Legal remedies in a civil case where one party has profited from wrongdoing to another party, such as civil fraud or breach of fiduciary duty, will generally result in damages being awarded to the wronged party. Often, the plaintiff in such a case has suffered a financial loss due to the defendant’s actions, and a court will award damages in an attempt to make the plaintiff whole or put them in a position they would have been in if not for the defendant’s actions. This is referred to as a remedy of restitution. However, there are other remedies available for situations in which the defendant’s gain did not result in a corresponding loss to the plaintiff. For example, in cases where a defendant, acting as a fiduciary for the plaintiff, profits from this relationship without the defendant’s consent. In this case, a court may order the defendant to transfer this profit to the plaintiff in a remedy called disgorgement.
The remedies of restitution and disgorgement are similar in result for the defendant, but the elements necessary to obtain each remedy differ slightly. In a recent case, the Ontario Superior Court of Justice awarded a large sum to Canadian National Railway (CN) for disgorgement after a former employee used his position to benefit financially from a number of contracts without his employer’s knowledge. While CN did not suffer a financial loss as a result, the court still ordered the defendant to pay over $10 million to his former employer in disgorgement of profit.
Restitution vs. Disgorgement: When Are They Applied?
Both disgorgement and restitution are equitable remedies for gain-based wrongdoings; however, the elements required to establish entitlement to each remedy are different. One of the primary distinguishing factors between the two is the existence of an identifiable loss to the plaintiff. While both remedies require the defendant to have gained a benefit, only unjust enrichment requires a corresponding deprivation to the plaintiff.
The Supreme Court of Canada clarified the difference between the two in a 2020 decision called Atlantic Lotter Corp. v. Blackstock, as follows:
[R]estitution is the law’s remedial answer to circumstances in which a benefit moves from the plaintiff to the defendant, and the defendant is compelled to restore that benefit. Further, restitution stands in contrast to another measure of relief, disgorgement, which refers to awards that are calculated exclusively by reference to the defendant’s wrongful gain, irrespective of whether it corresponds to damage suffered by the plaintiff and, indeed, irrespective of whether the plaintiff suffered damage at all.
In this case, the SCC also clarified that disgorgement is strictly a remedy and not an independent cause of action.
Ontario Court: Restitution and Disgorgement Serve Two Different Goals
In the recent Ontario decision, Canadian National Railway Company v. Holmes, the Court further distinguished the two remedies by discussing the purposes they serve. In the case at hand, the primary cause of action was a breach of fiduciary duty. One of the defendants, Scott Paul Holmes, had worked as an employee of CN since 1981, working his way up from track labourer to track supervisor. In his role as a supervisor, he had the authority to hire contractors and approve the payment of invoices on behalf of CN. In 2008, CN received an anonymous letter stating that Holmes had been using his position to cause CN to enter into contracts with companies of which Holmes was a beneficial owner. CN launched an investigation and terminated Holmes’ employment shortly after.
CN brought a claim against Holmes, his common-law partner, Jennifer Lynn Flynn, and a number of companies owned by the two, for several causes of action, including breach of fiduciary duty. As a remedy for breach of fiduciary duty specifically, CN sought disgorgement of profit.
In its analysis, the Court held that remedies for breach of fiduciary duty often serve one of two purposes:
- Compensating the plaintiff through the payment of damages for losses suffered due to the defendant’s actions; or
- Deterrence to prevent the defendant from benefitting from their wrongdoing in an effort to help preserve the integrity of the fiduciary relationship.
In this case, Holmes was in the position of acting as a fiduciary for his employer, CN. He misused this position to create a financial gain for himself. It was not established that the contracts he had entered into on CN’s behalf had resulted in a financial loss to CN, and in fact, they may have cost the company less than similar contracts with other businesses. However, the Court determined that Holmes could not be permitted to profit from his breach of fiduciary duty to his employer:
The point is not whether the beneficiary is getting a better deal than it otherwise could. Rather, the point is that the fiduciary is misrepresenting the basis of the relationship to the beneficiary. Fiduciaries obtain their power on the assumption that they will act solely in the beneficiary’s best interest. Fiduciaries abuse that power by taking information and authority from the beneficiary and using it to their own advantage without obtaining the beneficiary’s informed consent. That is inherently deceitful. It misrepresents to the beneficiary the basis on which the fiduciary is acting. The fiduciary has, in effect, told the beneficiary that the fiduciary is acting one way when he is, in fact, acting in an entirely different way. Disgorgement of profit, even if it results in a windfall for the beneficiary, is a necessary mechanism to incentivize fiduciaries to avoid conflict.
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