'Restitutionary Damages' Vs. 'Compensatory Damages' For Breach Of Contract: Madras High Court Explains

"This Court is of the considered view that an order directing an account of profits developed in response to cases where the loss suffered could not be measured adequately or if measured could/would not adequately place the plaintiff in the same position as if the breach had not occurred. In such a situation, the Court was empowered to justly compensate the plaintiff by assessing damages with reference to the gains made by the defendant instead of conventionally assessing it with reference to the loss caused to the plaintiff," it held.

When the damages payable can be ascertained in the normal way, the court need not resort to assessing damages based on account of profits, the bench clarified by relying on One Step (Support) Limited v Morris-Garner (2018) where the Supreme Court of England addressed the question of assessment for breach of a non-compete clause. In the case relied upon by Madras High Court, the Supreme Court made clear that the general rule of compensatory damages must be applied since the pecuniary loss was identifiable by conventional means like loss of profits, loss of goodwill, loss accrued from wrongful competition etc.

Background

The plaintiff company had moved against the Respondent, its former employee, alleging breach of non-compete, non-disclosure/ confidentiality and non-solicit agreements entered into between them.

According to the plaintiff, the first defendant floated the second defendant Company with same business model, having one of the plaintiff's primary clients as a subscriber to the latter's MoA.

The matter proceeded ex-parte as the defendants did not enter appearance.

Court's Observations

While the court concurred with the plaintiff's submission that the confidentiality and non-solicitation of customer clauses in the letter of appointment binds the first defendant, there were certain reservations made about the applicability of the non-compete clause. 

Insofar as the non-compete clause is concerned, the same cannot be made enforceable after the first Defendant has left the employment, the Court said relying on the Madras High Court judgment in FL Smidth (P) Ltd. v. Secan Invescast (India) (P) Ltd (2013).

It added,

"first Defendant had an obligation under the nonsolicit and confidentiality/non-disclosure clauses and if the same is violated, he is bound to face the consequences. This is more so since the first Defendant is bound by the non-solicit clause for a period of 3 years even after leaving the employment. Insofar as the confidentiality clause is concerned, he was bound by the same during the term of employment and even thereafter."

While examining the plea for damages, the court observed that the first defendant had caused a computable loss of Rs 96 lakhs to the plaintiff by soliciting one of its primary clients, PI Holdings.

In this backdrop, it relied on the case of Attorney General v. Blake (2000) where the Supreme Court of the United Kingdom had refused to resort to order an account of profits where the damages were indentifiable in the normal way.

"This has a direct bearing on the case at hand, since there exists unrebutted material providing a legitimate basis on which the Court can base its conclusion to assess damages. This Court also finds that there is nothing "exceptional" in the facts of this case so as to warrant a deviation from the general principle," the High Court observed.

Reliance was further placed on State of Kerala v. K. Bhaskaran, AIR 1985 Ker 49, where it was noted that the liability is restricted for reasonably foreseeable losses under Section 73 of Contract Act — those that a normally prudent person, standing in his place possessing his information when contracting would have had reason to foresee.

According to the bench, determination of the measure of damages 'must be made with reference to the loss caused to the claimant rather than with reference to the gain made by the other party' in the normal course of things.

In restitution by way of an account of profits followed by disgorgement of those profits, enquiry is not on the loss suffered by the plaintiff but is focused on the gain made by the defendant from the alleged breach', it was added by the court.

The court observed that the plaintiff had produced an auditor's certificate revealing losses to the tune of Rs 96,51,264/- during the financial year 2019-20 when the defendant company was floated. This loss was the result of PI holding's disengagement with the plaintiff company on account of the defendant's company set up in contravention of non-disclosure and non- solicit clauses which was not rebutted by either of the defendants.

"In view of the aforesaid, the case of the plaintiff does not fall within the exceptional class of cases for an account of profits. Even otherwise, in view of the Exhibits 33-43 and 45, there are adequate material for the Court to arrive at an assessment of damages under the general principles. The prayer for an account of profits will, therefore, stand rejected", it was held.

Since the plaintiff had sought both compensatory damages as well as an account of profits, the Court made it clear that restitution by way of an account of profits and compensatory damages are inconsistent with each other, while at the same time, they are alternatives to each other. It relied on the case of J.C. Eno. Ltd. v. Vishnu Chemical Co. (1940) wherein the Bombay High Court held that the plaintiff can opt for an account of profits or an assessment of damages.

Lastly, taking into account the conduct of the defendants, the court has also imposed costs of Rs 2, 50,000/- on them.

Case Title: E-merge Tech Global Services P Ltd. v. Mr M.R.Vindhyasagar & Anr.

Case No: Civil Suit No.258 of 2021 (Comm. Suits)

Appearance: For Plaintiff-  Advocate Anirudh Krishnan assisted by Advocate Advaidh Nelakanttan

For Defendant- Ex Parte

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