When a plaintiff suffers a loss due to the misconduct of a defendant, the typical approach is to award damages that reflects the loss. However, this does not always fit the circumstances of the breach. In some cases, a plaintiff may have suffered no damages, but the defendant has gained significantly. For example, a wrongdoer who improperly uses trust funds, profits from that breach of trust, and later returns the monies to the trust account, but seeks to keep the gains. Where a wrongdoer’s profits are so intimately connected with the wrong and these profits would not have been earned but for the wrongful acts, a plaintiff may turn to gain-based disgorgement remedy as a more appropriate measure of damages.
Disgorgement aims to deprive a wrongdoer of his or her ill-gotten gains and has the practical effect of transferring the wrongfully-obtained profits. This remedy may be an alternative to compensatory damages in fraud cases.
When is disgorgement available?
Disgorgement requires a wrongdoer to give up the wrongfully-acquired gains. Disgorgement is most commonly awarded as a remedy for breach of fiduciary duty and breach of trust. Disgorgement is also ordered in cases involving corporate oppression where it would have been unjust that the responsible party benefit from the oppressive conduct. The remedy has also been awarded for breach of contract in exceptional circumstances, where damages are inadequate and where the circumstances of the case warrant such an award. The Supreme Court in Atlantic Lottery Corp Inc. v. Babstock held that “courts should consider whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity” and that disgorgement is appropriate where the claimant’s interest “cannot be vindicated by other forms of relief”.
Atlantic Lottery is the Supreme Court’s most recent pronouncement on the issue of disgorgement. 3464920 Canada Inc. v. Strother is another leading Supreme Court decision on disgorgement, looking this time at the remedy in the context of fiduciary relationships. The plaintiff had sued their former lawyer, Strother, for breach of confidence and breach of fiduciary duty. The Supreme Court upheld the trial judgement in favour of the plaintiff awarding disgorgement with respect to Strother’s personal financial gains earned as a result of his conflict of interest, even though the plaintiff had suffered no provable loss. The Supreme Court held that disgorgement could be ordered where a plaintiff has suffered no loss solely as a way to deter fiduciary faithlessness: “[d]enying Strother profit generated by the financial interest that constituted his conflict teaches faithless fiduciaries that conflicts of interest do not pay.”
Strother was most recently followed by the Ontario Court of Appeal in Extreme Venture Partners Fund I LP v. Varma, where various claims had been made against corporate directors, including breach of fiduciary duty, breach of contract, knowing assistance and conspiracy. The Court of Appeal reiterated that a disgorgement order was focused on the faithless fiduciary’s gains, as opposed to the beneficiary’s loss, even if there was a potential windfall to the beneficiary.
Key takeaways
- Disgorgement may be an alternative remedy to compensatory damages in fraud cases where the plaintiff cannot adequately quantify his or her loss, or has suffered no loss as a result of the fraud, while the fraudster has profited from the wrongful acts.
- This gain-based remedy is available in cases involving a breach of fiduciary duty, tortious conduct, breach of contract or oppression.
- Disgorgement is most commonly awarded where the relationship between the plaintiff and the defendant is a fiduciary relationship. Court may also order disgorgement in common law claims where other types of damages are inadequate.
* * The author thanks Juliette Mestre, student-at-law, for her assistance in drafting this post.