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Ineffective transactions and unjust enrichment: a framework for analysis

Published online by Cambridge University Press:  02 January 2018

Sue Arrowsmith
Sue Arrowsmith*
Affiliation:
University College of Wales, Aberystwyth
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Extract

A contract which is believed to be legally binding sometimes turns out to be unenforceable by one or both parties because of some defect at the time it was made. An agreement may be affected, for example, by mistake; by uncertainty; or by the incapacity of one of the parties. Often preparation or performance has already begun, and the question then arises as to how the relationship – which was thought to be governed by the agreement – is to be adjusted. Where one party has received what he was promised under the agreement there exists the possibility of a claim against him in restitution. A difficulty in many cases of this kind is that the same factors which render the contract unenforceable also provide an argument against allowing a restitutionary claim. However, this is not always the case; and even where it is, there may be some justification for permitting recovery in restitution whilst refusing an action in con tract.

Type
Research Article
Information
Legal Studies , Volume 9 , Issue 2 , July 1989 , pp. 121 - 145
Copyright
Copyright © Society of Legal Scholars 1989

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References

1 This article is not concerned with contracts which become unenforceable after they are made-for example, through frustration, or a breach of contract by one party.

2 This article considers only restitutionary claims. It does not examine wider questions such as how a choice is made between enforcing an executed contract or limiting the plaintiff to a restitutionary claim; or whether some intermediate, more flexible, solution might be appropriate (as to which see, for example, S.N. Ball, ‘Work Carried out in Pursuance of Letters of Intent -Contract or Restitution?’ (1983) 99 LQR 572).

3 This is now widely accepted as a general principle underlying restitutionary claims. The principle has been recognised by the Supreme Court of Canada (see Deglman v Guaranb Trust Co of Canada (1954) DLR 785, SCC; Pettkus v Becker (1980) 2 SCR 834, SCC) and by the High Court of Australia (Pavey & Matthews Pty Ltd v Paul (1987) 69 ALR 577). It has been used in Britain to explain decisions (see Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943) AC 32 at 64 per Lord Wright) although its existence as a general principle has been denied (Orakpo v Manson Investments Ltd (1978) AC 95 at 104 per Lord Diplock). This approach is clearly illogical, a point made by the Law Reform Commission of British Columbia: see Report, BeneJits Conferred under a Mistake of Law (1981) at p 11.

4 R. Goff & G. Jones, The Law of Restitution (3rd edn, (1986).

5 Birks, P., Introduction to the Law of Restitution (1985). For the United States see Palmer, G. E., Law of Restitution, 4 vols (1978); and in Canada G. B. Klippert, Unjust Enrichment (1983); G. M. Fridman & J. G. McLeod, Restitution (1982).Google Scholar

6 The textbook (at pp 369–374) considers briefly the general principles relating to restitution in these cases before examining the position with specific kinds of transaction. But the discussion in these pages does not clearly distinguish the two issues of whether there is an enrichment and whether its retention is unjust; nor is the important issue of the valuation of the benefit dealt with very thoroughly. Furthermore, in applying the rules to specific transactions there are sometimes unexplained inconsistencies in approach: see, for example, the discussion of how the benefit is to be valued, below at ns 71–73 and associated text.

7 Ibid, p 1.

8 Goff, & Jones, , Above, note 4, at 16. Cf the formulation of Dickson J of the Supreme Court of Canada in Pettkus v Becker (1980) 2 SCR 834 at 838 -the doctrine requires an enrichment, a corresponding deprivation and absence of any juristic reason for the enrichment.Google Scholar

9 Above, n 5, Ch IV.

10 Ibid Chs VI and VII.

11 Ibid Ch VIII. Not everyone would agree that this is a factor rendering retention of a benefit unjust: see Burrows ‘Free Acceptance and the law of Restitution’ (1988) 104 LQR 576.

12 Ibid Ch IX.

13 Some of the cases refer to the claim as being based on ‘acceptance’ (as to which see below at ns 45–49 and associated text). However, as will be explained in the next paragraph, this cannot normally form the ground for restitution in the case of an ineffective transaction. It may, however, be relevant to showing a benefit to the defendant (as to which see below at ns 20–28 and associated text). In none of the cases do the courts make clear the function of the acceptance but it is submitted that references to ‘acceptance’ should be treated as relating to the ‘benefit’ element of the claim.

14 [1988) 2 FTLR 536; 28 May 1988, official transcript 1986 No 4941.

15 Birks, op cit at pp 272–274.

16 Ibid, at pp 115–116.

17 Ibid, at p 276.

18 The only one of the examples given by Birks which appears to fit this ‘free acceptance’ analysis is that of Way v Latilla (1937) 3 All ER 759, HL. On this see below at n 76 and associated text. He further suggests (at pp 275–276) that restitution may be justified in some such cases because of the ‘dishonesty’ of the defendant or at least his ‘violation of all the rules of ordinary decency’ in acquiescing in the provision of the benefit. Obviously these arguments are also inapplicable in the current situation.

19 It is not clear whether or not the executed contract may itself be enforced in such a case: see further below at ns 77–78 and associated text.

20 Two commentators have recently attacked the use of one request/acceptance concept for the purpose of showing a benefit: see Burrows, op cit n 11. (who argues that it should not be used at all) and Beatson (1987) CLP 71 (who argues it is not sufficient to show a benefit). Although both would accept the existence of some claim in most of the situations discussed here, they would offer a different justification. In addition, both seem to reject the principle of subjective valuation although neither argue this in detail. The present writer does not accept many of the arguments and assumptions in these papers and prefers the approach of Birks and Goff & Jones.

21 Ibid, at pp 117–121.

22 Ibid, at pp 121–124.

23 Birks devotes a whole chapter to the alternative restitutionary measure of ‘value surviving’ (as to which see below ns 36–39 and associated text) but makes only passing mention of how to value the benefit received.

24 Goff & Jones, above, n 4, seem to recognise the principle at p 376 and p 390 where they refer to the sum recoverable for necessary goods as being the lesser of the reasonable price or the price which the defendant would have paid (or the contract price).

25 See the discussion of contracts void for mistake, below ns 71–73 and associated text.

26 Above, n 3.

27 Ibid, at 605. This case concerns a promise considered unenforceable rather than void but there is no reason to limit the dictum to such a case: in neither instance is the plaintiff in a restitutionary claim seeking to enforce the contract in any way -he simply relies on the defendant's act in requesting the performance to prove one of the elements of his restitutionary claim.

28 (1869) 20 LT 175. Sometimes mentioned in this context also is Way v Lufifla (1937) 3 All ER 759, HL concerning a contract for services void for uncertainty, including as to the amount of remuneration. In fixing the amount of the restitutionary claim for the value of the services their Lordships used the remuneration anticipated by the parties in negotiating the agreement. This case does not provide specific support for the principle of subjective valuation since it was acknowledged that there was no market rate to guide the courts; but it is certainly consistent with it. On this case see further below ns 77–78 and associated text.

29 Above, n 14. Page references given are to the official transcript.

30 Dillon J gave a separate judgment and dealt only briefly with this point. Nicholl LJ agreed with both judgments.

31 At p 25.

32 The only statement made which appears to touch on this point is one in the judgment of Kerr LJ at p 25, suggesting that an additional ground for refusing recovery is that there would be no limit to the amount Cannon could claim from gross receipts. Insofar as this might suggest that Cannon had received an incontrovertible benefit from the services it is submitted that it is wrong: these services were only one element leading to the profit made by Cannon.

33 At pp 25–26.

34 At pp 26–27.

35 To meet such difficulties it might be possible to adopt a presumption that the contract price was a reasonable one, and place the burden on the defendant to show otherwise. An analogy can be found in the way the courts deal with expenditure incurred in anticipation or reliance on a contract in actions for breach of contract.

36 Birks, above n 5, at pp 75–76. And see generally Ch XI.

37 See generally Ibid at pp 377–394.

38 Ibid pp 394–401.

39 Ibid at p 401.

40 This view was stated by Deane J in Pavey & Matthews, above, n 3, at 609.

41 Cf Goff & Jones at p 376 and 390; although as stated this view is not taken consistently. Birks deals with this issue only in relation to contracts which become unenforceable after their creation.

42 Where, however, he is aware that there is no agreement on price estoppel may come into play: see below 11s 77–79 and associated text.

43 As in Planche v Colburn (1831) S Carr & p 678.

44 Above, n 3.

45 Ibid at 583.

46 Ibid eg at 599, 609.

47 The leading authority is Lawford v Billericay RDC (1903) 1 QB 772, CA, when liability is clearly regarded as based on the later acceptance of performance.

48 This is also resonant of the ‘implied contract’ fallacy, as to which see above ns 56–57 and associated text.

49 With many kinds of transaction property will pass: see, for example Stocks v Wilson (1913) 2 KB 235 (contracts of minors); Trades Hall Co v Eric Tobacco Co (1916) 10 WWR 846 (ultra vires contracts); Belvoir Finance v Stapleton (1971) I QB 210 (illegal contracts).

50 This is the approach of Goff & Jones, above n 4; see pp 29–30.

51 Introduction to the Law of Restitution, at p 436. Birks is only willing to acknowledge the existence of a benefit in the case of necessary goods.

52 See, for example, Steinberg v Scala (1923) 2 Ch 452, CA; Fibrosa Spolka Akyjna v Fairbairn Lnwson Combe Barbour, above, n 3.

53 See the discussion of Lord Macmillan in Fibrosa, above, n 3, at 59.

54 Introduction to the Law of Restitution, above, n 5, at pp 242–245.

55 Stortoaks v Mobil Oil Canada Ltd (1976) 2 SCR 147.

56 Ibid.

57 On this see Goff & Jones, above, n 4 at pp 5–12.

58 See Fibrosa, above n 3, at 64 (per Lord Wright).

59 They prefer to regard such mistakes as being mistakes as to attribute so that the contract is not rendered void: see G. H. Treitel, The Law of contract (7th edn, 1987) at pp 224–228.

60 (1857) LJ Exch 117.

61 Ibid at 118.

62 Ibid.

63 Goff & Jones, above, n 4, at 388. However, they do seem to contradict their view at p379 where Boulton v Jones is cited as an example of a case where recovery should be refused because the defendant did not believe he was required to ‘pay’ for the services. Normally when this is so no benefit can be shown. But Boulton v Jones is not such a case: the defendant believed he was bound to pay in the relevant sense of being required to provide consideration -the mistake essentially concerned the form and extent of the consideration, and hence the extent of the benefit, as explained.

64 Goff & Jones, op cit, at p 388.

65 Birks at pp 102–103 suggests that this concept has no independent role, Simply being used to describe conduct in those situations where there is no positive basis for restitution.

66 In such a case, where, unlike the others, there would be prejudice to the defendant in allowing a claim, it is perhaps relevant that the plaintiff should have known of the other's mistake.

67 Cundy v Lindsay (1878) 3 App 459.

68 Normally the objective theory means the contract is valid but the mistake may be operative where known to one party, or negligently induced by him, or where the agreement is ambiguous.

69 See the discussion in Treitel, above, n 59 at p 229 and pp 233–234.

70 [1939) 3 All ER 566.

71 A similar case arose recently in Britain, but the court was not required to fix the precise amount of the claim: See Peter Lind v Mersey Docks Harbour Board (1972) Lloyds Rep 234.

72 36 Am Rep 251 (1880).

73 Above, n 4, at p 389.

74 Strickland v Turner (1852) 7 Ex 208; Couturier v Hastie (1856) 5 HLCpageFirstStart 673; and the Sale of Goods Act 1979, s 6.

75 Treitel, above, n 5.2, at pp 214– 219. And see the statement to this effect in Associated Japanese Bank v Credit du Nord (1989) 1 WLR 255.

76 This would apply if the ‘discrepancy’ between what was bought and what was anticipated could be rectified, and the cost of doing so valued (for example, by repairs being done to the object purchased). If this is not possible it would still seem to be open to the plaintiff to argue that he would not have bought the thing at all but for the mistake; and a benefit probably could not then be shown.

77 Except, of course, if there is some understanding or agreement that the risk of commencing performance is to be borne by one of the parties.

78 Above, n 28.

79 [1984) 1 All ER 504 (Goff J).

80 Treitel, above, n 59, at pp 45–46.

81 Above, n 79.

82 As an overall solution to this problem a simple restitutionary claim is obviously unsatisfactory, and something like a ‘contract on reasonable terms’ as suggested by Ball, above, n 2, would no doubt be better.

83 It is not self-evident that this should be the case where the person who has purported to enter into the contract is an employee or other agent of the defendant acting outside the scope of his authority. It would be logically possible to treat his act as the act of the defendant for the purposes of restitution, though not of contract.

84 [1936) 2 KB 403, CA.