(C) THE PRINCIPLE OF REMOTENESS OF GAIN

In the same way that remedies which seek to compensate the claimant for loss suffered are subject to a principle of remoteness of loss, the award of gain-based remedies are limited by a principle of remoteness of gain. Without such a limiting principle, all gains which accrue to the defendant as a result of the wrongdoing would be liable to be transferred to the claimant. This could constitute over-protection of the claimant from the effects of the defendant’s wrongdoing by emphasizing the principle that no wrongdoer should gain from the commission of the wrong, without sufficient consideration of whether the value of all of this gain should properly be transferred to the claimant. It is for this reason that a principle of remoteness of gain is needed, the effect of which is that the defendant will only be liable to give up benefits to the claimant if they were obtained in circumstances which were not too remote from the commission of the wrong.

The nature of the problem is illustrated by the following example. If the defendant takes ?10,000 from the claimant without consent, it is obvious that the benefit which was obtained by the defendant as a result of the conversion was ?10,000. But what if the defendant used part of the money to buy shares and the value of the shares increased? Can the claimant successfully argue that this increase in value arose from the wrong or should this profit be regarded as too remote from the commission of the wrong? This depends on how the notion of remoteness is defined.

The preferable test of remoteness is that a gain is not too remote from the commission of the wrong where it arises directly from the commission of that wrong.^[1] Gains which arise indirectly from the commission of the wrong should be considered to be too remote and so do not need to be disgorged.^[2] So, where the defendant wrongfully takes the claimant’s car, all the benefits which the defendant gains from the use of that car should be considered to arise directly from the wrongdoing. So, if the defendant hires the car to third parties, any money obtained from such hiring should be disgorged to the claimant. Similarly, if the defendant used the car and saved the cost of hire, the value of this negative benefit should be paid to the claimant in the form of restitutionary damages. If, however, the defendant obtained ?500 from the use of the car and bought shares with this money, any dividends paid to the defendant in respect of the shares need not be disgorged to the claimant, since they did not arise directly from the wrongful use of the claimant’s car. A possible qualification to this will arise if the claimant could establish a proprietary claim to the profits obtained by the defendant, as would occur if the profits are found to be held on constructive trust, for then the claimant would be able to claim all the profits made from the use of the car, regardless of whether they arose directly or

indirectly.^[3]

Some support for this principle that indirect benefits are too remote can be found in the decision of the Court of Appeal in Halifax Building Society v Thomas}^[4] One of the issues in that case concerned whether a restitutionary claim could be made in respect of the proceeds of sale of a flat which had been purchased by the defendant with a loan from the claimant. This loan had been made as a result of the defendant’s fraudulent misrepresentation as to his identity. When the flat was sold by the claimant there was a surplus after the loan had been discharged. It was held that the defendant could claim this surplus because it had not been made at the expense of the claimant.^[5] Whilst this reasoning should be criticized since, had the defendant received the proceeds of sale, the restitutionary claim would have been founded on tort rather than unjust enrichment, so there was no need to show that the benefit was received at the claimant’s expense, the intuitive response of the court was correct. This is because the surplus proceeds of sale were not obtained directly from the commission of the wrong, but were gained indirectly once the defendant had used the loan to purchase the flat, by virtue of the fact that the value of the flat had increased.^[6] Similarly, in Chief Constable of Leicestershire v M^[7] the defendant had made profits from the sale of properties he had purchased with the assistance of a mortgage advance which he had obtained by deception. Hoffmann J did not accept that these profits derived from the deception but concluded that they arose from the loan which was obtained by deception. In other words, the profit was too remote from the wrong and did not have to be disgorged.

Whilst the analysis of Peter Gibson LJ in Halifax Building Society v Thomas using the language of ‘at the expense of the claimant’ can be criticized as confusing restitutionary claims for wrongs with claims for unjust enrichment, might the language of ‘at the expense of the claimant’ be preferable to the language of remoteness? The better view is that it would not. It is certainly inapplicable where the benefit was obtained from a third party rather than from the claimant. Even where the defendant’s gain has resulted in some loss to the claimant it is better to focus on whether the defendant’s gain derived directly from the wrong rather than to focus on whether it came directly from the claimant, and this can be expressed most clearly with reference to the language of remoteness of gain.

• [1] This test of remoteness was endorsed by the Court of Appeal in Attorney-General v Blake [1998] Ch 439,459. The matter was not considered by the House of Lords.
• [2] Birks called this the principle of the first non-subtractive receipt: Birks, An Introduction to the Law ofRestitution, 352. The distinction between direct and indirect gains is a more elegant way of describing thesame idea.
• [3] See, for example, Attorney-General of Hong Kong v Reid [1994] 1 AC 324. See further p 511, below.
• [4] [1996] Ch 217. See alsoBoyter vDodsworth (1796) 6 TR 681,101 ER 770; Exp Vaughan (1884) 14 QBD25 and Chief Constable of Leicestershire v M [1989] 1 WLR 20.
• [5] Halifax Building Society v Thomas [1996] Ch 217, 227 (Peter Gibson LJ).
• [6] See P Watts, ‘The Limits of Profit-Stripping for Wrongs’ (1996) 112 LQR 219,220. If, however, the courthad recognized that, had the defendant received the proceeds of sale, they had been received in circumstanceswhere the defendant had been acting unconscionably, it would follow that the proceeds would have been heldon constructive trust and so the defendant would have been liable to disgorge all the proceeds to the claimantregardless of whether they arose directly or indirectly from the commission of the wrong. See p 509, below.
• [7] [1989] 1 WLR 20.