Equitable Compensation – The Element of Causation

Written by  //  September 22, 2010  //  Corporate Law and Business  //  5 Comments

The decision of the House of Lords in Transfield v. Mercator provoked great legal controversy in the law relating to remoteness in contractual damages. Two Court of Appeals decisions – Gwembe Valley Development Co. v. Thomas Koshy [2003] EWCA Civ 1048 and Murad v. Al-Saraj [2005] EWCA Civ 959 indicate that application of similar principles to claims for equitable compensation is no less uncertain.

Gwembe Valley involved the plaintiff company’s claim against an alleged breach of fiduciary duty by the defendant director. The company claimed inter alia that the director, in breach of his duties towards the plaintiff company, had entered into transactions on behalf of the plaintiff with another company within his de facto control. The company claimed two reliefs against such breach: (1) to hold the director liable to account for profits made in this secret deal (2) to compensate the plaintiff company for the loss occasioned thereby.

The court upheld the claim for profits made by the director. However, on the claim for equitable compensation, the court held:

147. However, when determining whether any compensation, and, if so, how much compensation, should be paid for loss claimed to have been caused by actionable non-disclosure, the court is not precluded by authority or by principle from considering what would have happened if the material facts had been disclosed. If the commission of the wrong has not caused loss to the company, why should the company be entitled to elect to recover compensation, as distinct from rescinding the transaction and stripping the director of the unauthorised profits made by him? There is no sufficient causal link between the non-disclosure of an interest by Mr Koshy and the loss suffered by GVDC, if it is probable that, even if he had made the required disclosure of his interest in the transaction, GVDC would nevertheless have entered into it. In our judgment, a director is not legally responsible for loss, which the company would probably have suffered, even if the director had complied with the fiduciary-dealing rules on disclosure of interests.

While the decision in Gwembe Valley seems to indicate that damages can be recovered only for losses bearing a causal link to the alleged breach, a contrary view was taken by the court in Murad v. Al-Saraj. The plaintiff and the defendant in that case entered into a joint venture agreement to purchase a hotel together. The claim of the plaintiff was that the defendant fraudulently represented that the total price for the hotel would be £4.1 million and that his contribution of £500,000 while in actuality, the price of the hotel was £3.6 million. Existence of a fiduciary relationship between the parties was also established. The defendant argued that even if the set off had been disclosed to the plaintiffs, they would have agreed to go ahead with the acquisition of the hotel, perhaps, demanding a higher profit share. It was argued hence, that the quantum of profits claimed ought to be restricted to only what resulted directly from the non-disclosure of the director – a lesser amount than the plaintiff’s claim. Rejecting the defendant’s argument, the court held:

The fact that the fiduciary can show that that party would not have made a loss is, on the authority of the Regal case, an irrelevant consideration so far as an account of profits is concerned. Likewise, it follows in my judgment from the Regal case that it is no defence for a fiduciary to say that he would have made the profit even if there had been no breach of fiduciary duty.

While prima facie contradictory, these decisions could be reconciled on the ground that while in Gwembe Valley, the claim was one for damages and hence it was necessary to establish the causal link, in Murad, establishing causation was held irrelevant since the claim was one to hold the director liable to account for profits. In the latter category of cases, the claim of the company is that the profits rightly belong to the company rendering remoteness a redundant criterion. The landmark decision of the House of Lords in Regal Hastings v. Gulliver, [1942] UKHL 1 supports the position on the latter category by holding that the only condition necessary to establish a claim to account for profits is that the benefit accrued to the director by virtue of his position in the company. An excellent analysis of the law in this area is provided by this article in the Singapore Journal of Legal Studies.

5 Comments on "Equitable Compensation – The Element of Causation"

  1. Niranjan September 22, 2010 at 6:17 am ·

    Interesting. But whether an action is brought for recovering profit or for damages, isn’t the relief claimed in both cases similar? In the one case, damages for loss arising out of breach of fiduciary duty, in the other damages for loss arising out of lost profit as a result of breach of fiduciary duty. Do you think the reconciliation is plausible, or must we simply conclude that one or the other decision is incorrect?

  2. Shantanu September 22, 2010 at 7:26 am ·

    @ Niranjan- I don’t think the relief in the two cases is similar. The claim for profits is less ‘profits lost by the company’ and more ‘profits gained by the director by breaching his fiduciary duty’. So, in a way, the claim is restitutionary as opposed to compensatory. The claim for damages is purely compensatory. While compensation requires proof that the breach caused the damage, restitution (to the best of my knowledge) only requires proof that the profits were obtained from the breach (and not necessarily at the cost of the person to whom the duty was owed).

  3. Krishnaprasad September 22, 2010 at 9:17 am ·

    Hey, thanks for the comments. I agree with Shantanu. This paragraph from Murad, makes the distinction clear:

    58. Furthermore, a loss to the person to whom a fiduciary duty is owed is not the other side of the coin from the profit which the person having the fiduciary duty has made: that person may have to account for a profit even if the beneficiary has suffered no loss.

    This is also sometimes formulated as the distinction between a ‘no-conflict rule’ and a ‘no-profit rule’. While a no-conflict rule bars the director from putting himself in a position of conflict with the company thereby causing loss to the company, a no-profit rule entitles the company to all profits made by the director by virtue of his position in the company. An article in the Cambridge Law Journal [Pearlie Koh, “Once a Director, Always a Fiduciary”, 62(2) Cambridge Law Journal 403-443] has an interesting discussion on this distinction. The author in that article writes:

    The no-conflict rule, which requires a fiduciary to avoid situations in which his personal interest and his duty conflict, or may possibly conflict, was referred to by Sir Frederick Jordan as “rather a counsel of prudence than a rule of equity”, there being no breach of duty unless and until he fiduciary takes advantage of such a conflict… The no-profit rule, on the other hand, renders a fiduciary liable to account for any gain which he obtained as a result of taking advantage of his fiduciary position, whether there was present a conflict of interests or not.

  4. Niranjan September 22, 2010 at 2:16 pm ·

    Thanks. That makes the position clear. Is there any law in India on the point?

  5. Krishnaprasad September 23, 2010 at 11:20 am ·

    Haven’t been able to find any Indian law on this point.

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