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, as well as potential defences. 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 need 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. As you work through this article, focus on:
- 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.
- The meaning and application of quantum meruit for work done or goods supplied.
- Key defences to a restitution claim, such as change of position.
- The distinction between restitutionary remedies and compensatory damages for breach of contract.
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.
- What are the four essential elements required to establish a claim for unjust enrichment?
- What is meant by a 'total failure of consideration' in the context of restitution?
- 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.
- 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:
- Enrichment: The defendant must have received a benefit. This benefit can be positive (e.g., receiving money or services) or negative (e.g., saving an expense).
- At the Claimant's Expense: The enrichment must have been gained at the claimant's expense. There needs to be a link between the defendant's gain and the claimant's loss or conferral of the benefit.
- 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.
- Absence of Defences: There must be no applicable defence available to the defendant (e.g., change of position, illegality).
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.
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.
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.
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 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.
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.
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. If the party in breach performed work, they generally cannot claim quantum meruit under an entire contract unless the innocent party voluntarily accepted the partial performance or prevented completion.
In Sumpter v Hedges [1898] 1 QB 673, a builder abandoned work halfway through. He could not claim for the work done (as it was an entire contract and the owner had no choice but to accept the partially built structure on his land), but he could claim for the value of materials left behind which the owner chose to use.
Worked Example 1.2
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.
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.
Estoppel
If the claimant represented they would not seek restitution, and the defendant relied on this, the claimant may be estopped from claiming.
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.
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. 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, in tort).
- 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.
Revision Tip
In problem questions, first identify if a valid contract exists and if there's a breach. Contractual remedies (damages) are primary. Only consider restitution if there's no valid contract, the contract is void/frustrated, or if a specific unjust factor (like total failure of consideration) applies alongside termination.
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.
- Quantum meruit allows recovery of a reasonable sum for services rendered in specific circumstances, such as under a void contract or where voluntarily accepted.
- Defences like change of position, estoppel, and illegality (post-Patel v Mirza) can defeat a restitution claim.
- Restitution focuses on the defendant's gain, whereas damages focus on the claimant's loss.
Key Terms and Concepts
- Unjust Enrichment
- Restitution
- Total Failure of Consideration
- Quantum Meruit
