In an important decision from 2021, the Court of Appeal confirmed that a claim for unjust enrichment can be made when the contract is valid and subsisting and there is a failure of basis of the contract. The court stressed that this doctrine only applies to benefits unjustly obtained by the receiving party in circumstances that are outside the contemplation of the contract. Unjust enrichment can be relied on by the paying party which got no benefit in return for its payment.
In this article we explain unjust enrichment and review the Court of Appeal decision where the unjust enrichment claim failed. We also explain what is meant by ‘failure of basis’.
Unjust enrichment may be claimed where a defendant is unjustly enriched at the claimant’s expense. Its purpose is ‘to correct normatively defective transfers of value, usually by restoring the parties to their pretransfer positions’. An important feature of unjust enrichment is that it is not based on a subjective concept of fairness. The cause of action arises where the enrichment is demonstrated to be both unjust and gained at the claimant’s expense.
In the case of Dargamo Holdings Ltd v Avonwick Holdings Ltd[1], the Court of Appeal considered the scope and application of the principle of unjust enrichment. The claimant, Dargamo, asked the court to order the repayment (restitution) of sums which it claimed were unjustly received by the defendant, Avonwick. Dargamo said Avonwick’s gain was unjust because Dargamo had received nothing in return. Dargamo said the sums received by Avonwick were not the basis of the contract these parties had entered into.
Dargamo’s claim for unjust enrichment failed at first instance and on appeal. The Court of Appeal said that on a proper construction, the contract plainly contemplated receipt by Avonwick of the sums it had received, and there was nothing unjust in Avonwick keeping the money. The Court of Appeal made clear that whilst in principle an unjust enrichment claim can be made under a valid and subsisting contract where there is a total failure of basis, there is no injustice if the payment made was what the parties had bargained for in their contract.
Lady Justice Carr explained the history of unjust enrichment as a cause of action. It started life in 1966 as an academic concept, where it was known as ‘the law of restitution’. Restitution came to be recognised by the courts, but there was confusion about how and in what circumstances it operated. By 2003 this area of law was refined to refer to the cause of action (unjust enrichment) not just the remedy (restitution). That distinction was later endorsed by the House of Lords in the case of Sempra Metals Ltd v IRC[2], and today this area of law is referred as the law of unjust enrichment.
Gains of benefits will be unjust in a number of situations. Most claims for unjust enrichment arise where money has changed hands but the parties’ contract is invalid, for example, due to mistake, duress or illegality. In those circumstances, there is no contract for the paying party to rely on to claim its money back. In Dargamo’s case, the Court of Appeal said ‘the invalidity of a relevant contract is not a necessary prerequisite to a successful claim in unjust enrichment’.
The Court of Appeal then went on to explain what is meant by a failure of the basis where one party obtains a benefit which the contract did not provide for, leaving the paying party out of pocket. A failure of basis means that the state of affairs contemplated as the basis or reason for the payment to the receiving party has failed or not materialised. In most contracts, there is a reciprocal exchange of benefits. For example, party A gives party B a benefit on condition B pays A a sum of money. As the Court of Appeal said, the ‘core concept of 'failure of basis' is that a benefit has been conferred on a joint understanding that the recipient’s right to retain it is conditional. If the condition is not fulfilled, the recipient must return the benefit.'
When deciding whether there is a failure of basis, in Bank of New York Mellon (International) Ltd[3] Sir Julian Flaux said that the judge must decide whether the thing not done, or the thing not provided, was fundamental to the basis on which the parties entered into their contract. The basis of most contracts is the exchange of benefits.
In the Dargamo case, the unjust enrichment claim failed because the contract clearly and expressly contemplated the payments Avonwick received. Dargamo could not claim it had received no benefit under the contract for those payments, so there was no failure of the basis of the contract. The Court of Appeal said Dargamo had tried ‘to use the principle of unjust enrichment to override rather than complement the express contractual obligations’ contained in the contract.
The courts will hold the parties to the express terms of their contract, even if the bargain is unequal, or bad for one party. The law of unjust enrichment does not provide a means of subverting the contract. The case serves as a useful reminder that benefits received by one contracting party at the other’s expense will only be classed as unjust enrichment if that benefit was not contemplated by the parties as part of the bargain they contracted for.
For further information and advice, please contact Sebastian Pigott or Mark Manning.
[1] Dargamo Holdings Ltd v Avonwick Holdings Ltd [2021] EWCA Civ 1149
[2] Sempra Metals Ltd v IRC [2007] UKHL 34
[3] Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2022] EWCA Civ 1021
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