The appeal court’s decision on British double-agent George Blake’s memoirs could make it easier for property litigants to win restitutionary damages. Marcus Barclay and Stephen Jourdan open the dossier.
At first glance a case about a British double agent being prevented from making profits from his autobiography because it breached the Official Secrets Act has little to do with lessors, lessees and property developers.
Yet the comments of the Court of Appeal in Attorney General v Blake may well signal a potentially significant change in property law.
The court suggested, for the first time, that an innocent party may recover the fruits of a wrongdoer’s breach of covenant, in a claim for “restitutionary damages”.
This could apply, for example, if a lessee sublets his property at a profit in breach of covenant; or a lessee carries out a more profitable business than that allowed by his user clause; or a developer makes an extra profit in breach of covenant by building 100 houses instead of 80 on land acquired from another.
The case concerned the infamous spy George Blake. A member of the British Secret Intelligence Services and an agent for the Soviet Union, he was convicted on five counts of unlawfully communicating information to the Soviet Union, contrary to the Official Secrets Act, in 1961 and sentenced to 42 years in prison.
He escaped and in 1989 wrote his autobiography, substantial parts of which included information that breached the Official Secrets Act. It also breached a contractual undertaking he had given not to divulge in book form any official information gained by him as a result of his employment.
The Crown issued proceedings to try to recover money paid to Blake by his publisher, Jonathan Cape, and to prevent his receiving any royalties from sales of the book. The claim failed at first instance and came before a strongly constituted Court of Appeal in December 1997. The Crown’s claim against Blake was made on two grounds:
- Breach of a fiduciary duty not to profit from a position of trust; and
- Public policy of ensuring a criminal did not retain profits derived from the commission of his crime.
There was no claim for restitutionary damages for breach of contract, ie Blake’s contractual promise not to disclose information. The Attorney General presumably believed that as there was already clear Court of Appeal authority that restitutionary damages were not available in contract1 there was little point in pursuing such a claim.
He was in for a surprise.
What the appeal court said
The Court of Appeal decided in favour of the Attorney General on public law/policy grounds, but before doing so, decided to take the highly unusual step of expressing its views on an issue which had not been pleaded and on which it had heard no argument. The Court of Appeal included Lord Woolfe, the Master of the Rolls, and its views, uninvited though they were, must carry some weight.
The question the court posed itself was whether in the particular circumstances of the case the Crown might have “a private claim to restitutionary damages for breach of contract”. The court affirmed that the general rule for damages for breach of contract is that they are compensatory not restitutionary, ie they are measured by the loss to the plaintiff not the gain to the defendant. It then went on to make clear its view, however, that: “If the Court is unable to award restitutionary damages for breach of contract then the law of contract is seriously defective.”
In the light of this sentiment, it is perhaps not surprising that after the briefest review of the existing authorities, including those referred to below, the court pronounced its view that: “There are at least two situations in which justice requires the award of restitutionary damages…”
The first situation the court identified was what it called “skimped performance” where the defendant fails to provide the full service he has contracted to provide and has charged for. The second, and potentially much more widely applicable situation, is: “Where the defendant has obtained his profit by doing the very thing which he contracted not to do.”
This was the principle which the court thought would apply to Blake.
On the face of it, however, it would also apply to any number of cases where defendants have improved their own position by breaching a covenant in a lease or transfer or other contract.
Perhaps, surprisingly, bearing in mind the circumstances of the case, the court expressly rejected moral culpability on the part of the defendant as a principle for justification of the award of restitutionary damages.
The only limitation which the court seemed to impose on the general principle was that the profits in question are occasioned directly by the breach and the breach does not merely provide the defendant with the opportunity to make them. Even with this somewhat obscure proviso, though, the principle would appear to be irreconcilable with the court’s own description of what it was doing as permitting the availability of restitutionary damages in “exceptional cases”.
So what were the authorities that the Court of Appeal reviewed and what was the law before Blake?
The law before Blake
In Wrotham Park Estate Co Ltd v Parkside Homes2, the estate company had the benefit of a restrictive covenant binding Parkside Homes’ land, and preventing Parkside from building on the land. Despite that, Parkside built and sold 14 houses, in breach of the covenant. The value of the estate company’s land had not been diminished by one farthing as a result of the breach. Wrotham Park claimed a mandatory injunction ordering the houses to be pulled down. Brightman J refused, as that would have been an unpardonable waste of much needed houses. But he awarded damages in lieu of an injunction equal to “such a sum of money as might reasonably have been demanded by the plaintiffs from Parkside as a quid pro quo for relaxing the covenant”, which he assessed at 5% of the profit which Parkside had made by erecting and selling the houses.
In Surrey CC v Bredero Homes Ltd3, however, the Court of Appeal refused to award more than nominal damages where the plaintiffs had suffered no loss. In that case, Bredero had covenanted to develop land in accordance with a planning permission which permitted only 72 houses to be built. They breached that covenant by building 77 houses. The three judges each gave different reasons for not following Wrotham Park4.
Both those cases were reviewed by the Court of Appeal in Jaggard v Sawyer5. The position after that review was probably as follows:
- Wrotham Park was correctly decided6.
- The principle to be derived from Wrotham Park was that:
“If the plaintiff has the right to prevent some act being done without his consent, the plaintiff has suffered a loss in that the defendant has taken without paying for it something for which the plaintiff could have required payment, namely the right to do the act. The court therefore makes the defendant pay what he ought to have paid the plaintiff, for that is what the plaintiff has lost.”7
- It seems likely that damages on the Wrotham Park basis could only be awarded where the court could have awarded an injunction to the plaintiff, but chose not to8.
Before Blake, however, there had never been any suggestion from the courts that a plaintiff in a breach of contract case who had suffered no loss could recover the whole of the profit made by the defendant as a result of the breach. The most that was contemplated was that the defendant might have to pay by way of damages the sum he would have had to pay for the right to vary the contract to permit the conduct in question, if the court could have ordered an injunction.
The amount of damages awarded on the Wrotham Park basis will depend on all the circumstances, and in some cases could be substantially more than the 5% allowed in the case, where there were particular circumstances leading to the award of such a low percentage of the developer’s profit9. In Bracewell v Appleby10, Graham J awarded Wrotham Park damages based on 40% of the defendant’s anticipated profit. Awards of between one third and one half of the anticipated profit may be appropriate in some cases, by analogy with the approach of the Lands Tribunal to the valuation of ransom strips11 and to the division of the marriage value released on enfranchisement under the Leasehold Reform Act 1967l2.
What is the position after Blake?
Going back to the examples we gave at the beginning of the article, there seem to be three possibilities as to the state of the law after Blake:
- No damages at all can be awarded because the covenantee has suffered no loss. This would require Wrotham Park to be overruled, which is unlikely.
- Damages can be awarded on the Wrotham Park basis (but probably only if the court could, instead, have awarded an injunction). Such damages will be equal to the amount which the tenant or covenantor would have paid for the right to vary the lease or restrictive covenant. This will be a percentage of the covenantor’s profit.
- Restitutionary damages can be awarded on the Blake basis, equal to the whole of the profit made by the tenant or covenantor. Although damages on the Blake basis are a possibility, there can be no certainty that the views expressed in Blake would be followed. It is arguable that only the House of Lords could award such damages, as they would appear to be inconsistent with the decision in Bredero.
Conclusion
In some circumstances, a landlord or covenantee will be able to claim damages for breach of covenant even though he has suffered no loss. It is possible that the damages may be equal to the whole of the profit made by the defendant, as suggested by the Court of Appeal in Blake.
Alternatively, the damages may equal the proportion of the profit which the court decides the defendant would have paid in order to purchase a variation of the covenant.
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Footnotes 1. Surrey County Council v Bredero Homes Ltd [3] 1 EGLR 37 – see below. 2. [4] 1WLR798 3. [3] 1 EGLR 37 4. Dillon LJ said Wrotham Park was wrongly decided. Steyn LJ said it was based on the fact that the restrictive covenant there was in the nature of a proprietary right. Rose LJ said that the difference was that in Bredero there was never any possibility of obtaining an injunction. 6. This was the view of Steyn and Rose LJJ in Bredero and all the judges in Jaggard. Dillon LJ in Bredero alone expressed doubts as to its correctness. 8. This was the view of Rose LJ in Bredero and Millett LJ in Jaggard and probably also Sir Thomas Bingham MR in Jaggard. It was rejected by Dillon and Steyn LJJ in Bredero. But it does seem to be the only satisfactory basis for distinguishing Wrotham Park from Bredero. 11. See Stokes v Cambridge Corporation (1961) 13 P&CR 77, Ozanne v Hertfordshire CC [8] 2 EGLR 213, Wards Construction (Medway) v Barclays Bank plc [1994] 2 EGLR 32. 12. See Hague: Leasehold Enfranchisement (2nd Edition) para 9-55. |
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