Restitution Claims: Getting your own back
15 March 2011
The story of the Dean’s dog is something of an Oxford institution. The Dean of the college owned a Springer Spaniel, of whom he was very fond. The college rules, however, prohibited anyone from bringing dogs into the college. To avoid the problem, the Dean described the spaniel as a quasi cat; there were no rules relating to cats, whether quasi or otherwise, and the Dean happily took the spaniel into college with him.
Restitution bears a certain resemblance to the Dean’s dog. For a long time it was known as quasi contract, which made it difficult to recognise what it actually was and what rules applied to it. Over the last 20 years, however, it has emerged as a distinct part of commercial law whose role and parameters have become more clearly defined. At the same time, it is something that is often, and increasingly, asserted in broad terms where facts simply will not support it. So in what circumstances can you assert a restitution claim? And when can you push back if you see such a claim being advanced by the other side?
What is it?
Whilst parties often talk of a restitution claim in the same way they would talk of a contract claim or a tort claim, unlike the latter two, restitution is the remedy rather than the cause of action. There are various bases for seeking that remedy, but by far the most common is unjust enrichment. Unjust enrichment is part of the law of obligations; that is, it sits alongside areas such as contract and tort. Importantly, it is not a part of the law of property and restitution normally is not a proprietary remedy. Whilst some of the earlier cases suggest that a proprietary remedy, in the form of a constructive trust, might be available, more recent case law has emphasised that the restitutionary remedy is personal, not proprietary. Put another way, in a claim for restitution you are not, literally, getting your own back; the defendant is ordered to pay to you a sum representing the amount by which he was enriched.
This is important in two regards. First, where the defendant is insolvent, the claimant will be in a much stronger position if it can point to an asset and seek recovery of it, rather than simply bringing a monetary claim representing the asset’s value against an insolvent defendant who will only be able to pay pennies in the pound. Second, the reverse is equally true: where the value of the asset, or the property into which it can be traced, has increased, the claimant will be better placed if it can assert a proprietary claim over that asset. The facts of Foskett demonstrate this. The defendant had embezzled funds from the claimant, which he had used to purchase a policy of life assurance. The policy of life assurance had matured and was worth considerably more than the original sums embezzled. By asserting a proprietary claim, the claimants were entitled to recover that increase in value. That would not, normally, be the case where the claim was a ground for restitution for unjust enrichment.
What are the elements?
Restitution will be available in, broadly, two sets of circumstances.
As we have noted above, the most common ground is restitution for unjust enrichment. There are two elements: some form of payment or transfer by the claimant to the defendant coupled with some unjust factor that vitiates the claimant’s intention. It is important to take them both in turn.
Looking first at enrichment, this is a two stage test. First, there must be an objectively identifiable enrichment: the claimant must be able to point to the provision of some payment or service that a reasonable person would consider to have value. This is normally reasonably straightforward: if I have paid you twice for the same thing, you have been overpaid and so have enjoyed an objective enrichment. However, even once that is established, it remains open to the defendant recipient to show that what was provided was for some reason less valuable to him than it would have been to others. This is known as the doctrine of subjective devaluation and can be particularly important in cases of quantum meruit, as a simple example will illustrate. A consultant is engaged to review and prepare a report on 250 contracts. In fact, due to an error, he reviews 2,500 contracts and prepares a far more thorough report. Objectively, there is a greater benefit to the recipient in receiving the broader review and the more thorough report. But if the recipient can show that, in fact, he has not received a greater benefit (for example, if the review was a statutory requirement that specified a certain number of contracts) then he will not be obliged to pay for the extra work done because he has not been enriched by it.
Assuming there has been an enrichment, it needs to be unjust. The grounds of restitution are not closed, but the unjust factors come within specific heads. It is not sufficient for the claimant simply to assert unfairness; he must show that his claim falls within an identifiable (and normally pre existing) category. The key categories are:
- Mistake: Here the claimant has mistakenly made a payment to the defendant and seeks a recovery. The standard is quite a low one. In particular, it does not matter that the claimant was negligent in making the mistake; it is still entitled to restitution.
- Duress: The claimant makes the transfer pursuant to some illegitimate threat or pressure.
- Undue influence: The claimant and the defendant are in some form of relationship of trust and confidence, either actual or presumed. The defendant secures the provision of the benefit through an abuse of that relationship.
- Failure of consideration: Here, as with other grounds of restitution for unjust enrichment, the basis of restitution is that the claimant’s intention that the defendant should receive some benefit has been vitiated. However, whereas with most claims of unjust enrichment the unjust factor goes to demonstrate that there was never an intention to enrich the defendant, in the case of failure of consideration the claimant accepts that it intended to enrich the defendant, but argues that subsequent events caused that intention to fall away.
The relationship between unjust enrichment and contract is an important one. Clearly, many of the unjust factors resemble bases for vitiating contracts. That does not make restitution an alternative to contract, however. Where there is a valid, subsisting contract, the parties will be bound by it; any payment made under it will be caused by the parties’ contractual obligations, rather than any unjust factor, and so will not be subject to restitution. In order to bring an unjust enrichment claim, the claimant must first set aside the contract.
Take a simple example. The claimant enters into a settlement agreement with the defendant. Their dispute arose out of a contract of business interruption insurance. Both parties assumed that the contract was written on a particular basis. In fact, it was written on a very different basis and, had the parties known this, the settlement sum would have been around 33% higher. The claimant cannot recover the difference in value caused by the mistake. It did make a mistake, in entering into the settlement agreement, but that mistake was not the direct cause of its giving up its claim for a lesser sum; it was the existence and terms of the settlement agreement that caused the claimant to act in that way. The claimant must, therefore, set aside the settlement agreement before it can bring a restitution claim. This will be much harder for it to do because the test setting aside a contract on the grounds of mistake is essentially and radically different (and is much higher) than the restitution test.
Restitution for wrongs
The second ground for restitution is restitution for wrongs. Here, the claimant asserts that there has been a breach of contract or a tort but, rather than seeking damages reflecting the loss that it has suffered, it seeks restitution reflecting the gain that the defendant has enjoyed through the breach. As we have previously seen in the case of contract, this is an exceptional and highly unusual remedy outside cases involving interference with property rights.
There are a number of key defences to a restitution claim, notably:
- Exclusion of the right to restitution by contract: If both parties have expressly agreed what is to happen in their contract, there is no place for the law of restitution.
- Counter-restitution impossible: Before the claimant can recover any benefit from the defendant, it must return any benefit which it has received from the defendant. Thus, in any case where there has been an exchange of benefits, if the claimant is unable to give counter-restitution, its claim will be barred.
- Change of position: This is one of the most important defences in restitution. Restitution is about reversing enrichment. Where the defendant has changed its position following receipt of the enrichment such that it would be inequitable in all the circumstances to require it to make restitution, either in whole or in part, then the defendant will have a defence to a restitution claim. The courts have made clear that the precise parameters of the defence have to be elaborated on a case-by-case basis.
- Illegality: Where the defendant’s enrichment arose as a result of an illegal transaction, for reasons of public policy the courts will not normally permit a claim of restitution to reverse the enrichment.
Raining quasi cats and dogs?
Restitution has emerged as an important part of the law of obligations, with an increasing role to play. At the same time, it is not a universal solution for a claimant struggling to articulate a claim. A targeted approach, based on a proper application of the principles of unjust enrichment, is far more likely to succeed than is a quasi contractual deluge.
- For example, Chase Manhattan Bank v Israeli British Bank (London) Ltd  Ch 105.
- See, for example, Westdeutsche Landesbank Girozentrale v Islington London Borough Council  AC 669 and Foskett v McKeown  1 AC 102.
- CTN Cash and Carry Ltd v Gallaher Ltd  4 All ER 714.
- Banque Financière de la Cité v Parc (Battersea) Ltd  1 AC 221.
- Fibrosa Spolka Akcykna v Fairbairn Lawson Combe Barber Ltd  AC 32.
- The facts, along with the test for vitiation, come from Kyle Bay v Underwriters  EWCA Civ 57, although that case did not involve a restitution claim.
- Arnold v National Westminster Bank  1 Ch 63 at 67.
- Lipkin Gorman v Karpnale Ltd  2 AC 58 at 558, 568 and 578.
This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey email@example.com, or tel +44 (0)20 3088 3710.