Legal Briefing

Claim for restitution crashes in the High Court

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Corporate and commercial | 01 December 2010

Remedies for contractual disputes are traditionally compensatory in nature, with damages assessed based on the loss suffered by the claimant. Restitutionary remedies, however, focus on any unfair benefit (known as ‘unjust enrichment’) to the defendant at the claimant’s expense, with the aim of restoring that benefit to the claimant. Restitutionary remedies are therefore distinct from traditional remedies, but in some circumstances are essential to ensuring a client can obtain an appropriate remedy.

The recent High Court decision in Giedo Van Der Garde BV (GVG) & anor v Force India Formula One Team Ltd [2010] provided extensive guidance on restitutionary remedies. Stadlen J considered the case law regarding restitutionary remedies at length. GVG provides useful guidance, particularly in relation to the application of the principle that restitution is only available where there is a total failure of consideration.

Overview of restitutionary remedies

Broadly speaking, restitutionary remedies are available in three circumstances:

  1. where the defendant has been unjustly enriched from, or by, an act of the claimant;
  2. where the defendant has acquired a benefit from a third party for which they must account to the claimant; and
  3. where the defendant has obtained a benefit from their own wrongdoing.

Unjust enrichment can lead to a restitutionary remedy where it can be established that:

  • the defendant has been enriched;
  • the enrichment was unjust;
  • the enrichment was at the expense of the claimant; and
  • none of the bars to restitutionary remedies apply.

The enrichment can be either positive (for example money received) or negative (for example the saving of necessary expenditure). It can consist of the performance of work, or the provision of goods or services. The categories for non-monetary benefits that can lead to restitutionary remedies are not strictly defined and are subject to voluminous case law. Problems can arise with non-monetary benefits because they are often difficult to value and it can sometimes be impossible to restore the defendant to its original position.

Bars to Restitution and Defences

The limits (or bars) to a restitutionary claim are distinct from the defences available, although in both circumstances the burden of proof lies with the defendant.

When advising a claimant, it is important to consider the bars to restitution, which will preclude a claim for restitution at the outset. A claim for restitution will be barred in various circumstances, for example where the defendant cannot be restored to its original position. One of the ways in which this can occur is where there has been only partial consideration as opposed to a total failure (the total consideration principle). It was this bar that was the subject of some debate in the recent GVG decision.

The bars to restitution include:

  1. the benefit conferred on the defendant by the claimant was a valid gift or in pursuance of a valid common law, equitable or statutory obligation;
  2. the benefit conferred was by way of a compromise or settlement of an honest claim;
  3. the claimant conferred the benefit while performing an obligation owed to a third party;
  4. the claimant acted officiously or voluntarily;
  5. the defendant cannot be restored to its original position (consequently money cannot be recovered unless there is a total failure of consideration) or is a bona fide purchaser; and
  6. public policy precludes restitution.

Alternatively, if advising a defendant, the defences to a claim for restitution will be relevant. The most common defence is change of position, and prior to the recognition of that defence, common law estoppel was widely relied on, although other defences do exist.

Change of position was recognised as a defence to a claim for restitution in Lipkin Gorman v Karpnale [1988], where it was stated that the defence would be available to a person whose position had changed, so that it would be ‘inequitable in all the circumstances to require him to make restitution’. The House of Lords agreed not to strictly define the scope of the defence, and subsequent case law has therefore specified circumstances where the defence is applicable, and its limits.

As a generic example, if money is stolen and the thief gives this money to an innocent third party, who then donates the money to charity, the third party should have a good defence to a claim for money had and received. By donating the money to charity, the third party would have effectively changed their position to the extent that it would no longer be equitable to order restitution against them.

Types of Restitutionary Remedies

The appropriate restitutionary remedy depends on the type of benefit conferred on the defendant. In most circumstances, the claimant can seek a personal remedy requiring the defendant to transfer the unjust enrichment back to the claimant. In appropriate circumstances, however, a claimant can seek the proprietary remedy of tracing into the defendant’s assets, asserting a lien over an asset or subrogation to third party rights against the defendant.

An action for money had and received arises where money has been paid involuntarily, in return for failed consideration or pursuant to a transaction where consideration has failed. An action for money paid will arise where a benefit has been conferred on the defendant as a result of money paid by the claimant to a third party, or where the claimant has been compelled by law to pay money to a third party that has resulted in a gain for the defendant.

Where the enrichment is in the form of services, the claim would be for a quantum meruit (a reasonable sum deserved by the claimant), and where the enrichment is in the form of goods the claim would be for a quantum valebat (a reasonable price for the goods).

The courts have also ordered remedies, such as the rescission of a contract and the recovery of compound interest (see Sempra Metals Ltd v Revenue & anor [2007]). In exceptional circumstances the courts have awarded restitutionary remedies for breach of contract, specifically an account of profits (see Attorney General v Blake & anor [2000]).

GVG

Facts

The claimants were Giedo Van der Garde (GVG), a young racing driver with aspirations to race in Formula One, and his management company. The defendant was Force India Formula One Team Ltd (formerly Spyker F1 Team Ltd). The parties entered into two agreements, a service agreement and a fee agreement (the agreements), which provided that in consideration for $3m, GVG would be permitted to drive a Formula One racing car owned by the defendant for 6,000 km. The 6,000 km would consist of testing, practising and/or racing. The agreements also provided for other benefits including sponsorship, travel expenses and pit access passes for Grand Prix weekends. The agreements provided that subject to obtaining a Fédération Internationale de l’Automobile (FIA) Super Licence, GVG would have the opportunity to participate in Friday morning test sessions on Grand Prix weekends, and to become a reserve driver for the defendant (the contingent rights).

The claimants subsequently brought a claim for breach of contract against the defendant on the basis that GVG was not permitted to complete 6,000 km driving the Formula One car, which he was entitled to under the agreements.

Stadlen J found that the defendant had permitted GVG to drive the Formula One car for only 2,270 km (although GVG actually drove the car for only 2,004 km having declined the offer of a further 266 km) and therefore had failed to fulfil its obligations under the agreements. The claimants advanced four alternative claims for relief:

  1. an order for restitution (including compound interest);
  2. damages for loss of the value of the defendant’s performance not provided;
  3. damages for loss of opportunity relating to GVG’s future income; and
  4. a claim for ‘Wrotham Park damages’ (broadly speaking, compensatory damages to reflect the reasonable value of releasing a defendant from its obligations under a contract that it has breached).

Stadlen J held that the claimants were not entitled to an order for restitution, the value of which was stated to be $1.865m plus compound interest. However, he awarded damages of $1.865m for the loss of the value of the benefits withheld by the defendant. Stadlen J stated that if that remedy was subsequently deemed inappropriate, the claimants would be entitled to an award for ‘Wrotham Park damages’ to the value of $1.865m or alternatively to a modest award of $100,000 as damages to compensate for the damage to the claimant’s career prospects and loss of opportunity.

Claim for restitution

Although Stadlen J refused the claim for restitution, the judgment provides useful guidance on the practical application of restitutionary remedies. The analysis focused on the well-established principle that a party to a contract is entitled to restitution of the contractual price paid if there has been a total failure of consideration by the defendant (see Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943]). In other words, a partial consideration would not suffice. The total consideration principle itself was not in dispute in GVG and the analysis just concerned its application to the facts.

The claimants challenged the application of the total consideration principle based on two exceptions. First, on the grounds that, where benefits conferred on the defendant are incidental or collateral benefits, the receipt of such benefits does not preclude a claim for restitution. Secondly, on the grounds that, if the benefits could be apportioned, it could be said that, although there was not a total failure of the entire consideration due to pass under the agreements, there had nevertheless been a total failure as to part of it, such that restitution is still possible in respect of that part.

Stadlen J considered that the benefits provided under the agreements (such as sponsorship, pit passes for Grand Prix weekends and travel expenses) were all incidental to the key entitlement to drive the Formula One car for 6,000 km. However, he considered the contingent rights to be of a different category due to their importance to GVG’s reputation, skill and experience as a driver, and ultimately his future career. Since all the lost rights were not incidental or collateral, the first exception could not therefore be relied on by the claimants.

However, Stadlen J subsequently decided that the second exception could be applied in GVG as it was possible to apportion consideration to show that there had been total failure in part, in that the defendant’s failure to provide 3,730 km driving time to GVG was total. Stadlen J said that the failure was capable of being apportioned on a dollar per kilometre basis, so that the claimants would have been awarded $1.865m of the $3m paid to the defendant, had both exceptions applied. Due to the failure of the first exception though, the claim for restitution failed.

Comment

This decision provides useful guidance on the practical application of the total consideration doctrine for restitutionary remedies. Knowledge of restitutionary remedies is important to enable practitioners to consider all possible avenues of relief available to their clients.

By Charlotte Bunn, associate, and Richard Tyler, trainee, Edwards Angell Palmer & Dodge UK LLP.