Disgorgement of Ill-Gotten Gains

August 10, 2020

By Brian Babcock

What is your remedy if someone breaches a duty to you that earns them a profit, but which causes you no losses? Or your losses are impractical to prove or measure?

You might think that after hundreds of years, our legal system already has neat answers to these sort of questions, but the question of ill-gotten gains is one that courts continue to struggle with. A recent Supreme Court of Canada decision promises a new solution, but does not quite deliver. Hopefully future cases will build on the progress.

For over fifty years, Canadian courts have world leaders in developing the concepts of restitution and unjust enrichment as doctrines which addressed the issue of deprivation that benefited others, and in some cases, this included the disgorgement of ill-gotten gains. The difficulty of this was that the theory of unjust enrichment requires that the enrichment of the Defendant be matched by a corresponding deprivation of the Plaintiff. The problem of what to do about a Defendant’s improper profits where that deprivation, or loss, could not be proven, remained unclear.

In July 2020, in Atlantic Lottery Corp. Inc. v. Babstock, the Supreme Court distinguished between unjust enrichment and disgorgement. They clarify that unjust enrichment is limited to restitution when a benefit moves from the plaintiff to the defendant, and the defendant is compelled to restore that benefit. They distinguish this from disgorgement, which they recognize as a remedy available in situations where the defendant gained a benefit but the plaintiff does not suffer or does not prove a corresponding deprivation.

They further distinguish the two types of remedies by stating that while unjust enrichment is a cause of action in itself, not requiring any proof of an underlying actionable wrong (such as a breach of contract or tort), disgorgement is strictly a remedy, which means that the plaintiff must prove some breach of duty. Although this might be a breach of contract, that is unlikely – the Court specifically says that disgorgement is not available to get around matters of proof in contract cases. The English case which is the classic example of disgorgement involved a spy who as part of a plea deal agreed not to profit from his wrongdoing. When he published a memoir, the government sued for disgorgement, although it had no loss. Our Supreme Court refers at length to this case as an example for Canadian law, but it is obviously a rare situation.

Along the way, the Court considers an alternative argument by the Plaintiff that relies on a doctrine known as “waiver of tort”. This theory, derived from American cases, argues that where there is a tort (an actionable wrong in the absence of a contract), the Plaintiff can elect not to prove damages (usually because they have none) and pursue disgorgement of profits. Although advanced in a number of Canadian cases, it had never been fully determined at a trial or appeal level. The Court decided that using the term “waiver of tort” was confusing and ought to be abandoned. This is related to the finding that in order to obtain disgorgement, a plaintiff must first establish an actionable wrong.

In the end, they dismissed the Plaintiff’s claim as bound to fail. Which leaves open the question of what circumstances will justify the remedy of disgorgement of profits. They do specifically mention a breach of fiduciary duty. To obtain disgorgement, a plaintiff likely needs to show a breach of fiduciary duty, a breach of trust, or a breach of confidence.

If you find yourself in a situation where someone has made a profit and has wronged you, and neither breach of contract nor tort seems likely to be provable, unjust enrichment remains the likely remedy; but where you can demonstrate a breach of a duty to you but have a hard time figuring out what your loss really is, disgorgement may be an alternative remedy.

In the meantime, we have a better understanding of unjust enrichment, which might be your remedy where you have a loss that benefits another, but there is no breach of contract or tort.