Unjust enrichment - Restitution in the context of contract t...

Learning Outcomes

This article outlines the principles of unjust enrichment and the remedy of restitution, particularly when a contract is terminated. For the SQE1 assessment, you will need to understand the core elements required for an unjust enrichment claim and how restitution operates to reverse such enrichment. You will learn about key concepts such as total failure of consideration and quantum meruit, the statutory scheme under the Law Reform (Frustrated Contracts) Act 1943 including recovery of prepayments and the “just sum” for any “valuable benefit” retained before frustration, and how rescission (e.g., for misrepresentation) triggers restitutionary unwinding. You will also examine important defences (especially change of position), the limits of recovery where performance is partial or where counter‑restitution is impossible, and how restitution differs from compensatory damages in measure and purpose. This knowledge will enable you to identify and apply the relevant legal rules to SQE1-style single best answer questions concerning remedies after contract termination.

SQE1 Syllabus

For SQE1, you are required to understand how unjust enrichment claims operate when a contract ends, distinguishing this from contractual remedies like damages. It is important to recognise the specific circumstances where restitution might be claimed, with a focus on the following syllabus points:

• The core requirements for establishing a claim in unjust enrichment.
• The concept of total failure of consideration and when it allows for recovery of payments.
• Restitution after rescission and its bars (e.g., affirmation, lapse of time, third party rights).
• The statutory adjustments on frustration under s 1(2) and s 1(3) of the Law Reform (Frustrated Contracts) Act 1943.
• The meaning and application of quantum meruit for work done or goods supplied.
• Key defences to a restitution claim, such as change of position and bona fide purchase.
• The distinction between restitutionary remedies and compensatory damages for breach of contract.
• The impact of entire obligations on recovery and exceptions (acceptance of partial performance; prevention).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the four essential elements required to establish a claim for unjust enrichment?
2. What is meant by a 'total failure of consideration' in the context of restitution?
3. True or false? A claimant can recover payment for partially completed work under an entire contract if the other party has no choice but to accept the benefit of the work done.
4. Which defence might protect a defendant who received money by mistake but spent it in good faith before realising the error?

Introduction

When a contract comes to an end, particularly through breach or frustration, questions arise about benefits already conferred by one party on the other. While contract law primarily deals with enforcing promises (often through damages), the distinct legal principle of unjust enrichment addresses situations where one party has gained a benefit at the other's expense in circumstances the law deems unjust. The primary remedy for unjust enrichment is restitution, which aims to restore the benefit to the claimant. This article focuses on restitutionary remedies in the context of contract termination, particularly where contractual remedies may be unavailable or inadequate.

Key Term: Unjust Enrichment
A legal principle where one party has been enriched at the expense of another in circumstances that the law considers unjust. It forms a distinct cause of action.

Key Term: Restitution
The remedy associated with unjust enrichment, aiming to reverse the enrichment by restoring the benefit (or its value) to the claimant.

ELEMENTS OF AN UNJUST ENRICHMENT CLAIM

To succeed in a claim for unjust enrichment, a claimant must establish four key elements:

1. Enrichment: The defendant must have received a benefit. This benefit can be positive (e.g., receiving money, goods, services, or proprietary rights) or negative (e.g., saving an expense or discharge of a liability). It may also include improvements or increases in the value of an asset retained by the defendant.
2. At the Claimant's Expense: The enrichment must have been gained at the claimant's expense. There needs to be a causal link between the defendant's gain and the claimant's loss or conferral of the benefit. In many cases the expense is direct (payment or services supplied); in others it may be indirect, but the court will generally require sufficient connection (for example, payment to a third party induced by the defendant).
3. Unjust Factor: There must be a legally recognised reason ("unjust factor") why the defendant's retention of the enrichment is unjust. Examples relevant to contract termination include mistake, duress, undue influence, and, crucially, total failure of consideration (also known as failure of basis).
4. Absence of Defences: There must be no applicable defence available to the defendant (e.g., change of position, bona fide purchase for value without notice, illegality, estoppel).

It is important to understand that 'unjust' does not simply mean unfair in a general sense; it refers to specific legal grounds that justify reversing the enrichment. Where the parties’ bargain remains enforceable, unjust enrichment will not typically be used to rewrite contractual risk allocation; it operates where the basis of the transfer fails or the contract is set aside (e.g., by frustration or rescission).

RESTITUTION FOLLOWING CONTRACT TERMINATION

Restitutionary claims often arise when a contract is discharged (e.g., by breach or frustration) and benefits have already been exchanged.

Total Failure of Consideration

A primary unjust factor allowing restitution is total failure of consideration. This occurs where a party pays money under a contract but receives no part of the performance they bargained for. The focus is on whether the basis for the transfer has wholly failed, not on fault.

Key Term: Total Failure of Consideration
A ground for restitution where a party has paid money but received none of the expected performance or benefit under the contract.

In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, advance payments made under a contract later frustrated by war were recoverable because the paying party had received none of the machinery ordered. The consideration (the promise to deliver machinery) had wholly failed.

Worked Example 1.1

Ahmed pays BuildCo £10,000 in advance for construction materials for a new extension. Before any materials are delivered, BuildCo goes into liquidation and cannot fulfil the contract. Can Ahmed recover the £10,000?

Answer:
Yes. Ahmed can likely claim restitution of the £10,000 based on a total failure of consideration. He paid the money but received none of the materials (the performance bargained for).

Note that if any part of the performance is received, even if defective, the failure is generally only partial, and a claim in restitution for the money paid will typically fail. The remedy in such cases usually lies in damages for breach of contract. Where the contract is rescinded (e.g., for misrepresentation), the general aim is mutual restoration: each party restores benefits received, subject to bars to rescission and equitable adjustments (e.g., damages in lieu under Misrepresentation Act 1967 s 2(2)).

The Law Reform (Frustrated Contracts) Act 1943

The harshness of the common law rule (especially regarding expenses incurred by the payee before frustration) led to the Law Reform (Frustrated Contracts) Act 1943. This Act applies to contracts frustrated after 1 July 1943 (subject to certain exceptions, like charterparties and insurance contracts).

Key Term: Valuable Benefit
Under s 1(3) of the Law Reform (Frustrated Contracts) Act 1943, a non‑monetary benefit obtained by a party before frustration (e.g., goods delivered, services producing an end product, or use of property) which the court can value when deciding whether the recipient should pay a just sum.

Key Term: Just Sum
The amount the court may order a party to pay under s 1(3) of the Law Reform (Frustrated Contracts) Act 1943 for any valuable benefit received prior to frustration, assessed by reference to all the circumstances and capped at the value of the benefit.

Key provisions include:

• s 1(2): Money paid before the frustrating event is recoverable, and money payable ceases to be payable. However, the court has discretion to allow the payee to retain or recover expenses incurred before frustration, up to the amount paid or payable.
• s 1(3): If one party obtained a valuable benefit (other than money) before frustration, the court may order them to pay a just sum for it, not exceeding the value of the benefit. In assessing value, courts often identify and value the end product of services to the recipient—if the frustrating event destroys that end product (e.g., building burned down), there may be little or no valuable benefit left.

The leading guidance on s 1(3) is BP v Hunt [1982] 1 All ER 925, emphasising the identification of the benefit, its value, and then the discretionary “just sum,” while Appleby v Myers (1867) illustrates how destruction of the end product can leave no benefit to value.

Worked Example 1.2

A designer agrees to produce and install a bespoke exhibition structure in a hall for a month‑long event. Halfway through the install, a fire (no one’s fault) destroys the hall and the partially installed structure. The contract is frustrated. The client had paid nothing in advance. What can the designer recover?

Answer:
The designer cannot recover a price under the contract (it has been discharged). Under s 1(2) LR(FCA), there is no prepayment to adjust. Under s 1(3), the court considers whether the client obtained a “valuable benefit” from the designer’s services by identifying and valuing the end product. As the end product was destroyed before use, there may be little or no valuable benefit. A “just sum” may be nil. The designer bears the loss of wasted effort unless the court can identify some residual benefit to the client.

Exam Warning

Remember that the LR(FCA) 1943 adjusts financial consequences after a contract is frustrated. It does not determine if a contract is frustrated. Also, be aware of its limitations and exceptions. For s 1(3), courts frequently value the end product to the recipient; if the end product has been destroyed or the recipient obtained no usable gain, the “just sum” may be nil.

Quantum Meruit

Where one party provides services or goods under a contract that is later terminated (or perhaps never properly formed), they may sometimes claim reasonable remuneration for the work done or goods supplied. This is known as quantum meruit (for services) or quantum valebat (for goods).

Key Term: Quantum Meruit
A restitutionary remedy allowing a party to recover a reasonable sum for services rendered where the contract does not specify remuneration or is otherwise unenforceable.

A claim often arises where:

• Work is done under a contract later found to be void.
• A contract provides for services but does not fix the price (a reasonable sum is implied).
• Work is done under a contract terminated for breach. If the innocent party performed work, they can sometimes choose between claiming damages or quantum meruit. Where the party in breach seeks remuneration, entire obligations and acceptance rules are critical.

Under an entire obligation, payment is due only on complete performance. If the performing party abandons part-way and the other party has no real choice but to accept an incomplete structure, quantum meruit for work done will generally be barred (unless the other party voluntarily accepts part performance). In Sumpter v Hedges [1898] 1 QB 673, a builder could not claim for the incomplete works (the owner had no option but to accept the unfinished building on his land), but could recover the value of materials left behind which the owner chose to use. Conversely, if the other party prevents performance (wrongful conduct), the performing party may claim quantum meruit (e.g., Planche v Colburn (1831)) or damages.

Substantial performance is distinct: if an entire obligation has been substantially performed (e.g., Hoenig v Isaacs [1952]), the contractor can recover the contract price subject to deductions for defects; but if defects are significant, substantial performance fails (Bolton v Mahadeva [1972]) and recovery may need to proceed on a quantum meruit basis if available.

Worked Example 1.3

Priya hires David to design her garden for £5,000, payable on completion. David completes about 80% of the work but then abandons the project due to a dispute unrelated to the quality of his work so far. The work done is usable by Priya. Can David claim any payment?

Answer:
Probably not under the contract, if it's deemed an 'entire contract' requiring full completion for payment. He might argue for quantum meruit if Priya's subsequent actions constitute voluntary acceptance of the partial work, but this is difficult if she had no real choice. If Priya wrongly prevented completion, David could claim quantum meruit or damages. If David's abandonment was a repudiatory breach, he likely cannot claim payment.

Worked Example 1.4

A publisher commissions a specialist author to produce a book for a fixed fee payable on delivery. Midway, the publisher cancels without justification. The author has already carried out substantial research and drafting. Is any recovery possible?

Answer:
Yes. The author was prevented from completing by the publisher. The author may claim damages for breach or, alternatively, a quantum meruit for reasonable remuneration reflecting the value of work done. The author is not confined by the entire obligations rule because performance was wrongfully prevented (Planche v Colburn).

Restitution upon Rescission

If a contract is rescinded (e.g., for misrepresentation, duress or undue influence), restitution generally follows to unwind the transaction: each party restores the benefits received. Bars to rescission (affirmation, lapse of time, impossibility of counter‑restitution, and third party rights) will prevent rescission and the consequential restitution. Courts may award damages in lieu of rescission under s 2(2) Misrepresentation Act 1967 where equitable to do so, rather than unwinding the exchange.

DEFENCES TO RESTITUTION

Even if the elements of unjust enrichment are met, certain defences may prevent recovery.

Change of Position

This defence protects a defendant who innocently received a benefit and, in good faith, changed their position in reliance on that benefit, such that it would be inequitable to require full restitution. For example, mistakenly receiving £1,000 and spending £500 on non-returnable holiday deposits before the mistake is realised. The defence may reduce or extinguish the liability to make restitution. The change must be causally linked to the receipt and reasonable; bad faith or knowledge of the error will usually defeat the defence.

Estoppel

If the claimant represented they would not seek restitution, and the defendant relied on this, the claimant may be estopped from claiming. Estoppel most often operates as a shield (not a sword) and is sensitive to inequity; the court will consider whether reliance and detriment make it unjust to allow the claimant to resile.

Illegality

Historically, illegality barred restitution claims related to illegal contracts. However, Patel v Mirza [2016] UKSC 42 introduced a more flexible, policy-based approach. Restitution may be allowed unless granting it would be contrary to the public interest, considering the purpose of the prohibition transgressed, other relevant public policies, and proportionality.

Bona Fide Purchaser for Value Without Notice

If the defendant received the benefit (e.g., property) and subsequently transferred it to an innocent third party who paid value for it without notice of the claimant's interest, the claimant generally cannot recover the property from the third party. This protects transactional security and can operate as a complete defence regarding the transferred asset.

Counter‑restitution Impossibility

Where the defendant cannot be restored to their pre-transfer position (e.g., goods consumed, services irreversible), the court may limit or refuse restitution. The question is whether substantial restoration is feasible; if not, monetary adjustments may be made, or restitution refused if inequitable.

Worked Example 1.5

A bank mistakenly credits Alex with £3,000. Believing it to be a work bonus, Alex donates £1,500 to a charity and spends £500 on non-refundable travel. Before spending the remaining £1,000, Alex is told of the mistake. The bank claims restitution of £3,000. How does the change of position defence apply?

Answer:
Alex can likely rely on change of position to reduce restitution. The £2,000 spent irretrievably in good faith (charity donation and non-refundable travel) may be protected; the remaining £1,000 is repayable. The court will assess Alex’s good faith and the causal link between the receipt and the expenditure. If Alex had reason to doubt the payment, the defence may be curtailed.

DISTINGUISHING RESTITUTION FROM DAMAGES

It is essential to distinguish restitution from damages for breach of contract:

• Basis: Restitution focuses on reversing the defendant's unjust gain. Damages focus on compensating the claimant's loss caused by the breach.
• Measure: Restitution aims to restore the value of the benefit received by the defendant (e.g., the sum paid, or a just sum for a valuable benefit). Damages aim to put the claimant in the position they would have been in had the contract been performed (expectation loss) or had the contract never been made (reliance loss).
• Fault: Unjust enrichment generally does not require fault on the part of the defendant (though the reason for the enrichment might involve fault, e.g., duress). Damages for breach require proof of a breach of contract.

Occasionally courts award restitutionary damages (e.g., account of profits) for breach of contract, but this is exceptional (see AG v Blake [2001] 1 AC 268) and not a general measure of contractual damages. In termination contexts, the primary tools remain damages, statutory adjustments on frustration, and conventional restitution.

Revision Tip

In problem questions, first identify if a valid contract exists and if there's a breach or frustration. Contractual remedies (damages) are primary. Only consider restitution if there's no valid contract, the contract is void/frustrated, rescinded, or if a specific unjust factor (like total failure of consideration) applies alongside termination. Where frustration is established, apply LR(FCA) 1943; where rescission is available, consider restitutionary unwinding and any bars.

Key Point Checklist

This article has covered the following key knowledge points:

• Unjust enrichment is a distinct legal principle requiring enrichment, at the claimant's expense, an unjust factor, and no valid defence.
• Restitution is the remedy aiming to reverse unjust enrichment.
• Total failure of consideration is a key unjust factor where money is paid but no contractual performance is received.
• The Law Reform (Frustrated Contracts) Act 1943 provides statutory rules for adjusting financial consequences after frustration, including recovery/retention of expenses (s 1(2)) and payment of a just sum for any valuable benefit (s 1(3)).
• Quantum meruit allows recovery of a reasonable sum for services rendered in specific circumstances, such as under a void contract, where payment is not fixed, where performance is prevented, or where partial performance is voluntarily accepted.
• The entire obligations rule limits recovery where payment is due only on complete performance; exceptions exist (voluntary acceptance, substantial performance, wrongful prevention).
• Defences like change of position, estoppel, illegality (post-Patel v Mirza), and bona fide purchase can defeat or reduce a restitution claim.
• Restitution focuses on the defendant's gain, whereas damages focus on the claimant's loss. Account of profits for breach is exceptional.

Key Terms and Concepts

• Unjust Enrichment
• Restitution
• Total Failure of Consideration
• Quantum Meruit
• Valuable Benefit
• Just Sum