Very damaging

Can you force cartels to account for their profit? That is a simple question with a complicated answer, made more complicated by the recent High Court decision in World Wide Fund for Nature vs World Wrestling Federation Entertainment Inc (of which more in a moment).

The whole question of damages used to be relatively simple. They were (and perhaps still are) compensatory in nature: they were intended to put the innocent party in the position it would have been had the breach of contract not occurred. The profit (or increased profit) made by the contract breaker was irrelevant: damages were measured by the claimant's loss and not the defendant's gain.

The problem with this "simple" approach was that it did not always result in justice being done. What if the innocent party doesn't suffer any significant loss? Or the contract breaker's breach of contract still leaves it significantly in profit even after it has paid damages?

The answer is a concept known as restitutionary damages: damages that take account of the contract breaker's actual profit. A few years ago we summarised a number of decisions that suggested restitutionary damages might become more common, particularly in relation to cartels or other restrictive practices (link to the article below).

Cartels are certainly big news in construction. Only last month we heard in Building that the Office of Fair Trading is set to crack down on the housing repair sector, and before that it fined a number of roofing contractors - in some cases more than £500,000.

Matters may not stop there. OFT raids on Mowlem and Morgan Sindall, reported earlier this year, were presumably part of an investigation. There is no reason why fines levied here might not be on the same scale as those imposed on major French contractors in March this year. A number of companies were fined a total of *50m (£35m) for a variety of bid rigging practices on a range of public contracts, including those for SNCF and RATP (Paris public transport). Companies in the Bouygues group alone were subject to fines of *10m (£6.9m)

However large they get, these fines remain statutory penalties (analogous to criminal sanctions) where the money is paid to the government: they do not address the loss suffered by each innocent party to the anti-competitive behaviour. In the UK, there is a special procedure in the Competition Appeal Tribunal. A claimant can use the competition authority's decision to show that the behaviour was illegal and seek compensation, which would be damages over and above the fine paid by the cartel.

Restitutionary damages take account of the contract breaker’s actual profit rather than simply making good the innocent victim’s losses

Which brings us back to damages and the WWF case. The litigation centred around the damages payable to the well-known wildlife charity for the breach of an agreement by the wrestling federation not to use the initials WWF. One of the many issues to be decided was whether or not the fund was entitled to restitutionary damages. The decision on the facts (that the fund was in theory entitled to do so but still had to prove an entitlement in practice) is less important than the judge's lengthy and detailed analysis of all of the leading authorities and his summary of key principles.

Some are not relevant to a cartel case but others are, including issues such as the wrongdoer's conduct and motives, and when "merely" compensating the innocent party for its loss is inadequate as a penalty. Perhaps most striking is the judge's suggestion that restitutionary damages are only to be awarded in exceptional circumstances.

Contrast this with a statement from the president of the CAT in the first damages claim of this type in 2004. He gave a firm indication that cartels should expect to have to give up their unjust enrichment If that approach were right this would involve claimants not simply seeking compensation for what they had lost but also

for the cartelists' gain: in other words, restitutionary damages. It has been made pretty clear in the CAT that when assessing damages the tribunal's sympathies will lie with the victims of the cartel. It is interesting to note that in a current damages claim in the CAT the claimant is seeking exemplary damages on top of compensation. It is not yet clear whether this claim is intended to bring in just this sort of restitutionary claim, or even a claim for a punitive level of damages.

If the CAT continues in this way, it may well be the case that the WWF case offers cartelists cold comfort. Few, if any, in the industry would consider this to be a bad development.