Out-Law / Your Daily Need-To-Know

Restitution for unjust enrichment in a contractual context

Out-Law Analysis | 15 Dec 2021 | 6:49 am | 6 min. read

The precise interplay between claims under contract and the non-contractual remedy of restitution for unjust enrichment is a complex issue, as highlighted in two recent English Court of Appeal decisions.

Construction claims ordinarily rest on the claimant establishing its entitlement under the contract which governs the parties’ relationship. Where there is no valid contract on which the claimant can base its claims, and one party has been unjustly enriched at the expense of the other, restitution for unjust enrichment may provide a distinct basis for claims to be raised against the party which has been unjustly enriched.

Restitution for unjust enrichment refers to the reverse transfer of benefits from the defendant to the claimant where the defendant has been unjustly enriched, in the eyes of the law, at the claimant’s expense.

Restitutionary claims for unjust enrichment are usually thought of as alternatives to a claim in contract. This is because if parties have agreed on their respective obligations and the consequences that flow therefrom, there is generally no need to rely on extra-contractual grounds. For this reason, a court will not undermine the contractual bargain which parties have struck. Restitution for unjust enrichment is therefore usually only applicable where a contractual claim would be ineffective by reason of discharge for breach or the contract itself is frustrated, void, unenforceable, or incomplete.

There are exceptions which may apply, such as where the claim is not inconsistent with the contract and parties’ contractual allocation of risk. As such, a restitutionary claim for unjust enrichment based on a failure of basis is only possible in limited circumstances as it has been argued that the very need to establish a failure of the basis of a transaction would be a sufficient safeguard against subversion of the contract itself. 

The recent English case Dargamo Holdings Ltd v Avonwick Holdings Ltd  highlights the importance of accurate drafting – something even an extra-contractual claim in restitution for unjust enrichment cannot circumvent. The case should serve as an important reminder of the potentially catastrophic consequences of incomplete or imprecise drafting.

The second case, School Facility Management Ltd v Governing Body of Christ the King College, considers the interaction between the terms and structure of a contract, and the principle of counter-restitution. The decision shows how a contract’s objective, terms and structure, and the framing of an unjust enrichment claim, can affect the analysis of the actual, as opposed to the contractual, benefits transferred. The case also explores counter-restitution of differing benefits within the same contractual matrix. Here, however, the counter-restitution principle was formulated rather broadly, so may not enjoy much certainty in application in the near term.

The Dargamo case

The Dargamo case involved a claim by a wealthy businessman and former governor, Mr Taruta, and his corporate vehicle (Taruta), against Mr Gaiduk, a former deputy prime minister of Ukraine, and his corporate vehicle (Gaiduk). Taruta claimed to have purchased Gaiduk’s interest in two Ukrainian companies, , PJSC New Engineering Technologies (NET) and CJSC Bakhmutsky Agrarian Union (Agro Holding), as part of a sale and purchase agreement for shares in another company, Castlerose Limited ('the SPA').

It was understood that part of the contract sum of US$950 million payable under the SPA would be applied to assets other than Castlerose shares, including Gaiduk’s interests in NET and Agro Holding. However, these arrangements were not formalised in the Castlerose SPA, and the interests in NET and Agro Holding were never transferred.

Taruta brought a claim for the US$82.5 million as part purchase price of the SPA on the basis of, among other things, unjust enrichment on the grounds of a total failure of basis as the interests in NET and Agro Holding were not transferred.

The Court of Appeal restated the key principles of an unjust enrichment claim based on a failure of basis. A recipient must return a benefit if the right to retain said benefit was jointly understood to be conditional and this condition was not fulfilled. The ’basis‘ referred to is broadly construed to extend beyond mere contractual consideration or counter-performance and includes the state of affairs or reason for the transaction. 

In this case, having considered the evidence, the Court of Appeal held that there had been no failure of basis. The basis of the parties’ agreement had been “expressly and unconditionally spelt out on the face of a valid and subsisting contract”, and there was no room to apply an alternative basis that would be “plainly contrary to the express basis freely agreed between the parties”. Clause 2.4 of the SPA stated plainly that: "The consideration for the sale of the Shares shall be US$950,000,000".  As explained by the Court, “an unjust factor will not override a valid and subsisting legal obligation of the claimant to confer the benefit on the defendant”.  This means there can be no valid claim in restitution for unjust enrichment where the contract clearly specifies the consideration each party is to receive under the contract.

The court also held that exceptions to this rule could exist where allowing a claim in unjust enrichment would not be contrary to the parties’ contract, as in a 2001 case in the High Court Australia, Roxborough v Rothmans of Pall Mall Australia. The reasoning behind the exceptions, however, was noted in Dargamo to be “difficult to pinpoint” and would in any case, remain limited.

The School Facility Management case

In the second case, the Court of Appeal considered a lease entered into between Christ the King College (the college) and, after assignment, School Facility Management Ltd (SFM) for the hire of a building.

Under the lease, the college was required to make annual payments for a minimum of 15 years, and negotiations were had over the course of the contract for the college to purchase the building at the end of the 15-year minimum term. The judge at first instance found that the college had a strong expectation of purchasing the building at the end of the 15-year minimum term.

The annual payments were made by the college between 2013 – 2017 but not after. In 2018, SFM terminated the lease in response to a notice from the college that the lease was void. The college continued to use the building but made no further payment.

High Court judge Mr Justice Foxton found at first instance that the lease was void. This was because, under the 2002 Education Act, the college had no capacity to borrow without approval of the government’s education secretary. 

SFM sought restitution from the college for its use of the building from 2017 until the date of the trial in a claim for unjust enrichment. The college counterclaimed likewise, in unjust enrichment, for return of the payments it had made during 2013-2017. It agreed to make counter-restitution for the benefits that it had received in both periods.

At the first instance, Mr Justice Foxton held that the objective market value of the benefit received by the college for use of the building during period of 2013-2017 was £1,024,000, a sum much lower than the £3,205,607 paid by the college. The objective value of the benefit received by the College from 2017 until the trial, for which no payment had been made, was £711,323.88. 

Whilst the college was entitled to restitution of the sum of £3,205,606 in unjust enrichment for the initial period for which it paid in principle, there had been a total change of position by SFM, which acted as a defence to the claim.

Mr Justice Foxton found that the claims between the two periods should be considered separately, such that the defence of a change of position applied in SFM’s favour to wipe out the college’s claim in the initial period and caused the college to have no defence to SFM’s claim in the latter period for which it did not pay for use of the building. The net result was that SFM was entitled to a sum of £711,323 in restitution even though the college had paid an excess of about £1.5 million in total, relative to the market value of the benefit it received from use of the building.

Mr Justice Foxton's decision was upheld on appeal. The Court of Appeal held that, for counter-restitution to apply, the “benefits for which the claimant must give credit are those which are sufficiently closely connected with the benefits provided to the defendant that justice requires him to do so”.  This would be similar to the application of equitable set-offs and similarly, be subject to fact-specific exceptions.

The Court of Appeal found that the payments made by the college between 2013-2017 were not sufficiently closely connected to the benefits received by the college after 2017 until trial to allow the principle of counter-restitution to apply to set-off its liability. This was because the college was only entitled to use the building if the annual hire payments were made. The benefit of use was therefore only connected to the payment of the annual hire.

The contract’s nature as a finance lease and the higher hire rates which were intended to go toward acquisition were irrelevant as capital acquisition cost elements are irrelevant to an unjust enrichment claim for use of an asset since no part of it is in exchange for use of the asset. As the contract was found to be void, the capital acquisition cost element was also irrelevant because the claim in unjust enrichment was premised on the unwinding of the contract – the benefit fell to be unwound by a retransfer of the asset.

Co-written by Glenn Sim of Pinsent Masons.