The Supreme Court of India and the law of unjust enrichment

These are troubled times for the law of unjust enrichment in India, so much so that one is forced to ask whether such an area of law at all exists in this country. That is regrettable especially because the High Courts (especially those in Bombay, Madras and Calcutta) gave many powerful and important judgments on this area of the law, particularly between 1900 and perhaps the late 1960s. We began the year with a discussionof the Supreme Court’s judgment in Nagpur Golden Transport, in which the Court approved a claim for restitution for unjust enrichment without considering what, if any, the unjust factor was. The purpose of this post is to comment on another important judgment, Indian Council for Enviro-Legal Action v Union of India, in which the Court has considered certain principles of the law of unjust enrichment in some detail.

As we noted in our discussion of Nagpur Golden Transport, it is crucial to a coherent understanding of private law to distinguish a cause of action founded on consent (for example, contract) from those founded on a wrong (for example, tort) and those founded on neither. Unjust enrichment is a prominent member of the third category, although it was thought at one time that it was a form of (implied) contract. Today it is recognised across the common law world that a claim for restitution founded on unjust enrichment is founded neither on consent nor on wrongdoing (see for example Lipkin Gorman v Karpnale and Kleinwort Benson v Birmingham City Council). It is also generally recognised in English law that a claim for unjust enrichment has four elements: (a) enrichment of the defendant; (b) “at the expense” of the claimant; (c) an unjust factor and (d) defences, if any, such as change of position. The judgments of the High Courts in India, especially before the 1960s, also accept that the juridical basis of unjust enrichment is neither consent nor wrongdoing, and have considered such important issues as the ability of a claimant who confers a gratuitous benefit to bring a claim for restitution (see for example Nallaya Goundar and Damodarasamy Mudaliar). However, in recent years, the Supreme Court has held on more than one occasion that unjust enrichment is any enrichment that appears to the court to have been “unjustly” gained and has occasionally referred to it as “implied contract”, creating doubt as to the state of the law of unjust enrichment in India.

In ICELA, as the name suggest, the Court was concerned with issues of environmental law. For the purposes of our discussion, it suffices to note that the Supreme Court passed an order in 1996 giving certain directions to industries to the Government to take remedial action to clean a village badly affected by pollution caused by chemical industries. In this order, the Court found that the industries in question were liable to pay the costs, which were later quantified as Rs. 37.385 crores. This amount was not paid by the industries for more than fifteen years, and the litigation, the Court records, was kept alive by filing a number of interlocutory applications. In these circumstances, the question arose whether the Supreme Court could direct the industries to not only pay Rs. 37.385 crores, but also to pay compound interest on it for the period of non-payment (14 years). It may be that the Court could have made this order as a punitive measure, but it chose to analyse the law of unjust enrichment for an answer.

What is of more interest than the eventual conclusion of the Court that the industries were liable to pay compound interest is a number of observations that it makes on the meaning of “enrichment” and the nature of the law of unjust enrichment. It is impossible to summarise these, and the following is a selection of some of the observations of the court, with comments.

1. Unjust enrichment is the unjust receipt of any benefit (Paras 152, 153, 159)

152. “Unjust enrichment” has been defined by the court as the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience. A person is enriched if he has received a benefit, and he is unjustly enriched if retention of the benefit would be unjust.

159. A person is enriched if he has received a benefit, and he is unjustly enriched if retention of the benefit would be unjust

Comments: With respect, it is submitted that these observations require reconsideration. The observation in para 152 that unjust enrichment is the retention of a benefit that is unjust comes close to holding that this is a matter of discretion, which is far from what the law of unjust enrichment is. Perhaps the best explanation of this is Lord Goff’s oft-cited observations in Lipkin Gorman:

… it does not, in my opinion, follow that the court has carte blanche to reject the solicitors' claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle [emphasis added].

2. Unjust enrichment is (i) the receipt of a benefit that causes loss to the claimant, or (ii) the wrongful receipt of a benefit by the defendant, or (iii) the receipt of a benefit that “belongs” to the claimant (Paras 152, 154, 161)

154. Unjust enrichment occurs when the defendant wrongfully secures a benefit or passively receives a benefit which would be unconscionable to retain

Comments: It is widely accepted that a claim for restitution for unjust enrichment is not founded on wrongdoing. Indeed, that is precisely the reason the law distinguishes restitution for unjust enrichment from restitution for wrongs. The cause of action for unjust enrichment is a distinct one; and as distinct as contract or tort. Whether the claimant must prove not only that the defendant was enriched but also that he suffered loss is somewhat controversial, though the prevailing view is that he does not (see for example Sempra Metals; BP v Hunt). With respect, it is submitted therefore that the above observations require reconsideration.

3. The relationship between restitution and unjust enrichment

159. Unjust enrichment is basic to the subject of restitution, and is indeed approached as a fundamental principle thereof. They are usually linked together, and restitution is frequently based upon the theory of unjust enrichment. However, although unjust enrichment is often referred to or regarded as a ground for restitution, it is perhaps more accurate to regard it as a prerequisite, for usually there can be no restitution without unjust enrichment

161. The terms “unjust enrichment” and “restitution” are like the two shades of green—one leaning towards yellow and the other towards blue. With restitution, so long as the deprivation of the other has not been fully compensated for, injustice to that extent remains. Which label is appropriate under which circumstances would depend on the facts of the particular case before the court. The courts have wide powers to grant restitution, and more so where it relates to misuse or non-compliance with court orders.

Comments: Para 161 again appears to suggest that unjust enrichment is a matter of discretion, which it is submitted it is not. Para 159, to the extent it notes that restitution is “frequently based upon the theory of unjust enrichment”, is undoubtedly correct, but it may not be accurate to suggest that there “can be no restitution without unjust enrichment”, for the law does recognise restitution for wrongs (Attorney General v Blake). This observation also obscures the distinction between a cause of action founded on wrongdoing and a cause of action founded on unjust enrichment.

4. There is a distinction between “pre-suit” and “post-suit” unjust enrichment (Paras 162, 164)

162. We may add that restitution and unjust enrichment, along with an overlap, have to be viewed with reference to the two stages i.e. pre-suit and post-suit. In the former case, it becomes a substantive law (or common law) right that the court will consider; but in the latter case, when the parties are before the court and any act/omission, or simply passage of time, results in deprivation of one, or unjust enrichment of the other, the jurisdiction of the court to levelise and do justice is independent and must be readily wielded, otherwise it will be allowing the court’s own process, along with time delay, to do injustice.

164. This view of law as propounded by author Graham Virgo in his celebrated book The Principles of the Law of Restitution has been accepted by a later decision of the House of Lords (now the UK Supreme Court) in Sempra Metals Ltd. v. IRC

Comment: It is submitted, with respect, that there is no distinction between “pre-suit” and “post-suit” enrichment claims. In Sempra Metals, the House of Lords was in fact concerned with whether a claimant who mistakenly pays taxes can recover compound interest on it. Four of the five Law Lords held that he can, but on different grounds. Lords Nicholls and Hope accepted a claim in unjust enrichment, of which the best explanation is that the Government was enriched by the “inevitable expense” of borrowing the funds it unlawfully collected as taxes, and that enrichment was measured by the compound interest the Government would have to pay in the market (which is lower than what a commercial party pays). It is submitted, with respect, that the Court’s reliance on Sempra is misplaced, because there was an unjust factor in that case (mistake), but apparently none in this case. The basis of the Court’s order – that a party “saves” the interest it would have paid a nationalised bank to borrow the money it did not pay – is correct only if it is first shown that it was inevitable that the party would have borrowed money (see Lord Nicholls’ example at paras 118 and 119). The Court does not make this finding. Nor does it find that there is an unjust factor, which there was in Sempra.

Unfortunately, these developments mean that the law of unjust enrichment in India is close to being reduced to one sentence: the receipt of enrichment that the court finds is unjust in the circumstances of the case. It is hoped that the Supreme Court will revisit these issues.

Hat-tip: Aditya Swarup

Illegitimate pressure in economic duress

Traditionally, duress rendered a contract voidable only if it was physical duress (which involved a threat to the person or belongings of an individual), but following the decision of the Privy Council in Pao On v Lau Yiu Long, the concept of economic duress was also recognised. It is now fairly settled law that there are two essential ingredients for voiding a contract on grounds of economic duress: (a) there should be illegitimate pressure, and (b) the pressure should be a significant cause for the claimant entering into the contract (Per Mance J, Huyton v Cremer). However, each of these requirements gives rise to a controversial issue:
First, can a legal act by defendant ever amount to illegitimate pressure, and if so, in what circumstances?
Secondly, does the claimant also need to establish that the illegitimate pressure left him with 'no reasonable alternative' other than to enter into the contract? Or is this merely another way of satisfying the causation requirement?
The second of these issues has been the subject of much debate, with some High Court decisions (for instance, Adam Opel v Mitras Automotive) holding 'no reasonable alternative' to be a third requirement, and several academics dismissing it as an unnecessary third wheel. However, it was with the first of the issues that the High Court in Progress Bulk Carriers Limited v Tube City IMS LLC [2012] EWHC 273 (Comm) grappled, making some interesting observations.
The facts of the case involved the proposed charter of a vessel to carry goods from the Mississipi River to China. The identity of the vessel (the "Cenk K") and the time of delivery, were significant elements of the contract between the charterer (the Claimant) and the recipient of the goods in China (the Recipient). This fact was communicated by the Claimant to the owner of the vessel proposed to be chartered (the Respondent). A week before Cenk K was to be provided, the Respondent chartered it to another charterer, without the Claimant's approval. Instead, on the date of delivery to the Claimant, the Respondent offered a substitute vessel. The Claimant objected, and stated that any substitution would be subject to approval by the Recipient. Although the act of chartering Cenk K to another party without the Claimant's consent was a repudiatory breach of the charter party, the Claimant did not terminate the charter party. Two days later, the Respondent admitted it had made a mistake, and that it would compensate the Claimant for any losses suffered due to the substitution. Based on this assurance, the Claimant did not look for other alternatives. The Claimants then communicated the revised timetable and the new vessel to the Recipient, which accepted the changes subject to a reduction in the purchase price of $6 per metric ton. This was above the market price of the commodities at that time, and hence was accepted by the charterer as a reasonable discount. However, when this was communicated to the Respondent, it refused to grant the charterer a discount of more than a $2 per metric ton. Given the lack of alternatives, the Claimant informed the Respondent that it would accept the discount, but would reserve its rights in respect of claims for damages arising out of the owner's breach of the charter party. In response, the Respondent made the Claimant a 'take it or leave it' offer, where the Claimant had the option between (a) not having any discount from the Respondent, or (b) having a $2 per metric ton discount, contingent on the waiver of all claims for loss or damages arising out of the substitution of the vessel. Given the situation, the Claimant accepted option (b) under protest.
Against this backdrop, the issue before the Court was whether this waiver could be challenged on the ground of economic duress. There were no issues of causation, and the arbitral tribunal below had found that the Claimant had no reasonable alternative to granting the waiver. Hence, the only question was whether the 'take it or leave it' offer amounted to illegitimate pressure.
For these purposes, the Court relied on the Court of Appeal's decision in CTN, Cash and Carry v Gallaher. In this case, a threat to refuse to enter into future contracts was held to be legitimate because (i) the defendant was not obliged to enter into any future contracts, (ii) the defendant bona fide believed that it was entitled to the amount it was claiming and (iii) the parties were in a purely commercial relationship. Against this backdrop, Steyn LJ in CTN had held there that the key question is not whether the conduct was 'lawful', but whether it was 'morally or socially acceptable'. He went on to observe that it would only be in rare cases that the Court would conclude that in a commercial relationship, a lawful act would amount to economic duress.
On the facts here, the Court concluded that the breach of the charter party by the owner, combined with the subsequent failure to live up to the assurance given to the charterer was sufficient to make the pressure illegitimate. Thus, although the 'take it or leave it' offer was legal, and although the parties were in a purely commercial relationship, the defendant had acted in bad faith. Reliance was placed on the Privy Council's decision in Borrelli v Ting for the proposition that an illegality in the past, which coloured the subsequent pressure, could render the pressure illegitimate. Hence, since the waiver of claims under the charter party was procured by the application of illegitimate pressure, the waiver was held to be voidable.
Although the result appears to be right, it is important to identify the real basis of the decision. The reliance on Borrelli, though persuasive, is made suspect by the fact that the impugned settlement agreement in that case required the defendant to do that which he was anyway statutorily obliged to do. On the other hand, on the facts here, the waiver merely imposed a new contractual obligation on the Respondent, to replace an earlier contractual obligation it had breached. Hence, although the similarities with Borrelli should not be understated, it is important to note that the existence of a purely commercial relationship, and the absence of a legal obligation to fulfil the assurance made following the breach, amounts to an extension of Borrelli.
The decision reiterates the highly fact-specific nature of any economic duress claim, with findings that the Respondent had 'lulled the charterer into a false sense of security' and 'driven the charterer into a corner from which it could not escape' playing an important role. However, in terms of legal principle, the notable addition is that when there is an unjustified past illegality/breach of contract which colours or leads to subsequent pressure, any subsequent unconscionable conduct by the defendant aggravating that pressure (although not amounting to the breach of a legal obligation), can be sufficient to render the pressure illegitimate.

An Unfortunate Judgment: India and the Law of Restitution for Unjust Enrichment

The law of restitution for unjust enrichment* is so well developed in the common law world today that it is impossible to conceive of a coherent system of private law without it. In India, a part of this area is codified in sections 68-72 of the Contract Act, 1872, and  some outstanding judgments of the High Courts, particularly before and around the 1950s (see for example Damodara Mudaliar v Secretary of State for India, Nallaya Goundar v Ramaswami Goundar and Maniagaran v Maniagaran), contain valuable accounts of how, if at all, the common law principles have been modified by the Indian legislature. It is therefore especially unfortunate that this branch of the law has subsequently not developed in India as one might have expected; and the recent judgment of the Supreme Court in Nagpur Golden Transport v Nath Traders, with respect, may not be fully correct insofar as these issues are concerned.

Perhaps the best exposition of the law of unjust enrichment is to be found in the work of the legendary Professor Peter Birks, and an interested reader may also find it helpful to refer to the comprehensive textbooks in the field (such as Burrows and Virgo). Two features sharply distinguish a claim in unjust enrichment from a claim in contract or tort – one, that it is founded neither on consent nor on wrongdoing, and secondly, that it is concerned not with compensating the loss the claimant has suffered (unlike compensation for breach of contract or damages for a tort), but with “disgorging” the gain the defendant has made “at the claimant’s expense”. It is, therefore, as Professor Birks puts it in his famous “map” of private law, an “independent causative event” that consists of four elements: (i) enrichment of the defendant; (ii) at the expense of a claimant; (iii) an unjust factor and (iv) defences, such as change of position. While the scope and correct interpretation of all of these elements are a source of considerable controversy, it is safe to say that the traditional insistence of the English and other common law courts on an “unjust factor” is what separates the common law’s approach from the civilian approach. In the common law, an “unjust factor” is a recognised reason for or basis of granting restitution to the claimant – the English courts have repeatedly emphasised that “unjust enrichment” is not just any enrichment that appears to be “unjust” or “unfair”, but enrichment that is founded on a judicially recognised unjust factor. These unjust factors are, without attempting to be exhaustive: (i) mistake (this is the archetypal unjust factor); (ii) undue influence and duress and (iii) failure of consideration. There are other unjust factors, such as ignorance/powerlessness, free acceptance, Woolwich claims, contribution/reimbursement etc., whose existence or characterisation is contested by some. It is axiomatic, therefore, that a claimant cannot obtain restitution for unjust enrichment simply by demonstrating that the defendant has been enriched and that this is “unfair” or “unjust” on the facts of the case or by “balancing the equities”. The unjust factor is as distinctly a question of law as is establishing in a negligence claim that there was a duty of care, or in a breach of contract claim that there was a valid contract. The word “unjust” should not be taken to suggest otherwise.

In Nagpur Golden Transport, the facts were that a consignor entered into a contract with a carrier (Nagpur Golden Transport, NGT) to transport and deliver monoblock pumps to the consignee. The consignee had paid the consignor the price of these pumps, Rs. 3,61,000. As a result of an accident involving the vehicle in which NGT carried these goods, the pumps were damaged and the consignees refused to take delivery. NGT accordingly returned the 198 damaged pumps to the consignor. The consignee then brought a claim, not against the consignor, but against NGT, in the Consumer Forum, Gwalior, alleging negligence. This claim succeeded and NGT was directed to pay a sum of Rs. 3,61,000 (representing the payment made by the consignee), plus damages and interest. In its appeal to the Supreme Court, the question was whether, in view of its payment of this sum to the consignees, it was entitled to demand that the consignor return the 198 pumps which NGT had delivered to it on the consignee’s rejection of the goods.

At first sight, the “justice” of NGT’s case is powerful: after all, it does not seem right that the consignor retains the 198 pumps (the goods sold) as well as the Rs. 3,61,000 (the sale proceeds) or that in effect NGT had paid the consignee what in truth was the liability of the consignor (assuming that the consignee was entitled to reject the goods as defective). Yet, on closer analysis, there are considerable difficulties: for one, even assuming that the first and second elements of a claim in unjust enrichment are satisfied (enrichment and “at the expense of”), there is no obvious unjust factor that is attracted – NGT did not return the 198 pumps to the consignor under a “mistake”; nor was there a “failure of consideration” unless it is said that the “basis” of the return of goods was that the NGT would not be liable to the consignee. It may also be that NGT had “discharged” a “debt” owed by the consignor to the consignee in respect of the defective goods and that this was sufficient for it to claim in restitution from the consignor. In both of these cases, however, the Court would have had to consider difficult questions of law; in the first case the true scope of the unjust factor of failure of consideration and in the second whether it is at all possible for X to discharge A’s debt to B without A’s consent, and even if it is, whether “free acceptance” is a recognised unjust factor. If the Court had answered either question against the claimant, it would have had to reject the claim, no matter how “unfair” or “unjust” it appears to allow NGT what appears to be a windfall.

The Supreme Court decided that the consignor was liable to either return the 198 pumps to NGT or pay its realisable value. It gave the following reasons:

If the damaged monoblock pumps are not returned by respondent No.3 to the appellant or if the value of the damaged monoblock pumps realized by respondent No.3 are not paid to the appellant, respondent No.3 would stand unjustly enriched. To quote Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [(1942) 2 ALL ER 122 (HL)]:"......Any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution.”   

It is submitted, with great respect, that this analysis is not persuasive. For one, the Supreme Court did not consider what the unjust factor (if any) might be; nor did it, with respect, apply Lord Wright’s observations accurately. Far from holding that any enrichment that appears to be unjust on the facts of the case attracts the principle of unjust enrichment, Lord Wright’s observations in Fibrosa v Fairbairn actually represent a landmark in the English law of unjust enrichment, for it was this case that discarded what has subsequently been called the “heresy” of Chandler v Webster [1904] 1 KB 493, in which Collins MR had held that “consideration” for the purposes of failure of consideration is to be understood as “consideration” in a contractual sense, with the result that there is no failure of consideration even when a contract is frustrated (because the “promise” to perform has not failed; only the performance of the promise has). In Fibrosa, Lord Wright recognised that “consideration” for the purposes of the law of unjust enrichment normally refers to failure of the performance of the promise (as opposed to the promise itself), and it is a passage from this speech that the Supreme Court has quoted above. However, in Fibrosa, there clearly was a failure of consideration since a contract had been frustrated, whereas in Nagpur Golden Transport, failure of consideration could not have been invoked unless it was shown that the “basis” or “purpose” (construed objectively) of the delivery of goods by NGT to the consignor was that the consignor would return those goods in the event NGT found itself liable to pay damages to the consignee. Since the matter has now been remanded to the Consumer Forum on a question of fact, it appears that the Supreme Court has approved a claim in unjust enrichment without finding that there is an unjust factor, which, with respect, is not correct.

We wish our readers a happy new year.

* It is necessary to use the expression “restitution for unjust enrichment” to distinguish it from “restitution for wrongs” ie cases in which the remedy is still gain-based, but founded on a wrong as opposed to unjust enrichment.

Rescission and Repudiatory Breach

When C and R enter into a contract which is breached by R, C can either claim specific performance of the contract, or elect for the breach to have discharged the contract and claim damages. However, in cases where the latter option is chosen, it has been recognized since Johnson v Agnew that the contract continues to remain valid until the date of the repudiatory breach and is discharged only prospectively. It in only when C seeks to set aside the contract on grounds of fraud or misrepresentation that the contract is rescinded ab initio, and is deemed never to have been in existence. However, one issue that has continued to cause some confusion, partly due to the influence of civilian authority (in particular, the concept of fundamental breach), and partly because of some controversial decisions, is whether the magnitude of the breach influenced the contractual remedy. In other words, if the breach was of a term which formed an important part of the contract, could that be taken as a ground to rescind it ab initio? In Howard-Jones v Tate, the UK Court of Appeal has vehemently answered this question in the negative, reasserting the distinction between rescission and repudiatory breach forcefully laid down by Lord Wilberforce in Johnson v Agnew.

The dispute involved the purchase of a warehouse and some buildings from the respondent by the claimant, and a condition of the contractual agreement was-

"The seller [Mr Tate] shall at his own expense and no later than six months from the Completion Date:

(a) provide a new directly metered single phase electricity supply to the building [the warehouse] forming part of the Property;

(b) provide a separately metered water supply (mains) to the building forming part of the Property." [emphasis supplied]

On the alleged non-performance of this condition, the claimant sought to rescind the contract, the respondent arguing that damages were an adequate remedy for the non-performance, if any, and that rescission ab initio was inappropriate. It was against this backdrop that the Court of Appeal was called on to consider the very interesting conflict between Johnson v Agnew and Gunatunga v DeAlwis, a decision of the Court of Appeal never cited by subsequent case-law.

In Agnew, Lord Wilberforce, in his archetypal style, had provided a clear summary of the law on rescission and repudiatory breach. After making some uncontroversial statements on the consequences of breach by the purchaser in a contract for sale, he observed:

At this point it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as "rescinding" the contract, this so-called "rescission" is quite different from rescission ab initio, such as may arise for example in cases of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence. (Cases of a contractual right to rescind may fall under this principle but are not relevant to the present discussion.) In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about "rescission ab initio".

That same year, Lord Diplock in Photo Productions v Securiror also approved the position laid down by Lord Wilberforce in Agnew, and observed that the effect of an election by the innocent party to accept the repudiatory breach and make a claim for damages was that “(a) there is substituted by implication of law for the primary obligations of the party in default which remain unperformed a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of their non-performance in the future and (b) the unperformed primary obligations of that other party are discharged.” There was no right to treat the contract as never having existed.

On this understanding of the law, the decision in Howard-Jones should have been fairly straightforward. Matters were complicated however, by the decision in Gunatunga. In that case, a contract for sale of property required that vacant possession be provided to the purchaser. The purchaser, aware that the property was not vacant, proceeded to completion of the contract. However, when the property was still not vacant on the designated completion date, rescission and consequential repayment of the purchase price was sought. The claimant’s counsel made two arguments- that there had been misrepresentation, and that a fundamental condition of the contract had not been fulfilled. The Court rejected the first, but accepted the second and allowed rescission. Sir Christopher Slade held that:

The question whether the refusal or failure to perform part of the contract amounts to a repudiation of the whole depends on the construction of the contract and all the circumstances of the case. As Mr Buckhaven [counsel for the defendants] submitted, there must be a refusal or failure to perform something which goes to the root of the contract, before the innocent party can regard himself as discharged from further performance of the contract and entitled to rescind … In my judgment, Mr Buckhaven's well-sustained submissions were unable to circumvent a fatal weakness in the defendants' case, which was not canvassed before the learned judge, namely that the defendants' failure to give vacant possession on August 30, 1991 gave rise to a new and separate right to rescind the contract which was in due course duly exercised by the plaintiff. [emphasis supplied]

Faced with this conflict between Agnew and Gunatunga, the Court in Howard-Jones had one of three options- (i) to hold that Gunatunga was incorrectly decided; (ii) to hold that Gunatunga dealt with an issue different from that in Agnew; and (iii) to distinguish Gunatunga on facts. While Kitchin and Lloyd LJJ (Ward LJ concurring) come very close to adopting the first of these approaches, they ultimately choose to distinguish Gunatunga on facts. Kitchin LJ (¶ 28) suggests that the decision could be per incuriam, while Lloyd LJ (¶39) suggests that it is inconsistent with Agnew. However, both of them conclude that this question does not need to be decided because, unlike in Gunatunga, the condition which was breached here was not a condition to be satisfied on completion, but a condition which was to be fulfilled six months later. Hence, they hold that the breach of such a subsequent condition cannot lead to rescission ab initio. With respect, this distinction seems slightly unsatisfactory. The fact that the condition was one which related to performance which was to occur subsequent to completion, cannot by itself deny rescission. If, following Gunatunga, the condition was such that its breach entitled the claimant to set aside the contract ab initio, the fact that it was breach after the completion and not at the time of completion should not be material. Thus, while the Court is clear is reaffirming Agnew, the reconciliation of Gunatunga is not satisfactory.

However, this is not to say that Gunatunga is necessarily per incuriam. The language adopted by Sir Slade in that case, is more one of failure of consideration, entitling the claimant to restitution. What he seems to say is that the claimant in Gunatunga did not get what he bargained for, entitling him to the repayment of the amount he had paid to the respondent as a restitutionary remedy. One basis on which Gunatunga can be reconciled is by saying that while the facts in Gunatunga entitled the claimant to restitution, the facts in Howard-Jones did not (because the claimant got substantially what he bargained for). The role of rescission in the law of restitution is the subject of much academic debate, with lack of clarity over whether rescission is a restitutionary remedy or is a condition precedent to awarding restitution when there is a contractual relationship between the parties. In other words, what is still not entirely clear is whether the right to rescind a contract is something is granted by the law of restitution, or is something which emanates from the law of contract, and on being exercised, entitles the claimant to restitution. Gunatunga can be understood as a decision which supports the former view, while a strict reading of Agnew could suggest the latter (though not necessarily so).

Admittedly, Kitchin LJ does seem to touch on the restitutionary explanation of Gunatunga, in ¶28 (“Nor is there any suggestion (in Gunatunga) that the plaintiff elected, as an alternative to claiming damages, to sue for recovery of the money paid on the basis that the consideration for the payment had wholly failed”) and ¶30 (“Upon completion, Mr Howard-Jones became the owner of precisely what he had bargained for”). However, one would have hoped for some more discussion of this fascinating issue. No doubt, a conclusive understanding of the place of rescission in the law of restitution was beyond the boundaries of what the Court was called on to decide. However, some clarity on the relationship (if any) between the factual distinction relied on by the Court, and the concept of failure of consideration, would have been welcome.

In sum, Howard-Jones v Tate is very useful for clarifying the distinction between rescission and repudiatory breach, and reaffirming the irrelevance of the magnitude of the breach. However, the controversy over rescission and the law of restitution remains to be resolved another day.

The Court of Appeal on the 'Entire Contract Doctrine'

In any synallagmatic arrangement (such as a contract), it is often necessary to determine at what stage one party is entitled to call on the other to perform. Consider two common cases: (i) A enters into a contract with B which he breaches, B wishes to treat this as a repudiatory breach and avoid the contract; and (ii) A makes an advance payment to B under a contract, which is subsequently discharged for breach (whether by A or B), and A wishes to bring an action to recover the advance, rather than claim damages (if B is in breach). Although the first case belongs to the law of contract and the second to the law of unjust enrichment, the key to the solution in both appears to be a close analysis of what the parties agreed. In case (i), it was traditionally thought (and is still true) that the question is whether A’s breach was of a condition or a warranty. However, as Diplock LJ explains in his classic judgment in Hongkong Fir Shipping v Kawasaki Kisen, this tendency to focus on the classification of the term of the contract at times obscured the importance the law attaches to the impact of the event of breach, and the fact that the question is essentially whether the event of breach has deprived one party of what it was intended by them he should have as consideration for performing his obligations under the contract. In case (ii), A can bring an action in unjust enrichment to recover the advance if he can demonstrate that there was a “failure of consideration”. There is a failure of consideration if B has not “rendered” to A what the advance was paid for (see Lord Goff’s speech in Stocznia Gdanska v Latvian). For instance, suppose A paid Rs. 50,000 for a 20 day luxury cruise which is interrupted after 17 days, he cannot recover the entire sum because the “basis” of the payment was the provision of those luxury services on a continuing basis (see Baltic Shipping v Dillon).* On the other hand, suppose he paid Rs. 50,000 for a Chennai-Singapore-Sydney air ticket, he can recover the entire sum if the plane is unable to continue beyond Singapore, because the “basis” of the payment was that he would be transported from Chennai to Sydney. A more intuitive example is this: a cobbler cannot retain 50 % of the price by providing one shoe. These are examples where the agreement of the parties is that entire performance (or performance of every single obligation) is a “condition precedent” for payment or counter performance – this is sometimes known as the “entire contract” doctrine. As these examples demonstrate, the entire contract doctrine – again just a way of understanding the intention of the parties – is important not only to the law of contract, but for issues of unjust enrichment, limitation etc.

The recent decision of the Court of Appeal in Smales v Lea is a good illustration of why entire contract matters in the law of limitation. The claimant was an independent surveyor who in 1996 entered into a contract with a Mr Batram for valuing damage caused to Mr Batram’s property and making on his behalf a claim with his insurance company. Mr Smales accordingly undertook and completed the valuation work by 1998. Under the contract, Mr Smales was required to negotiate his fees with the insurance company, for the policy would cover the cost of repair as well as his fees in preparing the report. In 2001, he submitted his bill of £12,583 to the insurance company’s loss adjusters, Ellis and Buckle [“E and B”]. E and B refused to pay this bill partly because they considered it was too high but principally on the ground that Mr Smales was required to submit his claim to Mr Batram in the first instance, who would be indemnified by the insurance company. However, Mr Smales was unable to trace Mr Batram, who had moved elsewhere without leaving a forwarding address. Mr Smales also suffered from poor health and was unable to pursue the matter until 2006, when he submitted a bill of about £16,000 to Mr Batram’s executors. After further correspondence, the executors refused to pay this bill on the ground that it had been wrongly computed and was consequently too high.

Mr Smales issued a claim form in 2008 and the preliminary question was whether this claim was barred by limitation. Under section 5 of the Limitation Act, “an action founded on a simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.” Counsel for the claimant relied on the entire contract doctrine to avoid this result, suggesting that Mr Smales’ right to be paid did not arise until he negotiated a fee with E and B, even though all the work he was to do under the contract had been completed.

The Court of Appeal, it is submitted correctly, rejected this contention. It began by observing that there is a presumption in English law that a contract for services is not an entire contract. The presumption does no more than reflect the business common sense that parties to a service contract would not normally intend that the service provider is entitled to be paid nothing even though he has performed a substantial part of the contract. This principle is well established in English law, and the Court of Appeal referred to the following observations of Lord Denning MR in Hoenig v Isaacs, one of the leading cases on the subject:

…the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition.

There was no reason to think that this was not true of Mr Smales’ contract with Mr Batram. As Jackson LJ rightly pointed out in his judgment, the argument could be tested by asking what the position would have been if Mr Smales had submitted a bill to the executors in 2001, before he had negotiated with the insurance company. While the executors could no doubt have raised a dispute over the computation of the sum due, they could not have said that Mr Smales did not have a right to be paid.

* Readers may wonder whether in this example he can recover a proportion of the advance. The answer is unclear because of the traditional insistence in English law that failure of consideration must be “total”, although there are signs (disputed by some) in recent years that this requirement is honoured more in its breach than in its observance (see for example the Privy Council in Goss v Chilcott, the Court of Appeal in Rover v Cannon [1989] 1 WLR 912 and the High Court in Giedo van der Garde v Force India Formula One Team).