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Hickey v Roches Stores is a landmark decision of the Irish High Court, setting the precedent for disgorgement. Delivering the judgment of the Court, Finlay P held that the general rule that damages for breach of contract are confined to actual loss is subject to exceptions where a wrongdoer acted mala fides, unjustly profiting from his wrongdoing.

Facts
The plaintiffs, Hickeys, entered into a lease agreement with the defendant, Roches Stores, to sell fashion fabrics in their flagship store. Various methods of termination were stipulated including, inter alia, a remedy available to Roches requiring no reasoning nor compensation, provided six months’ notice was provided and a non-competition clause was adhered to.

On several occasions, the defendants sought to terminate the agreement. They claimed that they could negate the contractually stipulated requirement of six-month’s notice or compensation by virtue of their 'reasonable grounds' for termination. Under the agreement, an arbitrator was required to investigate the circumstances of such termination by Roches, and it was found that reasonable grounds were not present. Thus, Roches were liable for damages. Hickeys vacated their unit in accordance with the notice served by the defendants, subsequently entering into a similar agreement with Penneys.

The matter came before Finlay P to quantify the damages payable.

Judgment
Neither party disputed the award of conventional corrective damages based on Robinson v Harman. Contention arose concerning the validity of assessing damages beyond the loss directly incurred. In essence, Hickey’s sought relief requesting the Court extend principled limitations upon damages whilst Roches argued for conservative precedent to be followed.

The plaintiffs claimed that the nature of the six month notice of intention and twelve month non-competition clause was to prevent the defendants from unjustly benefiting from a valuable asset which accrued by virtue of the joint enterprise. In exceptional circumstances, the plaintiffs noted, common law recognises the desirability of extending damages beyond direct injury. Therefore, for practical justice to be administered, an exception to the general rule should be permitted as it would be erroneous to confine damages to express contractual breach, thereby permitting Roches to benefit from their ill-gotten-gains.

The plaintiffs were seeking the introduction of a doctrine unknown to the law of contract in this jurisdiction or the Commonwealth. Roches argued that exceptions to the general rule of corrective damages were confined to tort, but if the Court found contrarily, damages exceeding direct injury should merely apply where a defendant acted mala fides.

The Court invoked landmark British decisions to infer whether departure from the conventional approach was necessitated and warranted. Such conventional principles are established in Hadley v Baxendale, wherein the House of Lords held that the law imposed a “total restriction” upon damages exceeding loss actually suffered from contractual breach. The rationale behind such principles is to ensure pragmatic adjudication, preventing interventionalist imposition of liability upon parties who negotiated at arms-length. Therefore, only contemplated injury is compensable, affording predictability to parties entering legally enforceable relations.

The Court cited both Strand Electrical Engineering Company and The Medina with approval, the former stipulating that the general rule was often departed from in the law of contract. Finlay P concluded that as a matter of Irish law, a broad assumption that there are exceptions in both tort and contract to the general rule of assessment of damages exists. At this juncture, the Court indicated its willingness to look beyond Robinson, but failed to stipulate circumstances where this would be permissible.

The cases considered by Finlay P to establish circumstances where the general rule in Robinson can be cast aside ought to be distinguished from their facts, and they merely serve a basis of guiding the Court on the permissions and limitations of the common law. In Reading v Attorney General, Denning J held that where an individual violates his contractual duty of "honesty and good faith”, taking advantage of circumstances which provided him with the opportunity to unjustly benefit, he is to be held liable. Rookes v Barnard provided Finlay P with limitations of the sweeping dicta in Reading. The Court of Appeal indicated that a wrongdoer ought to be deterred from unfavourable conduct by the imposition of liability where she acted mala fides.

Delivering the judgment of the Court, Finlay P affirmed the general rule in both tort and contract of corrective justice. However, with reliance on The Medina, exceptions to this rule exist where a contract is breached. Where a wrongdoer acts in a “calculated” manner to achieve a gain which would not be feasible otherwise, the Court should consider the unjust gain whilst awarding damages to the plaintiff. However, as Rookes indicated, to protect contractual parties from unpredictability and to prevent paternalistic judicial practices, this measure only applies to mala fides conduct. Finlay P conceded that such qualification may have the result of a wrongdoer maintaining his unjustly gained profit in exceptional circumstances. Finally, and of paramount significance to the instant case, it was held that a Court should not be deterred by the difficulty of ascertaining definitive evidence of the measure of damages. Speculation is a necessary evil in particular cases, and provided a Court acts “alert” in assessing the general sum, this will be sufficient.

Upon this finding, the contended quantification of damages by Hickeys was unsuitable. The Court was sufficiently satisfied that Roches did not “design and calculate” their contractual breach to unjustly benefit, and therefore no damages were payable from Roches value of trade by virtue of goodwill. However, the plaintiffs were still entitled to damages for the breach of the non-competition clause, which was necessitated in the absence of “good reason” for contractual termination and compensation. Hickeys were entitled to three prongs of damages: firstly, for the deprival of the requisite six months’ notice; secondly, for the non-compete clause not being adhered to and an additional loss to reflect the continuation of Roches benefiting from goodwill following the elapse of the twelve months. The latter head of damages was payable in recognition of Hickeys having no opportunity to develop goodwill whilst located in Penneys and competing with the defendant benefiting from the former joint enterprise.

The matter was adjourned for the numerical quantification of such damages.

Significance
The decision in Hickey enhanced the availability of alternative remedies for contractual breach. The judgment stimulated a shift in contract law towards a more practicable balance between predictability and flexibility. The Law Reform Commission welcomed Finlay P’s approach and distinguished its principles from exemplary damages, which are primarily founded upon utilitarian standards of public policy. Holmes expressed contra views, stating that restitutionary damages are rife with moral considerations thereby burdening a Court with unreasonable interventionalist authority.

The Commission was satisfied that the development of restitutionary damages in contract law should be confined to common law, and that legislative codification should be resisted. However, the principles in Hickey have yet to be applied or developed in subsequent decisions.

In Vavasour v O’Reilly, concerning a franchise agreement, Clarke J held that the decision in Hickey was “only relevant where there is a difference between those two sums such that the wrongdoer gains more by his breach than the plaintiff has actually suffered by his wrongdoing”. Thus, the principle established in Hickey was not applicable because there was no difference between the defendant’s gain achieved resulting from the breach and the loss sustained by the plaintiff.

In relation to the mala fides test, given that restitutionary damages were not awarded on the facts in Hickey, there is no Irish precedent detailing conduct which satisfies the principle. The potential sweeping effect of the decision has been weakened as a result, and guidance from Commonwealth courts has been scant. McDermott and McDermott argue that it remains to be seen whether the mala fides test will ever be applied in Ireland, given that there is no general concept of ‘good faith’ in contractual dealings. Application of the mala fides test requires the acceptance of the concept of fair dealing in a commercial contract. Such development would require expansive reconsideration of many of the basic tenets of Irish contract law, such as the distinction between rights in rem and in personam and the unfavourable views of quasi-distributive justice.