Disgorgement of Profits for Breach of Contract in Contrast to Efficient Breach

Document Type : Research Paper

Authors

1 Associate Professor, Faculty of Law, Tarbiat Modares University, Tehran.Iran.

2 PhD Candidate, Faculty of Human Sciences, Azad University, North Tehran Branch Tehran.Iran.

3 Professor of Faculty of Law and Social Sciences, Tabriz University, Tabriz. Iran.

4 nstructor, Faculty of Human Sciences, Azad University, North Tehran Branch, Tehran.Iran.

Abstract

The theory of disgorgement interest or in other words, disgorgement of the profits for breach of contract, is an American legal theory that is being applied in the American contract law and sometimes reflected in English case law. The primary principle of contractual compensation in the common law system is the Principle of Full Compensation. This principle, put the promise in as good a position as he would have been in if the contract had been performed. There have been many discussions about whether the injured person of the breach of contract (regardless of the damage he suffered) can ask for the disgorgement interest that the violator obtained from the breach of contract, and even in American law, although the judicial procedure has progressed towards the acceptance of this Principle (principle of full disgorgement), it cannot be said that this principle has been fully accepted. In English law, Some decisions show the relative acceptance of this principle. On the other hand, the theory of efficient breach, a product of the common law system, indicates the possibility of the breach of contract in cases where the breach of contract is so profitable that it puts both parties to the contract in a better position in addition to covering the losses suffered by the promisee. These two theories contradict themselves, so by accepting one of them in a legal system, it is difficult to accept and apply the other. This article has been carried out to examine the foundations and conflicts of each of these two theories and finally the possibility of accepting each of them in Iran's legal system.
Research method
The theory of Disgorgement of Profits for Breach of Contract is an unknown subject in Iranian law, therefore, in this article, an attempt has been made to open a new chapter regarding contractual damages by using foreign sources, including books, articles, and judicial procedure, and adapting it to the accepted laws and principles of Iran's legal system.
Theoretical framework
The theory of the disgorgement interest (which requires the violator to return all or part of the profits obtained from the breach of contract) conflicts with the theory of efficient breach (which encourages the promisor to breach when the breach is profitable for him/her). Therefore, the theory of efficient breach is always considered an obstacle to accepting disgorgement of profits for breach of contract. In any legal system where the theory of efficient breach is fully accepted, there will be no opportunity for the disgorgement interest and vice versa. By examining the foundations of both theories, this article has tried to study the possibility of accepting each of them in Iranian law and the possible cases where the acceptance of one does not prevent the application of the other.
 Hypothesis
The most important hypothesis of this article is that "the theory of efficient breach cannot be accepted (except in exceptional cases), due to the legal resources of the Iranian legal system and since there is always the possibility of requiring the promisor to fulfill the promise by the promisee. On the other hand, there are many obstacles to accepting the disgorgement interest due to breach of contract in Iranian law".
Achievements
The theory of disgorgement of profits for breach of contract, or in other words, disgorgement damage and the theory of efficient breach, are both products of the common law system, none of them can be accepted absolutely, but the limited acceptance of each of these two theories will not be pointless due to the circumstances and conditions of each case. The theory of efficient breach has no place in any legal system that accepts the theory of disgorgement of profits for breach of contract. Nevertheless, efficient breach seems to be acceptable sometimes when it is not for profit, it is only to prevent more losses for the promisor, which in this case is not in conflict with the principles of contract law. On the other hand, the theory of disgorgement of profits for breach of contract when no loss has been caused to the promisee, although it may seem irrational at first sight, sometimes some circumstances make this restitution consistent with legal principles; Including in cases where the contract was concluded based on trust, or when conditions prevail that the expected damage cannot compensate the promisee in full. Since there is always the possibility of requiring the promisor to fulfill the promise as a guarantee of breach of contract in Iranian law, the theory of efficient breeach cannot be accepted; Except in cases where the violation is to prevent loss and not to gain profit. Also, due to the non-identification of damages for loss of prospective profits and, as a result, the principle of full compensation, disgorgement of profits for breach of contract cannot be considered as an accepted rule. Nevertheless, since the profits for breach of contract are obtained illegally and the effectiveness of the rights of the contracts requires that it be prevented from the exploitation of the breach, in some contracts, especially contracts where one of the parties has a fiduciary duty, and he benefits from the violation of this fiduciary duty can be done, and the usual methods of determining damages cannot compensate for the damage caused to the injured person, perhaps the amount of the infringer’s gain can be considered as a criterion for measuring damages.

Keywords

References

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Law Quarterly
Volume 54, Issue 3
November 2024
Pages 283-309

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