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Part IV Termination and Affirmation, 11 Restitutionary Relief

From: Termination for Breach of Contract (2nd Edition)

John E Stannard, David Capper

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Subject(s):
Damages and contract — Contract clauses and damages — Termination and damages — Types of damages

(p. 289) 11  Restitutionary Relief

11.01  This chapter is concerned with several inter-connected instances where the non-breaching party in a contract terminated for the other’s breach might seek restitutionary relief under the law of unjust enrichment as opposed to damages for breach of contract. It is also concerned with some situations where the claimant seeks relief which has been thought to be the province of the law of unjust enrichment but is not strictly speaking something falling within that branch of the law of obligations. What causes it to be placed in this chapter is that it is not necessarily a contract remedy. This chapter will also analyse some situations where the breaching party seeks, on the termination of a contract, to recover restitution of money and other benefits transferred to the other party. As the remedy here is not contractual, it is not particularly surprising that the breaching party should be entitled to relief in certain circumstances. As restitution (or unjust enrichment as some prefer to call it) has been recognized as a discrete branch of the law of obligations comparatively recently,1 some of the discussion of older authorities will require re-interpretation of decisions in the light of the more modern vocabulary used today.

11.02  The law of restitution has been the subject of some significant treatment from the United Kingdom Supreme Court since the first edition of this book was published. The specific issues with which this chapter is concerned have not been considered in any Supreme Court decisions during this time but those decisions have all emphasized the need to analyse restitution cases within a certain framework. In chronological order the decisions are Benedetti v Sawiris,2 Memelaou v Bank of Cyprus UK Ltd,3 and Investment (p. 290) Trust Companies v Revenue and Customs Commissioners.4 The framework requires the court to ask the following questions:-

  1. 1.  Has the defendant been enriched?

  2. 2.  Was this enrichment at the claimant’s expense?

  3. 3.  Was there an unjust factor, i.e. anything which would make retention of the enrichment unjust?

  4. 4.  Is there any defence which the defendant could assert to the claim in restitution?

The Supreme Court emphasized that these questions are not an invitation to the court to engage in any kind of broad-brush policy based analysis but an analytical framework which requires close attention to precedent.

A.  Claimant Recovery

11.03  For claims where the claimant seeks to recover benefits transferred under a contract now terminated it is still conventional to distinguish between claims for restitution of money benefits and claims for non-money benefits. Traditionally the ground of restitution for both money and non-money benefits has been known as ‘total failure of consideration’. Professor Virgo prefers to call this ground ‘failure of basis’ and cites Barnes v Eastenders Cash and Carry Plc5 as judicial support. In this book, however, the traditional vocabulary shall continue to be used as this is the language of the case law discussed. But before examining these two claims in turn, it is worth asking why the claimant might be seeking restitution? The claimant has a claim for breach of contract against the defendant which would in principle extend to loss of bargain damages and claims for consequential loss, and in most cases these losses would exceed the sum likely to be recovered in a claim for restitution. The answer is that sometimes, particularly when the contract is not a profitable one from the claimant’s perspective, restitution provides the claimant with a higher recovery than contract. In light of contracting parties’ inability to recover reliance expenses in a loss making contract as this would put a party in a better position than if the contract had been performed,6 it might be wondered how a better remedy in restitution could be justified. The answer appears to be that the defendant should not be allowed to retain an enrichment it has earned from a breach of contract.

11.04  Distinction should be drawn between restitution for breach of contract and restitution following breach of contract.7 In the context of termination for breach of contract a claim in restitution requires the contract to be terminated first although bringing a claim in restitution could be construed as an effective exercise of the right to terminate. (p. 291) However, as the following text will demonstrate, the contract’s provisions can continue to have an effect upon the remedies available in the event of a breach. The High Court of Australia has said that a claimant cannot combine a claim in restitution with a claim for damages for breach.8 In the relevant case the claimant was evacuated from a cruise ship which sank off the south-east coast of New Zealand. She claimed a refund of her fare plus contractual damages for, inter alia, distress and disappointment. The breach of contract claim ultimately succeeded but the claim for a refund of the fare failed because this would ultimately have given the claimant double recovery.9 The objective of damages for breach of contract are to put the claimant into the financial position he or she would have been in if the contract had been performed. To obtain the defendant’s contractual performance Mrs Dillon would have had to pay the fare so refunding the fare plus damages for breach would have given her the defendant’s performance for nothing. One caveat to add to this is that Mrs Dillon could have received compensation for personal injuries (for breach of contract) as well as a refund of the fare because this would not have been double recovery.10

(1)  Money benefits—total failure of consideration

11.05  If the claimant has transferred money to the defendant before the contract was terminated there may be a right to restitution of that payment provided the consideration for that payment has totally failed. This requires two questions to be addressed—what is the meaning of consideration in this context and what does it mean to say that the consideration has failed totally?

(a)  Meaning of ‘consideration’

11.06  For the meaning of ‘consideration’ the following two judicial statements are helpful. First, in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd Viscount Simon LC said:11

In English law, an enforceable contract may be formed by an exchange of a promise for a promise, or by the exchange of a promise for an act. . . and thus, in the law relating to the formation of a contract, the promise to do a thing may often be the consideration, but when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails the inducement which brought about the payment is not fulfilled.

(p. 292) Then in Stocznia Gdanska SA v Latvian Shipping Co Lord Goff said:12

. . . the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.

From these two statements the following important conclusions can be drawn. First, consideration does not mean in this context what it means when determining whether an agreement is enforceable as a contract. Secondly, and more importantly in this context, one does not ask what benefits the claimant has received but whether the defendant has performed any part of its contractual obligations. As Treitel: The Law of Contract has expressed it ‘the test is whether performance has been rendered, not whether it has been received’.13 The court’s task is to determine whether the defendant has done anything to justify retention of the money benefit it has received. The only thing that is capable of justifying that retention is the performance of at least some of the contractual obligations promised in return for the promise to pay the money.

(b)  Failure of consideration must be total

11.07  To succeed in recovering money paid pursuant to a contract that has now been terminated the claimant must show that the failure of consideration was total. Officially, partial failure of consideration will not do. As will become apparent, the application of this total failure of consideration test has often proved to be a difficult exercise and it cannot be maintained dogmatically that all the decisions can be convincingly reconciled. A comparatively straightforward case is Baltic Shipping Co v Dillon.14 The claimant’s claim to a full refund of her fare was unsuccessful because she was evacuated from the ship after eight days of a fourteen-day cruise and thus the defendants could not be said to have rendered none of their agreed contractual performance. This was not, in the end, an inequitable outcome because the defendants had refunded that part of the claimant’s fare which pertained to the six days’ cruising she did not enjoy.

11.08  Application of the ‘total failure’ test has yielded some quite perplexing results. A leading authority is Rowland v Divall.15 In this case the buyer of a motor vehicle innocently bought it from someone who was not the owner. The buyer was himself a dealer and after two months resold the vehicle to a third party. The police traced the vehicle and it was returned to its true owner. The buyer reimbursed the third party and sought to recover the price paid to the seller as money paid for a consideration that totally failed. The obvious problem with the buyer’s claim was that he had two months’ possession of the vehicle before he sold it to the third party. The Court of Appeal, however, held that under the contract of sale between the seller and the buyer the seller was obliged to transfer ownership of the vehicle to the buyer and this he had totally failed to do. (p. 293) As for the possession which the buyer enjoyed, that was also meant to be given to him under the contract, so this can be rationalized as total failure as well because the buyer contracted for a lawful right to possession which the seller was unable to confer. If the consideration that fails is to be seen in terms of consideration rendered as opposed to benefits received, this decision can be viewed as reasonably sound. It is also worth pointing out that in theory the true owner could have sued the buyer in conversion. And in unjust enrichment terms the buyer’s possession of the vehicle was at the expense of the owner, not the seller, so should not be seen as a proper subject for counter restitution to the defendant.16 The same approach was taken and same result reached in Butterworth v Kingsway Motors Ltd17 and in Barber v NWS Bank plc.18

11.09  A somewhat contrasting case is Yeoman Credit Ltd v Apps.19 The claimant hire-purchase company entered into a hire-purchase contract with the defendant. The car had numerous defects, about which the defendant protested to the claimant. However, he paid three hire-purchase instalments before he defaulted on the next two. The claimant sued to recover the arrears of instalments and damages and the defendant counterclaimed for the three instalments paid on the ground that the defective condition of the car reduced these payments to sums for which the consideration totally failed. The Court of Appeal held that there had been no total failure of consideration because the defendant contracted for lawful possession of the vehicle and that was what he got. If the contract had been one for work and materials or services and the quality of the work done by the recipient of payment had been completely useless, the outcome would have been different.20

11.10  Where the contract is entire it would seem that total failure of consideration is relatively easy to establish. As the claimant paid the money for the defendant’s entire performance any failure by the defendant to meet the strict requirements of the contract will be held to be a total failure of consideration. This seems to be the best explanation of the old case of Giles v Edwards.21 The claimant paid the defendant in advance for cordwood which the defendant was to cord. The defendant corded only some of the wood and the claimant recovered the advance payment on the ground of total failure of consideration.

11.11  There will be a total failure of consideration if money is paid in advance for the purchase of goods and the goods are not delivered. Thus in Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe Barbour Ltd (a frustration case)22 the claimant entered into a contract with the defendant to purchase machinery which the defendant was to manufacture. An advance payment was made but the outbreak of the Second World War frustrated (p. 294) the contract and no machinery was delivered. The claimant recovered the advance payment on the ground of total failure of consideration even though the defendant had begun to manufacture the machinery. The contract was construed as one of sale of goods only and as none of the machinery had been delivered to the claimant the consideration for the money paid had totally failed. A different outcome was reached in Stocznia Gdanska SA v Latvian Shipping Co,23 where the claimants part manufactured a ship for the defendants and exercised a contractual right to terminate the contract for the defendants’ repudiatory breach. The claimants sought summary judgment for an instalment due under the contract and were faced with the defendants’ defence that as this would have been a payment for a consideration that totally failed they were not entitled to it. The House of Lords held that this was a contract to build and sell the ship so that the construction work done to date prevented total failure of consideration. Assuming the correctness of the decision that the contract was not just for the sale of the ship but for its construction and sale, it has to be correct to hold that there had been no total failure of consideration. Consideration in this context means not benefits transferred but performance rendered. Furthermore in the language of unjust enrichment scholarship the defendants would not be permitted to argue that they received no enrichment (the subjective devaluation argument) because the claimants had done precisely what the contract required of them and the contract was not entire. The difficulty with these cases, however, is that they show how the distinction between a contract to sell goods and a contract to manufacture and sell goods is not always easy to draw.

11.12  An effect resembling partial failure of consideration may be produced where it is possible to apportion payments among separate parts of the contractual performance due from the defendant. Thus the buyer of 100 tons of a commodity could recover half the payment if only 50 tons were delivered.24 In Goss v Chilcott25 lenders of money on mortgage were able to recover the principal sum even though the borrowers had paid two instalments of interest. The obligations to pay interest and to repay capital were treated as separate and distinct and as no part of the capital sum had been repaid the consideration for lending it had totally failed once the contract of loan was terminated. Subtle as this distinction between interest and capital is, it makes nothing like the inroads into the total failure requirement that the following passage from the judgment of Lord Goff makes:26

But even if part of the capital sum had been repaid, the law would not hesitate to hold that the balance of the loan outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which apportionment can be carried out without difficulty, the law will allow partial recovery on this ground.

(p. 295) Apportionment seems also to have been applied rather strangely in DO Ferguson & Associates v M Sohl.27 The employer in a building contract had paid £26,738 for contract work that was actually worth only £22,065. The overpayment of £4,673 was recovered on the ground of total failure of consideration. It is difficult to contest the validity of Ralph Cunnington’s comment that ‘the Court of Appeal effectively broke up the consideration pound by pound to enable them to find a total failure of the severed part. Such analysis removes any real distinction between partial and total failure of consideration’.28

(c)  Making sense of total failure of consideration

11.13  In order to make sense of the right to recover money paid before the termination of a contract, it is useful to begin by explaining why a claimant might prefer to bring such an action. The claimant does have, it must not be forgotten, a right to claim damages for breach of contract and in the great majority of cases this right, which compensates for disappointed expectations, will yield a higher return than the restitutionary action to recover money paid. To begin with there are those cases where the non-breaching party has made a bad bargain and thus has no expectation losses. Here a restitutionary action is better. It is sometimes protested that this subverts the contractual allocation of risk and that it is wrong in principle to allow a claimant to do better in restitution than in contract. But the positing of an example given by Tettenborn29 comprehensively answers this argument. If A buys a car from B for £10,000 but which is worth only £8,000 A’s damages for breach of contract would be nominal as there is no difference on these facts between what A got and what A should have got. By pursuing a restitutionary claim A gets the £10,000 back and returns the car to B. To limit A to £8,000 would leave B with a quite undeserved profit of £2,000.30 It may also be advantageous for A to sue in restitution and avoid the sometimes difficult issues in breach cases concerning proof of loss, remoteness, and mitigation.31 It will, of course, be rare for a defendant to breach a profitable contract.

11.14  The next question which needs to be addressed is why the failure of consideration needs to be total. Why can it not be partial? In addressing this question it should be pointed out that the claimant does have a right to sue for breach of contract and that cases of partial failure of consideration closely resemble cases requiring measurement of loss. It should also be acknowledged that the official commitment to total failure (p. 296) of consideration does not often seem to have denied a remedy, either in restitution or breach, to a claimant who should have one. In the Rowland v Divall32 type of case the buyer gets restitution because the seller cannot provide lawful ownership and possession. In Yeoman Credit Ltd v Apps33 the hire-purchaser still had a contractual counterclaim for the wretched condition of the vehicle. And in the apportionment cases a way was found to grant restitution to claimants the courts believed deserved it. So it may well be that sticking with the total failure requirement will not produce any significant injustice.

11.15  So what are the reasons for the current commitment to total failure of consideration? First, it has been argued that to recognize partial failure of consideration could subvert the contractual allocation of risk. This argument points out that where the claimant has a right to seek damages for breach partial failure would lead to claimants doing better in restitution than in contract.34 The argument does not apply where the claimant has no contractual remedy and is unconvincing even where the claimant does because it does not clearly explain why subverting the contractual allocation of risk is no problem in cases of total failure but a real difficulty in partial failure. Secondly, it has been argued that partial failure would involve difficult problems of counter restitution which would clearly not be present where the consideration totally failed. This argument is convincingly answered by Burrows, who states that ‘simplicity is hardly justice’ and points out the ‘vast tracts’ of the law of unjust enrichment where restitution is granted on the condition that counter restitution be provided.35

11.16  Against these unconvincing reasons the following more persuasive reasons are offered as to why partial failure should suffice. First, there remains an unjust enrichment even if the failure of consideration is not total. Secondly, open acknowledgement of partial failure would obviate the need to manipulate total failure as arguably occurred in some of the apportionment cases discussed previously. Thirdly, partial failure of consideration underlies the award of restitution under section 1(2) of the Law Reform (Frustrated Contracts) Act 1943 where a defendant obliged to make restitution of a payment made prior to a frustrating event is entitled to deduct from it expenses incurred in the performance of the contract. Arguably, the common law should develop in step with this statutory reform.36

11.17  There is precious little academic support for the total failure rule and, it is submitted, very convincing reasons why a partial failure rule should replace it. However, the current rule does not seem to be causing a great deal of injustice and judicial hints about (p. 297) its future present a rather mixed picture. In Westdeutsche Landesbank Girozentrale v Islington LBC Lord Goff said:37

There has long been a desire among restitution lawyers to escape from the unfortunate effects of the so-called rule that money is only recoverable at common law on the ground of failure of consideration where the failure is total, by reformulating the rule upon a more principled basis; and signs that this will in due course be done are appearing in judgments throughout the common law world.

In Roxborough v Rothmans of Pall Mall Australia Ltd Gummow J stated that the total failure requirement would not apply where the contract was no longer subsisting and there was no difficulty in apportioning the consideration.38 However, Lord Goff was more cautious in Stocznia Gdanska SA v Latvian Shipping Co where he said:39

This rule has been subject to considerable criticism in the past; but it has to be said that in a comparatively recent Report (Law Com. No. 121 (1983) concerned with Pecuniary Restitution on Breach of Contract) the Law Commission has declined to recommend a change in the rule, though it was there considering recovery by the innocent party rather than by the party in breach.

Recently in Giedo van der Garde BV v Force India Formula One Team Ltd Stadlen J dismissed a restitutionary action for failure of consideration because it was only for partial failure.40 The judge said:41

I am bound to say that I reach this conclusion with considerable regret, joining as I do the growing list of judges and academic writers who have expressed the view that the requirement of proof of total failure of consideration as a necessary condition for an award of restitution is unsatisfactory and liable in certain cases to work injustice.

His Lordship did award the claimants £1,865,000 damages in line with the principle in Wrotham Park Estate Co Ltd v Parkside Homes Ltd.42 In Barnes v Eastenders Cash and Carry Plc Lord Toulson acknowledged ‘the lively academic debate’ about whether the failure of consideration had to be total but the issue did not require determination in that case.43

(2)  Non-money benefits

11.18  Where a contract is terminated before completion the non-breaching party may have, in addition to its claim for damages for breach, a right to seek restitution of any benefits (p. 298) conferred upon the defendant. In unjust enrichment terminology there has to be an enrichment at the expense of the claimant and an unjust factor. Whether the enrichment takes the form of money benefits as in the previous section of this chapter or non-money benefits as in this section, the unjust factor is failure of consideration.44 The failure of consideration has to be total just as it has to be with money benefits but non-money benefits in practice present somewhat different issues, making it convenient to address them separately. The two principal issues that must be addressed are whether the defendant has been enriched by the claimant’s contractual performance prior to termination and whether restitution is measured by the value received by the defendant or a pro rata portion of the contract price. It will be seen that these two issues overlap to some extent.

11.19  Before proceeding to those issues a preliminary issue needs to be addressed. It appears that if the claimant has completed its performance prior to the termination of the contract, it will be confined to its remedy under the contract, e.g. in debt or damages. These accrued rights appear to be treated as still subject to the contractual regime.45 But if the claimant has been prevented from completing performance of an obligation it seems that a restitutionary remedy can be claimed.46

(a)  Enrichment

11.20  In relation to the first of the two issues above, whether the defendant has been enriched, cases cited in support of this proposition do not always exhibit clear evidence of enrichment. Thus in Planché v Colburn47 the claimant was contracted to write a book for the defendant publisher for £100. After starting to write the book but before tendering any part of it the claimant validly terminated the contract for the defendant’s repudiatory breach in abandoning publication of the series of which this book was part. The Court of Common Pleas awarded the claimant £50 damages on a quantum meruit basis. It is not clear precisely what benefit (enrichment) was conferred on the defendant but Virgo’s suggestion that the defendant was estopped from denying enrichment has merit.48 It simply does not lie in the mouth of someone who has contracted for something to repudiate the contract and then contend (s)he was not enriched. In De Bernardy v Harding 49 the defendant erected seats for the public to view the funeral of the Duke of Wellington. He contracted with the claimant for the latter to advertise the funeral abroad and sell tickets for it. The claimant was to be paid an allowance of 10 per cent of the money raised from ticket sales abroad. The claimant incurred expense advertising the funeral abroad but before he had sold any tickets the defendant repudiated the contract and decided to sell the tickets himself. The defendant met the expenses (p. 299) incurred by the claimant but refused to pay any remuneration to the claimant himself. The claimant brought an action upon a quantum meruit against the defendant which the judge dismissed on the ground that he should have sued for breach of contract. On appeal it was held that the claimant was entitled to bring a quantum meruit action and that the issue of the appropriate amount should have been left to the jury. Once again the enrichment is not clear but the estoppel argument suggested earlier in connection with Planche v Colburn seems a suitable rationale.

11.21  In Chandler Bros Ltd v Boswell50 the defendant main contractors repudiated a subcontract under which the claimants were excavating a tunnel. The claimants were held to be entitled to recover on a quantum meruit for the work they had done. In this case the enrichment of the defendant is somewhat easier to see and the real issue raised by the case is whether a restitutionary claim should be allowed whenever the claimant has an obvious case for breach of contract. Greer LJ said ‘it has long been settled that the plaintiff whose contract is broken is entitled, if he so chooses, to claim damages or claim on a quantum meruit basis’.51 While this choice is undoubtedly well settled, its rationale is not as clear as the choice between suing for restitution of money paid for a consideration that totally fails and the recovery of contract damages. There are clear advantages to claiming restitution of money payments, in the context of bad bargains especially and in terms of avoiding some of the difficult quantification issues that can arise when suing for breach. But as will be shown, there is a serious unresolved issue as to whether the claimant can recover the value of the benefit received by the defendant if it exceeds what would have been earned under the contract.

(b)  Whether enrichment is measured by benefit to defendant or contract value

11.22  It has been argued that the claimant is not entitled to full restitution of the value of the benefit to the defendant where this exceeds the rate that would have been payable under the contract. This, it is said, is to undermine the allocation of risk provided by the contract itself. If the claimant has made a bad bargain it should be required to live with that and not seek to improve its position by framing its claim in restitution. So the claimant should not be able to do better by partial performance than by full,52 and where the claimant’s performance is complete English decisions support the proposition that only the price should be recoverable.53

11.23  Decisions from other common law jurisdictions support a different view. This is that the contract has been terminated and does not provide the governing framework of analysis. The defendant therefore cannot set up a contract it has caused to be terminated as a defence to the claimant’s unjust enrichment action. So in Lodder v Slowey 54 the Privy Council dismissed an appeal from a decision of the New Zealand Court of (p. 300) Appeal allowing the claimant remuneration on a quantum meruit basis for the partial completion of a tunnel constructed under a contract repudiated by the defendant. In Boomer v Muir 55 another building contractor was awarded $258,000 on a quantum meruit despite there being only another $20,000 due under the contract. Carter attempts to reduce the significance of these cases by arguing that they proceeded on a theory of rescission ab initio.56 While restitution follows as a matter of principle in a case where the contract has been rescinded ab initio, it does not seem to follow that it would be inappropriate where the contract has been terminated prospectively.

11.24  The argument in favour of allowing recovery exceeding the sum due under the contract is perhaps most clearly articulated in the judgment of Meagher JA in the New South Wales Court of Appeal decision of Renard Constructions (ME) Pty Ltd v Minister for Public Works. His Honour said:57

There is nothing anomalous in the notion that two different remedies, proceeding on entirely different principles, might yield different results . . . Nor is there anything anomalous in the prospect that a figure arrived at on a quantum meruit might exceed, or even far exceed, the profit which would have been made if the contract had been fully performed . . . The most that one can say is that the amount contractually agreed is evidence of the reasonableness of the remuneration claimed on a quantum meruit; strong evidence perhaps, but certainly not conclusive evidence. On the other hand, it would be extremely anomalous if the defaulting party when sued on a quantum meruit could invoke the contract which he has repudiated in order to impose a ceiling on amounts otherwise recoverable.

It is submitted that this dictum accurately states the law, subject to two qualifications, one impliedly and the other expressly acknowledged in the statement itself.

11.25  The first qualification, impliedly acknowledged previously, is that if the contract expressly or as a matter of clear implication, states that the contractual measure of relief shall apply, then it shall apply.58 Contractual provisions can exist beyond the grave, as is the case with liquidated damages clauses, choice of law clauses, and dispute resolution clauses to give just some examples. The speech of Lord Goff in the analogous context of Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty),59 provides further support for this view. Shipowners had assigned charter hire to assignees and then failed to undertake contractually required repairs to the chartered vessel. The charterers sued the assignees to recover advance payments of charter hire in respect of a period when the ship was off hire awaiting the repairs that had not been carried out. The owners were not worth suing, hence the restitutionary claim was brought against the assignees. The (p. 301) leading speech was given by Lord Woolf (with whom Lords Keith, Lowry, and Slynn agreed), who essentially held that the charterers had no restitutionary action against the assignees in any event. Lord Goff held that this kind of action had not yet been recognized but appeared to be developing. It would not be available in this case because the contract between the charterers and the owners had expressly provided for any overpaid hire to be refunded by the owners. The contract thus expressly provided for the situation that had arisen in that case and therefore there was no role for the law of restitution to play.

11.26  The second qualification, expressly acknowledged by Meagher JA, is that the contract price will sometimes, maybe often, provide the best evidence of the value of the defendant’s enrichment. This is the view taken by Burrows and is used to re-interpret Taylor v Motability Finance Ltd,60 and the other cases cited previously as supporting the view that the claimant is not restricted to a contract measure of relief.61 In Taylor the claimant was wrongfully dismissed from his employment as a finance director. He sued for a bonus payment for negotiating a highly successful insurance settlement. He claimed that a negotiation consultant would have charged 0.5 per cent of the settlement figure, a sum amounting to £375,000. The defendants accepted that they were contractually obliged to pay the claimant £67,500 and this argument was accepted by Cooke J who, as stated earlier, held that the claimant was entitled only to the contractual measure of compensation. As Burrows has argued, rightly it is submitted, a sounder basis for this decision is that the claimant was entitled to the benefit actually gained by the defendant but that the contract sum of £67,500 was the most accurate measurement of that benefit. In principle the claimant should be entitled to restitution of the defendant’s enrichment whether or not the claimant’s contractual performance is complete and in both money and non-money cases. However, there is likely to be considerable scope for argument in non-money cases as to the value of the defendant’s enrichment. Hence it will often be better to limit the claimant to the contract measure as the most certain and reliable method of calculating the restitution measure.

(3)  Breach of fiduciary duty

11.27  Where the contractual duties of a party whose breach of contract has led to the termination of the contract are of a fiduciary nature, the claimant may have a remedy for breach of fiduciary duty. Fiduciary law is a large subject and this book is not the place to analyse it in detail.62 Fiduciary relationships are based essentially on trust and confidence. The typical fiduciary relationship is well described in the following statement of Millett LJ in Bristol and West Building Society v Mothew:63

(p. 302)

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty.

The normal context with which this book is concerned does not import fiduciary duties. Arm’s length transactions governed by bargained for contractual terms should not readily be re-characterized as fiduciary in order to bring about what might be considered a more just outcome. This can subvert the bargain the parties have actually made and re-allocate the risks among them differently from the contract’s true intent.64 One fact pattern exhibiting features of the commercial contract and fiduciary relationships is the joint venture, as illustrated by the facts of Murad v Al-Saraj.65 The claimants and the defendant entered into a joint venture to purchase a hotel. After the hotel was purchased the claimants discovered that the defendant had deceived them by reaching a deal with the hotel’s vendor whereby his contribution of £500,000 to the purchase price was rendered illusory because it consisted partly of a bribe to him and the discharge of various debts the vendor owed him. The breach of fiduciary duty which the defendant was guilty of was his non-disclosure to the claimants of the true nature of his contribution.

11.28  Where a breach of fiduciary duty has occurred and the claimant has suffered loss as a consequence, a remedy may be sought through equitable compensation.66 This remedy is similar to damages but not identical as different approaches apply to causation and remoteness.67 Where the claimant has a claim for an injunction or specific performance, damages may be awarded in lieu of the equitable remedy under Lord Cairns’ Act.68 The latter is different from ordinary common law damages in so far as it is able to provide relief in respect of future loss that would usually be the subject of an injunction or specific performance, as well as past loss.69 The remainder of this section will focus on restitutionary remedies for breach of fiduciary duty.

11.29  The issue here is where the fiduciary makes an unauthorized profit from his or her fiduciary position. It is important to emphasize that the profit must be unauthorized before (p. 303) any kind of legal liability can attach. If the fiduciary has a service contract with the principal which permits the fiduciary to earn remuneration in specified ways there can be no legal liability for profit earned in accordance with the contract. It is where the contract does not authorize the making of the profit that the question of legal liability arises. In some of these situations there may be little or no obvious loss to the principal and little or no chance of the principal taking up the opportunity for itself. The justification for requiring the fiduciary to make any kind of recompense in these situations is essentially prophylactic, to take from the fiduciary any temptation to put his or her interests before those of the principal.

11.30  Traditionally the law has distinguished between three very broad categories of case:

  1. (1)  where the fiduciary acquires a benefit through the misappropriation or misapplication of the principal’s property;

  2. (2)  where the benefit is obtained by taking advantage of an opportunity that comes the fiduciary’s way by virtue of the fiduciary relationship. This includes taking advantage of opportunities that are properly those of the principal and opportunities the principal is unable to pursue.

  3. (3)  bribes and secret profits made by the fiduciary.

Cases falling within category (1) have always been considered to be situations where the principal was granted a proprietary remedy against the fiduciary. It was the principal’s property that was effectively taken from the principal so that proprietary relief was necessary to restore the principal to the position it occupied before the breach of duty occurred. Some cases falling under category (2), sometimes called ‘interceptive unjust enrichment’, where fiduciaries divert economic opportunities away from their principals and to themselves, are also appropriately situations meriting proprietary relief.70

11.31  The more controversial cases have been those where the fiduciary acquired a profit through his or her fiduciary position when the principal was unable to acquire the profit for itself and bribes and secret profits acquired through the fiduciary position. There has never been an issue here as to whether the fiduciary was under a personal liability to account to the principal for the benefits acquired. The issue was whether the principal was entitled to proprietary relief, a constructive trust, enabling the principal to obtain priority over third parties with claims against the fiduciary and to trace their entitlement into assets acquired by the fiduciary with the illicit gain. This question has now been settled in favour of proprietary relief by the decision of the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC.71

(p. 304) (4)  Interference with property right

11.32  Where a breach of contract takes the form of an interference with the claimant’s property rights, for example through trespassing on the claimant’s property, damages may be assessed as a measure of the defendant’s gain as opposed to the claimant’s loss. So in Penarth Dock Engineering Co Ltd v Pounds72 the claimant sold a floating pontoon to the defendant. The pontoon occupied part of dock premises which the claimant leased from the British Transport Commission. As the Commission wanted to close the dock and the claimant to shut down its ship repairing business, it was made an express term of the contract of sale between claimant and defendant that the defendant would remove the pontoon as soon as possible. The defendant was dilatory in removing the pontoon and the claimant sued for damages for breach of contract and trespass. Lord Denning MR, sitting at first instance, observed that the claimant had not suffered any loss, either through extra rent paid to the Commission or any benefit it missed out on because the dock was occupied by the pontoon. Damages were assessed by analogy with what the defendant would have had to pay if the pontoon had been moved elsewhere. Although this decision is technically about breach of contract, in truth it is one of a ‘family’ of tort (mainly trespass) cases where damages were assessed either on the basis of the defendant’s gain or as an estimate of the rent the claimant might have charged for use of its land.73 These cases all contribute to the debate referred to later as to whether damages on the Wrotham Park measure74 are compensatory or restitutionary. For present purposes all that needs to be said is that damages for the invasion of the claimant’s property rights are essentially tortious and only merit inclusion in a book on breach of contract in the relatively infrequent instance where the breach takes the form of a tort.

(5)  Exceptional gain-based recovery

11.33  Aside from the ‘interference with property rights’ cases dealt with previously, there is also a growing body of jurisprudence in contract law where damages for breach have been measured by the defendant’s gain. Usually this involves taking a part of that gain as damages for the claimant but exceptionally the defendant may be stripped of the entire gain. To the extent that any damages awarded here are restitutionary it is important to point out that this is restitution for breach of contract as opposed to restitution following breach of contract, as was the case in previous sections of this chapter. To explain the current position the case law will be analysed chronologically.

(p. 305) (a)  Wrotham Park Estate Co Ltd v Parkside Homes Ltd

11.34  The first case to discuss is Wrotham Park Estate Co Ltd v Parkside Homes Ltd.75 The claimant was the successor in title to land subject to a restrictive covenant that limited owners’ rights to develop it for building purposes. The claimant sold the land to the first defendant, who bought with notice of the covenant. In breach of covenant the first defendant built a housing estate and sold the houses to the second defendants. The claimant sought an injunction to compel demolition of the houses but did not seek any interim relief while the properties were being erected. Brightman J refused to grant an injunction to compel the demolition of the completed homes but awarded the claimant damages in lieu of an injunction under the Chancery Amendment Act 1858 (Lord Cairns’ Act).76 The judge’s assessment of damages was 5 per cent of the reasonably anticipated profits of the first defendant, that being his not particularly scientific estimate of the likely sum the claimant would have charged for relaxing the covenant. The decision is technically more of an invasion of property rights case than breach of contract but it is close to breach of contract and has been used, as we shall see, as a means of remedying breaches of contract where conventional compensatory damages were not available or considered unsuitable.77

(b)  Surrey County Council v Bredero Homes Ltd

11.35  Restitutionary damages for breach of a contractual covenant were sought in Surrey County Council v Bredero Homes Ltd.78 The claimant council sold land to the defendants for the purpose of building houses. In breach of contract the defendants built eighty-two houses on the land sold, five more than the contractually agreed number. The claimant did not seek any injunctive relief, either interim or permanent, and because it had suffered no identifiable loss sought to strip the defendants of the entire profit grossed from building an additional five houses. The Court of Appeal held that as the claimant had suffered no loss there could be only nominal damages. As far as Wrotham Park damages were concerned the easy way to explain why they were not awarded in that case would be that the claimant did not apply for an injunction or specific performance and hence there was no basis for awarding damages in lieu of the equitable relief. Virgo prefers the subtly different explanation that Bredero was a case about breach of contract whereas Wrotham Park involved invasion of a property right,79 but it seems to the present authors that Wrotham Park damages can be suitable for breach of contract.80

(p. 306) (c)  Attorney General v Blake

11.36  The principal decision in which a complete disgorgement of the defendant’s profits from a breach of contract was ordered is Attorney General v Blake.81 George Blake, a notorious traitor and former MI5 officer, who defected to the Soviet Union in the early 1960s, published a book about his career and traitorous activities. This involved using a lot of information that his contract with the secret services did not permit him to use even after he had left that employment. By the time the book came to be published the information Blake was disclosing in breach of contract had ceased to be confidential so an action in breach of confidence would not have availed the Crown. The Crown did not seek an injunction to restrain publication of the book so instead it sought to prevent Blake from profiting from his breach of contract. But the Crown had not suffered loss that could be compensated in accordance with traditional breach of contract principles. The award of Wrotham Park damages, amounting to a portion of the defendant’s profits, was not considered. This may have been because there was no jurisdiction to grant an injunction,82 or because no property right was infringed,83 or more likely than the foregoing because the breach of contract was so outrageous that only stripping the defendant of all gains derived from the breach of contract would have satisfied the claimant.

11.37  So when will an account of the defendant’s profits be ordered? The following passage from the speech of Lord Nicholls is worth quoting in full:84

An account of profits will be appropriate only in exceptional circumstances. Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to a breach of contract. It will only be in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought. A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit.

Later in his speech Lord Nicholls identified three circumstances which individually would not constitute a good reason for ordering an account of profits: ‘the fact that the breach was cynical and deliberate; the fact that the breach enabled the defendant to (p. 307) enter into a more profitable contract elsewhere; and the fact that by entering into a new and more profitable contract the defendant put it out of his power to perform his contract with the plaintiff’.85 ‘Expense saved’ or ‘skimped performance’ does not fall into the exceptional category either.86 What made Blake such an exceptional case was that it came so close to breach of fiduciary duty.87

11.38  This is not the place in which to engage in an evaluation of Blake. It has received a mixed press.88 It appears to have been followed in only one English decision, Esso Petroleum Co Ltd v Niad.89 The defendant owned a petrol station and was supplied by the claimant with petrol subject to a ‘price support’ provision. In breach of this the defendant overcharged its customers. Sir Andrew Morritt V-C awarded the claimant an account of profits based on the gains made by the defendant from breaching the contract. Compensatory damages were inadequate because there was no way to ascertain the sales lost because of the defendant’s breach. The claimant had a legitimate interest in preventing the defendant profiting from the breach as it undermined the Pricewatch scheme in the area in which the defendant traded and the claimant had complained to it several times. An account of profits was rejected in AB Corporation v CD Company (The Sine Nomine)90 where shipowners withdrew a vessel from a charterparty because the market had risen and higher rates of hire were available elsewhere. This is an example of a case Lord Nicholls said was not suitable for an account of profits and one where compensatory damages were sufficient.

(d)  Experience Hendrix LLC v PPX Enterprises Inc

11.39  The courts have been unenthusiastic about Blake ever since judgment was handed down, consistently preferring Wrotham Park damages. A particularly significant post-Blake decision on this kind of relief was Experience Hendrix LLC v PPX Enterprises Inc.91 In this case a settlement was reached in 1973 of a dispute between the rock star Jimi Hendrix and the defendant record company. By that settlement it was agreed that certain master tapes could be retained by the defendant but that the remainder (non-Schedule A material) should be delivered up to Jimi Hendrix. In breach of contract the defendant continued to use master tapes that should have been delivered up to Jimi Hendrix. The estate of the late Jimi Hendrix obtained an injunction against any further breaches of the settlement agreement and in respect of past losses sought substantial damages. However compensatory damages could not be awarded for past losses as the claimant had not suffered any real loss arising out of this breach of the settlement (p. 308) agreement and no equitable relief (injunction or specific performance) could be awarded either, ruling out damages under Lord Cairns’ Act. The Court of Appeal decided that damages awarded by reference to profits made by the defendant were appropriate for reasons aptly summarized in this passage from the judgment of Peter Gibson LJ:92

In my judgment, because (1) there has been a deliberate breach by PPX of its contractual obligations for its own reward, (2) the claimant would have difficulty in establishing financial loss therefrom, and (3) the claimant has a legitimate interest in preventing PPX’s profit-making activity carried out in breach of PPX’s contractual obligations, the present case is a suitable one (as envisaged by Lord Nicholls) in which damages for breach of contract may be measured by the benefits gained by the wrongdoer for the breach. To avoid injustice I would require PPX to make a reasonable payment in respect of the benefit it has gained.

The Court of Appeal was not required to assess the damages, just to decide whether these should only be nominal because losses could not be calculated or based on the defendant’s profits; and, if the latter, whether this should be an account of all profits or a Wrotham Park-like notional fee which the claimant would have demanded as the price of relaxing the contractual condition. Significant points of distinction from Blake were that the defendant was not close to being a fiduciary, no issue analogous to national security was involved, and the contractual provision breached was not central to the claimant’s whole mode of operation. Virgo draws attention to the fact that both Wrotham Park (restrictive covenant) and Hendrix (intellectual property rights) were concerned with the invasion of the claimant’s property.93 He also points out that in Hendrix the Wrotham Park damages were not, as was originally suggested in Bredero,94 awarded in lieu of an injunction.95

(e)  Three subsequent decisions

11.40  There have been three subsequent decisions awarding Wrotham Park damages. In Amec Developments Ltd v Jury’s Hotel Management (UK) Ltd96 the defendant breached a restrictive covenant by building a hotel several metres closer to the claimant’s land than permitted. Anthony Mann QC, sitting as a Deputy High Court judge, assessed the fee that would be charged by the claimant for relaxing the covenant by looking to the benefit the defendant actually acquired from the breach and discounting the fee from that.97 In Lane v O’Brien Homes Ltd 98 the defendant developer built four houses instead (p. 309) of the permitted three, in breach of a collateral contract with the claimant seller of the land. David Clarke J estimated that an additional £280,000 profit was earned from building the extra house and he calculated Wrotham Park damages at £150,000. The last of these cases is Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd,99 which is authority for the proposition that Wrotham Park damages can exceed the profit eventually made from the breach of contract. Confidentiality agreements in a failed joint venture for an offshore oilfield were broken by the defendants proceeding with a joint venture with a different partner to the claimants. Profits of $1.8 million were eventually made from the project but at the time prior to breach when it was assumed that the hypothetical release bargain would have taken place the parties were assuming greater profits. The Privy Council awarded $2.5 million because the release fee would have been based on the much higher profit margin anticipated at this earlier stage.

(f)  WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc

11.41  The final authority to which reference should be made is WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc.100 After a dispute between the parties about the use of the initials WWF, a settlement agreement was reached which the claimant alleged the defendant had broken. At first instance Jacob J held that an account of profits for breach of this agreement was inappropriate.101 The question then arose of whether the claimant could be entitled to Wrotham Park damages as a reasonable payment for the claimant releasing its rights under the settlement agreement and Peter Smith J held that in principle this was possible.102 On appeal it was held that, for procedural reasons, this should not be allowed. The appeal is significant because of the following passage in the judgment of Chadwick LJ, with which Maurice Kay and Wilson LJJ agreed:103

The circumstances in which an award of damages on the Wrotham Park basis may be an appropriate response, and those in which the appropriate response is an account of profits, may differ in degree. But the underlying feature, in both cases, is that the court recognises the need to compensate the claimant in circumstances where he cannot demonstrate identifiable financial loss. To label an award of damages on the Wrotham Park basis as a ‘compensatory’ remedy and an order for an account of profits as a ‘gain-based’ remedy does not assist an understanding of the principles on which the court acts. The two remedies should, I think, each be seen as a flexible response to the need to compensate the claimant for the wrong which has been done to him.

Burrows has described this passage as ‘infamous’ and criticized it as erroneous for regarding the account of profits as compensatory and not restitutionary.104

(p. 310) (g)  One-Step (Support) Ltd v Morris-Garner105

11.42  The Supreme Court has provided welcome clarity to this area of the law in the above decision. The facts of the case were that in 1999 the first appellant established a business providing support for young people leaving care. In 2002 she sold a 50 per cent interest in the business to Mr and Mrs Costelloe, incorporating the respondent company (‘One Step’) as the vehicle for this transaction. In 2004 relations between the first appellant and the Costelloes began to deteriorate. In 2006 Mrs Costelloe served a ‘deadlock notice’ under the parties’ shareholders’ agreement requiring the first appellant either to buy the Costelloes’ shares or sell her own to the Costelloes for a certain price. The first appellant opted to sell her shares to the Costelloes for £3.15m. Both appellants agreed to be bound by restrictive covenants not to compete with One Step or to solicit its’ clients for a period of three years. In 2007 the appellants began trading in competition to One Step through another company called Positive Living. One Step sought damages for breach of the restrictive covenants.

11.43  The judge, Phillips J, and the Court of Appeal took a fairly broad-brush approach to the assessment of damages. The non-breaching party to a contract could opt for damages to be assessed as the notional fee that could be charged for releasing the other party from its contractual obligations. Difficulties in assessing compensatory damages as well as the absence of loss were capable of justifying this approach. The Supreme Court, however, rejected this approach as productive of too much uncertainty. The term ‘negotiating damages’ was preferred to ‘Wrotham Park’ damages and these could be awarded where the loss for which compensation was due was the economic value of the right which had been breached considered as an asset. The Supreme Court derived support for this approach by reference to the cases discussed above on interference with property rights.106 The claimant may not have suffered tangible loss as such but the defendant had taken something for nothing and should be required to pay compensation for it. Negotiating damages are simply one way of assessing compensatory damages and are not to be regarded as a restitutionary remedy. They are not to be awarded in the discretion of the judge or at the election of the claimant. The difficulty in assessing damages in traditional ways is not a reason for using the negotiating method. This is all very helpful clarity but some slightly perplexing questions remain. The losses for which the respondents sought compensation in this case, breaches of restrictive covenants, were not regarded as ‘assets’. The assessment of damages was remitted to the judge to calculate in the traditional way but it would still be open to a party to submit evidence of the hypothetical negotiating fee for the release of a contractual obligation and for the judge to decide what weight to attach to that in the assessment of damages! The question of when negotiating damages should be employed remains likely to be the subject of further decisions of the senior courts in the years ahead.

(p. 311) B.  Defendant Recovery

11.44  The essential question to be examined in the remainder of this chapter is the converse of the one examined in the first two subsections of  Part A. There we examined situations where the contract had been discharged following the defendant’s breach and the innocent party was seeking restitution of money and non-money benefits transferred under the contract. Here we are also dealing with situations where one party has committed breach and the contract has been discharged but this time the party that committed the breach is seeking restitution of money and non-money benefits transferred under the contract. The first question to be addressed is why that breach does not of itself bar any restitutionary claim. As Virgo points out,107 this is largely because the innocent party is sufficiently protected by its breach of contract claim, which is capable of placing it in the financial position it would have been in if the breach had not occurred. English law has never seen a need to remedy breach any further than that and where the innocent party seeks restitution following a breach it is always required to give counter restitution of any benefits it has received. In principle, where a contract has been discharged the law of restitution takes over and the contract should only continue to influence the remedial position where it clearly provides that it is to do so. Later, we shall see how fully this is all worked out in the case law. The same division between money and non-money benefits will be observed as in innocent party recovery.

(1)  Money benefits

11.45  The position can be expressed fairly shortly and succinctly. Any pre-payment may be recovered if there is a total failure of consideration. Any deposit or payment subject to forfeiture is irrecoverable. How, why, and whether that should continue to be the case will be examined now.

11.46  The conventional starting point seems to be Dies v British and International Mining and Finance Co.108 The claimant contracted to buy rifles and ammunition from the defendant for £270,000 and made a pre-payment of £100,000. The claimant breached the contract by refusing to take delivery and the defendant validly terminated it. The claimant recovered the £100,000 but not on the ground of total failure of consideration. The judge, Stable J, reasoned that this was because the contract impliedly provided for restitution in these circumstances.109 Burrows points out that this reasoning was dictated by the earlier decision in Chandler v Webster,110 where it was held that restitution for total failure of consideration was only possible where the contract was rescinded ab initio.111 Now that the House of Lords has corrected this error in Fibrosa Spolka Akcyjna (p. 312) v Fairbairn Lawson Combe Barbour Ltd,112 the decision can now be rationalized as one based on total failure as subsequent decisions clearly do.

11.47  In Rover International Ltd v Cannon Film Sales Ltd 113 Proper Films Ltd entered into a contract with Thorn EMI for the exhibition of films on Italian television. Under the contract EMI granted a licence to Proper to exhibit nine films for a total fee of $1.8 million. The fee was to be paid in three instalments with the last of $900,000 due on 30 September 1986. Cannon took over Thorn EMI in May 1986 and thereafter relations between the parties deteriorated. In the light of the disputes which developed, Proper refused to pay the last instalment directly to Cannon, insisting that it be paid into a joint account maintained by the parties’ solicitors pending resolution of the disputes between them. Cannon elected to terminate the contract for this and then sued for recovery of the $900,000. The Court of Appeal dismissed this claim for the reason that if Proper were forced to pay the sum it would have an immediate right to recover it for a total failure of consideration. This was regardless of whether it was the guilty or innocent party in the termination of the contract. Dies was explained as a total failure of consideration case, a proposition supported by dicta of McHugh J in Baltic Shipping Company v Dillon (The Mikhail Lermontov)114 and of John Martin QC (sitting as a Deputy High Court judge) in Clowes Development (UK) Ltd v Mulchinook.115 The decision most important to settling this question is Stocznia Gdanska SA v Latvian Shipping Co,116 where again the issue was whether money should not be paid by a party in breach of contract because it would be immediately recoverable on grounds of total failure of consideration.

11.48  There is no right to recover in restitution where the payment is a deposit or of the nature of something understood to be forfeited in the event that the payer breaches the contract. This is one of those situations where the law of restitution is subservient to the contract. If the parties have agreed what is to happen in the event of a breach, restitution has no role to play. Like other parts of the general law it only prescribes solutions where the parties have not worked one out for themselves. So there is nothing inherently implausible in Stable J’s reliance on an implied contractual obligation to refund the pre-payment in Dies. The danger lies in reading the contract to mean what you want it to mean. If you think there should be restitution you find an implied obligation to make restitution. The better approach is not to go looking for contractual terms to solve the problem but to recognize that the solution lies outside the contract unless the contract clearly provides a solution within.

11.49  Where the contract expressly or by clear implication provides that money is paid as a deposit or is to be forfeited in the event of the paying party’s breach, there is a clear (p. 313) solution within the contract. In Howe v Smith117 a party in breach could not recover a payment because it was a deposit. Fry LJ defined a deposit as an ‘earnest to bind the bargain so entered into [which] creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract’.118 In Mayson v Clouet119 a contract for the sale of land provided that if the purchasers defaulted they were to forfeit the deposit paid. The purchasers paid the deposit and two instalments and then defaulted. It was held that they could recover the instalments but not the deposit. Deposits and other similar payments are subject to those equitable principles governing penalties so that in the event that a deposit or forfeiture provision is struck down as a penalty the payer’s right to restitution would be reinstated, subject to the innocent party’s claim for damages for breach.120 Birks explained deposits and similar payments not on grounds of contracting out of restitution but as cases where there would be no total failure of consideration or unjust enrichment.121 It is not thought that this makes for any practical difference ultimately.

11.50  As the right to restitution depends largely on the removal of the contract from the analytical terrain, save for those cases where express or clearly implied contractual provision governs post-discharge issues, the contract breaker should in principle be treated comparably to the innocent party seeking restitution. Just as the innocent party can only have restitution in preference to breach where it provides a better remedy or can have restitution as part of breach where breach is the better remedy,122 the guilty party can have restitution because the innocent is entitled to damages for breach putting it into the financial position it would have been in had the contract not been breached. From this it should follow that the guilty party, no more than the innocent, should not be required to demonstrate a total failure of consideration. The contract has gone and no longer should there be any concern about a party doing better than the contract would allow. If there is concern about that, the parties should agree a contractual provision to prevent it.

(2)  Non-money benefits

11.51  It may come as some surprise to the reader to discover that the law in respect of restitution for non-money benefits by a party in breach of contract is really quite different from restitution for money payments. If there were to be a right to restitution the restitutionary ground would probably be failure of consideration and one might expect to (p. 314) meet similar issues as to whether that failure had to be total and to what extent restitution was capped by the terms of the contract. But actually it would be more accurate to say that the party in breach has no right to restitution at all.

(a)  Sumpter v Hedges

11.52  Explaining the law logically begins with the decision of the Court of Appeal in Sumpter v Hedges.123 In this case the claimant builder did a little more than half of the work of constructing certain buildings for the defendant when he ran out of money and abandoned the contract. The defendant completed the buildings, using materials left on site by the claimant. At first instance the claimant recovered for the value of the materials left on site but he failed both there and in the Court of Appeal to recover on a quantum meruit for the value of the work he had done before abandoning the contract. It was pointed out by all the judges in the Court of Appeal that the contract was entire so the claimant was not entitled to be paid under the contract until the work was completed. As far as a restitutionary claim was concerned, the claimant could not get that either in the absence of a fresh contract to pay for the same.124 No authority need be cited for the proposition that the latter is a deeply flawed basis for the decision. Recovery in restitution depends on unjust enrichment, a principle independent of the law of contract so that the absence of any fresh contract, either express or implied, is not a reason to bar recovery. Whether the contract being entire is a reason to bar recovery in restitution is another question to which further consideration will be given in due course. It would appear to be the basis for the later Court of Appeal decision in Bolton v Mahadeva.125 The claimant agreed to install a combined heating and domestic hot water system in the defendant’s home for £560. The work was found to be defective and meriting a deduction of £174 from the bill. The contract was entire and the defects in the standard of the work too much to invoke the doctrine of substantial performance.126 In the absence of the latter, this meant that the claimant was not entitled to recover anything for the work he had done, although the defendant had paid £400 into court so that the outcome of the case primarily affected the claimant in liability for costs.

(b)  Substantial performance

11.53  Mention was made in the last paragraph of substantial performance. The origins of this doctrine lie in the famous New York case of Jacob and Youngs Inc v Kent.127 In the construction of a house a builder used a different kind of piping to the one contractually stipulated. It was cheaper but it had no effect whatever on the building’s structural integrity or its value. The contract was entire and the defendant maintained that no payment was due as the contractor had not performed precisely as the contract required. Cardozo J for the majority ruled that in cases where the contract was substantially (p. 315) performed the contractor should receive the contractual payment minus a small deduction to reflect the defective performance. In Hoenig v Isaacs128 the contractor was allowed the agreed price of £750 subject to a set-off of £56 to allow the owner to rectify some defective workmanship. It is important to recognize that in none of these substantial performance cases is the contract discharged. Indeed the contractor’s right to payment minus a small deduction for defective performance is a contractual right and has nothing to do with the law of restitution. Restitution will only apply where the defective performance goes beyond the minor, so that in no sense imaginable can it be said that entire performance has been rendered.

(c)  Support for restitutionary right

11.54  There is some support for a right to restitution for a party in breach on termination of the contract. In Hain Steamship Co Ltd v Tate & Lyle Ltd 129 the question of whether a shipowner who deviates from the agreed voyage route, thereby committing a repudiatory breach, but who delivers the goods on time to the cargo owner at the agreed port of discharge, should be entitled to payment on a quantum meruit. The question was obiter because the parties had intended that the charterers, not the cargo owners, would pay the freight. Lord Wright posed the following hypothetical situation:130

Let me put a quite possible case: a steamer carrying a cargo of frozen meat from Australia to England deviates by calling at a port outside the usual or permitted route: it is only the matter of a few hours extra steaming: no trouble ensues except the trifling delay. The cargo is duly delivered in England at the agreed port. The goods owner has had for all practical purposes the benefit of all that his contract required; he has had the advantages, of the use of a valuable ship, her crew, fuel, refrigeration and appliances, canal dues, port charges, stevedoring. The shipowner may be technically a wrongdoer in the sense that he has once deviated, but otherwise over a long period he has been performing the exacting and costly duties of a carrier at sea. I cannot help thinking that epithets like ‘unlawful’ and ‘unauthorised’ are not apt to describe such services; it may be that by the maritime law the relationship of carrier and goods owner still continues despite the deviation, though subject to the modifications consequent on the deviation. Nor can I help feeling that the court would not be slow to infer an obligation when the goods are received at destination to pay, not indeed the contract freight, but a reasonable remuneration. . .

To similar effect was the speech of Lord Maugham.131 As well as being obiter the preceding quotation may also be reflective of a special maritime law rule.132 In any event one wonders if a deviation as slight as that posed would not be better rationalized as a case of contractual substantial performance.

(p. 316) 11.55  In Miles v Wakefield MDC 133 a council employed registrar of births, deaths and marriages engaged in industrial action, refusing to perform marriage ceremonies on Saturday mornings but performing all his other contractual duties on that day. The defendants refused to pay him anything for his work on Saturdays and the claimant sued to recover for that part of his work on a Saturday that was attributable to the work he actually did. His claim failed because the House of Lords held that in order to recover his salary under his contract of employment the claimant had to prove that he was ready and willing to perform all his duties under his contract. On the question of whether the employee was potentially entitled to claim in restitution for the value of the services he rendered Lords Brightman and Templeman were in favour, Lord Bridge was against, and Lords Brandon and Oliver reserved their opinion. As Burrows points out, the value of the views of Lord Brightman and Lord Templeman is somewhat diminished in the present context because the employer did not elect to terminate the contract of employment.134 One also has to wonder if the views expressed here are not too context-specific to offer any real basis for a general restitutionary right to recover the value of work done prior to the termination of an entire contract.

(d)  Specific exceptions

11.56  It is probable that there would be a right to restitution where there was a free acceptance of the contract breaker’s performance after the termination of the contract. There is no specific authority for a free acceptance principle but there is academic support.135 This principle holds that where the defendant chooses to accept a benefit provided by the claimant in the full knowledge that it was not intended to be gratuitous, there is an obligation to pay for it. It develops to some extent from section 30(1) of the Sale of Goods Act 1979, which provides that if the seller delivers to the buyer less than the agreed quantity of goods and the buyer accepts them the buyer must pay for them at the contract rate. Free acceptance would not have troubled the non-breaching party in Sumpter v Hedges or Bolton v Mahadeva as neither had any real option but to take the partial performance rendered and make the best of it.

11.57  One other exception is where the Apportionment Act 1870 applies. Section 2 of the Act provides that all periodic payments in the nature of income, including rents, annuities, and dividends, are to be considered as accruing from day to day ‘and shall be apportionable in respect of time accordingly’. The effect of this provision is that payment obligations and the consideration for them are not regarded as entire contracts. Thus in Item Software (UK) Ltd v Fassihi136 an employee’s salary was payable one month in arrears. He was sacked on 26 June and the employer refused to pay him any of his June salary. His claim to be paid his salary up to 26 June was successful, his salary being deemed to (p. 317) be payable day by day instead of monthly. It must be stressed, however, that for the 1870 Act to apply the claimant must be entitled to payment periodically.

(e)  Should there be a restitutionary claim?

11.58  The last issue to be addressed in this chapter is whether the law needs to be changed to allow a party in breach to obtain restitution of the value of any benefit conferred on the other party? To do so would be to recognize that the contract is gone and to effect some symmetry with the position where the non-breaching party seeks restitution. The crucial question here is whether the parties have expressly or impliedly provided in their contract that there shall be no restitution following discharge by breach. In the absence of an express contractual term barring restitution this question often turns on whether the contract is entire. It is often assumed that if the contract is entire both contractual and restitutionary payment is barred. But is this necessarily so? Burrows puts the matter thus:137

While it may be true that sometimes that is the best interpretation of what was meant by the contract, in many and probably most entire contracts the parties have not thought about the restitutionary consequences for the part performer. A contract may require payment after the completion of the work, and hence may be entire, not because the parties intend the payor to get something for nothing in the event of non-completion of the work, but because, for example, the payor fears that he will be unable to recover an advance payment in the event of bankruptcy or abandonment of the job by the other party or simply because his financial circumstances make it more convenient for him to pay at the end.

It should be a question of construction in each case whether the contract excludes a restitutionary claim in the event of an entire contract being terminated. A rebuttable presumption that it does may make sense but it should not be automatically assumed. All this would change the situation for the better without really changing the law. It would also be broadly consistent with the majority report of the Law Commission on Pecuniary Restitution on Breach of Contract.138 The recommendation was that the contract breaker should be entitled to the value of the benefit conferred on the other party, subject to a pro rata contract price ceiling and the other’s right to counterclaim damages for breach.

Footnotes:

1  The first judicial recognition of the existence of restitution as an independent subject came in the decision of the House of Lords in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL).

2  [2013] UKSC 50, [2014] AC 938.

3  [2015] UKSC 66, [2016] AC 176.

4  [2017] UKSC 29, [2018] AC 275.

5  [2014] UKSC 26, [2015] AC 1; G. Virgo, The Principles of the Law of Restitution (3rd edn, OUP, 2015) p 308.

6  Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm), [2011] 1 Lloyd’s Rep 47.

8  Baltic Shipping Co v Dillon (1993) 176 CLR 344 (HCA).

9  See K Barker, ‘Restitution of Passenger Fare’ [1994] LMCLQ 291, where this is explained.

11  [1943] AC 32 (HL) 48.

12  [1998] 1 WLR 574 (HL) 588.

13  E Peel, Treitel: The Law of Contract (14th edn, Sweet & Maxwell, 2015) para 22-003.

14  (1993) 176 CLR 344 (HCA) (n 8).

15  [1923] KB 500 (CA).

16  See A Burrows, The Law of Restitution (3rd edn, Hart, 2011) p 342.

17  [1954] 1 WLR 1286 (Liverpool Assizes) (hire-purchaser had used a car for eleven months).

18  [1996] 1 WLR 641 (CA) (conditional purchaser had used a car for twenty-two months).

19  [1962] 2 QB 508 (CA).

20  Heywood v Wellers (a Firm) [1976] QB 446 (CA), 458.

21  (1797) 7 Term Rep 181; 101 ER 920 (KB).

22  [1943] AC 32 (HL).

23  [1998] 1 WLR 574 (HL).

24  Peel, Treitel, para 22-004 (n 13). The Sale of Goods Act 1979, s 30(1) states that if the seller delivers short the buyer may reject the goods but if the goods are accepted the buyer must pay pro rata.

25  [1997] 2 All ER 110 (JCPC–NZ).

26  Goss v Chilcott, 117 (n 25).

27  (1992) 62 BLR 95 (CA).

28  R Cunnington, ‘Failure of Basis’ [2004] LMCLQ 234, 246.

29  A Tettenborn, The Law of Restitution in England and Ireland (3rd edn, Routledge-Cavendish, 2002) para 6.20.

30  If authority need be cited that restitution may be granted in this scenario consider Wilkinson v Lloyd (1845) 7 QB 25, 115 ER 398 (QB). The claimant agreed to buy shares in a company conditional upon the defendant obtaining the directors’ consent to the share transfer. The defendant failed to obtain the directors’ consent and the claimant sued to recover the price paid. He succeeded even though the value of the shares had decreased in the meantime. Supporting dicta for this decision may be found in Ebrahim Dawood Ltd v Heath Ltd [1961] 2 Lloyd’s Rep 512 (QBD).

31  Burrows, The Law of Restitution, p 346 (n 16), where it is pointed out, for example, that the claimant’s use of the motor vehicle in Rowland v Divall (see n 15) would reduce his damages for breach but would not be a matter of counter restitution as the seller was not the owner of the vehicle.

32  See para 11.08.

33  See para 11.09.

34  Peel, Treitel, para 22-004 (n 13).

37  [1996] AC 669 (HL) 682.

38  (2002) 76 ALJR 203 (HCA).

39  [1998] 1 WLR 574, 590.

40  [2010] EWHC 2373 (Ch).

41  Giedo van der Garde v Force India Formula One Team, para 367 (n 40).

42  [1974] 1 WLR 798.

43  [2014] UKSC 26, [2015] AC 1, [114].

45  Taylor v Motability Finance Ltd [2004] EWHC 2619 (Comm), Howes Percival v Page [2013] EWHC 4104 (Ch), Elek v Bar-Tur [2013] EWHC 207 (Ch).

46  Peel, Treitel, para 22-022 (n 13).

47  (1831) 8 Bing 14 (Court of Common Pleas).

49  (1853) 8 Exch. 822 (Court of Exchequer).

50  [1936] 3 All ER 179 (CA).

51  Chandler Bros v Boswell, 186 (n 50).

52  Tettenborn, The Law of Restitution, paras 6.11 and 6.31 (n 29).

53  See the authorities cited at n 45.

54  [1904] AC 442 (JCPC–NZ), affg [1900] 20 NZLR 321 (NZCA).

55  24 P 2d 570 (1933) (District Court of Appeal of California). A different view is, however, taken in the Restatement Third, Restitution and Unjust Enrichment § 38 and comment.

56  JW Carter, Carter’s Breach of Contract (2nd edn, Hart, 2019) para 13-55.

57  (1992) 26 NSWLR 234 (NSWCA) 267–8.

58  This is the view of Virgo: Principles of the Law of Restitution, p 336 (n 5).

59  [1994] 1 All ER 470 (HL).

60  [2004] EWHC 2619 (Comm) (QBD).

61  Burrows, The Law of Restitution, pp 348–50 (n 16).

62  See further M Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart, 2010).

63  [1998] Ch 1 (CA) 18.

64  See Re Goldcorp Exchange plc [1995] 1 AC 74 (JCPC–NZ); Sir Peter Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 217–18; Virgo, Principles of the Law of Restitution, p 470 (n 5).

65  [2005] EWCA Civ 959 (CA).

66  IE Davidson, ‘The Equitable Remedy of Compensation’ (1982) 13 Melbourne University L Rev 349; WMC Gummow, ‘Compensation for Breach of Fiduciary Loyalty’ in TG Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, 1989) pp 57–92; D Capper, ‘Damages for Breach of the Equitable Duty of Confidence’ (1994) 14 Legal Studies 313; C Rickett, ‘Compensating for Loss in Equity—Choosing the Right Horse for Each Course’ in P Birks and F Rose (eds), Restitution and Equity (Mansfield Press, 2000) pp 173–91; J Getzler, ‘Equitable Compensation and the Regulation of Fiduciary Relationships’ also in P Birks and F Rose (eds) pp 235–57; Conaglen, Fiduciary Loyalty, pp 85–96 (n 62).

67  See here Target Holdings Ltd v Redferns [1996] AC 421 (HL); AIB Group (UK) Ltd v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503.

68  Now the Senior Courts Act 1981, s 50.

69  See JA Jolowicz, ‘Damages in Equity—A Study of Lord Cairns’ Act’ [1975] CLJ 224.

70  R Goode, ‘Property and Unjust Enrichment’, in A Burrows (ed), Essays on the Law of Restitution (OUP, 1991), 215.

71  [2014] UKSC 45, [2015] AC 250.

72  [1963] 1 Lloyd’s Rep 359 (QBD).

73  Phillips v Homfray (1883) 24 Ch D 439 (CA); Whitwham v Westminster Brymbo Coal & Coke Co [1896] 2 Ch 538 (CA); Stoke-on-Trent City Council v W & J Wass Ltd [1988] 1 WLR 1406 (CA); Ministry of Defence v Ashman (1993) 66 P & CR 195 (CA).

74  Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (Ch D).

75  [1974] 1 WLR 798 (Ch D).

76  The current statutory provision preserving this jurisdiction is Senior Courts Act 1981, s 50.

77  See also Bracewell v Appelby [1975] Ch 408 (Ch D) where 40% of the value of a house to which the only access was along a private road owned by the defendants was the sum awarded on the same principles.

78  [1993] 1 WLR 1361 (CA).

80  Burrows, The Law of Restitution, pp 665–6 (n 16) treats Wrotham Park as involving both contract and invasion of property rights.

81  [2001] 1 AC 268 (HL).

82  It does not take much to establish jurisdiction to grant an injunction. See Hooper v Rogers [1975] Ch 43 (CA) 48 where Russell LJ said of a mandatory injunction that the critical question was whether the court ‘could have (however unwisely. . . ) made a mandatory order’. However some doubts were expressed about the width of this principle in One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [45] (Lord Reed).

84  [2001] 1 AC 268 (HL) 285.

85  Attorney General v Blake, 286 (n 84).

86  Attorney General v Blake, 286 (n 84).

88  For analysis see J Edelman, Gain-Based Damages (Hart, 2002) ch 5; PD Maddagh and JD McCamus, The Law of Restitution (looseleaf, Canada Law Book, 2004) ch 25. For hostile views see D Campbell and D Harris, ‘In Defence of Breach: A Critique of Restitution and the Performance Interest’ (2002) 22 Legal Studies 208; D Campbell and P Wylie, ‘Ain’t No Telling (Which Circumstances are Exceptional)’ [2003] CLJ 605.

89  22 November 2001, unreported (Ch D).

90  [2002] 1 Lloyd’s Rep 805 (QBD).

91  [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830.

92  Experience Hendrix LLC v PPX Enterprises, para 58 (n 91).

94  See nn 78–80.

96  (2000) 82 P & CR 286 (Ch D).

97  cf Lunn Poly Ltd v Liverpool and Lancashire Properties Ltd [2006] EWCA Civ 430 in which a landlord breached its covenant of quiet enjoyment with its tenant by bricking up a fire door. Neuberger LJ said that in assessing Wrotham Park or ‘negotiating damages’, post-breach events were normally irrelevant. This approach was approved in Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd [2009] UKPC 45 (JCPC–Jersey), discussed later.

98  [2004] EWHC 303 (QB).

99  [2009] UKPC 45 (JCPC–Jersey).

100  [2007] EWCA Civ 286, [2008] 1 WLR 445.

101  [2002] FSR 32 (Ch D).

102  [2006] EWHC 184 (Ch).

103  [2007] EWCA Civ 286, para 59.

104  Burrows, The Law of Restitution, pp 675–6 (n 16).

105  [2018] UKSC 20, [2018] 2 WLR 1353.

106  See nn 72–74 and text.

108  [1939] 1 KB 724 (KBD).

109  Dies v British and International Mining and Finance Co, 744 (n 108).

110  [1904] 1 KB 493 (CA).

112  [1943] AC 32 (HL).

113  [1989] 1 WLR 912 (CA).

114  (1993) 176 CLR 344, 390–1.

115  24 May 2001, unreported (Ch D).

116  Explained in n 23 and accompanying text.

117  (1884) 27 Ch D 89 (CA).

118  Howe v Smith, 101 (n 117). cf Chillingworth v Esche [1924] 1 Ch 97 (CA) where a deposit ‘subject to contract’ was recovered by the payer. No contract was ever signed so the payer was not in breach. The payment was thus not a true deposit but ‘an anticipatory payment intended only to fulfil the ordinary purpose of a deposit if and when the contemplated agreement should be arrived at’ (Sargant LJ at 115).

119  [1924] AC 980 (JCPC–Singapore).

120  Stockloser v Johnson [1954] 1 QB 476 (CA); Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 (JCPC–Jamaica).

121  P Birks, An Introduction to the Law of Restitution (Clarendon Press, 1989) pp 235–8.

122  Double recovery is avoided in both instances.

123  [1898] 1 QB 673 (CA).

124  All this was said in relation to the claim for compensation for work done beyond the supply of materials.

125  [1972] 1 WLR 1009 (CA).

126  See Hoenig v Isaacs [1952] 2 All ER 176 (CA).

127  129 NE 889 (1921, NY CA).

128  [1952] 2 All ER 176 (CA).

129  [1936] 2 All ER 597 (HL).

130  Hain Steamship Co v Tate & Lyle Ltd, 612 (n 129).

131  Hain Steamship Co v Tate & Lyle Ltd, 616 (n 129).

132  See also B McFarlane and R Stevens, ‘In Defence of Sumpter v Hedges’ (2002) 118 LQR 569, 592–4.

133  [1987] AC 539 (HL).

136  [2004] EWCA Civ 1244, [2005] ICR 450.

138  Law Commission, Law of Contract: Pecuniary Restitution on Breach of Contract (Law Com No 121, 1983) paras 2.37–2.40. Brian Davenport QC dissented.