’ contains the word ‘damages’, which is

inappropriate considering our observation that the application of the remedy of account of

profits is independent of other remedies for breach of contract and in particularly the remedy

of damages. Moreover, the word ‘damages’ implies that some loss has to be suffered, which is

not a requirement for the remedy of account of profits.

So, in short, a definition of account of profits is given that includes the three elements of the

solution for the problem in the cases as discussed in the introduction. Moreover, it is

explained why the alternative term ‘restitutionary damages’ must be avoided. With this

knowledge in mind, we are now ready to discuss the developments of account of profits in

several legal jurisdictions.

19

Beale, Bishop & Furmston 2008, p.745; Beale 2012, at 26-046; McGregor 2003 at 12-002. See also: English

Law Commission, Aggravated, Exemplary and Restitutionary Damages (Law Com No 247, 1997). 20

English Law Commission, Aggravated, Exemplary and Restitutionary Damages (Law Com No 247, 1997), p.

2.We can find a similar definition in McGregor 2003, at section 12-002. 21

Ibid, p. 29. 22

Farnsworth 1985, p. 1342. See also Jackman 1989, p. 303.

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3. Account of Profits in Dutch, English and American Law

This chapter will describe the main developments of account of profits in Dutch, English and

American law in order to understand the current position of these jurisdictions towards the

idea of account of profits as a remedy for breach of contract. Moreover, the discussion of the

cases is particularly useful, because these cases will also be used in our discussion of the

objections against account of profits in chapter 4.

3.1. Dutch Law

3.1.1. Developments in Legislation

The Old Dutch CC did not have a general legal basis for account of profits.23

In a decision

dating from 1959, the Dutch Supreme Court even rejected the idea of account of profits in the

area of private law.24

Dutch academic writers like Haardt and Hermann later advocated the acknowledgement of

account of profits in certain areas of private law, in particular tort law and intellectual

property law.25

In support of their views, they referred to other jurisdictions where an award

of account of profits already existed for certain kinds of torts.26

Starting in 1971, the Dutch

legislation began to acknowledge the award of account of profits in certain intellectual

property codes,27

but there was no general acknowledgement of account of profits in the area

of contract law, nor under the provision of the Old Dutch CC, nor in the decisions of the

Dutch Supreme Court before the introduction of the New Dutch CC in 1992.28

By contrast, the New Dutch CC introduced a section that provides a legal basis for stripping

profits of a party in the event of a breach of contract: article 6:104 Dutch CC. The text of this

article is the following:

23

Krans 1999, p. 35; Spier 1992a, nr. 28; Linssen 2001, p.1. 24

HR 16 januari 1959, NJ 1959, 355 (Swieringa/Swieringa) at p. 873: ‘De omvang van de door den schuldeiser

geleden schade [is] geheel onafhankelijk (...) van de opbrengst, die de schuldenaar bij de vervreemding van de

door hem verschuldigde zaken heeft ontvangen.’ 25

Haardt 1969 and Herrmann 1970. 26

Hermann referred for example to: article 423 O.R. (Swiss); section 687 BGB (Germany); section 87 of the

Austrian Author Code of 1936; articles 73 and 74 of the French Author Code of 1957 and section 2 of the Trade

Mark Act of 1938 of England. 27

See for example art. 13A section 4 (old) Benelux-Merkenwet (1971); article 43 section 3 (old) Rijksoctrooiwet

(1978) and article 27a section 1 Auteurswet (1989). 28

Linssen 2001, p. 1.

11

‘If a person who is liable towards another on the ground of a tort or of a failure in the

performance of an obligation has derived profit from that tort or failure, the court may assess

the damage, upon demand of such other person, at the amount of such profit or at a part

thereof.’29

A literal reading of article 6:104 Dutch CC suggest that the article does not provide a party an

independent remedy for breach of contract, but rather an instrument to assess loss. This

assumption is confirmed if one reads the legislative history of article 6:104 Dutch CC:

‘Anders dan de Commissie heeft gesuggereerd betreft artikel 6.1.9.9a (i.e. article 6:104 Dutch

CC, RJD) de begroting van de schade.’30

Notably, the reason for introducing article 6:104 Dutch CC is similar to our reason to

introduce account of profits as a remedy:

‘[De ratio van artikel 6:104 BW] komt er op neer dat het onredelijk is geacht om ongeoorloofd

ten koste van een ander verkregen winst aan de verkrijger te laten, waardoor die ander

vermoedelijk wél schade is geleden, maar deze naar haar aard niet goed bewijsbaar is.’31

This thought of the legislator seems to be contradictory and therefore false. This is because

the legislator tries to introduce a measure for loss in situations in which loss cannot be

measured. As proposed in this thesis, it would be more reasonable if the legislator would have

introduced article 6:104 Dutch CC as a new remedy instead of a way of calculating damage,

but this option has simply not been considered during the drafting process.32

Moreover, no

substantial discussion has taken place at all amongst the legislative powers concerning the use

or meaning of article 6:104 Dutch CC during its introduction. This is surprising if one

considers that the idea to strip a promisee of his gains was a completely unknown

phenomenon in the area of contract law under the Old Dutch CC.33

This thoughtless way of

introducing article 6:104 Dutch CC could explain why account of profits has not yet been

introduced into Dutch law as a remedy, but merely as a method of assessing losses.

3.1.2. Developments in Case Law

Whereas legislative texts are rather vague about how to understand article 6:104 Dutch CC,

case law of the Hoge Raad is very clear. First of all, the Hoge Raad makes it abundantly clear

29

Warendorf, Thomas & Curry-Sumner 2013, p. 661. 30

Parl. Gesch. Boek 6, p. 1270. See also Van Dam 1992. 31

Parl. Gesch. Boek 6, p. 1269. See also Krans 1999, p. 35. 32

Parl. Gesch. Boek 6, p. 1266-1270.. 33

See Linssen 2001, p. 3.

12

that article 6:104 Dutch CC cannot be seen as a basis for an independent remedy. In the

landmark case Waeyen-Scheers/Naus the Hoge Raad decided:

‘Art. 6:104 geeft niet aan degene jegens wie onrechtmatig is gehandeld of wanprestatie is

gepleegd, een ‘vordering tot winstafdracht’, doch verleent aan de rechter een discretionaire

bevoegdheid om, ingeval schadevergoeding is gevorderd, de schade te begroten op het bedrag

van de door dit handelen of die wanprestatie genoten winst of op een gedeelte daarvan.’ 34

This is in essence a clear confirmation of what has been said by the legislator. What follows,

however, is completely new:

De (…) wijze van begroting komt neer op een vorm van abstracte schadeberekening, waarbij

wordt geabstraheerd van de vraag of concreet nadeel is komen vast te staan, zodat zodanig

nadeel bij onzekerheid niet door de eiser behoeft te worden aangetoond. Dit neemt echter niet

weg dat, zo de rechter vaststelt dat in het gegeven geval in het geheel geen schade is geleden,

daarmee de weg naar toepassing van art. 6:104 is afgesneden. In een en ander ligt tevens

besloten dat de rechter niet tot toepassing van art. 6:104 kan overgaan, indien de

aangesprokene bewijst dat door de gedragingen waarvoor hij aansprakelijk gesteld wordt, geen

schade ontstaan kan zijn.’35

With this, the Hoge Raad makes it clear that the promisee has to suffer at least some loss in

order to be able to invoke article 6:104 Dutch CC.36

This reaffirms that article 6:104 Dutch

CC is a method of calculating loss rather than an independent remedy.

Nevertheless, the new condition introduced by the Hoge Raad does not seem to help us with

introducing account of profits as an independent remedy. According to a strict interpretation

of this new condition, a promisee would not be able to take away any gains from a promisor

in cases such as given in the introduction or comparable cases, as he would not be able to

prove any loss. However, this requirement of loss does not create a serious obstacle.

According to the new condition, the burden of proof must be carried by the promisor, not by

the promisee. So if a promisee proves that there is a breach of contract, the court must assume

34

HR 24 december 1993, ECLI:NL:HR:1993:ZC1202, NJ 1995, 421, r.o. 3.4. (Waeyen-Scheers/Naus). 35

Ibid. 36

This requirement of loss is repeated in several later decisions of the Hoge Raad. HR 15 november 1996,

ECLI:NL:HR:1996:ZC2195, NJ 1998, 314; HR 16 juni 2006, ECLI:NL:HR:2006:AU8940, NJ 2006, 585, m.nt.

J.H. Spoor (Kecofa Lancôme); HR 18 juni 2010, ECLI:NL:HR:2010:BL9662, NJB 2010, 1406 (Setel NV/AVR

Holding).

13

that it suffered at least some lossas a consequence. The promisor then has to refute this

assumption by showing sufficient facts to make it plausible37

that the promisee indeed did not

suffer any loss.38

In 2010 the Hoge Raad decided another case in which a claim was based on article 6:104

Dutch CC in HR Doerga/Stichting Ymere. This case has exactly the same facts as the example

case of the introduction concerning the subleasing of a house. We turn therefore directly to

the decision of the court towards the claim of damages based on article 6:104 Dutch CC.

The court assumes that the landlord has suffered some loss, because it seems to be likely that

landlords in general incur costs in order to track down subleasing. Since these costs are

generally difficult to calculate, the application of article 6:104 Dutch CC becomes appropriate.

Besides, the court notes that the damage assessment on the basis of article 6:104 Dutch CC

offers a quick and effective instrument against illegal subleasing, which makes the use of this

article even more appropriate in this specific case. The Dutch Supreme Court affirms this

decision and adds some interesting considerations concerning article 6:104 Dutch CC.

First, the Hoge Raad makes unambiguously clear that the nature of article 6:104 Dutch CC is

absolutely not punitive, not even in part. As a result, a court should be reluctant in taking

away all profits from the promisor if the profits heavily outweigh the loss of the promisee. In

such cases, a court should rather remove only a part the profits from the promisor.39

So, if

gains of the promisor heavily outweigh the loss of the promisee, it could be a punitive – and

therefore forbidden – measure if those gains would be taken away from the promisor. To put

it more simply: a gain based award can sometimes be punitive and courts should therefore be

reluctant in awarding it. This decision therefore implies an important objection against the use

of account of profits as a whole and will be discussed in the examination of objections in

chapter 4 below.

Second, the Hoge Raad again decides that article 6:104 Dutch CC does not create a serious

obstacle for its use. Moreover, it even decides that the applicability of article 6:104 Dutch CC

37

In HR Waeyen-Scheers/Naus the promisor had to prove that the claimant did not suffer any loss, but in HR

Doerga/Stichting Ymere (which will be discussed below) the Hoge Raad lowered this bar to the plausibility of

no loss suffered. See consideration 3.6 in the latter decision. 38

Linssen 2001, p. 383-385; Van Boom 2011, p. 121. 39

HR 18 juni 2010, ECLI:NL:HR:2010:BM0893, NJB 2010, 1407, r.o. 3.6. (Doerga/Stiching Ymere).

14

does not require any additional criteria to be satisfied by comparison with a normal claim for

loss based on article 6:74 Dutch CC. 40

3.1.3. Conclusion as to Dutch law

All developments in Dutch law considered, we have seen that account of profits is a relatively

new phenomenon in Dutch law. The whole idea to strip a promisor of his gains was unknown

and even rejected in the area of contract law before the introduction of the New Dutch CC.

Surprisingly, the legislator introduced article 6:104 Dutch CC in 1992, which formed a legal

basis to strip a promisor of his profits in the event of a breach of contract. The thoughtless

way of introducing this section eventually resulted in an ill-considered section which did not

provide the promisee with an additional remedy for breach of contract, but merely a method

of calculating loss for cases in which it would be difficult to assess such loss. Later case law

of the Hoge Raad has decided that this section can only be used in cases where the promisee

has suffered at least some loss. Moreover, the nature of the section is non-punitive and a court

should therefore be reluctant in taking away all profits of the promisor if those profits heavily

outweigh the loss of the promisee. Notwithstanding these considerations, we have seen that

article 6:104 Dutch CC is relatively easy to access for a promisee. No requirements other than

a normal claim for damages have to be satisfied, and the burden of proof of the ‘loss

requirement’ has to be carried by the promisor.

Everything considered, one could be confident in saying that the attitude of Dutch law has

become more and more open towards the idea of stripping a promisor of his gains in the event

of a breach of contract, and it would therefore be only be a modest step to introduce account

of profits as an independent remedy.

3.2. English Law

In contrast to Dutch law, English law has already reluctantly introduced account of profits as

a remedy for breach of contract. This chapter will describe the most important developments

of this introduction. However, in order to fully understand these developments, it is necessary

to provide some explanation about the common law within the area of contract law first. For

the sake of this thesis, there are three traditional principles of common law in particular that

need to be discussed first.

40

Ibid.

15

3.2.1. Three Traditional Principles in Common Law

First of all, in contrast to Dutch law,41

the primary remedy for breach of contract under

common law is damages.42

On the other hand, the remedies of specific performance and

injunction are considered to be exceptional. Those remedies are generally only available if the

award of damages would be an inadequate response to the breach of contract.43

This order of

merit in remedies can be explained if one understands how a common lawyer looks at the

nature of contracts. Under common law, a contract includes both a promise to perform (‘the

primary obligation’) and a promise to pay damages if the performance cannot be delivered

(‘the secondary obligation’).44

Closely related to the idea that damages are the primary remedy for breach of contract, there

is a second aspect of common law that is significant for remedying a breach of contract. In

contrast to Dutch law,45

a party is generally allowed to breach his contract as long as he

sufficiently compensates the promisee for his loss by paying him monetary damages. To put it

in the famous words of Oliver Wendell Holmes Jr.:

‘the only universal consequence of a legally binding promise is, that the law makes the

promisor pay damages if the promised event does not come to pass. In every case it leaves him

free from interference until the time for fulfilment has gone by, and therefore free to break his

contract if he chooses.’46

Such a right to breach a contract has stimulated the development of the ‘efficient breach

theory’.47

According to this theory breach of contract should even be encouraged if it leads to

a ‘maximisation of resources’, which is the case when the profits of the promisee outweigh

the costs of paying compensatory damages to the promisor.48

This theory has been developed

in the seventies,49

but according to Professor Campbell, it was already accepted by the House

of Lords in the decision Teacher v Calder dating from 1899.50

Anyhow, the fact remains that

41

Asser/Hartkamp & Sieburgh 6-I* 2012/380. 42

Furmston 2011, p. 796; Beatson, Burrows & Cartwright 2010, p. 534. 43

Furmston 2011, p. 745. 44

Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 849 (Lord Diplock): ‘Every failure to

perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker

to which it gives rise by implication of the common law is to pay monetary compensation to the other party for

the loss sustained by him in consequence of the breach.’ 45

Asser/Hartkamp & Sieburgh 6-I* 2012/380. See also HR 21 december 1956, NJ 1957/126. 46

Holmes 1881, p. 301. 47

Campbell 2002, p. 259; Friedmann 1989, p. 1-2. 48

Posner 2011, p. 151. 49

See also Birmingham 1970. 50

Campbell 2002, p. 259.

16

a party may generally breach his contract under common law, as long as he compensates the

promisee for the breach of contract by paying him damages.

The third typical common law principle within the area of contracts is that damages aim to

compensate the promisee for his loss. The following judgement delivered by Parke B in

Robinson v Harman is illuminating and has been cited innumerable times by common law

lawyers:

The rule of 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 situation, with respect to damages, as

if the contract had been performed.51

Admittedly, this principle of common law is also shared by Dutch law,52

but it is still

important to mention it, because the principle is, in contrast to Dutch law, strongly rooted

within the common law and courts will therefore be unlikely to ignore it in their decision

making.

According to the rule in Robinson v Harman, loss can be measured on the basis of the

promisor’s loss only. Consequently, the profits of the promisee are irrelevant in the event of

breach of contract.53

If a promisee cannot prove any loss, he will be rewarded with nominal

damages (i.e. a token sum) only and cannot, traditionally, try to take away any profits from

the promisor.54

Considering the three principles of common law, it is not hard to imagine that the idea of

account of profits is difficult to reconcile with the basic principles of common law. The

driving idea behind account of profits is that contracts should be performed – pacta sunt

servanda – and such an idea does not narrowly correspond with (1) the idea that damages are

the main remedy for breach of contract (instead of specific performance), (2) the idea that one

should be free to breach ones contract as long as the promisee is sufficiently compensated

with an award of damages and (3) the idea that damages could only compensate the promisee

for his loss. It may come as a surprise then, that it is possible to strip a party of his gains in

the context of breach of contract under English law. The decision of the House of Lords in

51

Robinson v Harman (1848) 1 Exch 850, 855 (Ex. Ct.). 52

Lindenbergh 2008, nr. 6. 53

‘The question is not one of making the defendant disgorge what he has saved by committing the wrong, but

one of compensating the plaintiff.’ Tito v Waddell (No. 2) [1977] Ch. 106, 332 (Megarry V-C). See also: Beatson,

Burrows & Cartwright 2010, p. 597: ‘The traditional approach, which remains the general rule, is that the gain to

a defendant from a breach of contract is irrelevant.’. 54

Beale 2012, at 26-002. See also McGregor 2010 at 10-001.

17

Attorney General v Blake (2001) is unarguably the key authority that has acknowledged this.55

In order to fully understand how account of profits works in English law, I will not only

discuss the Blake decision, but also the most relevant decisions before and after Blake.

3.2.2. Developments before Blake

Before the decision in Blake, the attitude of the English law towards account of profits was

quite negative. In Teacher v Calder (1899), 56

the House of Lords had to decide a case in

which the promisee was seeking, inter alia, an account of profits on the basis of a breach of

contract. The claim, which was ‘a novelty unsupported by either authority or principle’,57

was

rejected by Lord Davey, because there was ‘no evidence of any business being lost by the

[promisor]’.58

In other words, the claim was rejected because the promisee could not prove

that it suffered any loss due to the breach.

In a later decision of the High Court of Justice in Tito v Waddell, 59

it becomes even more

clear that account of profits cannot be reconciled with the fundaments of common law. Sir

Megarry V-C cited the clear words of O’Connor LJ in Murphy v Wexford County Council to

support his judgment:

‘You are not to enrich the party aggrieved; you are not to impoverish him; you are, so far as

money can, to leave him in the same position as before.’60

Despite the decisions in Teacher v Calder and Tito v Waddell, the High Court awarded a

promisee a part of the profits in the context of breach of contract in Wrotham Park Estate v

Parkside Homes.61

In this case, Wrotham Park, the owner of the Wrotham Park estate, sold a

part of the land to Parkside. The contract contained a specific ‘lay-out plan’: a restrictive

covenant that prohibited Parkside from developing the land for building purposes, except in

strict accordance with a lay-out plan to be first submitted and to be approved in writing by

Wrotham Park. Parkside however breached this covenant by building fourteen houses on the

land. While the building work was in construction, Wrotham Park drew attention to the lay

out plan by sending Parkside a letter. Parkside nevertheless continued with the building

process, and even sold the houses to several purchasers. Litigation on the basis of breach of

55

Beatson, Burrows & Cartwright 2010, 597; Beale 2012, at 26-001; Furmston 2011, p. 748. 56

Teacher v Calder [1899] AC 451 (HL). 57

Ibid, at p. 467. 58

Ibid, at p. 468. Lord Watson and Lord Shand concurred with this judgment. 59

Tito v Waddell (No. 2) [1977] Ch 106 (HC). 60

Murphy v Wexford County Council [1921] 21 IR 230, 240. 61

Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (HC).

18

contract followed. The claim for specific performance was rejected by the High Court of

Justice, because the purchasers had already moved in. Specific performance would also mean

that all houses would have to be demolished, which would be, according to Brightman J, ‘an

unpardonable waste of much needed houses’.62

Brightman J then turned to the decision on the

other claim: damages.

But how should Brightman J assess loss here? It was clear that Wrotham Park did not suffer

any loss due to the breach of the lay-out plan, but if Wrotham Park would only be awarded

nominal damages, ‘justice [would] manifestly not have been done’.63

Brightman J then came

up with a remarkable solution. He noted that Parkside could have avoided a breach of contract

in two ways: either by not building on the land or by negotiating with the promisee in order to

relax the restricting covenant. Because Parkside already had built on the land, only the second

option was still feasible. If considering this second option, Parkside could have offered a

reasonable part of its profits (around 50.000 pounds) in order to relax the covenant and to

build the houses accordingly. According to Brightman J, five per cent of this amount would

have been reasonable. He awarded Wrotham Park 2500 pounds as damages.64

Note that the solution of Brightman J is comparable to our idea of account of profits: the

promisee is eventually awarded (a part of the) profits of the promisor which he made by

breaching the contract. It is however not identical to account of profits, because the solution

of Brightman J is clearly a method of assessing loss, based on a hypothetical bargain. In

literature one even uses the term ‘Wrotham Park damages’ to describe this method.65

Nevertheless, the decision in Wrotham Park made it possible to consider the gains of a

promisor in the context of breach of contract, which must be considered as an important step

towards the acceptance of account of profits as a remedy. Later, the decision in Wrotham Park

seemed to be overruled in Surrey County Council and Another v Bredero Homes, in which the

Court of Appeal awarded the promisee only nominal damages, while the facts were very

similar to those in Wrotham Park.66

By contrast, the English Law Commission reached a

different conclusion as to the status of Wrotham Park in its law rapport of 1997 called

Aggravated, Exemplary and Restitutionary Damages.67

They observed that Wrotham Park is

62

Ibid, at 811. 63

Ibid, at 815. 64

Ibid, at 815-816. 65

Beale 2012, at 26-050; Beatson, Burrows & Cartwright 2011, at p. 602; Peel 2011, at 20-009. 66

Surrey County Council and another v Bredero Homes Ltd [1993] 1 WLR 1361 (CA). 67

Law Commission, Aggravated, Exemplary and Restitutionary Damages (Law Com No 247, 1997).

19

rather an exception to the decision in Bredero Homes, in which an account of profits was

denied.68

They also observed that case law did not provide a clear tradition as to the remedy

of account of profits,69

and concluded that this area of contract law should not be codified in

legislative form, but should be left to common law development.70

It took only four years for

the House of Lords to develop this area of the law in the landmark case Blake, which will be

discussed in the following subsection.

3.2.3. The Decision in Blake

The facts of Blake71

are rather unusual, but no less exciting. In 1944, George Blake signed a

contract at the Secret Intelligence Service (‘SIS’) in which he agreed not to divulge any

official information gained as a result of his employment as an agent at the SIS. Mr Blake

failed to do so in multiple ways. He secretly served the Soviet Union by providing them with

confidential information concerning the SIS. After these acts were uncovered, he was

sentenced to prison for 42 years. Yet he managed to escape prison after only five years and

fled to Moscow afterwards. There, he wrote his autobiography, titled No Other Choice. In this

book Mr Blake revealed much information about his former work at the SIS and thereby

breached his contract dating from 1944. He subsequently signed a publication contract with

Jonathan Cape Ltd, a British publisher. The book became a bestseller. When the SIS

discovered the existence of the book, Mr Blake had already received £60.000 of the stipulated

£150.000 for the publication of the book. On behalf of SIS, the Attorney General sued Mr

Blake for, inter alia, breach of contract.

The most important judgment of the case is delivered by Lord Nicholls of Birkenhead. He

starts by appointing the basic principles of Robinson v Harman (damages are compensatory)

and Tito v Waddell (loss is measured by the promisee’s loss, not by the promisor’s gain).72

Lord Nicholls then expresses serious doubt whether these principles should have a universal

applicability.73

Subsequently he refers to several cases – although not common law cases

68

Ibid, at paragraph 1.36. 69

The Commission actually uses the term ‘restitutionary damages’, but this term is avoided because of the

reasons as given in section 2.2.1. supra. 70

Law Commission, Aggravated, Exemplary and Restitutionary Damages (Law Com No 247, 1997), at

paragraph 1.47. 71

Attorney General v Blake (Jonathan Cape Ltd, third party) [2001] AC 268. 72

These two principles are explained at subsection 3.2.1. supra. 73

As to the principle in Robinson v Harman, he notes: ‘Even when awarding damages, the law does not adhere

slavishly to the concept of compensation for financially measurable loss.’ As to the principle in Tito v Waddell,

he notes further: ‘But the common law, pragmatic as ever, has long recognised that there are many commonplace

20

concerning a breach of contract – where the compensation for a wrong is measured through

the gains of the promisor. These cases lead him to conclude that ‘there seems to be no reason,

in principle, why the [common law] court must in all circumstances rule out an account of

profits as a remedy for breach of contract.’74

Lord Nicholls then carefully introduces a legal

basis that is very similar to our concept of account of profits:

‘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. ’75

After the introduction of this discretional remedy, which he calls ‘account of profits’,76

Lord

Nicholls emphasizes that this remedy could only be applied in exceptional circumstances. He

furthermore refuses to give fixed criteria for the availability of the new remedy, but only

provides a general guide:

‘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.’77

Reading the judgment of Lord Nicholls, one gets the impression that the circumstances of a

case should be strikingly exceptional in order to be eligible for an account of profits under

English law. So what then are the exceptional circumstances in Blake, that enabled the House

of Lords to award such a remedy? Three circumstances can be discerned in Blake which make

the case not only exceptional, but rather extreme.78

Firstly, the breach in Blake was a serious one, committed multiple times. It was also a serious

criminal offence for which he was sentenced for 42 years to prison. Instead of accepting this

situations where a strict application of this principle would not do justice between the parties.’ See p. 285 of the

decision. 74

Ibid, at p. 284-285. At p. 285 he repeats this introduction: ‘I consider it would be only a modest step for the

law to recognize openly that, exceptionally, an account of profits may be the most appropriate remedy for breach

of contract.’ 75

Ibid. 76

Ibid, at p. 282. Lord Nicholls preferred to ‘avoid the unhappy expression restitutionary damages’. He does not

give a reason for this, but it might be the same reasons as given in chapter 2, supra. 77

Ibid at 284-285. Lord Nicholls might have been inspired by Peter Birks by providing such a general guide. See

Birks 1992, p. 521. 78

See also Peel 2011 at paragraph 20 – 014.

21

punishment, he escaped prison and even made a profit by breaching his contract. Considering

this, it would be contrary to any form of justice if an English court would allow him to keep

those ill-made profits. Secondly, it is beyond doubt that the SIS had ‘a legitimate interest in

preventing the promisor’s profit-making activity’, as confidential information is the core

business of the SIS.79

Thirdly, the breach of contract in Blake was closely akin to the breach

of a fiduciary duty, for which the award of an account of profits is the standard remedy.80

The

only reason there was no breach of fiduciary duty is because the shared information by Blake

was not confidential anymore at the time of the trial.

The overall conclusion of the examination of Blake is that the House of Lords has

acknowledged the availability of account of profits as a remedy. At the same time the House

of Lords has emphasized that this remedy is only available in exceptional or rather extreme

circumstances. Moreover, it provides only a general guide as to its application, ruling that the

promisee needs ‘a legitimate interest in preventing the promisor’s profit-making activity’ in

order be awarded an account of profits. Case law after Blake concerning account of profits has

eventually filled in this general guideline with specific criteria. We will therefore turn now to

relevant case law that has been given after the decision in Blake.

3.2.4. Developments After Blake

Esso Petroleum

In Esso Petroleum Co Ltd v Niad Ltd,81

the Chancery Division followed the decision in Blake

and awarded the promisee with a full account of profits. The facts are the following. Niad, the

owner of a retail outlet and the seller of motor fuels, promised Esso to adjust its prices

according to Esso’s marketing scheme called ‘Pricewatch’. To Esso, it was important that

Niad strictly followed this scheme, as Esso had carried out an extensive advertising and

marketing campaign, claiming that it had the lowest prices in the region. Niad was

comprehensively informed about the importance of the price adjustment scheme by attending

a presentation which concerned the new marketing campaign. However, Niad did not adjust

its prices according to the scheme, because it was convinced that these adjustments would

decrease its profits. Instead, it charged as much as it considered the market would stand.

During later proceedings, Esso primarily claimed damages for losses suffered through the

79

Mance LJ made this clear in Experience Hendrix LLC v PPX Enterprises Inc and another [2003] EWCA Civ

323, at par. 31. 80

Attorney General v Blake (Jonathan Cape Ltd, third party) [2001] AC 268, 287 (Lord Nicholls). 81

Esso Petroleum Co Ltd v Niad Ltd [2001] EWHC 6.

22

breach, and alternatively claimed an account of profits or restitution of the difference between

the recommended price by Esso and the higher price charged by Niad.

Sir Morrit V-C awarded Esso all claimed remedies, provided that Esso chose one of them. As

to the account of profits claim, Sir Morrit V-C decided that the specific circumstances of the

case justified the availability of such a remedy. In particular he decided that Esso had a

legitimate interest in preventing Niad from breaching the contract because of the following

circumstances: (1) damages would be an inadequate remedy, as it was practically impossible

to assess any loss; (2) Esso had a strong interest in good performance by the promisor, as

Esso’s whole business model depended on a strict applicability of the marketing scheme; (3)

there was a serious breach of contract, because Niad ignored a complaint that was made at

four different occasions. 82

In contrast to Blake, this case was a regular commercial case. It is doubtful whether one could

speak of exceptional – let alone extreme – circumstances in this case. It is therefore alluring to

draw the conclusion that the access to account of profits has been simplified in the Niad

decision. However, this conclusion should be drawn carefully, since the decision in Niad

lacks authority and is, as we shall see, the only real English decision after Blake in which a

full account of profits is awarded until this date.

Experience Hendrix

Another important case after Blake in which a full account of profits is claimed is the decision

in Experience Hendrix LLC v PPX Enterprises Inc and another.83

The Court of Appeal

eventually granted this claim, although not a full account of profits.

The case concerned the licensing of master recordings of the well-known artist Jimi Hendrix.

After being engaged in a long and frustrating series of lawsuits during the late sixties, Jimi

Hendrix, and later his estate, made a settlement agreement with Hendrix’ producer, PPX

enterprises. Under this agreement, PPX was entitled to exploit 33 of Hendrix’ master

recordings. The agreement also contained a provision holding that PPX was not allowed to

issue or release other recordings than those specified under the contract. PPX breached this

provision by contracting with a third party in which it granted licenses in respect of 39 master

recordings that were not listed in the settlement agreement. The estate then sued PPX for

82

Ibid, at paragraph 63. 83

[2003] EWCA Civ 323.

23

breach of contract and claimed inter alia a full account of profits for the use of the non-listed

records in the past.

In the judgment of Mance LJ, the circumstances of the case justified awarding the estate an

account of profits. These circumstances are strikingly similar to those in Niad: (1) damages

would be an inadequate remedy, because it was practically impossible to prove any loss of the

estate suffered due to the breach; (2) PPX had a strong interest in performance considering the

fact that the settlement agreement was based on long and frustrating series of lawsuits, and (3)

the case concerned a serious breach of contract, as not just one, but 39 recordings were used

for a long period without the consent of the estate.84

Despite these circumstances, only a part of the profits made by PPX were given to the estate.

According to the judgment of Mance LJ, the circumstances were not as exceptional as in

Blake; the latter case involved the interest of national security, while Experience Hendrix

involved a (comparably minor) commercial interest.85

Besides, if one would apply the

hypothetical bargain theory just like happened in Wrotham Park, the estate would never have

demanded all profits made by PPX, but only a proportion of it. A reasonable demand would

be, in the eyes of Mance LJ, at least twice the amount as what the estate had demanded for the

33 listed recordings.86

Vercoe v Rutland

Another case of interest is Vercoe v Rutland Fund Management Ltd.87

In short, this case

concerned the breach of a confidentiality agreement that was made due to a planned

acquisition of a pawn broking business. As a result, the promisee tried to seek damages based

on Wrotham Park or Blake. Sales J only awarded the promisee Wrotham Park damages but

made some useful remarks about the availability of the remedy that was given in Blake:

‘In some situations, where the rights of the claimant are of a particularly powerful kind and his

interest in full performance is recognised as being particularly strong, there may well be a

tendency to recognise that the claimant should be entitled to a choice of remedy (both as

between damages and an account of profits).88

84

These three circumstances are also given by Gibson LJ at paragraph 58 in the same judgment. 85

Ibid at par. 37. 86

Ibid at par. 46. 87

Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch). 88

Vercoe v Rutland Fund Management Ltd [2010] Bus LR Digest D141.

24

I believe that this specific judgment, if placed into the context of the other judgments, allows

us to understand how the general guide of Lord Nicholls must be used. A promisee has a

legitimate interest in preventing a profitable breach of contract if he has a particularly strong

interest in full performance. He has such an interest if he, hypothetically, does not have to

adapt the contract for the exchange of a reasonable sum of money. In Vercoe the claimants

admitted that they would have relaxed the restrictive covenants if they would have received a

reasonable amount of money for it. 89

Hence they do not have a legitimate interest in

preventing a profitable breach, and therefore they have no right to a full account of profits

either. By contrast, in cases like Blake, Experience Hendrix, Niad, and – in a comparable

Dutch case – HR Stichting Doerga/Ymere, one could defend the opposite. In these cases the

claimants would not have adapted the contract for a reasonable sum of money which makes

their interest in full performance – and therefore in a full account of profits – particularly

strong.90

Pell Frischmann

The last case of interest is the Privy Council decision in Pell Frischmann Engineering Ltd v

Bow Valley Iran and others.91

In short, this case concerned a joint venture between the

claimant and the defendants. By means of this joint venture, the parties aimed to participate in

a large project of an oil company. Within this context, both parties entered into an agreement

in which the defendant promised, inter alia, not to approach the oil company without the

express written consent of the claimant. The defendant became, however, dissatisfied with the

claimant and started buy out negotiations with the claimant. Despite that these negotiations

failed, the defendant approached the oil company and breached the contract with the claimant

accordingly. The defendant expected to make a significant profit by entering into a contract

with the oil company, but this contract turned out to be less profitable than expected. In the

following proceedings, the claimant seeks for damages for breach of contract.

The Privy Council eventually awarded the claimant Wrotham Park damages. Most

interestingly, these damages were based on the offer made by the defendant during the buy

89

Ibid, at D144. 90

Blake concerned a public security interest, which generally is not an object of commercial negotiations. The

interest in Niad concerned the deep interest of a successful marketing campaign; an interest which also could

reasonably not be the object of negotiations with the promisors. This is why the promisees also did not claim for

Wrotham Park damages, either primarily or alternatively. Also in the decision in Experience Hendrix the

claimants did not intend to release any marketing rights on the non-listed recordings. See paragraph 46 in that

decision. 91

Pell Frischmann Engineering Ltd v Bow Valley Iran and others [2011] 1 WLR 2370 (PC).

25

out negotiations and not on the relatively low profits made by the defendants as a result of the

breach of contract:

In a case (…) where there has been nothing like an actual negotiation between the parties it is

no doubt reasonable for the court to look at the eventual outcome and to consider whether or

not that is a useful guide to what the parties would have thought at the time of their

hypothetical bargain. But in this case the parties clearly expected, as is apparent from their

negotiations, that the contract with [the oil company] would be much more profitable than it

turned out to be. For that reason, it is unnecessary to give a detailed account of the actual

outcome.92

As this is a recent decision of high authority, one could draw the conclusion that damages

based on Wrotham Park should be based on loss because of a loss of bargain, rather than

profits made as a result of the breach of contract.

3.2.5 Conclusion as to English Law

Let us evaluate the findings made in this subsection. We have seen that the idea of account of

profits can hardly be reconciled with the law of contract in England when looking at it from a

traditional common law perspective. The common law approach in remedying a breach of

contract contains three well-founded principles that create obstacles for allowing account of

profits as a remedy for breach of contract. These principles are: (1) damages are the main

remedy for breach of contract, while specific performance and injunction are exceptional

remedies; (2) a promisor is generally allowed to breach its contract, as long as he sufficiently

compensates the promisee with damages and (3) damages are compensatory, meaning that

they must place the promisee into the same position as if the contract had been performed.

Despite these conflicting traditional principles, English courts started to develop exceptional

rules that allowed a promisee to seek a remedy that is very similar to account of profits. The

gains of the promisor can be used to determine the proper award for a breach of contract since

the decision in Wrotham Park. It was however not until the House of Lords decision in Blake

that account of profits was fully recognised as a remedy for breach of contract. The decision

created some confusion, since no detailed criteria were given, but only a general guide

providing that the promisee must have a legitimate interest in preventing the promisor’s

profit-making activity. This general guide has been filled in more accurately by decisions

after Blake. These cases (Niad, Experience Hendrix and Vercoe) have in common that they

92

Ibid, at 2387-2388 (Lord Walker of Gestingthorpe JSC),

26

concern a serious breach of contract for which the existing remedies (damages, specific

performance or injunction) could not have provided a suitable response. Most importantly,

they all have in common that the promisee must have ‘a particularly strong interest in

performance’ in order to have a legitimate interest in preventing the promisor from the profit

making breach of contract. This is particularly true if the promisee is allowed to decline a

reasonable amount of money for adapting the contract in the hypothetical situation in which

the promisor would have made such an offer.

Of course, account of profits is a remedy that is only awarded in exceptional, if not extreme

circumstances under current English law. Until now we have only seen two cases in which a

full account of profits has been given to a promisee. A comparable remedy that is awarded

more often is Wrotham Park damages. According to the latest case law, this remedy seems to

be based on the loss (i.e. hypothetical loss of bargain) suffered by the promisee, rather than

the benefits gained by the promisor. All the same, account of profits is an available remedy

for breach of contract under English law and its use under English law could therefore serve

as an inspiring example for the way it could be used under Dutch law.

3.3. American Law

3.3.1. Restatements as Sources of U.S. Law

Most contracts in the United States are governed by state law, not federal law.93

Therefore

one cannot technically speak of ‘U.S. contract law’, since every state has its own rules of

contract law. However, the fundaments of contracts are similar in nearly every state, as the

contract laws of these states originally derive from the common law in England.94

In this

regard, it is not a coincidence that all states share the traditional common law principles of

contract law as mentioned before in this thesis:95

(1) damages are the primary remedy for

breach of contract,96

(2) a party is generally allowed to breach his contract97

and (3) remedies

93

Klass 2010, nr. 49. 94

Ibid. This does however not count for the state of Louisiana, which has a civil law tradition derived from

French law. 95

See section 3.1, supra. 96

Klass 2010, nr. 282. However, there are many decisions from U.S. courts available in which specific relief (e.g.

specific performance) is granted. Nonetheless, there is a strong preference for awarding a damages in order to

remedy a breach. This preference can be traced back to the common law principles from England. See also

Farnsworth 2004, p. 730: ‘In any event, along with the celebrated freedom to make contracts goes a considerable

freedom to break them as well.’. 97

Farnsworth 2004, p. 735-737.

27

are primarily meant to put the promisee into the same position as if the contract had been

performed.98

Next to these English common law principles, there are some other legal sources that are

shared by the laws of the several states. Some of these sources are the Restatements made by

the American Law Institute (‘ALI’). The ALI is a select group of practicing lawyers, judges

and professors,99

and their Restatements aim to set forth black letter rules containing general

principles of common law.100

Next to this, the Restatements also aim to reshape the existing

common law by taking into consideration how the common law should be according to the

major line of academic thinking.

Although the Restatements embody a very useful source of present and possible future U.S.

law, state courts are not bound to apply them, as the Restatements are not official sources of

U.S. law. Still, state courts usually take the Restatements seriously into account in their

decisions, as these Restatements are considered highly authoritative sources.101

3.3.2. §39 Restatement (Third) of Restitution and Unjust Enrichment

One of the most recent restatements of the ALI is of particular interest for this thesis: the

Restatement (Third) of the Law of Restitution and Unjust Enrichment (‘R3RUE’), of which

Professor Andrew Kull is the main reporter. Under the heading ‘Alternative Remedies for

Breach of an Enforceable Contract’ we find a section that puts forward a remedy that is very

similar, if not identical to our definition of account of profits. Note that the section narrowly

corresponds with the three elements of our definition as given in chapter 2:102

Ԥ39 Profit Derived from Opportunistic Breach

(1) If a deliberate breach of contract results in profit to the defaulting promisor and the available

damage remedy affords inadequate protection to the promisee’s contractual entitlement, the

promisee has a claim to restitution of the profit realized by the promisor as a result of the

breach. Restitution by the rule of this section is an alternative to a remedy in damages.

98

In this context, American lawyers speak of the protection of the promisee’s ‘expectation interest’. Klass 2010,

nr. 280. See also Farnsworth 2004, p. 730 and 757-758 and Restatement (Second) of Contracts, §347. 99

Barnett 2008, p. 6. 100

Klass 2010, nr. 51. 101

The drafters of the Restatements are authoritative lawyers and the drafting process is particularly rigorous.

See Barnett 2008, p. 6-7 for a description of the extensive drafting process. 102

According to our definition, account of profits is (1) an alternative remedy, (2) an independent remedy and

not just an instrument to measure loss and (3) a remedy that could focus on both the profits and saved

expenditures made by the promisor.

28

(2) A case in which damages afford inadequate protection to the promisee’s contractual

entitlement is ordinarily one in which damages will not permit the promisee to acquire a full

equivalent to the promised performance in a substitute transaction.

(3) Breach of contract is profitable when it results in gains to the defendant (net of potential

liability in damages) greater than the defendant would have realized from performance of the

contract. Profits from breach include saved expenditure and consequential gains that the

defendant would not have realized but for the breach, as measured by the rules that apply in

other cases of disgorgement §51(5)).’103

§39 R3RUE is not quite a restatement of current U.S. law, 104

but rather a restatement of how

the law should be according to the major line of academic thinking.105

According to this

collective view – and the drafters of the Restatement share this view – a party should not

always be allowed to breach his contract in order to gain a benefit.106

Note that this view is

contrary to traditional common law thinking as advocated by Holmes107

and Parke B108

in

Robinson v Harman, in which a promisor is generally free to breach his contract, as long as he

sufficiently compensates the promisee with monetary damages based on his expectation

interest. The official explanation at §39 R3RUE reflects the view that this traditional thinking

contains an erroneous element:

There is a substantial truth, though not of course the whole story, in the Holmesian paradox

according to which the legal obligation imposed by contract lies in a choice between

performance and payment of damages. But the observation is most accurate where it matters

least: in those transactional contexts where loss can be calculated with relative confidence as a

full equivalence of performance.109

In other words, there are cases in which the general remedies for breach of contract (in

particular damages) cannot sufficiently protect the contractual entitlement of the promisee.

Multiple examples of such cases are given in the official illustrations under §39 R3RUE, most

103

§39 Restatement (Third) of the Law of Restitution and Unjust Enrichment, 2011. 104

There is some case law available in which an account of profits is awarded for breach of contract, but not

enough to draw the conclusion that it is current U.S. law. See comment a of the Reporter’s Note of the

Restatement. Famous cases are Snepp v. United States, (1980) 444 U.S. 507 and Earthinfo, Inc. v. Hydrosphere

Resource Consultants (1995) Inc., 900 P.2d 113. In City of New Orleans v Firemen’s Charitable Association

(1891) 43 La.Ann. 447, an account of profits was considered, but rejected because the promisor did not suffer

any loss. 105

A list, albeit not an exhaustive account, of important articles in which account of profits is advocated:

Jackman 1989; Farnsworth 1985; Kull 2001; Rogers 2007; Shiffrin 2007; and Roberts 2009. 106

See Comment a of the Restatement. 107

Please see section 3.2.1, supra. 108

Ibid. 109

See Comment a of the Restatement.

29

of which are comparable or even similar to the Dutch and English cases as discussed earlier in

this chapter.110

The drafters of the Restatement advocate that account of profits should be

available in such cases for two main reasons. At first, such a remedy gives the promisee

supplemental protection against the ‘risk of underenforcement’ in cases where damages could

not fully compensate the breach of contract and in which remedies such as specific

performance and injunction would not be satisfactory responses to the breach.111

Secondly,

the remedy deters a promisor from abusing this situation by obtaining a benefit from it.112

3.3.3. Conclusion as to American Law

The attentive reader must have recognised that §39 R3RUE corresponds narrowly to our

concept of account of profits and the reasons for introducing it as a supplemental remedy for

breach of contract. The existence of §39 therefore demonstrates that the idea to introduce

account of profits is not just a theoretical experiment, but also a certain reality in practice.

However, no court has applied §39 R3RUE directly to a case yet, but it is certainly not

impossible that this will happen in the future.

3.4. Conclusion

In this chapter, we have analysed the remedy of account of profits in Dutch, English and

American contract law. We have seen that account of profits is not (yet) available under

Dutch law as a remedy, but only as a method of calculating loss. This method is however easy

to access for the promisee as we have seen in the case HR Doerga/Stichting Ymere. In

contrast to Dutch law, English and American law do recognise account of profits as an

independent remedy, albeit reluctantly, as it requires to put aside conflicting common law

principles. Straightforward sources that have recognised the availability of account of profits

in English law are Blake, Niad, Experience Hendrix and Vercoe. These cases share the view

that it is only appropriate to award account of profits if the promisee has a legitimate interest

in preventing the promisor from obtaining a benefit from the breach of contract. I have

demonstrated that this is the case if – considering all circumstances of the case – the promisee

110

Some examples: illustration 4 is based on Snepp v United States, a case that is comparable to Blake.

Illustration is based on Long Building, Inc. v. Buffalo Anthracite Coal Co., 190 Misc. 97, 74 N.Y.S.2d 281 (Sup.

Ct. 1947), a case that is very comparable to HR Doerga/Stichting Ymere. Illustration 11 is based on Wrotham

Park. 111

See Comment a of the Restatement: ‘Where a party’s contractual entitlement would be inadequately protected

by the legal remedy of damages for breach, a court will often reinforce the protection given to the claimant by an

order of injunction of specific performance. Restitution affords comparable protection after the fact, awarding

the gains from a profitable breach of a contract that the defendant can no longer be required to perform.’ 112

See also Comment a of the Restatement: ‘a primary object of §39 is to prevent the unjust enrichment of the

defendant at the expense of the plaintiff.’

30

has a particularly strong interest in performance. In American law the most straightforward

source that recognises the idea of account of profits is §39 R3RUE. This source corresponds

narrowly to our concept of account of profits and the reasons for introducing it as a

supplemental remedy for breach of contract. Both the English cases and §39 R3RUE are

therefore valuable sources that could inspire the Dutch law to introduce account of profits as a

remedy for breach of contract.

Not surprisingly, the introduction of account of profits in English and American law as a

remedy, and in Dutch law as a method of calculating loss, went along with extensive debate in

both judicial discussions and in academic writing about the very idea of the availability of a

gain-based remedy in contract law. The main trigger for this debate is mainly, but not

exclusively, the conflict between fundamental principles of contract law and the idea of

account of profits. What then are precisely the objections against account of profits as a

contractual remedy? In the following and final chapter, all known objections against this

remedy as proposed by Dutch, English and American lawyers will be examined, leading to

the conclusion that there are no real reasons why account of profits should not be available for

breach of contract under Dutch law.

31

4. Objections Against Account of Profits Examined

There are, to my knowledge, five main objections made in Dutch, English or American case

law and academic writing against the idea of account of profits in contract law. These five

objections will be examined separately in the following subsections.

4.1. The Remedy Violates the Compensation Principle

A much heard objection against account of profits is that the award of such a remedy would

violate the compensatory nature of damages.113

As a counterargument, it could be said that

this objection is of no interest to the main proposition of this thesis, because in our idea of

account of profits, the remedy is an independent remedy and it is therefore also independent

from the rules on damages.114

Yet a closer examination of this argument will demonstrate that

there are indeed good reasons for introducing account of profits.

We start by turning to the compensation principle of damages. Once again, the goal of

monetary damages is to place the promisee into the same situation as if the contract had been

performed. If following Lindenbergh, this is not only a principle of common law (Robinson v

Harman115

), but also a principle of Dutch contract law:

‘Het doel van schadevergoeding is (…) om de benadeelde zoveel mogelijk te plaatsen in de

positie waarin hij zou hebben verkeerd indien de laedens zijn (primaire) rechtsplichten zou

zijn nagekomen.116

There is a great chance that this principle will be violated if a court awards a promisee with

account of profits. As we have seen, this remedy is particularly available in situations where a

promisee cannot prove any loss.117

If the compensation rule is strictly followed in this

situation, the promisee cannot be awarded anything more than nominal damages. But if the

gains made by the promisor surpass the amount of nominal damages, the compensation rule

would be violated if the promisee is awarded those gains. It is primarily because of this reason

that the promisee did not receive such a remedy in Tito v Waddell118

and Bredero Homes.119

113

See for example Tito v Waddell (No. 2) [1977] Ch. 106, 332 (Sir Mergarry V-C) and Surrey County Council

and another v Bredero Homes Ltd [1993] 1 WLR 1361, 1364-1365 (Dillon LJ). 114

See section 2.1, supra. 115

Robinson v Harman (1848) 1 Ex 850, 855 (Co. Ex.) 116

Lindenbergh 2014, nr. 6. See also Asser/Hartkamp & Sieburgh 6-II 2013/31. 117

See the discussions of HR Doerga/StichtingYmere, Blake, Ruxley, Niad, Experience Hendrix and Vercoe in

sections 3.1 and 3.2, supra. 118

Tito v Waddell (No. 2) [1977] Ch. 106, 332 (Sir Mergarry V-C). See also subsection 3.2.2, supra.

32

Yet only a very strict interpretation of the term ‘loss’ would prevent the use of account of

profits from contract law. As demonstrated by Lord Hobhouse of Woodborough, ‘loss’ should

not be interpreted too narrowly in the context of compensatory damages:

‘The error is to describe compensation as relating to a loss as if there has to be some identified

physical or monetary loss to the plaintiff.’ 120

So what then is exactly the loss of the promisee in the event of breach of contract? In

determining what loss is, one should not limit oneself by focusing on the negative

consequences of the breach only, but one should also look at the breach itself. The common

law incorporates this view in its concept of nominal damages:

‘Even if the claimant can prove no substantial loss, he is entitled to at least nominal damages –

a token sum, such as £5 – for the fact that the defendant has broken the contract (italics RJD).

The legal wrong is complete when the contract has been broken: it does not depend on there

being any particular loss (or even any loss) flowing from the breach. ’121

Thus, in some way, nominal damages compensate the promisee for ‘the legal wrong’ (here:

the mere breach of contract) that has been done to him. I see no reason why the compensation

for this wrong should always be limited to nominal damages. Not every breach of contract is

the same, and therefore the magnitude of the ‘wrong’ differs widely. It should therefore be at

least possible that a promisee could be awarded more than just nominal damages if he cannot

prove any loss.

How then, can we determine the magnitude of a wrong that is caused by a breach of contract?

To answer this question, it might be useful to consider in more detail what a wrong could be.

According to Jackman one can speak of a wrong if ‘harm against others’ has been done.122

Within the context of contract law, one cannot only do ‘personal harm’ to others by breaching

a contract and by burdening a party with physical or monetary loss accordingly, but one can

also do ‘institutional harm’ to them.123

The law has created certain legal institutions to control

human behavior, and the institution of contracts is one of them.124

This institution is not

necessarily harmed if a breach of contract occurs. This is because the institution of contracts

119

Surrey County Council and another v Bredero Homes Ltd [1993] 1 WLR 1361, 1364-1365 (Dillon LJ). See

also subsection 3.2.2, supra. 120

Attorney General v Blake (Jonathan Cape Ltd, third party) [2001] AC 268, 298. 121

Cartwright 2013, p. 279. See also McGregor 2003 at 10-001: ‘the rationale of nominal damages is that the

mere breach of contract is an injuria or wrong for which the claimant must be compensated.’ 122

Jackman 1989, p. 303-304. Jackman makes this conclusion by referring to Mill 1910, p. 73. 123

Jackman 1989, p. 304. See also Raz 1982 p. 937. 124

Ibid.

33

includes remedies like specific performance, injunction or damages, and in most cases, these

remedies enable the promisee to receive the (value of the) performance he is entitled to. In

some cases however – and we have seen a number of such cases in chapter 3 of this thesis –

these remedies do not give the promisee the (value of the) performance he is entitled to. If a

promisor then abuses this situation by breaching the contract and obtaining a benefit

accordingly, he abuses the institution of contracts and therefore does institutional harm to the

promisee.125

The institutional harm is done to the promisee in particular, because the promisee

is the eventual victim of the abuse of contracts. It is the remedy of account of profits that

could compensate the promisee against this institutional harm.126

This is because this remedy

aims, inter alia, to deter a promisee to obtain a benefit by breaching a contract.127

Because of this specific aim, account of profits could also compensate the promisee for

another wrong that has been done to him merely by breaching the contract. The wrong that is

mentioned here is the promisee’s infringement of the right that property (including contractual

rights)128

cannot generally be taken away from the promisor without his consent.129

Of course,

a breach of contract could be committed after noticing the promisee, but there are cases in

which a breach of contract occurs without any form of consultation with the promisee. We

have seen this in our discussion of HR Doerga/Stichting Ymere, in which the promisor

secretly subleased a house to students. 130

In Wrotham Park, the promisor even continued with

breaching the contract after the promisee explicitly requested him to stop.131

Thus, in these

cases the promisor deprived a right from the promisee, and harmed him accordingly. Acount

of profits protects the promisee against such harm. If such a remedy would be available as a

remedy, a promisor is triggered to negotiate with the promisee first before breaching the

contract without asking.132

Note that the argument of ‘institutional harm’ goes beyond the reasoning in Wrotham Park.

One can only apply the latter kind of reasoning on cases in which the promisee would have

adapted the terms of the contract in return for a reasonable sum of money. There are, however,

cases possible in which the promisee would never had adapted those terms for a reasonable

125

See also Farnsworth 1985, p. 1384-1386. 126

Ibid. See also Jackman 1989, p. 320-321. 127

See chapter 1, supra. 128

Friedmann 1989, p. 14. According to Friedmann, this right is a fundamental right under both common law

and civil law. 129

Ibid. 130

See subsection 3.1.2. supra. 131

See subsection 3.2.2. supra. 132

Roberts 2009, p. 997.

34

sum of money, as we have seen in for example Blake and Esso Petroleum.133

In fact, account

of profits can still be compensatory in those cases, as this remedy compensates for the

institutional harm that has been done to the promisee.

There are, of course, exceptions to the right that property should not be taken from its owner.

Article 1 of the Protocol to the Convention for the Protection of Human Rights and

Fundamental Freedoms reads:

No one shall be deprived of his possessions except in the public interest and subject to the

conditions provided for by law and by the general principles of international law.

But there are no such exceptions known under Dutch contract law.134

To make a legitimate

exception is exclusively within the power of the government, and a party would be a judge in

his own case if he could deprive property from the claimant in order to obtain a benefit.135

Considering all observations made above, the objection as proposed in this subsection must be

rejected. Account of profits does not necessarily violate the compensation principle on

damages. I have demonstrated that compensation does not only relate to physical or monetary

loss that results from a breach of contract, but it could also relate to the loss that is caused by

the breach itself. This loss can include loss due to institutional harm and loss due to the

infringement of a property right. Because damages primarily focus on physical and monetary

loss that results from the breach of contract, account of profits could provide compensation

for the other losses. In that sense, account of profits could be regarded as a compensatory

remedy and therefore does not infringe the principles of compensation.

4.2. The Remedy Has a Punitive Nature

Closely related to the first objection is a second objection: that the remedy of account of

profits contains a punitive element and should therefore be excluded from the area of contract

law. Both under common law136

and Dutch law137

it is a well-established principle that a

promisor should not be punished within the context of contract law. Instead, he should simply

133

See sections 3.2.3 and 3.2.2, supra. 134

By contrast, under Dutch law, a party is not allowed to make the choice between paying damages and

performing. As a party in a contract, he is simply obligated to perform. See Asser/Hartkamp & Sieburgh 6-I*

2012/380. 135

See also Friedmann 1989, p. 14. 136

Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 15 (Lord Hoffmann): ‘‘But

the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled

to performance.’’ See also Beatson, Burrows & Cartwright 2010, p. 534-535 and Farnsworth 2004, p. 811-813. 137

Van Nispen 2003, nr. 3 and nr. 22; Lindenbergh 2014, nr. 8.

35

be compelled to put the promisee into the same situation as if there would not have been a

breach of contract.138

Because an execution of the remedy of account of profits could result in the removal of more

than only compensatory damages, it seems to be that account of profits punishes the promisor

for breach of contract, rather than putting him into the same position as if the contract would

have been performed. The decision of the Hoge Raad in HR Doerga/Stichting Ymere reflects

this line of thought:

‘Aangezien de wijze van schadebegroting waarin art. 6:104 voorziet niet, ook niet mede, het

karakter heeft van een punitieve maatregel (…) behoort de rechter bij de toepassing van dit

voorschrift in zoverre terughoudendheid in acht te nemen dat, indien aannemelijk is dat het

door de schuldenaar behaalde financiële voordeel de vermoedelijke omvang van de schade

aanmerkelijk te boven gaat, de schade in beginsel wordt begroot op een door de rechter te

bepalen gedeelte van de winst.’139

Thus, an award of a full account of profits can be regarded as a punitive measure if the

removed amount of money excessively outweighs the loss, if any, of the promisee. It is

because of this punitive character that a court should be reluctant in awarding a full account of

profits. I disagree with this kind of reasoning for two reasons.

Firstly, I do not believe that a remedy such as account of profits automatically becomes

‘punitive’ if it covers more than just loss. As I already have demonstrated in the previous

section, account of profits could also cover institutional harm and the infringement of the

right of intangibility of contractual entitlements. For this reason, I would rather label the

remedy as ‘compensatory’ than ‘punitive’.

Secondly, even if account of profits takes away more from the promisor than loss or harm

suffered, I still doubt whether that automatically makes the measure ‘punitive’. I agree with

Van Boom140

that a measure can only be labeled as ‘punitive’ if its goal is to punish the

wrongdoer by means of deliberate distress.141

A similar definition of ‘punitive’ is used in

Dutch administrative law in describing a punitive fine.142

In this sense, account of profits

cannot be seen as a punitive measure, because this remedy clearly does not aim to distress the

138

Lindenbergh 2014, nr. 8. Farnsworth 2004, p. 811. 139

HR 18 juni 2010, ECLI:NL:HR:2010:BM0893, NJB 2010, 1407, r.o. 3.6. (Doerga/StichingYmere). 140

Van Boom 2011, p. 123. 141

De Hullu 2012, p. 5-6. 142

See article 5:2 Algemene wet Bestuursrecht (AwB). See also Konijnenbelt & van Male 2014, p. 447.

36

promisor. Rather, the remedy aims to (1) give the promisee an additional remedy in order to

obtain (the value of) the performance he is entitled to, and (2) deter the promisor from

obtaining a benefit by breaching the contract.143

It cannot be said that the promisor is also

distressed by the effect of account of profits, because he will only be stripped of the gains he

was not allowed to make, and nothing more.

To support the proposition that account of profits does not have a punitive goal, a comparison

with the area of criminal law can be made. Under Dutch criminal law, a court has the power

to forfeit a perpetrator of profits or advantages which he obtained by committing an offence.

The legal basis for this power is article 36e of the Criminal Code. This article is placed under

Title IIA named maatregelen, or, if translated into English,144

non-punitive measures.

Whereas maatregelen145

merely aim to recover the unjust situation, ‘principle

punishments’146

also aim to distress the perpetrator.147

According to the legislator, forfeiture of

illegally obtained profits or advantages should not be seen as a punitive measure. Rather, it

must be seen as a compensatory measure that aims to recover the just situation.148

Ergo, if

stripping a person of his gains as a response to a wrong is not considered a punitive measure

in criminal law, a comparable or similar measure cannot be found punitive in the area of

contract law.

To summarise, account of profits in contract law cannot be seen as a remedy with punitive

elements because its nature is rather compensatory (it compensates for institutional harm and

the infringement of property rights) and because it does not have, at least from a criminal law

perspective, a punitive goal. For these reasons the second objection must be rejected.

4.3. The Remedy Will Discourage Economic Activity

Another objection against account of profits is that it will discourage economic activity. More

specifically, it undermines the concept of efficient breach. According to this concept, one

should allow or even encourage breach of contract if it leads to a maximisation of

resources.149

To put it simply, this occurs when the promisor obtains a benefit by breaching

the contract, while the promisee is fully compensated by monetary damages. The aim of

143

See chapter 1 and section 2.1. supra. 144

Foster 2009, p. 136 at 2214. 145

E.g. forfeiture of illegally obtained profits or advantages; confiscation; an entrustment order or an entrustment

order. See under Book 1, Title 2A Criminal Code. 146

E.g. imprisonment; detention or community rehabilitation. See under Book 1, Title 2 Criminal Code 147

Hofstee, T&C Strafrecht, note at Criminal Code Title IIA. 148

Kamerstukken II 1989/90, 21504, nr. 3, p. 8. 149

See section 3.2.1, supra. See also Posner 2011, p. 151; Friedmann 1989, p. 3; Campbell 2002, p. 259.

37

account of profits on the other hand, is generally to discourage a breach of contract.150

The

availability of such a remedy would therefore undermine the efficient breach theory.

Before examining this objection, a preliminary remark should be made first. One could argue

that the efficient breach theory is not an obstacle for account of profits under Dutch law,

because under this law, a party is simply not allowed to choose between performance or

paying damages.151

This may be true, but parties can still breach their contracts for economic

purposes, just as we have seen in our analyses of HR Waeyen-Scheers/Naus and HR

Doerga/Stichting Ymere.152

In this sense, the efficient breach theory also applies to Dutch law,

and it is therefore useful to examine the objection as proposed in this subsection.

One of the stronger arguments favoring the efficient breach theory, is that such a theory

narrowly corresponds with the Western economic values of free market and competition.153

In

societies where such values are embraced, the same goods or services are generally offered by

a multitude of companies. Considering this, one should indeed not worry if a promisor cannot

provide the promised good or service, because multiple substitutes are offered by many other

parties. For example, A promises B to deliver a machine for €10.000 tomorrow and B

promises A to pay after the machine is delivered. C then offers A €11.000 for the same

machine. Should A decline this significantly better offer merely to avoid a breach of contract?

I think not, but only if a substitute is available on the market below €11.000. Let us say that

there is indeed a substitute available on the market for €10.500. In that case, A will just pay B

€500 and will subsequently accept the new offer. In this scenario, A gained €500 while B is

compensated for his loss that results from the breach of contract.

Admittedly, this scenario is desirable from an economic perspective, but it does not apply to

every possible scenario. As we shall see, it particularly does not apply to situations in which

account of profits should be available as a remedy.

First of all, the theory is based on the premise that there is always a substitute available in the

market for every kind of performance.154

If one considers the cases as discussed in chapter 3,

one must conclude that this premise is false. What is the substitute for performance in

Wrotham Park, in which the defendant promised not to build houses on the land, but

150

See Campbell 2011, p. 1073. See also Comment e of the Restatement. 151

Asser/Hartkamp & Sieburgh 6-I* 2012/380. 152

See section 3.1.2. supra. 153

Campbell 2011, p. 1100. 154

Friedmann 1989, p. 1.

38

eventually did so by building fourteen houses on it?155

Or what would be the substitute in HR

Doerga/Stichting Ymere in which the defendant promised not to sublease the house but

eventually did so by subleasing it to students for 40 months?156

In both cases there is none,

and it would therefore be erroneous to apply the efficient breach theory in such cases.

Secondly, the theory of efficient breach is not suitable for situations in which a substitute is

available, but unreasonable to award. In Ruxley, the promisor built a pool with a different

depth than stipulated. If the promisor would have provided damages in order to pay for a

substitute, the pool would have had to be demolished and be rebuilt all over again, increasing

the amount of damages to a significantly higher price than the original contract price.157

Thirdly, advocates of the efficient breach theory fail to understand that a party is not always

interested in obtaining a substitute. This is, I believe, particularly true in cases where the

claimant has a ‘particularly strong interest in performance’.158

In Niad, for example, Esso’s

interest was that all parties would strictly apply the prices according to the marketing scheme.

Parties could opt, of course, to pay damages for non-performance and provide a substitute by

doing so. But such a substitute would be of no interest for Esso, because its marketing

campaign would only be successful if every party would perform according to the contract.

There is another argument favoring the efficient breach theory that has to be examined. As

Campbell has pointed out, the theory does not only allow a party to maximize his breach, but

also to minimize his loss.159

Circumstances can change after the signing of the contract, and

the costs of performance could increase as a consequence. For example, A promises B to

deliver a machine for €10.000, but soon after this promise, A discovers that he made a

mistake in calculating a suitable contract price. It appears that it would cost A €11.000 to

produce the machine. Should A now make a loss of €1000 by performing or should he just

pay B €500 in damages (just like in the previous example) that will enable B to buy a

substitute? Again, I would agree that A must be able to minimize B’s loss by paying him

damages, but only if the €500 in damages can adequately compensate him. We have already

seen in the three arguments made above in this subsection that this is not always true, in

particular in cases in which account of profits is available. Also, contracting is, by definition,

about allocating risks, including the risk that costs of performance may change. The principle

155

See subsection 3.2.2. supra. 156

See section 3.1.2. supra. 157

See chapter 1 supra for a more detailed discussion of Ruxley. 158

See the discussion of Vercoe in section 3.2.4. supra. 159

Campbell 2011, p. 1094-1095.

39

of freedom of contract allows the parties to allocate such risk into their contract. The fact that

a party fails to do so does not on its own justify a breach the contract.

Aside from the fact that it is not possible or desirable to apply the efficient breach theory to

situations in which account of profits is available, another counterargument can be made

against the proposed objection in this subsection. Together with Friedmann I believe that the

efficient breach theory is not always as efficient as it seems.160

First of all, it takes more

transactions to breach the contract if compared to performance.161

To demonstrate this, we go

back to our example in which A sells a machine to B. If A wants to breach the contract he

would both have to negotiate with C to sell the machine for a higher price and negotiate with

B in order to settle on the amount of damages. It is not unlikely that B then disputes the

amount of damages or even starts litigation to solve the dispute. These two transactions could

be avoided if A just performs under the contract. Aside from this argument of transactions,

the efficient theory is also inefficient on its own terms because it infringes the institute of

contracts.162

If we encourage parties to breach their contracts in order to maximise economic

resources, a party is constantly spending time and effort searching for the availability of less

expensive substitutes, because he will never know if the other party delivers his performance.

This is unnecessary in a system in which everyone keeps his contract. Thus, for these reasons

given, one can doubt whether (adapted) performance is generally more inefficient than

breaching a contract.

Everything considered, the remedy for account of profits does not necessarily undermine the

efficient breach theory. We have seen that this theory is not suitable in the situations in which

account of profits is available as a remedy. In such situations, there either is no suitable

substitute, or it is not desirable to award damages to the promisee on the basis of such a

substitute. I have also argued that it is generally not true that a breach of contract leads to a

more efficient situation than the situation in which the contract would have been performed or

adapted. As demonstrated, rather the opposite seems to be true. For these reasons, the

objection as proposed in this subsection must be rejected.

160

Friedmann 1989, p. 6-7. 161

Ibid. 162

Friedmann 1989, p. 8-9.

40

4.4. The Remedy Leads to Uncertainty in Contracts

As a fourth objection, it has been said that the circumstances under which account of profits is

available are uncertain, which has a negative effect on the commercial world, where

predictability is important.163

Due to this uncertainty Campbell164

and Lord Hobhouse of

Woodborough165

have expressed fear that account of profits could become available in more

than only the exceptional cases like Blake.

Together with Lord Nicholls I believe that these fears are not well founded.166

As already

demonstrated above, account of profits is an alternative remedy, and it is therefore only

available in exceptional cases in which the normal remedies do not provide an adequate or

satisfactory response to the breach of contract.167

Also, the value of the award is assessed on

the basis of the gains of the promisor and not on the loss of the promisee. The promisor

knows what gain he will obtain if breaching the contract, but he does not always know what

loss the promisee will suffer in such an event. Therefore it could even be argued that from the

promisor’s perspective, an award of account of profits leads to more certainty than an award

of damages.

This is also true if one looks at it from the perspective of the commercial world as a whole.

One of the aims of account of profits is to deter a promisor from obtaining a benefit by

breaching a contract, and the availability of such a remedy can lead to a commercial

environment in which parties are more likely to keep their promises.168

Accordingly, it can be

argued that the availability of an account of profits will lead to more certainty within the

commercial world as a whole, as no promisee will have to be uncertain whether the promisor

breaches his contract in order to be better off. For this reason I find the objection concerning

uncertainty unconvincing.

163

Attorney General v Blake (Jonathan Cape Ltd, third party) [2001] AC 268, 285 (Lord Nicholls of

Birkenhead). 164

Campbell 2011, p. 1074: ‘Were restitutionary damages available as an alternative to expectation-based

damages for every breach, the law of contract would be changed in, to put it at its mildest, an utterly chaotic

manner.’ 165

Attorney General v Blake (Jonathan Cape Ltd, third party) [2001] AC 268, 299: ‘’(…) if some more extensive

principle of awarding non-compensatory damages for breach of contract is to be introduced into our commercial

law the consequences will be very far reaching and disruptive.’’ 166

Ibid at 285. 167

Ibid at 285. See also chapter 1 and section 2.1. supra. 168

This is already discussed in section 4.3. supra.

41

4.5 The Remedy Postpones the Problem of Evidence of Loss

The fifth and final objection has been made by Van Dam. In his article169

he explains that

article 6:104 Dutch CC has been created by the legislator for cases in which the promisee has

difficulties in proving his loss. By using article 6:104 Dutch CC, the promisee is able to take

into account the gains made by the promisor when determining his loss. This however does

not solve the problem of proving loss in the first place. Instead, a new problem of evidence

arises: to prove that the promisor has obtained a benefit by breaching the contract.170

I do not believe that this problem creates a serious obstacle for the availability of account of

profits. The Dutch Code of Civil Procedure provides sufficient leads in order to determine the

value of the gains made by the promisor.

The starting point under Dutch civil procedure law is that all sources of information can be

used as legal evidence (article 152 Code of Civil Procedure).171

Accordingly, all sources that

can provide some information about the gains made by the promisor can be used as evidence.

In order to obtain such information, one could for example look at the contract made by the

promisor with a third party. In Blake, for example, one could simply look at the contract made

between Mr. Blake and Jonathan Cape Ltd in order to determine the profits made by Blake.172

Similarly, one could look at the contract between the defendant and the buyers of the houses

in Wrotham Park,173

and to the contract between Mr. Doerga and his subtenants in HR

Doerga/Stichting Ymere.174

However, important information about the gains of the promisee could be in the hands of the

promisor only. In such cases, a court could simply demand that the promisor hand over all

documents which are required to determine the value of the gains (article 22 Code of Civil

Procedure).175

A court has the discretionary power to do so at any moment during the

procedure and could demand such a conveyance of information simply by sending the

promisor a letter.176

The power to demand such an order is a discretionary power of the court,

but a promisee is allowed to request the court to exercise it.177

If such a request is sufficiently

169

Van Dam 1992. 170

Van Dam 1992, p. 187. 171

Snijders, Klaassen & Meijer 2011, nr. 216. See also Procesrecht/Asser 3 2013/152. 172

See chapter 1 supra. 173

See subsection 3.2.2. supra. 174

See section 3.1.3. supra. 175

Asser 2014, p. 236. 176

Van Mierlo, T&C Burgerlijke Rechtsvordering, comment 2a on article 22 Code of Civil Procedure. 177

Ibid at 2c.

42

underpinned and if the request is strictly related to one of the claims, a court is even obligated

to respond to this request.178

Hence if a claim for account of profits is well founded and if a

conveyance of information is requested, it should not be too difficult to determine the value of

the gains made by the promisor. Considering this, I highly doubt whether the objection as

proposed by Van Dam is realistic, and I would reject this objection accordingly.

178

HR 27 maart 2009, ECLI:NL:HR:2009:BH1986, NJ 2009/254.

43

4. Conclusion

In this thesis I have advocated the introduction of a new remedy in Dutch contract law, called

‘account of profits’. According to my definition, account of profits is an alternative remedy

that takes away the profits (i.e. both net profits and saved expenditures) a promisor makes by

breaching the contract, also if the promisee cannot prove any loss suffered due to the breach.

What would be the point of introducing such a remedy? Under Dutch law, one could say, it is

already possible to strip a promisor of the gains he obtains by breaching his contract on the

basis of article 6:104 Dutch CC. One could however object that this article does not provide

the promisee an independent remedy, but merely a method of calculating loss. The promisee

should therefore at least suffer some loss in order to have access to article 6:104 Dutch CC

(HR Doerga/Stichting Ymere). The article is therefore useless in cases in which there is a

breach of contract, but no actual loss or loss that cannot be proved. Such cases do exist – e.g.

HR Waeyen-Scheers/Naus, HR Doerga/Stichting Ymere, Ruxley, Wrotham Park, Blake,

Experience Hendrix, Niad and Vercoe – and have been discussed throughout this thesis.

Moreover, the use of article 6:104 Dutch CC is subjected to the discretionary power of the

court and does therefore not give the promisee a tangible and accessible method of obtaining

an award that is based on the gains of the promisor.

Considering this, there are indeed good reasons to introduce account of profits as a remedy.

This will have two benefits which both aim to safeguard the pacta sunt servanda principle.

Firstly, it will give the promisee an actual and additional remedy that enables him to obtain

(the value of) the performance he is entitled to under the contract. Secondly, it deters the

promisor from trying to obtain a benefit by breaching a contract, because the remedy removes

the incentive to obtain such benefits in the first place. It thereby also deters a party from doing

the promisee institutional harm and infringing his property rights.

In a way, English and American lawyers have already realised the value of these benefits and

their laws have already recognised account of profits as a remedy for breach of contract. This

has been done in English law with the decision in Blake in 2001, and in the United States with

the introduction of §39 Restatement (Third) of Restitution and Unjust Enrichment (2011), a

source that is not binding on U.S. courts, but is considered highly authoritative nonetheless. In

both English and American law, account of profits is an exceptional remedy that is only

available in the event that the other remedies cannot provide an adequate or satisfactory

response to the breach of contract. More specifically, account of profits is available –

44

according to Lord Nicholl’s general guide – if the promisee has a legitimate interest in

preventing the promisor’s profit-making activity. This is the case if he has a particularly

strong interest in full performance. A promisee has such an interest if he would not,

hypothetically, have to buy off his contractual entitlement in return for a reasonable sum of

money. Considering our analysis of the cases in chapter 3, this condition of a particular strong

interest makes much sense, and it would be wise to include such a condition in Dutch law, if

account of profits would be introduced in Dutch contract law.

Furthermore, we have seen that the phenomenon of account of profits (both as a method of

calculating loss and as an independent remedy) is not uncontroversial in Dutch, English and

American contract law. The main reason for this controversy is that the remedy conflicts with

traditional principles of contract law. A principle that is shared by both Dutch and the

common law is that the aim of damages is to put the promisee into the same position as if the

contract would have been performed. Another important conflicting principle – although

mainly a principle under common law – is that a promisor is allowed to breach his contract as

long as it compensates the promisee sufficiently. These conflicting principles have triggered

many courts and academic writers to debate the idea of account of profits within the law of

contract. By studying this academic and judicial discourse, I have found five objections

against the remedy. We have seen in the last chapter that none of these objections are

convincing, and they should all be rejected accordingly.

In conclusion, there are strong reasons in favour of the introduction of account of profits as an

independent remedy for breach of contract in Dutch law, while there are no convincing

arguments against it. In the end, Dutch law will not make a loss and will gain a benefit only.

Such a particular benefit should, ironically, never be taken away.

45

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HR 13 juni 1890, W 5889.

50

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