University of Pennsylvania Journal of Business Law
First Page
377
Publication Date
Summer 2025
Document Type
Article
Abstract
Under the contract laws of both common law and civil law jurisdictions, the non-breaching party is typically entitled to expectation damages as compensation for a contractual breach. This aims to restore the non- breaching party to the position they would have had if there had been no breach. Although the doctrine fully compensates the non-breaching party for any expectancy loss, it fails to prevent the breaching party from retaining extra profits arising from the breach when the profits exceed the non- breaching party’s expectation interests. This results in a morally counterintuitive outcome wherein the breaching party profits from their wrongdoing. To mitigate this, the common law system offers the disgorgement of profits as a morally coherent alternative in certain circumstances, which is less familiar within civil law contexts.
Disgorgement of profits is not a novel remedy to common law jurisdictions, and English and U.S. law have both formally recognized it as an independent remedy for breach of contract. However, in practice this remedy is limited and, as this article demonstrates, inconsistencies are prevalent among English and American courts. Thus, the role of contractual disgorgement remains mysterious on the positive-law level. Furthermore, although this remedy has been substantially discussed in the literature, there remains a lack of comprehensive analysis on the normative relationship between disgorgement and the traditional expectation damages.
This article aims to address this research gap and contribute to a more robust and consistent approach to the application of this remedy. It explores the functions of disgorgement and normatively suggests its ideal relationship with expectation damages through critical analysis of three potential approaches from a law and economics perspective. The most radical approach advocates for the complete replacement of expectation damages with disgorgement, ultimately proven to be infeasible primarily due to the uncertainties over the profits from breach. The second approach considers disgorgement as a generally available alternative to expectation damages. However, existing empirical evidence cannot persuasively support this over the conventional rule of using expectation damages as the primary remedy, thereby to some extent justifying the significant reluctance towards disgorgement on the positive-law level. In this sense, this article contends that the third approach is the most convincing, whereby the plaintiff is entitled to disgorgement only in specific circumstances with particular economic characteristics. Furthermore, this article provides a refined taxonomy of applicable circumstances based on varied underlying economic rationales for justifying the award of disgorgement in each category of circumstances. This taxonomy not only provides robust economic justifications for case laws and legislative provisions explicitly or implicitly endorsing contractual disgorgement across both common law (represented by English and U.S. law) and civil law (represented by German and Chinese law) jurisdictions, but also highlights how to expand the recognition of this remedy in practice.
Repository Citation
Xingguang Zou and Yang Chen,
Unveiling the Mysterious Role of Contractual Disgorgement: A Comparative and Functional Approach,
27
U. Pa. J. Bus. L.
377
(2025).
Available at:
https://scholarship.law.upenn.edu/jbl/vol27/iss2/1