Judgments - Her Majesty's Attorney General v. Blake and Another

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    An instance of this nature occurred in Wrotham Park Estate Co. Ltd. v. Parkside Homes Ltd. [1974] 1 W.L.R. 798. For social and economic reasons the court refused to make a mandatory order for the demolition of houses built on land burdened with a restrictive covenant. Instead, Brightman J. made an award of damages under the jurisdiction which originated with Lord Cairns' Act. The existence of the new houses did not diminish the value of the benefited land by one farthing. The judge considered that if the plaintiffs were given a nominal sum, or no sum, justice would manifestly not have been done. He assessed the damages at five per cent of the developer's anticipated profit, this being the amount of money which could reasonably have been demanded for a relaxation of the covenant.

    In reaching his conclusion the judge applied by analogy the cases mentioned above concerning the assessment of damages when a defendant has invaded another's property rights but without diminishing the value of the property. I consider he was right to do so. Property rights are superior to contractual rights in that, unlike contractual rights, property rights may survive against an indefinite class of persons. However, it is not easy to see why, as between the parties to a contract, a violation of a party's contractual rights should attract a lesser degree of remedy than a violation of his property rights. As Lionel Smith has pointed out in his article Disgorgement of the profits of Contract: Property, Contract and 'Efficient Breach' 24 Can. B.L.J. 121, it is not clear why it should be any more permissible to expropriate personal rights than it is permissible to expropriate property rights.

    I turn to the decision of the Court of Appeal in Surrey County Council v. Bredero Homes Ltd. [1993] 1 W.L.R. 1361. A local authority had sold surplus land to a developer and obtained a covenant that the developer would develop the land in accordance with an existing planning permission. The sole purpose of the local authority in imposing the covenant was to enable it to share in the planning gain if, as happened, planning permission was subsequently granted for the erection of a larger number of houses. The purpose was that the developer would have to apply and pay for a relaxation of the covenant if it wanted to build more houses. In breach of covenant the developer completed the development in accordance with the later planning permission, and the local authority brought a claim for damages. The erection of the larger number of houses had not caused any financial loss to the local authority. The judge awarded nominal damages of £2, and the Court of Appeal dismissed the local authority's appeal.

    This is a difficult decision. It has attracted criticism from academic commentators and also in judgments of Sir Thomas Bingham M.R. and Millett L.J. in Jaggard v. Sawyer [1995] 1 W.L.R. 269. I need not pursue the detailed criticisms. In the Bredero case Dillon L.J. himself noted, at p. 1364, that had the covenant been worded differently, there could have been provision for payment of an increased price if a further planning permission were forthcoming. That would have been enforceable. But, according to the Bredero decision, a covenant not to erect any further houses without permission, intended to achieve the same result, may be breached with impunity. That would be a sorry reflection on the law. Suffice to say, in so far as the Bredero decision is inconsistent with the approach adopted in the Wrotham Park case, the latter approach is to be preferred.

    The Wrotham Park case, therefore, still shines, rather as a solitary beacon, showing that in contract as well as tort damages are not always narrowly confined to recoupment of financial loss. In a suitable case damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained. In the present case the Crown seeks to go further. The claim is for all the profits of Blake's book which the publisher has not yet paid him. This raises the question whether an account of profits can ever be given as a remedy for breach of contract. The researches of counsel have been unable to discover any case where the court has made such an order on a claim for breach of contract. In Tito v. Waddell (No. 2) [1977] Ch. 106, 332, a decision which has proved controversial, Sir Robert Megarry V.-C. said that, as a matter of fundamental principle, the question of damages was 'not one of making the defendant disgorge' his gains, in that case what he had saved by committing the wrong, but 'one of compensating the plaintiff.' In Occidental Worldwide Investment Corpn. v. Skibs A/S Avanti [1976] 1 Lloyd's Rep. 293, 337, Kerr J. summarily rejected a claim for an account of profits when ship owners withdrew ships on a rising market.

    There is a light sprinkling of cases where courts have made orders having the same effect as an order for an account of profits, but the courts seem always to have attached a different label. A person who, in breach of contract, sells land twice over must surrender his profits on the second sale to the original buyer. Since courts regularly make orders for the specific performance of contracts for the sale of land, a seller of land is, to an extent, regarded as holding the land on trust for the buyer: Lake v. Bayliss [1974] 1 W.L.R. 1073. In Reid-Newfoundland Co. v. Anglo-American Telegraph Co., Ltd. [1912] A.C. 555 a railway company agreed not to transmit any commercial messages over a particular telegraph wire except for the benefit and account of the telegraph company. The Privy Council held that the railway company was liable to account as a trustee for the profits it wrongfully made from its use of the wire for commercial purposes. In British Motor Trade Association v. Gilbert [1951] 2 All E.R. 641 the plaintiff suffered no financial loss but the award of damages for breach of contract effectively stripped the wrongdoer of the profit he had made from his wrongful venture into the black market for new cars.

    These cases illustrate that circumstances do arise when the just response to a breach of contract is that the wrongdoer should not be permitted to retain any profit from the breach. In these cases the courts have reached the desired result by straining existing concepts. Professor Peter Birks has deplored the 'failure of jurisprudence when the law is forced into this kind of abusive instrumentalism': see (1993) 109 L.Q.R. 518, 520. Some years ago Professor Dawson suggested there is no inherent reason why the technique of equity courts in land contracts should not be more widely employed, not by granting remedies as the by-product of a phantom 'trust' created by the contract, but as an alternative form of money judgment remedy. That well known ailment of lawyers, a hardening of the categories, ought not to be an obstacle: see 'Restitution or Damages' (1959) 20 Ohio L.J. 175.

    My conclusion is that there seems to be no reason, in principle, why the court must in all circumstances rule out an account of profits as a remedy for breach of contract. I prefer to avoid the unhappy expression 'restitutionary damages'. Remedies are the law's response to a wrong (or, more precisely, to a cause of action). 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.

    The state of the authorities encourages me to reach this conclusion, rather than the reverse. The law recognises that damages are not always a sufficient remedy for breach of contract. This is the foundation of the court's jurisdiction to grant the remedies of specific performance and injunction. Even when awarding damages, the law does not adhere slavishly to the concept of compensation for financially measurable loss. When the circumstances require, damages are measured by reference to the benefit obtained by the wrongdoer. This applies to interference with property rights. Recently, the like approach has been adopted to breach of contract. Further, in certain circumstances an account of profits is ordered in preference to an award of damages. Sometimes the injured party is given the choice: either compensatory damages or an account of the wrongdoer's profits. Breach of confidence is an instance of this. If confidential information is wrongfully divulged in breach of a non-disclosure agreement, it would be nothing short of sophistry to say that an account of profits may be ordered in respect of the equitable wrong but not in respect of the breach of contract which governs the relationship between the parties. With the established authorities going thus far, I consider it would be only a modest step for the law to recognise openly that, exceptionally, an account of profits may be the most appropriate remedy for breach of contract. It is not as though this step would contradict some recognised principle applied consistently throughout the law to the grant or withholding of the remedy of an account of profits. No such principle is discernible.

    The main argument against the availability of an account of profits as a remedy for breach of contract is that the circumstances where this remedy may be granted will be uncertain. This will have an unsettling effect on commercial contracts where certainty is important. I do not think these fears are well founded. I see no reason why, in practice, the availability of the remedy of an account of profits need disturb settled expectations in the commercial or consumer world. An account of profits will be appropriate only in exceptional circumstances. Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to a breach of contract. It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought. 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.

    It would be difficult, and unwise, to attempt to be more specific. In the Court of Appeal Lord Woolf, M.R. suggested there are at least two situations in which justice requires the award of restitutionary damages where compensatory damages would be inadequate: see [1998] Ch. 439, 458. Lord Woolf was not there addressing the question of when an account of profits, in the conventional sense, should be available. But I should add that, so far as an account of profits is concerned, the suggested categorisation would not assist. The first suggested category was the case of 'skimped' performance, where the defendant fails to provide the full extent of services he has contracted to provide. He should be liable to pay back the amount of expenditure he saved by the breach. This is a much discussed problem. But a part refund of the price agreed for services would not fall within the scope of an account of profits as ordinarily understood. Nor does an account of profits seem to be needed in this context. The resolution of the problem of cases of skimped performance, where the plaintiff does not get what was agreed, may best be found elsewhere. If a shopkeeper supplies inferior and cheaper goods than those ordered and paid for, he has to refund the difference in price. That would be the outcome of a claim for damages for breach of contract. That would be so, irrespective of whether the goods in fact served the intended purpose. There must be scope for a similar approach, without any straining of principle, in cases where the defendant provided inferior and cheaper services than those contracted for.

    The second suggested category was where the defendant has obtained his profit by doing the very thing he contracted not to do. This category is defined too widely to assist. The category is apt to embrace all express negative obligations. But something more is required than mere breach of such an obligation before an account of profits will be the appropriate remedy.

    Lord Woolf, at [1998] Ch. 439, 457, 458, also suggested three facts which should not be a sufficient ground for departing from the normal basis on which damages are awarded: the fact that the breach was cynical and deliberate; the fact that the breach enabled the defendant to enter into a more profitable contract elsewhere; and the fact that by entering into a new and more profitable contract the defendant put it out of his power to perform his contract with the plaintiff. I agree that none of these facts would be, by itself, a good reason for ordering an account of profits.

The present case

    The present case is exceptional. The context is employment as a member of the security and intelligence services. Secret information is the lifeblood of these services. In the 1950s Blake deliberately committed repeated breaches of his undertaking not to divulge official information gained as a result of his employment. He caused untold and immeasurable damage to the public interest he had committed himself to serve. In 1990 he published his autobiography, a further breach of his express undertaking. By this time the information disclosed was no longer confidential. In the ordinary course of commercial dealings the disclosure of non-confidential information might be regarded as venial. In the present case disclosure was also a criminal offence under the Official Secrets Acts, even though the information was no longer confidential. Section 1 of the Official Secrets Act 1989 draws a distinction in this regard between members of the security and intelligence services and other Crown servants. Under section 1(3) a person who is or has been a Crown servant is guilty of an offence if without lawful authority he makes 'a damaging disclosure' of information relating to security or intelligence. The offence is drawn more widely in the case of a present or past member of the security and intelligence services. Such a person is guilty of an offence if without lawful authority he discloses 'any information' relating to security or intelligence which is or has been in his possession by virtue of his position as a member of those services. This distinction was approved in Parliament after debate when the legislation was being enacted.

    Mr. Clayton submitted that section 1(1) is drawn too widely and infringes article 10 of the European Convention of Human Rights. Section 1(1) criminalises disclosure of information when no damage results. It focuses on the status of the individual who makes the disclosure, rather than on the nature of the information itself. A non-damaging disclosure by a member of the security and intelligence services is criminal, but the identical non-damaging disclosure by a Crown servant is not.

    This argument was raised for the first time in this House. Your Lordships are not equipped with the material necessary to decide the point. In the event this does not matter, because there is in the present case another consideration which is sufficient for the purposes of the Attorney General. When he joined the Secret Intelligence Service Blake expressly agreed in writing that he would not disclose official information, during or after his service, in book form or otherwise. He was employed on that basis. That was the basis on which he acquired official information. The Crown had and has a legitimate interest in preventing Blake profiting from the disclosure of official information, whether classified or not, while a member of the service and thereafter. Neither he, nor any other member of the service, should have a financial incentive to break his undertaking. It is of paramount importance that members of the service should have complete confidence in all their dealings with each other, and that those recruited as informers should have the like confidence. Undermining the willingness of prospective informers to co-operate with the services, or undermining the morale and trust between members of the services when engaged on secret and dangerous operations, would jeopardise the effectiveness of the service. An absolute rule against disclosure, visible to all, makes good sense.

    In considering what would be a just response to a breach of Blake's undertaking the court has to take these considerations into account. The undertaking, if not a fiduciary obligation, was closely akin to a fiduciary obligation, where an account of profits is a standard remedy in the event of breach. Had the information which Blake has now disclosed still been confidential, an account of profits would have been ordered, almost as a matter of course. In the special circumstances of the intelligence services, the same conclusion should follow even though the information is no longer confidential. That would be a just response to the breach. I am reinforced in this view by noting that most of the profits from the book derive indirectly from the extremely serious and damaging breaches of the same undertaking committed by Blake in the 1950s. As already mentioned, but for his notoriety as an infamous spy his autobiography would not have commanded royalties of the magnitude Jonathan Cape agreed to pay.

    As a footnote I observe that a similar conclusion, requiring the contract-breaker to disgorge his profits, was reached in the majority decision of the United States Supreme Court in Snepp v. United States (1980) 444 U.S. 507. The facts were strikingly similar. A former employee of the Central Intelligence Agency, whose conditions of employment included a promise not to divulge any information relating to the agency without pre-publication clearance, published a book about the agency's activities in Vietnam. None of the information was classified, but an agent's violation of his non-disclosure obligation impaired the agency's ability to function properly. The court considered and rejected various forms of relief. The actual damage was not quantifiable, nominal damages were a hollow alternative, and punitive damages after a jury trial would be speculative and unusual. Even if recovered they would bear no relation to either the government's irreparable loss or Snepp's unjust gain. The court considered that a remedy which required Snepp 'to disgorge the benefits of his faithlessness', was swift and sure, tailored to deter those who would place sensitive information at risk and, since the remedy reached only funds attributable to the breach, it could not saddle the former agent with exemplary damages out of all proportion to his gain. In order to achieve this result the court 'imposed' a constructive trust on Snepp's profits. In this country, affording the plaintiff the remedy of an account of profits is a different means to the same end.

The form of the order

    The Attorney General's entitlement to an account of Blake's profits does not, in this case, confer on the Crown any proprietary interest in the debt due to Blake from Jonathan Cape. The Crown is entitled, on the taking of the account, to a money judgment which can then be enforced by attachment of the debt in the usual way. These formal steps may be capable of being short-circuited. Despite the niceties and formalities once associated with taking an account, the amount payable under an account of profits need not be any more elaborately or precisely calculated than damages. But in this case there is a complication. Blake has brought third party proceedings against Jonathan Cape, seeking payment of £90,000 (less tax). In the third party proceedings Jonathan Cape has sought to deduct legal expenses incurred in resisting a defamation claim and in resisting the Crown's claim. Accordingly, the appropriate form of order on this appeal is a declaration that the Attorney General is entitled to be paid a sum equal to whatever amount is due and owing to Blake from Jonathan Cape under the publishing agreement of 4 May 1989. The injunction granted by the Court of Appeal will remain in force until Jonathan Cape duly makes payment to the Attorney General. I would dismiss this appeal.

    

The public law claim

    The public law claim, advanced by the Attorney General as guardian of the public interest, arises only if the Crown as Blake's former employer has no private law claim in respect of the royalties. Accordingly, having regard to the conclusion already reached on the private law claim, the public law claim does not call for decision. However, it is right that I should state briefly why I cannot agree with the decision of the Court of Appeal on this point, much as I sympathise with the court's objective. The public law claim is founded on the premise that the royalties belong to Blake. The order made by the Court of Appeal was not intended to be confiscatory. It was not intended to extinguish Blake's title. The Solicitor General stated explicitly that the order was intended only to be preservative: a 'freezing' order. Indeed, the order is so drafted. Blake is merely restrained from receiving payment of the royalties 'until further order'. This is the classic form of order that seeks to preserve property pending the happening of some other event. Typically, the event is a decision by the court on who is entitled to the property. Lord Woolf said that the injunction in the present case would serve the ordinary purpose of preserving assets pending adjudication.

    This form of order prompts the question: in the absence of a private law claim, what is the event pending which the money held by Jonathan Cape is being frozen in its hands? What is the anticipated adjudication? If Blake were to return to this country he could be prosecuted for a breach of section 1(1) of the Official Secrets Act 1989. When criminal proceedings were launched, the court would have statutory jurisdiction to make a restraint order to prevent the proceeds of a criminal offence being used or dissipated. If convicted, the Crown could seek a confiscation order under Part VI of the Criminal Justice Act 1988, as amended by the Proceeds of Crime Act 1995. But none of this is a realistic possibility. The Solicitor General openly accepted that this is so. There is no prospect of Blake returning to this country. Thus, the money is not being preserved pending a criminal prosecution.

    This being the case, one must look elsewhere for the event which will decide what is to happen to the money thus frozen in Jonathan Cape's hands. I have to say that one seeks in vain for any satisfactory explanation of what that event will be. The Crown suggested that at some stage in the future an application might be made to the court for the money to be released to a charity, or used in some other way which would not benefit Blake. The Court of Appeal envisaged the possibility of some use for the unpaid royalties which would not be 'contrary to the public interest.' But these suggestions serve only to underline that, although not so expressed, the effect of this order is confiscatory. The order will have the effect of preventing the money being paid to Blake. It is not envisaged that the money will ever be paid to him. He is being deprived of the use of the money indefinitely. That is the intention. Although the order is strictly only interlocutory in character ('until further order'), the basis on which the court has made the order is that Blake will never receive any of the unpaid royalties. That is confiscation in substance, if not in form. In my view the court has no power to make such an order. In respect of the proceeds of crime Parliament has conferred upon the court power to make confiscation orders and ancillary restraint orders. In Part VI of the Criminal Justice Act 1988, since amended by the Proceeds of Crime Act 1995, Parliament has carefully marked out when these orders may be made. The common law has no power to remedy any perceived deficiencies in this statutory code. An attempt to do so would offend the established general principle, of high constitutional importance, that there is no common law power to take or confiscate property without compensation: see Attorney General v. De Keyser's Royal Hotel, Ltd. [1920] A.C. 508, Burmah Oil Co. Ltd. v. Lord Advocate [1965] A.C. 75 and, in this context, Malone v. Metropolitan Police Commissioner [1980] 1 Q.B. 49, 61-63, per Stephenson L.J.

    I should add that in his judgment Lord Woolf, at p. 463, referred to several cases where interlocutory injunctions were granted to chief constables freezing the suspected proceeds of crime in circumstances where there had not yet been a conviction for a criminal offence. In this House Mr. Clayton mounted a sustained attack on these decisions. For his part the Solicitor General did not seek to rely on these decisions in support of the Attorney General's case. As Lord Woolf noted, the Attorney General stands in an altogether different legal and constitutional position. Since the House has not heard contrary argument, it would not be right to express any views on Mr. Clayton's submissions regarding these cases.

LORD GOFF OF CHIEVELEY

My Lords,

    I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead. I agree with it and for the reasons which he has given I would dismiss this appeal.

LORD BROWNE-WILKINSON

My Lords,

    I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead. I agree with it and for the reasons which he gives I would dismiss this appeal but vary the order of the Court of Appeal to declare that the Attorney-General is entitled to be paid a sum equal to whatever amount is due and owing to Blake from Jonathan Cape under the publishing agreement of 4 May 1989.

LORD STEYN

My Lords,

    In law classification is important. Asking the right questions in the right order reduces the risk of wrong decisions. This truth is illustrated by the case before the House. Blake is a convicted traitor. From 1944 to 1961 he was a member of the intelligence services. In 1944 he was required to and did sign a contractual undertaking "not to divulge any official information gained by me as a result of my employment, either in the press or book form". This undertaking still binds Blake. In flagrant breach of the terms of the undertaking Blake published a book in September 1990 dealing in part with his period in the intelligence services. This appeal concerns a sum of about £90,000 payable by Jonathan Cape Ltd., the publishers, to Blake. The Court of Appeal upheld the decision of the Vice-Chancellor, Sir Richard Scott, that Blake is not liable to account for his profits as a fiduciary: Attorney-General v. Blake [1998] Ch. 439. Despite the encouragement of the Court of Appeal Mr. John Smith Q.C., the Attorney-General at that time, declined to pursue a claim for restitutionary damages for breach of contract. While recording its view that such a claim, if made, might be sound, the Court of Appeal was powerless to act on that view: at 456B-458B. In a case crying out for effective relief against Blake, the Court of Appeal devised an injunction, the objective of which was to prevent the money reaching Blake. Due to an initiative taken by the House, the issue of the availability of a restitutionary remedy is now before the House. At the hearing of the appeal counsel for Blake addressed first the public law question whether the Court of Appeal had the power to grant the injunction before he dealt with the question whether a restitutionary remedy is available. My Lords, taxonomy requires that the question whether there is such a private law remedy should be considered first. This is so because the Court of Appeal in granting the injunction undoubtedly extended the reach of existing powers of the Attorney-General. And that course could only sensibly be entertained if there was not a restitutionary law remedy. It is therefore to the private law position that I first turn.

 
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