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Madras HC explains the difference between restitutionary damages vs compensatory damages



Legal Correspondent- Aryan Sharma

27-12-2021- In a recent judgment Madras High Court Court grant restitutionary damages by way of an account of profits, the Court explored when a party aggrieved is entitled to compensatory damages and when it may grant restitutionary damages.

A lawsuit was filed by the plaintiff company against its former employee, alleging breach of non-compete agreements, non-disclosure/ confidentiality agreements, and non-solicitation agreements they had entered into.

One of the plaintiff's primary clients signed a subscription agreement for the second defendant company based on the same business model as the first defendant company.

Although the court agreed with the plaintiff that the confidentiality and non-solicitation of customers clauses in the letter of appointment bind the first defendant, its opinion was somewhat reserved on the applicability of the non-compete clause. The court Considered FL Smidth (P) Ltd. v. Secan Invescast (India) (P) Ltd (2013), the Court ruled that the non-compete clause could not be enforced after the first defendant leaves the employment. They said- "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."

The court found that the first defendant caused the plaintiff a computable loss of Rs 96 lakhs. They referred to Attorney General v Blake (2000) described the facts as “nothing exceptional” to deviate from general principle. The court also relied upon State of Kerla v Bhaskaran where it was noted in Contract Act Section 73, the liability for reasonably foreseeable losses is restricted.

For the determination of the damages the court said the refrence must be measured with the refrence to the loss caused rather than the gain made by the opposing party. According to the court, in restitution by way of an account of profits, the point to examine is not the loss suffered by the plaintiff but rather the gain made by the defendant as a result of the alleged breach.

In its ruling, the court noted that the plaintiff had produced an auditor's certificate which showed losses of Rs 96,51,264/- during the financial year 2019-20. This loss was caused by PI holding's disengagement from the plaintiff company due to the defendants setting up their company in violation of non-disclosure and non-solicitation clauses, which neither defendant disputed.

Having requested both compensatory damages and an account of profits, the Court clarified that restitution through an account of profits and compensatory damages cannot be considered alternatives to one another, even though they may be at odds with each other. The court referred to J.C. Eno Ltd v Vishnu Chemical Co (1940) in which the High Court of Bombay held that the plaintiff could opt for a profit account or damages assessment. The court imposed a fine of Rs 2,50,000 on the defendants.

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