Re-examining Contract and Unjust Enrichment

RE-EXAMINING CONTRACT AND UNJUST ENRICHMENT

Re-examining Contract and Unjust Enrichment Anglo-Canadian Perspectives

EDITED BY PAULA GILIKER

LEIDEN / BOSTON 2007

This book is printed on acid-free paper. A Cataloging-in-Publication record for this book is available from the Library of Congress.

ISBN 978-90-04-15563-3 Copyright 2007 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishing, IDC Publishers, Martinus Nijhoff Publishers and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the Publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. PRINTED IN THE NETHERLANDS

Contents Foreword .................................................................................................. viii Préface ...................................................................................................... ix List of Contributors .................................................................................. xi Table of Cases .......................................................................................... xiii Table of Legislative Instruments ............................................................. xxvii Chapter 1 Diverging or Converging – The Ongoing Relationship of the Common Laws of England and Canada .................................................................. Paula Giliker

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Part 1: The Boundaries of Contract and Unjust Enrichment Chapter 2 The Relation Between Contract and Unjust Enrichment ......................... Stephen Waddams Chapter 3 Unjust Factors, Juristic Reasons and Contracts in Anglo-Canadian Law ............................................................................... Mitchell McInnes Chapter 4 Mistake in Contract Law and in Unjust Enrichment ............................... Kate Bracegirdle Chapter 5 No Longer taken to be Cognisant of the Law? Mistake of Law in Contract and Restitution in Canada and England .................................... Catharine MacMillan Chapter 6 The Fiduciary Concept, Contract Law, and Unjust Enrichment: A Functional Comparison ........................................................................ Leonard I. Rotman

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Chapter 7 Drafting an Irish Frustrated Contracts Act: Lessons from British Columbia ...................................................................................... Cliona Kelly Chapter 8 Once More unto the Breach: Remedies for the Non-Payment of Insurance Claims after Blake ................................................................... James Davey Chapter 9 Choice of Law for Void Contracts and their Restitutionary Aftermath: The Putative Governing Law of the Contract .......................................... Adeline Chong

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Part 2: Clarifying the Law of Unjust Enrichment Chapter 10 Implied Contract and the Taxonomy of Unjust Enrichment .................... Duncan Sheehan Chapter 11 Contract, Unjust Enrichment and Restitution: The Signicance of Classication ............................................................................................ Peter Jaffey

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Part 3: Clarifying the Law of Contract Chapter 12 The Purpose of the Doctrine of Presumed Undue Inuence .................... Jesse Elvin Chapter 13 Awarding Damages for Distress and Loss of Reputation in England and Canada ............................................................................................... Jill Poole

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Part 4: Contract and Unjust Enrichment – Reconciling Different Jurisdictional Approaches Chapter 14 Specic Performance in the Common and Civil Law: Some Lessons for Harmonisation ............................................................ Lucinda Miller

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Contents Chapter 15 ‘Compensation’ and ‘Indemnity’ under the Agency Regulations: How the Common Law System Copes with the Invasion of Civilian Concepts ..................................................................................... Robert Bradgate and Séverine Saintier Index ........................................................................................................

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Foreword The Canadian High Commission in London has had a fruitful relationship with the Legal Studies Group of the British Association for Canadian Studies for a number of years. It gives me great satisfaction that we have been able to play a small role in the development of their publications by offering a venue for the annual conferences on which they are based. I am pleased to have had the opportunity to open the 2006 conference which led to this book on Contract law and the law of Unjust Enrichment. The comparative nature of this volume demonstrates the continuing importance of the UK-Canada relationship and it highlights the value of scholarly exchange on contemporary legal problems which transcend national boundaries. The essays within discuss the nature of Unjust Enrichment, the current and potential problems arising in Contract law, and the interplay between Contract and Unjust Enrichment under both English and Canadian law. This material is specialised, controversial and relevant. Congratulations to the Legal Studies Group for another ne volume of comparative legal work, and especially to Dr. Paula Giliker of Bristol University, whose editorial skills no doubt helped to coax it into print in no time at all. Guy Saint-Jacques Deputy High Commissioner Canadian High Commission, London

Préface Le Haut-commissariat du Canada à Londres entretient depuis un certain nombre d’années une relation fructueuse avec le Groupe d’études légales de l’Association britannique d’études canadiennes. Je tire une grande satisfaction du fait que nous avons été en mesure de jouer un petit rôle dans l’essor de leurs publications en accueillant leurs conférences annuelles qui en sont la base. Je suis heureux d’avoir eu l’occasion d’ouvrir la conférence de 2006 qui a abouti à ce livre sur le Droit des contrats et la Loi sur l’Enrichissement sans cause. La nature comparative de ce volume démontre l’importance continue de la relation entre le R.-U. et le Canada et souligne la valeur des échanges universitaires sur les problèmes contemporains de droit qui transcendent les frontières nationales. Dans cet ouvrage, les essais traitent de la nature de l’Enrichissement sans cause, des problèmes actuels et potentiels qui émergent du Droit des contrats et de l’interaction entre le Contrat et l’Enrichissement sans cause, selon le droit anglais et le droit canadien. Cet ouvrage est spécialisé, sujet à controverse et pertinent. Félicitations au Groupe d’études de droit pour un autre excellent volume de travaux sur le droit comparé, et en particulier à Dr. Paula Giliker de l’Université de Bristol, dont les talents rédactionnels ont, sans nul doute, contribué à ce qu’il soit imprimé promptement. Guy Saint-Jacques Haut-commissaire adjoint Haut-commissariat du Canada, Londres

List of Contributors Kate Bracegirdle is a Lecturer at the University of Shefeld. Robert Bradgate is Professor of Commercial Law at the University of Shefeld. Adeline Chong is Lecturer in Law at the University of Nottingham. James Davey is Lecturer in Law at Cardiff University. Jesse Elvin is Lecturer in Law at City University. Paula Giliker is Reader in Comparative Law at the University of Bristol. Peter Jaffey is Professor of Law at Brunel University. Cliona Kelly is a doctoral student at University College Dublin and IRCHSS Government of Ireland Scholar. Catharine MacMillan is Senior Lecturer in Law at Queen Mary, University of London. Mitchell McInnes is Professor of Law at the University of Alberta. Lucinda Miller is Lecturer in Laws at University College, London. Jill Poole is Professor of Commercial Law at Aston Business School, Aston University. Leonard I. Rotman is Professor of Law at the University of Windsor. Séverine Saintier is Lecturer in Law at the University of Shefeld. Duncan Sheehan is Senior Lecturer in Law at the University of East Anglia. Stephen Waddams Goodman/Schipper Professor of Law at the University of Toronto.

Table of Cases Addis v. Gramophone Co. Ltd. [1909] AC 488 Albeko Schuhmaschinen AG v. Kamborian Shoe Machine Co. (1961) 111 LJ 519 Alicia Hosiery v. Brown Shipley & Co. [1970] 1 QB 195 Allcard v. Skinner (1887) LR 36 Ch. D 145 (CA) Allcard v. Walker [1896] 2 Ch. 369 Appleby v. Myers (1867) LR 2 CP 651 Arab Bank Ltd. v. Barclays Bank [1953] 2 QB 527 (CA) Associated Japanese Bank (International) Ltd. v. Crédit du Nord SA [1989] 1 WLR 255 Attorney General v. Blake [2001] 1 AC 268 (HL) Axa General Ins. Ltd. v. Gottlieb [2005] EWCA Civ 112, [2005] Lloyd’s Rep IR 369 (CA) Bank of Baroda v. Vysya Bank Ltd. [1994] 2 Lloyd’s Rep 87 Bank of Credit and Commerce International SA v. Aboody [1990] 1 QB 923 Bank of Credit and Commerce International SA (In Liquidation) v. Ali (No. 3) [2002] EWCA Civ 82, [2002] 3 All ER 750 Banque Financière de la Cité SA v. Parc (Battersea) Ltd. [1999] 1 AC 221, [1998] 2 WLR 475 (HL) Banque Financière de la Cité SA v. Westgate Insurance Co. Ltd. [1990] 1 QB 665 (CA) Barclays Bank plc v. O’Brien [1994] 1 AC 180 (HL) Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] QB 677 Barclays Mercantile Business Finance Ltd. v. Sibec Developments Ltd. [1992] 1 WLR 1253 Barrett McKenzie & Co. Ltd. v. Escada (UK) Ltd. [2001] ECC 50, [2001] Eu LR 567 Baylis v. Bishop of London [1913] 1 Ch. 127 (CA) Bell v. Lever Bros. [1932] AC 161 Bigg v. Howard Son & Gooch [1990] 1 EGLR 173 Bilbie v. Lumley (1802) 2 East 469, 102 ER 448 Birse Construction Ltd. v. Eastern Telegraph Co. Ltd. [2004] EWHC 2512 (TCC), [2004] 47 EG 164 (CS) Blakeley v. Muller & Co. (1903) 88 LT 90, [1903] 2 KB 760 Boardman v. Phipps [1967] 2 AC 46 Boissevain v. Weil [1949] 1 KB 482 (CA)

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Bonython v. Commonwealth of Australia [1951] AC 201 (PC) Borders (UK) Ltd. v. Commissioner of Police of the Metropolis [2005] EWCA Civ 197, (2005) 149 SJLB 301, Times, April 15, 2005 BP Exploration Co. (Libya) Ltd. v. Hunt (No. 2) [1981] 1 WLR 232 (CA); [1979] 1 WLR 783 (QBD) Brennan v. Bolt Burdon [2004] EWCA Civ 1017, [2005] QB 303 (CA) Brewer Street Investments Ltd. v. Barclays Woollen Co. Ltd. [1954] 1 QB 428 Brisbane v. Dacres (1813) 5 Taunt 143, 128 ER 641 Brown & Davis Ltd. v. Galbraith [1972] 1 WLR 997 (QB) Browning v. Morris (1778) 2 Cowp 791, 98 ER 1364 Burrow v. Scammell (1881–82) LR 19 Ch. D 175 Burton v. Pinkerton (1866–67) LR 2 Ex 340 Callaghan and Another v. Dominion Insurance Co. Ltd. and Others [1997] 2 Lloyd’s Rep 541 (QBD) Cargill International SA v. Bangladesh Sugar & Food Industries Corp. [1996] 4 All ER 563 Caxton Publishing Co. Ltd. v. Sutherland Publishing Co. Ltd. (No. 1) [1939] AC 178 Chandler v. Webster [1904] 1 KB 493 (CA) Chandris v. Argo Insurance Co. Ltd. [1963] 2 Lloyd’s Rep 65 (QBD) Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd. [1981] Ch. 105 Chater v. Mortgage Agency Services Number Two Ltd. [2003] EWCA Civ 490, [2003] HLR 61, [2004] 1 P & CR 4 (CA) CIBC Mortgages plc v. Pitt [1994] 1 AC 200 (HL) Clarion Ltd. v. National Provident Institution [2000] 1 WLR 1888, [2000] 2 All ER 265 Compania Naviera Micro SA v. Shipley International Inc. (The Parouth) [1982] 2 Lloyd’s Rep 351 Co-operative Insurance Society Ltd. v. Argyll Stores (Holdings) Ltd. [1998] AC 1 Cooper v. Phibbs (1867) LR 2 HL 149 Craven Ellis v. Canons Ltd. [1936] 2 KB 403 Cressman v. Coys of Kensington (Sales) Ltd. [2004] EWCA Civ 47, [2004] 1 WLR 2775 Cross v. David Martin & Mortimer (A Firm) [1989] 10 EG 110, [1989] 1 EGLR 154 Cundy v. Lindsay (1877–78) LR 3 App Cas 459 Cutter v. Powell (1795) 6 TR 320, 101 ER 573 (QB) Denitely Maybe (Touring) Ltd. v. Marek Lieberberg Konzertagentur GmbH [2001] 1 WLR 1745 Deutsche Morgan Grenfell Group Plc v. Inland Revenue Commissioners [2006]

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UKHL 49, [2006] 3 WLR 781 (HL); [2005] EWCA Civ 78, [2006] Ch. 243 (CA) Dies v. British & International Mining and Finance Co. [1939] 1 KB 724 Dimskal Shipping Co. SA v. International Transport Workers’ Federation (The Evia Luck) [1992] 2 AC 152 Donoghue v. Stevenson [1932] AC 562 (HL) Duffen v. Frabo SpA [2000] Eu LR 167, [2000] 1 Lloyd’s Rep 180 (CC (Central London)) Eastwood v. Magnox Electric plc [2004] UKHL 35, [2005] 1 AC 503 Egon Oldendorff v. Libera Corporation (No. 1) [1995] 2 Lloyd’s Rep 64 (QBD Comm Crt) England v. Guardian Insurance Ltd. [2000] Lloyd’s Rep IR 404, [1999] 2 All ER (Comm) 481 English v. Dedham Vale Properties [1978] 1 All ER 382 (Ch.) Esso Petroleum Co. Ltd. v. Niad Ltd. Unreported, 22 November 2001 (Ch. D) Evialis SA v SIAT [2003] EWHC 863 (Comm), [2003] 2 Lloyd’s Rep 377 Experience Hendrix LLC v. PPX Enterprises Inc. [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830, [2003] EMLR 25 Falcke v. Scottish Imperial Insurance Co. (1887) LR 34 Ch. D 234 Farley v. Skinner (No. 2) [2001] UKHL 49, [2002] 2 AC 732 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32, [1942] 2 All ER 122 (HL) Friends Provident Life & Pensions Ltd. v. Sirius International Insurance Corp. [2005] EWCA Civ 601, [2005] 2 Lloyd’s Rep 517 Furness Withy (Australia) Ltd. v. Metal Distributors (UK) Ltd. (The Amazonia) [1990] 1 Lloyd’s Rep 236 Gamerco SA v. ICM/Fair Warning (Agency) Ltd. [1995] 1 WLR 1226 Gray v. Southouse [1949] 2 All ER 1019 (KB) Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd. [2002] EWCA Civ 1407, [2003] QB 679 Greenwood v. Bennett [1973] 1 QB 195 (CA) Guinness Mahon & Co. Ltd. v. Kensington and Chelsea RLBC [1999] QB 215 (CA) Habton Farms v. Nimmo [2003] EWCA Civ 68, [2004] QB 1, [2003] 2 All ER (Comm) 109 Hadley v. Baxendale (1854) 9 Exch 341 Hamilton-Jones v. David & Snape (a rm) [2003] EWHC 3147 (Ch.), [2004] 1 WLR 924 Hammond v. Osborn [2002] EWCA Civ 885, (2002) 146 SJLB 176, [2002] 2 P & CR DG20 (CA)

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Hampton v. Glamorgan CC [1917] AC 13 (HL) Harbour Assurance Co. (UK) Ltd. v. Kansa General International Insurance Co. Ltd. [1993] QB 701 (CA) Hartog v. Colin & Shields [1939] 3 All ER 566 Hayes v. James & Charles Dodd (a rm) [1990] 2 All ER 815 Hazell v. Hammersmith and Fulham LBC [1992] 2 AC 1 (HL) Hedley Byrne v. Heller [1964] AC 465 (HL) Heywood v. Wellers [1976] QB 466 Highland and Universal Properties Ltd. v. Safeway Properties Ltd. (No. 2) [2000] EGLR 110 Hobbs v. London and South Western Railway Company (1874–75) LR 10 QB 111 Holt v. Markham [1923] 1 KB 504 (CA) Hutchinson v. Harris (1978) 10 BLR 19 ICCI v. McHugh [1997] 1 Lloyd’s Rep 94 (QBD) Ingmar GB Ltd. v. Eaton Leonard Inc. (formerly Eaton Leonard Technologies Inc.) [2001] CLC 1825, [2002] ECC 5, [2001] Eu LR 755 Ingram v. Little [1961] 1 QB 31 Inverugie Investments Ltd. v. Hackett [1995] 1 WLR 713, [1995] 3 All ER 841 Jackson v. Horizon Holidays Ltd. [1975] 1 WLR 1468 Jarvis v. Swans Tours Ltd. [1973] QB 233 Jennings v. Cairns [2003] EWCA Civ 1935 Johnson v. Gore Wood & Co. [2002] 2 AC 1, [2001] 2 WLR 72 Johnson v. Unisys Ltd. [2001] UKHL 13, [2001] 2 WLR 1076 Keech v. Sandford (1726) Sel Cas T King 61, 25 ER 223 (Ch.) Kelly v. Solari (1841) 9 M & W 54, 152 ER 24 Kenburn Waste Management Ltd. v. Bergmann [2002] EWCA Civ 98, [2002] CLC 644 Kiriri Cotton Co. Ltd. v. Dewani [1960] AC 192 (PC) Kleinwort Benson v. Lincoln City Council, Kleinwort Benson Ltd. v. Birmingham City Council [1999] 2 AC 349, [1998] 3 WLR 1095 [1998] 4 All ER 513 (HL) Kleinwort Benson Ltd. v. Birmingham City Council [1997] QB 380, [1996] 4 All ER 733 (CA) Kleinwort Benson Ltd. v. South Tyneside MBC [1994] 4 All ER 972 (QB) Krehl v. Burrell (1877–78) LR 7 Ch. D 551 Lancashire & Yorkshire Railway Co. v. McNicoll (1919) 88 LJKB 601 Lear v. Heath (1813) 5 Taunt 201, 128 ER 664.

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Leeder v. Stevens, also known as Stevens v. Newey [2005] EWCA Civ 50, (2005) 149 SJLB 112 Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548 (HL) Lloyds Bank plc v. Independent Insurance Co. Ltd. [2000] QB 110, [1999] 2 WLR 986 (CA) Lodder v. Slowey [1904] AC 442 Lonsdale (t/a Lonsdale Agencies) v. Howard & Hallam Ltd. [2006] EWCA Civ 63, [2006] 1 WLR 1281 Luckie v. Bushby (1853) 13 CB 864, 138 ER 1443 Mackender v. Feldia [1967] 2 QB 590 (CA) Macklin v. Dowsett [2004] EWCA Civ 904, [2004] 2 EGLR 75, [2004] 34 EG 68 Mahmud v. Bank of Credit and Commerce International SA (in liquidation) [1998] AC 20 Mandrake Holdings Ltd. v. Countrywide Assured Group Plc [2005] EWCA Civ 840 (CA) Manifest Shipping Co. Ltd. v. Uni-Polaris Insurance Co. Ltd. (The Star Sea) [2001] UKHL 1, [2003] 1 AC 469 (HL) Marc Rich & Co. AG v. Societa Italiana Impianti pA (The Atlantic Emperor) (No. 1) [1989] 1 Lloyd’s Rep 548 Marconi Communications International Ltd v. PT Pan Indonesia Bank Ltd [2005] EWCA Civ 422, [2005] 2 All ER (Comm) 325 Marston Construction Co. Ltd. v. Kigass Ltd. (1990) 46 Building LR 109 Martin v. Andrews (1856) 7 El & Bl 1, 119 ER 1148 McDonald v. Coys of Kensington, also known as Cressman v. Coys of Kensington (Sales) Ltd. [2004] EWCA Civ 47, [2004] 1 WLR 2775 Midland Bank Plc v. Brown Shipley & Co. Ltd. [1991] 1 Lloyd’s Rep 576 Midland Great Western Ry of Ireland v. Johnson (1858) 6 HLC 798, 10 ER 1509 Miles v. Wakeeld MBC [1987] AC 539 (HL) Ministry of Defence v. Ashman (1993) 66 P&CR 195, (1993) 2 EGLR 102 (CA) Moore v. Piretta PTA Ltd. [1999] 1 All ER 174, [1998] CLC 992 Morgan v. Ashcroft [1938]1 KB 49 Moses v. Macferlan (1760) 2 Burr 1005, 97 ER 676 National Commercial Bank (Jamaica) Ltd. v. Hew’s Executors [2003] UKPC 51 (PC (Jam)) Niersmans v. Pesticcio also known as Pesticcio v. Huet [2004] EWCA Civ 372, (2004) 154 NLJ 653, (2004) 148 SJLB 420 Nimmo v. Habton Farms [2003] EWCA Civ 68, [2004] QB 1, [2003] 2 All ER (Comm) 109

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Normhurst Ltd. v. Dornoch Ltd. [2004] EWHC 567, [2005] Lloyd’s Rep IR 27 (QBD) Nurdin and Peacock plc v. D. B. Ramsden & Co. Ltd. [1999] 1 WLR 1249, [1999] 1 All ER 941 Orakpo v. Manson Investments [1978] AC 95 Orphanos v. Queen Mary College [1985] AC 761 (HL) Paal Wilson & Co. v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal) [1983] 1 AC 854 Page v. Combined Shipping & Trading Co. Ltd. [1997] 3 All ER 656 Pankhania v. Hackney LBC [2002] EWHC 2441, [2002] NPC 123 Penarth Dock Co. v. Pounds [1963] 1 Lloyds Rep 359 (QB) Perry v. Sidney Phillips & Son [1982] 1 WLR 1297 Phillips v. Brooks Ltd. [1919] 2 KB 243 P. J. Pipe & Valve Co. Ltd. v. Audco India Ltd. [2005] EWHC 1904, [2006] Eu LR 368 (QB) Portman Building Society v. Dusangh [2000] 2 All ER (Comm) 221, [2000] Lloyd’s Rep Bank 197 (CA) Portman Building Society v. Hamlyn Taylor Neck [1998] 4 All ER 202 (CA) President of India v. Lips Maritime Corp. (The Lips) [1988] AC 395 (HL) Pride Valley Foods Ltd. v. Independent Insurance Co. Ltd. [1999] Lloyd’s Rep IR 120 Proctor & Gamble Phillipine Manufacturing v. Peter Cremer GmbH [1988] 3 All ER 843 Quadrant Visual Communications Ltd. v. Hutchison Telephone (UK) [1993] BCLC 442 R v. Attorney General of England and Wales also known as Attorney-General v. R [2003] UKPC 22, [2003] EMLR 24 (PC (NZ)) Rafes v. Wichelhaus (1864) 2 Hurl & C 906, 159 ER 375 Raiffeisen Zentralbank Österreich AG v. Five Star Trading LLC (The Mount I) [2001] EWCA Civ 68, [2001] QB 825 (CA) Rose (Frederick E) (London) Ltd. v. Pim (William H. Junior) & Co. Ltd. [1953] 2 QB 450 Rover International Ltd. v. Cannon Film Sales Ltd. [1989] 1 WLR 912 Royal Bank of Scotland v. Etridge (No. 2) [2001] UKHL 44, [2002] 2 AC 773 Rumsey v. North Eastern Rly (1863) 14 CB (NS) 641, 143 ER 596 Ruxley Electronics and Construction Co. Ltd. v. Forsyth [1996] AC 344 (HL) Samcrete Egypt Engineers and Contractors SAE v. Land Rover Exports Ltd. [2001] EWCA Civ 2019, [2002] CLC 533

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Seaconsar (Far East) Ltd. v. Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438 Shogun Finance Ltd. v. Hudson [2003] UKHL 62, [2004] 1 AC 919 Sinclair v. Brougham [1914] AC 398 Smith v. Hughes (1871) LR 6 QR 597 Solle v. Butcher [1950] 1 KB 671 South Australia Asset Management Corporation v. York Montague Ltd. [1997] AC 191 Spiliada Maritime Corpn. v. Cansulex Ltd. (The Spiliada) [1987] AC 460 (HL) Spring v. Guardian Insurance [1995] 2 AC 296 (HL) Sprung v. Royal Insurance (UK) Ltd. [1997] CLC 70, [1999] Lloyd’s Rep IR 111 Steinberg v. Scala [1923] 2 Ch 452 Strickland v. Turner (1852) 7 Ex 208, 155 ER 919 Sumpter v. Hedges [1898] 1 QB 673 (CA) Tamarind International Ltd. v. Eastern Natural Gas (Retail) Ltd. [2000] CLC 1397, [2000] Eu LR 708 Taylor v. Motability Finance Ltd. [2004] EWHC 2619 The Amazonia (Furness Withy (Australia) Ltd. v. Metal Distributors (UK) Ltd.) [1990] 1 Lloyd’s Rep 236 The Atlantic Emperor (Marc Rich & Co. AG v. Societa Italiana Impianti pA) (No. 1) [1989] 1 Lloyd’s Rep 548 The Fanti (Firma C-Trade SA v. Newcastle Protection and Indemnity Association) & The Padre Island (Socony Mobil Oil Co. Inc. v. West of England Shipowners Mutual Insurance Association (London) Ltd.) [1991] 2 AC 1 (HL) The Marinero (Owners of the Cressington Court v. Owners of the Marinero) [1955] P 68, [1955] 2 WLR 607 (PDAD) The Parouth (Compania Naviera Micro SA v. Shipley International Inc.) [1982] 2 Lloyd’s Rep 351 The Shropshire Union Railways and Canal Co. v. The Queen (1874–5) LR 7 HL 496 The TS Havprins (Chevron International Oil Co. Ltd. v. A/S Sea Team) [1983] 2 Lloyd’s Rep 356 Tigana Ltd. v. Decoro Ltd. [2003] EWHC 23, [2003] ECC 23, [2003] Eu LR 189 Tradigrain SA v. State Trading Corp. of India [2005] EWHC 2206, [2006] 1 Lloyd’s Rep 216, [2006] 1 All ER (Comm) 197 Transthene Packaging Co. Ltd. v. Royal Insurance (UK) Ltd. [1996] LRLR 32 (QBD) Turkey v. Awadh [2005] EWCA Civ 382, [2005] 2 FCR 7, [2005] 2 P & CR 29 (CA)

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Union Transport v. Continental Lines SA [1992] 1 WLR 15 United Railways of Havana and Regla Warehouses Ltd., Re [1961] AC 1007 (HL), [1960] Ch 52 (CA) Upton DC v. Powell [1942] 1 All ER 220 Vernon, Ewens & Co., In re (1886) 33 Ch D 402 Vick v. Vogle-Gapes Ltd. [2006] EWHC 1665, (2006) 150 SJLB 917 (QBD) Virk v. Gan Life Holdings Plc [2000] Lloyd’s Rep IR 159 (CA) Wapshott v. Davis Donovan & Co. [1996] PNLR 361 Warner Bros. v. Nelson [1937] 1 KB 209 Watts v. Morrow [1991] 1 WLR 1421 Way v. Latilla [1937] 3 All ER 759 Weldon v. GRE Linked Life Assurance Ltd. [2000] 2 All ER (Comm) 914 Westdeutsche Landesbank Girozentrale v. Islington LBC [1996] AC 669 (HL), [1994] 4 All ER 890 (CA) White and Carter (Councils) Ltd. v. McGregor [1962] AC 413 Whitehead (Patrick Whitehead Partnership) v. Jenks & Cattell Engineering Ltd. [1999] Eu LR 827 William Lacey (Hounslow) Ltd. v. Davis [1957] 1 WLR 932 Wiseman v. Virgin Atlantic Airways Ltd. [2006] EWHC 1566, (2006) 103(29) LSG 29 World Wide Fund for Nature v. World Wrestling Federation Entertainment Inc. [2006] EWHC 184, [2006] FSR 38 (Ch.) Wrotham Park Estate Co. Ltd. v. Parkside Homes Ltd. [1974] 1 WLR 798 Zamet v. Hyman [1961] 1 WLR 1442 (CA)

Australia Breen v. Williams (1996) 186 CLR 71 (HCA); [1994] 35 NSWLR 522 (NSWCA) CIC Insurance Ltd. v. Bankstown Football Club Ltd. (1997) 141 ALR 618 (HCA) David Securities v. Commonwealth Bank of Australia (1992) 175 CLR 353 (HCA) Harris v. Digital Pulse (2003) 56 NSWLR 298 (NSWCA) Hospital Products Ltd. v. United States Surgical Corp. (1984) 55 ALR 417, 156 CLR 41 (HCA) Jeffrey v. Fitzroy Collingwood Rental Housing Association [1999] VSC 335 (Victoria Supreme Court) McRae v. Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA)

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Noranda Australia Ltd. v. Lachlan Resources NL (1988) 14 NSWLR 1 (NSWSC) Oceanic Sun Line Special Shipping Co. Inc. v. Fay (1988) 165 CLR 197 (HCA) Roxborough v. Rothmans of Pall Mall Australia Ltd. [2001] HCA 68, (2001) 185 ALR 335, (2001) 208 CLR 516 (HCA)

Canada A (C) v. Critchley (1998) 166 DLR (4th) 475 (BCCA) Air Canada v. British Columbia [1989] 1 SCR 1161, 59 DLR (4th) 161 Air Canada v. Ontario (Liquor Control Board) (1997) 148 DLR (4th) 193 (SCC) Allen v. Taku Safari Inc. 2003 BCSC 516 CanLII (BC SC) Atlas Cabinets & Furniture Ltd. v. National Trust Co. (1990) 68 DLR (4th) 161 (BCCA) Baid v. Aliments Rinag Foods Inc. [2003] OJ No. 2153, (2003) 123 ACWS (3d) 272 (Ont SCJ) Bank of America Canada v. Mutual Trust Co. [2002] SCC 43, (2002) 211 DLR (4th) 385 (SCC) Barbour v. GH Heating & Air Conditioning Ltd. (1981) 15 CCLT 168 (Ont HC) Benson Construction Management Corporation v. Great Canadian Casinos Inc. et al. 2003 BCSC 1033 Breckenridge Speedway Ltd. v. R [1970] SCR 175, (1969) 9 DLR (3d) 142 (SCC) British Columbia v. Canadian Forest Products Ltd. [2004] SCC 38, (2004) 240 DLR (4th) 1 (SCC) British Columbia (Minister of Crown Lands) v. Cressey Development Corporation (1992) 97 DLR (4th) 380 (BCSC) Brown v. Mutual Life Ass. Co. of Canada [2005] AJ No. 1003, 30 CCLI (4th) 9 (Alberta Ct of QB) Brown v. Waterloo Regional Board of Commissioners of Police (1983) 150 DLR (3d) 729 (Ont CA) Buttereld v. Leonard Estate 1994 Can LII 3200 (BC SC) Cadbury Schweppes Inc. v. FBI Foods Ltd. (1999) 167 DLR (4th) 577 (SCC) Campbell v. Campbell (1999) 173 DLR (4th) 270 (Ont CA) Canadian Pacic Airlines Ltd. v. British Columbia [1989] 1 SCR 1133, (1989) 59 DLR (4th) 218 (SCC) Canson Enterprises Ltd. v. Broughton & Co. (1991) 85 DLR (4th) 129 (SCC) Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975) 9 OR (2d) 617, (1975) 61 DLR (3d) 385 (Ont CA) Carl B. Potter Ltd. v. Mercantile Bank of Canada (1980) 112 DLR (3d) 88, 8 ETR 219 (SCC)

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Carleton (County) v. City of Ottawa [1965] SCR 663, (1965) 52 DLR (2d) 220 (SCC) Cassidy v. Canada Publishing Corporation (1989) 41 BCLR 223 (BCSC) Central Guaranty Trust Co. v. Dixdale Mortgage Investment Corp. (1994) 121 DLR (4th) 53 (Ont CA) Cie Immobilière Viger Ltée. v. Lauréat Giguère Inc. [1977] 2 SCR 67 (SCC) Citadel General Assurance Co. v. Lloyds Bank Canada [1997] 3 SCR 805, (1997) 152 DLR (4th) 411 (SCC) Clarke v. Moir (1987) 82 NSR (2d) 183 (Nova Scotia Supreme Court, Trial Division) Club 7 Ltd. v. EPK Holdings Ltd. (1993) 15 Nd & PEIR 271 (Newfoundland Supreme Court, Trial Division) Communities Economic Development Fund v. Canadian Pickles Corp. [1991] 3 SCR 388, (1991) 85 DLR (4th) 88 (SCC) Construction Belcourt Ltée v. Golden Griddle Pancake House Limited [1988] RJQ 716 (CS Que) Conte v. The Canada Life Assurance Company [2005] OJ No. 3451 (Ontario Sup Ct of J) Cringle v. Northern Union Insurance Co. Ltd. (1981) 124 DLR (3d) 22 (BCSC) Dahl v. Royal Bank of Canada (2005) 46 BCLR (4th) 342 (BCSC) Deglman v. Guaranty Trust Co. of Canada and Constantineau [1954] SCR 725, [1954] 3 DLR 785 (SCC) Ditchburn v. Landis & Gyr Powers Ltd. (1997) 34 OR (3d) 578 (Ont CA) Dunn v. Disc Jockey Unlimited Co. (1978) 20 OR (2d) 309, 87 DLR (3d) 408 (Ontario District Court) Eadie v. Township of Brantford [1967] SCR 573, (1967) 63 DLR (2d) 561 (SCC) Edwards v. AG Canada [1930] AC 124 (PC (Can) Elder v. Koppe (1974) 53 DLR (3d) 705, 15 NSR (2d) 688 (Nova Scotia Supreme Court, Trial Division) Eurig Estate, Re (1998) 165 DLR (4th) 1 (SCC) Fenton v. Sand and Sea Travel Ltd. (1992) 4 Alta LR (3d) 86 (Alberta Provincial Court) Fidler v. Sun Life Ass. Co. of Canada [2006] SCC 30, [2006] 8 WWR 1 (Sup Ct of Canada) Frame v. Smith [1987] 2 SCR 99, (1987) 42 DLR (4th) 81 (SCC) Galaxy Sports Inc., Re (2005) 14 ETR (3d) 126 (BC SC) Garland v. Consumers’ Gas Co. (No. 1) [1998] 3 SCR 112, (1998) 165 DLR (4th) 385 (SCC) Garland v. Consumers’ Gas Co. (No. 2) [2004] 1 SCR 629, (2004) 237 DLR (4th) 385 (SCC), (2001) 208 DLR (4th) 494 (Ont CA), (2000) 185 DLR (4th) 536 (Ont SC)

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George (Porky) Jacobs Enterprises Ltd. v. City of Regina [1964] SCR 326, (1964) 44 DLR (2d) 179 (SCC) Gidney v. Shank [1995] 5 WWR 385, 101 Man R (2d) 197 (Manitoba Court of Queen’s Bench) Gold v. Rosenberg [1997] 3 SCR 767, (1997) 152 DLR (4th) 385 (SCC) Goldex Mines Ltd. v. Revill (1975) 54 DLR (3d) 672 (Ont CA) Goods and Services Tax, Re [1992] 2 SCR 445, (1992) 94 DLR (4th) 51 (SCC) Guerin v. The Queen [1984] 2 SCR 335, (1984) 13 DLR (4th) 321 (SCC) Hart v. Combined Ins. Co. of America [2005] NSJ No. 508 (Nova Scotia Sup Ct) Hodgkinson v. Simms [1994] 3 SCR 377, (1994) 117 DLR (4th) 161 (SCC) Hull and Yagi v. Kang et al. 2003 BCPC 312 (British Columbia Provincial Court) Iakoupov v. Pilot Insurance Company [2005] OJ No. 5146 (Ontario Sup Ct of J) James More & Sons Ltd. v. University of Ottawa (1974) 49 DLR (3d) 666 (Ont HCJ) KBK No. 138 Ventures Ltd. v. Canada Safeway Ltd. (2000) 185 DLR (4th) 650 (BCCA); 1999 CanLII 5876 (BCSC) Kemp v. Williams (1978) 87 DLR (3d) 544 (Sask CA) Kempling v. Hearthstone Manor Corp. (1996) 41 Alta LR (3d) 169, (1996) 137 DLR (4th) 12 (Ont CA) Khazzaka v. Commercial Union Ass. Co. of Canada [2002] 66 OR (3d) 390 (Ont CA) Kingstreet Investments Ltd. v. New Brunswick (Dept. of Finance) [2007] 1 SCC Knutson v. Bourkes Syndicate [1941] SCR 419, [1941] 3 DLR 593 (SCC) Kolan v. Solicitor (1970) 7 DLR (3d) 481 (Ont HCJ), afrmed on appeal at (1970) 11 DLR (3d) 672 (Ont CA) LAC Minerals Ltd. v. International Corona Resources Ltd. [1989] 2 SCR 574, (1989) 61 DLR (4th) 14 (SCC) Laskin v. Bache & Co. (1971) 23 DLR (3d) 385 (Ont CA) M (K) v. M (H) [1992] 3 SCR 6, (1992) 96 DLR (4th) 289 (SCC) Nepean (Township) Hydro-Electric Commission v. Ontario Hydro [1982] 1 SCR 347, (1982) 132 DLR (3d) 193 (SCC) Newell v. Canadian Pacic Airlines Ltd. (1976) 74 DLR (3d) 574, 14 OR (2d) 752 (Ont Co Ct) Norberg v. Wynrib [1992] 2 SCR 226, (1992) 92 DLR (4th) 449 (SCC) Nova Scotia (Attorney General) v. Walsh [2002] 4 SCR 325, (2002) 221 DLR (4th) 1 (SCC) Olchowy v. McKay [1996] 1 WWR 36 (Sask QB) Pacic National Investments Ltd. v. City of Victoria (No. 1) [2000] SCC 64, [2000] 2 SCR 919, (2000) 193 DLR (4th) 385 (SCC), aff’g (1998) 165 DLR (4th) 577 (BC CA), rev’g [1996] BCJ No. 2523 (BC SC).

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Pacic National Investment Ltd. v. Victoria (City) (No. 2) [2004] SCC 75, (2004) 245 DLR (4th) 211 (SCC), (2003) 223 DLR (4th) 617 (BC CA), (2002) 217 DLR (4th) 248 (BC SC) Palachik v. Kiss [1983] 1 SCR 623, (1983) 146 DLR (3d) 385 (SCC) Peel (Regional Muncipality) v. Canada [1992] 3 SCR 762, (1992) 98 DLR (4th) 140 Pereira v. Hamilton Township Farmers’ Mutual Fire Insurance Co. [2006] OJ No. 1508, [2006] 267 DLR (4th) 690 (Ont CA) Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. [2002] 1 SCR 678, (2002) 209 DLR (4th) 318 (SCC) Peter v. Beblow (1993) 101 DLR (4th) 621 (SCC) Peter Kiewit Sons’ v. Eakins Construction Ltd. [1960] SCR 361, (1960) 22 DLR (2d) 465 (SCC) Peters-Brown v. Regina District Health Board (1995) 136 Sask R 126 (Saskatchewan Court of Queen’s Bench) Pettkus v. Becker [1980] 2 SCR 834, (1980) 117 DLR (3d) 257 (SCC) Pilato v. Hamilton Place Convention Center Inc. (1984) 45 OR (2d) 652 (Ont HCJ) Pilon v. Peugeot Canada Ltd. (1980) 114 DLR (3d) 378, 29 OR (2d) 711 (Ont HCJ) Pitzel v. Saskatchewan Motor Club Travel Agency Ltd. (1983) 149 DLR (3d) 122 (Sask QB) Plester v. Wawanesa Mutual Ins. Co. [2006] OJ No. 2139 (Ont CA) Quebec (Attorney General) v. Canada (National Energy Board) [1994] 1 SCR 159, (1994) 112 DLR (4th) 129 (SCC) R v. Beaver Lamb & Shearling Co. Ltd. [1960] SCR 505, (1960) 23 DLR (2d) 513 (SCC) Rathwell v. Rathwell (1978) 83 DLR (3d) 289 (SCC) 306 RDS v. The Queen (1997) 151 DLR (4th) 193 (SCC) Ribeiro v. Canadian Imperial Bank of Commerce (1992) 13 OR (3d) 278 (Ont CA) Royal Bank v. The King [1931] 2 DLR 685 Schellenberg v. Ely Canada Ltd. [1962] OJ No. 195 (HCJ) Semelhago v. Paramadevan [1996] 2 SCR 415, (1996) 136 DLR (4th) 1 (SCC) Skookum Ventures Ltd. v. Long Hoh Enterprises Canada Ltd. (2005) 3 BLR (4th) 191 (BC SC) Sorochan v. Sorochan [1986] 2 SCR 38, (1986) 29 DLR (4th) 1 (SCC) A. L. Sott Financial (Newton) Inc. v. Vancouver City Savings Credit Unit [2000] BCJ 499 Stoltze v. Fuller [1939] SCR 235, [1939] 1 DLR 1 (SCC) Storthoaks (Rural Municipality) v. Mobil Oil Canada Ltd. [1976] 2 SCR 147, (1975) 55 DLR (3d) 1 (SCC) Taylor v. Gill [1991] 3 WWR 727 (Ata QB) Toronto-Dominion Bank v. Carotenuto (1997) 154 DLR (4th) 627(BC CA)

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Transport North American Express Inc. v. New Solutions Financial Corp. [2004] SCC 7, (2004) 235 DLR (4th) 385 (SCC) Turczinski Estate v. Dupont Heating & Air Conditioning Ltd. (2004) 246 DLR (4th) 95 (Ont CA) Victoria Wood Development Corp. v. Ondrey (1978) 22 OR (2d) 1, (1978) 92 DLR (3d) 229 (Ont CA) Vorvis v. Insurance Corp. of British Columbia [1989] 1 SCR 1085, (1989) 58 DLR (4th) 193 (SCC) Wallace v. United Grain Growers Ltd. [1997] 3 SCR 701, (1997) 152 DLR (4th) 1 Warrington v. Great-West Life Assurance Co. (1996) 139 DLR (4th) 18 (BCCA) Webb & Knapp (Can) Ltd. v. Edmonton (City) (1963) 3 DLR (3d) 123 (Alberta Supreme Court, Appellate Division) Wharton v. Tom Harris Chevrolet Oldsmobile Cadillac Ltd. [2003] 3 WWR 629 (BCCA) Whiten v. Pilot Insurance Company [2002] 1 SCR 595, (2002) 209 DLR (4th) 257 (SCC), (1999) 42 OR (3d) 641, 170 DLR (4th) 280, (Ont CA) Wilson v. Sooter Studios Ltd. (1989) 55 DLR (4th) 303, [1989] 3 WWR 166 (BCCA)

EC Benincasa v. Dentalkit Case 269/95 [1997] ECR I-3767 (ECJ)

French Civ, 19 March 1855 D 1855, 1, 297 Paris, 22 June 1987 D 1987 IR 178 (Paris CA)

German MünchKomm §812, no 262, BGHZ 47, 370 The Lankya Abbaya BGH December 15, 1986, [1988] I Prax 26

New Zealand Farmers Mutual Insurance Ltd. v. American International Underwriters Ltd. [1993] 3 NZLR 305

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Goldcorp Exchange Ltd. (In Receivership), Re [1995] 1 AC 74, [1994] 2 All ER 806 (PC (NZ)) Van den Berg v. Giles [1979] 2 NZLR 111

Scotland Baring Brothers v. Cunninghame District Council [1997] CLC 108 (Court of Session: Outer House) Diesen v. Samsen [1971] SLT 49 English v. Donnelly [1959] SLT 2 Hardie Polymers Ltd. v. Polymerland Ltd. 2002 SCLR 64 King v. T Tunnock Ltd. [2000] SC 424 [2000] SLT 744, [2000] Eu LR 531 Strachan v. Scottish Boatowners Mutual Ins. Assoc. [2001] Scot CS 138

USA Alaska Airlines v. United Airlines 902 F 2d 1400 (US Court of Appeals, 9th Circuit, 1900) Cox v. Delmas 33 P 836 (Cal 1893) David Welch Co. v. Erskine & Tulley 250 Cal Rep 339 (CA 1988) Edwards v. Lee’s Administrator 96 SW 2d 1028 (Ky CA 1936) Graham v. Mimms 444 NE 2d 549 (Ill. App. Ct. 1982) Hemenway v. Abbott 8 Cal App 450 (1908) Lorch Inc. v. Bessemer Mall Shopping Centre 310 So. 2d 872 (1975) Meinhard v. Salmon 164 NE 545 (NYCA 1928) Rosenfeld v. Black 445 F 2d 1337 (2d. Cir. 1971)

Table of Legislative Instruments (National, European and International) British Columbia Frustrated Contracts Act RSBC 1996, Chapter 166 section 2 section 5 section 5(1) section 5(2) section 5(4) section 6

Contracts (Applicable Law) Act 1990 section 2(2) section 3(3)(a)

Finance Act 2004 section 320

Financial Services and Markets Act 2000 section 150(1)

French Civil Code Article 1101 Article 1134 Article 1142 Article 1143 Article 1144 Article 1582 Article 1184

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French Commercial Code Articles L 134–1 to L 134–17 Article L 134–4 Article L 134–12

German Commercial Code Article 89b

Hague Convention on the Law Applicable to Contracts for the International Sale of Goods 1986 Article 10(3)

Hire Purchase and Small Debt (Scotland) Act 1932 Law Reform (Frustrated Contracts) Act 1943 section 1(1) section 1(2) section 1(3) section 2(5)(c)

Limitation Act 1980 section 32(1) (c)

Minors’ Contracts Act 1987 section 3

Québec Civil Code 1994 Article 1590

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Rome Convention (Convention on the Law applicable to Contractual Obligations) Article 3(4) Article 4 Article 4(2) Article 4(5) Article 8 Article 8(1) Article 8 (2) Article 10(1)(e)

Sale of Goods Act 1979 Supreme Court of Judicature Act 1873 Supreme Court of Judicature Act 1875 Torts (Interference with Goods) Act 1977 s 6(4)

UN Convention on Contracts for the International Sale of Goods 1980 Article 28

Uniform Land Transactions Act 1975 (US) STATUTORY INSTRUMENTS Commercial Agents (Council Directive) Regulations 1993 SI 1993/3053 as amended by SI 1993/3173 and SI 1998/2868 (England, Wales and Scotland) Regulation 14 Regulation 15 Regulation 16 Regulation 17

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Regulation 17(1) Regulation 17(2) Regulation 17(3) Regulation 17(3)(b) Regulation 17(4) Regulation 17(5) Regulation 17(6) Regulation 17(7) Regulation 17(7)(a) Regulation 17(7)(b) Regulation 17(8) Regulation 18 Regulation 18(c)

Commercial Agents (Council Directive) Regulations (Northern Ireland) 1993 SR 1993/483 amended by SR 1999, No. 201 The Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 SI 2001/2256 Regulation 3(1)

UNITED STATES RESTATEMENTS OF THE LAW American Law Institute, Restatement (First) of Restitution (1937) §107 §108

American Law Institute, Restatement (First) of Contracts (1932) §468

American Law Institute, Restatement (Second) of Contracts (1981) §§272, 240, 353, 377

American Law Institute, Restatement (Second) of Conict of Laws (1971) §221

Chapter 1 Diverging or Converging – The Ongoing Relationship of the Common Laws of England and Canada Paula Giliker This collection of essays brings together scholars active in England and Canada to discuss the relationship between contract and unjust enrichment. Organised under the auspices of the British Association of Canadian Studies Legal Studies Group,1 the authors were encouraged to examine contemporary problems arising in contract and unjust enrichment, and to consider how each system has

1

The British Association for Canadian Studies Legal Studies Group is a non-prot academic group which aims to promote education, learning and research, and the general dissemination of knowledge in the eld of legal studies with a particular focus on Anglo-Canadian issues. In order to achieve these aims, part of its work involves organising regular scholarly international conferences with a comparative legal theme. Previous publications include C. Waters (ed.), Canada-UK Perspectives on International Law (Martinus Nijhoff, Leiden 2006) and P. Torremans (ed.), Copyright and Human Rights (Kluwer, Amsterdam 2004). Its website may be found at . It would also like to thank Ester Herlin-Karnell for her assistance with the production of this volume.

1 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 1–11. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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responded to the challenges raised. By focussing on the laws of contract and unjust enrichment (or, to use the more traditional term, Restitution), the aim was to identify areas of contention in modern law and, more particularly, in choosing two subjects which, by their very nature, overlap, to examine the tensions which arise. The essays thus analyse various aspects of this relationship: the boundaries of contract and unjust enrichment, the taxonomy of unjust enrichment, outstanding questions in the law of contract, and the difculties faced in reconciling different jurisdictional approaches. In this introductory chapter, I seek to draw together the themes of the essays from a comparative perspective and consider what conclusions may be drawn as to the current state of the Anglo-Canadian relationship in terms of legal inuence and legal reasoning. At a time of globalisation, when the United Kingdom is becoming increasingly involved with European, rather than North American, affairs, are such comparisons still relevant to the development of contemporary law? In questioning whether the ties binding the systems have in recent years become more distant in terms of policy and case-law, I will examine whether a commonality of purpose and intent may still be identied. Is there, in the words of Patrick Glenn, ‘something beyond positive decisions, which is constitutive of the common law?’2

1) THE COMMON ROOTS OF ENGLISH AND CANADIAN LAW: PAST, PRESENT AND FUTURE The relationship between the common laws of Canada and England and Wales is well-known. Due to their common history, until 1949,3 decisions and developments in English law were incorporated into Canadian common law. As Gall states, ‘there can be no doubt that historically, and, to a lesser extent, presently, the British legal tradition plays a vital role in dening the nature of the Canadian legal system.’4 English case-law continues to be persuasive – some might

2 H. P. Glenn, Legal traditions of the world: Sustainable diversity in law (2nd ed., OUP, Oxford 2004) 252. See also his discussion of the nature of common law in Canada in ‘The common law in Canada’ (1995) 74 Can Bar Rev. 261 and his argument in favour of the continuing relevance of case law from England and Wales and other jurisdictions in ‘Persuasive authority’ (1987) 32 McGill LJ 261. 3 Amendment of the Supreme Court Act to make the Supreme Court of Canada the last court of appeal in Canada (with effect from 23 December 1949). It became the last court of appeal for criminal appeals earlier in 1933. The nal decisions of the Privy Council on cases from Canada were made in the mid-1950s. 4 G. L. Gall, The Canadian Legal System (5th ed., Carswell, Scarborough, Ont. 2004) 64.

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say too persuasive5 – authority for the Canadian courts and the common heritage shared by both jurisdictions is clearly relevant to the interpretation of modern law. In contrast, the Province of Québec, as noted by Miller in her paper,6 has continued in private law to follow the codied civil law approach of its French forebears. The Code civil du Québec of 19947 states in its Preamble that ‘The Civil Code comprises a body of rules which, in all matters within the letter, spirit or object of its provisions, lays down the jus commune, expressly or by implication. In these matters, the Code is the foundation of all other laws, although other laws may complement the Code or make exceptions to it.’ At the time of its publication, a former Minister of Justice commented on the signicance of its role in the Province: ‘Un code civil reète la vision qu’une société a d’elle-même et ce qu’elle veut être . . . . il est la trame sur laquelle se construit le tissu social.’8 Nevertheless, its public and criminal law, together with its court structures are based on those of the common law,9 and the Supreme Court of Canada is the nal Court of Appeal for all of Canada.10 Québec therefore

5

Professor Feldthusen, for example, has noted that the Canadian courts have in the past been accused of having too close a relationship with English law and failing, until the 1980s, to develop their own jurisprudence: see B. Feldthusen, ‘The recovery of pure economic loss in Canada: Proximity, justice, rationality and chaos’ (1996) 24 Manitoba L. J. 1 and ‘Pure economic loss in Canada’ in E. K. Banakas (ed.), Civil Liability for Pure Economic Loss (Kluwer Law International, The Hague 1996) 131: ‘I doubt whether there exists another sovereign jurisdiction whose lower courts have so frequently discredited or ignored decisions of their own appellate courts and turned instead to those of a foreign country.’ Note also the earlier comments of W. R. Lederman that ‘Canadian courts have too often followed English precedents uncritically and automatically when the comparative circumstances were not really sufciently similar to necessitate this’ in ‘The common law system in Canada’ in E. McWhinney (ed.), Canadian Jurisprudence: The Civil Law and Common Law in Canada (Stevens & Sons, London 1959) 34, 37. 6 See chapter 14. See also J. Vanderlinden ‘La reception des systèmes européens au Canada’ [1996] Revue d’histoire du droit 359. 7 The Code replaces the Civil Code of Lower Canada adopted by chapter 41 of the statutes of 1865 of the Legislature of the Province of Canada, An Act respecting the Civil Code of Lower Canada, as amended. It also replaces the rst section of chapter 39 of the statutes of 1980, An Act to establish a new Civil Code and to reform family law, as amended, and chapter 18 of the statutes of 1987, An Act to add the reformed law of persons, successions and property to the Civil Code of Québec. 8 Commentaires du Ministre de la Justice (Publications du Québec, Québec 1993). In translation: ‘A civil code reects the vision a society has of itself and what it wants to be . . . it is the framework on which the social fabric is built.’ 9 Gall (n. 4), 263 quips that ‘the practice of law in Québec today might be more familiar to a Bay Street litigator than to a French avocat.’ 10 The Supreme Court of Canada has nine members. Of the nine, the Supreme Court Act requires that three be appointed from Québec. Traditionally, the federal government appoints three judges from Ontario, two from the West, and one from Atlantic Canada.

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represents a hybrid system, which is both bijural and bilingual.11 Unlike England, Canada has faced from an early stage the question of how to reconcile common and civil law approaches within one national system. In recognising the historical ties of the common laws of Canada and England, two points of comparison stand out. First, as recognised in a number of the essays, both systems often start from the same authoritative source. This renders the post-1949 case-law of particular interest. If differences occur, what exactly does this signify in terms of different policy or legislative choices and different geographical or political inuences? Such a question is capable of presenting us with an insight into how legal systems develop over time and whether such differences may be attributed to particular policy-based objectives or can be traced simply to the natural idiosyncracies of different bodies responding to difcult questions of law. Secondly, comparison is of particular interest in considering the future development of the common law, both in terms of practical questions of law and the impact of new external inuences. As stated above, Canada has faced the challenges of dealing with both civilian and common law principle at a legislative and judicial level to a far greater extent than the limited English experience in dealing with Scottish law. Yet, as Bradgate, Saintier and Miller rightly point out, English lawyers can no longer avoid the challenges of interpreting civilian concepts within a common law context. European Directives in the law of contract require national courts to interpret terminology which originates in other civil law jurisdictions and whose meaning is often unclear. In the Bradgate and Saintier essay,12 concepts as apparently transparent as ‘indemnity’ and ‘compensation’ are seen to possess particular meanings in the context of French and German law, and yet no interpretative assistance is offered by the European Commission in the Directive itself. Such observations cast doubt on the viability of the European Commission’s proposals for a Common Frame of Reference (CFR),13 which seek to provide European contracting parties with a source of common terminology and rules. There is an obvious danger of underestimating the challenges fac-

11 See R. Jukier, ‘Where law and pedagogy meet in the transsystemic contracts classroom’ (2005) 50 McGill Law Journal 789 for the challenges this raises in terms of legal education. 12 See chapter 15. 13 See ‘A More Coherent European Contract Law’ (COM (2003) 68). This follows from the Commission’s launch in its Communication on European Contract law of July 2001 of consultation and discussion at a European level about the way in which problems resulting from divergences between national Contract laws in the EU should be dealt with: see COM (2001) 398. As Miller notes, the 2001 and 2003 Communications have been followed by a 2004 paper entitled European Contract Law and the revision of the acquis: The way forward (COM (2004) 651) and a 2005 First Annual Progress Report from the Commission (COM (2005) 456).

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ing those desiring unication of laws, and the Commission’s Communications have done little to lessen this debate.14 Such initiatives do highlight, however, that the future Anglo-Canadian relationship will differ from that of the past. As the United Kingdom becomes drawn into European proposals for harmonisation of law, it will continue to move away from its Canadian counterpart, for whom the immediate proximity to the United States of America15 will become more important. Nevertheless, the continuing usage, on both sides, of case-law as ‘persuasive’ suggests that lessons will continue to be learnt, whether as warnings or examples, from each system and it would be unwise to fail to recognise the benets to be gained from a cross-fertilisation of ideas, particularly at a time when communications between each country due to technological advances are far easier than in the past. Few would disagree that ‘With the law of Rome, the common law is one of the great collective achievements of man’s intellect and spirit. It has not taken, and cannot take, precisely the same form in all the countries of its reception, and all of them, each from its own experience, have something to contribute to its future.’16

2) RE-EXAMINING CONTRACT AND UNJUST ENRICHMENT In this light, an Anglo-Canadian study of contract and unjust enrichment has much to offer. In choosing these topics, the authors were faced with two areas of law at different stages of legal development, but which, by their very nature, will overlap, for example where a contract is void or voidable, or terminated for breach or frustration. Claims at the very boundaries of contract and unjust enrichment inevitably challenge our understanding of each area of law from both a practical and theoretical perspective. As Jaffey comments, ‘characterisation

14

See, for example, M. Kenny, ‘The 2004 Communication on European Contract Law: those magnicent men in their unifying machines’ (2005) 30 EL Rev. 724, and M. W. Hesselink, ‘The European Commission’s action plan: Towards a more coherent European Contract law? (2004) 12 ERPL 397. Even von Bar, an advocate of harmonisation, has questioned the motives of those involved: ‘What then is a “toolbox” aimed at improvement of European legislation in the eld of private law? The term allows for a vast range of meanings . . . This is because it allows for a vast range of meanings, none of them to be set in stone at this early stage. The idea of a toolbox allows those who manage and handle political process to buy time before taking a nal decision’: C. von Bar, ‘Working together toward a Common Frame of Reference’ (2005) Juridica International 17, 23. 15 See Glenn, ‘The common law in Canada’ (n. 2), 288. 16 G. V. V. Nicholls, ‘The migration of the common law: Canada’ (1960) 76 LQR 74, 77.

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of the claims is not just a matter of labelling, it is liable to affect the content of the law and its developments.’17 Where alternative remedies exist, legal systems face a dilemma: whether to deny litigants a choice, or favour freedom to choose at the possible cost of damaging the structural integrity of the competing forms of liability. Cases such as AG v. Blake18 and Whiten v. Pilot Insurance Co.19 provide recent examples where the courts have been forced to grapple with the intervention of restitutionary and punitive damages into the law of contract, and of the uncertainty which results. Yet even areas of Contract law which possess well-established legal principles must adapt to meet, as discussed in Elvin’s paper,20 contemporary concerns about unconscionability and inequality in bargaining. It is, however, with remedies that the common law of contract has traditionally focussed, largely, it has been suggested, due to its predominant commercial orientation.21 The law of damages continues to dominate the discourse of Contract law and, as Fuller and Perdue have commented, ‘it is impossible to separate the law of contract damages from the larger body of motives and policies which constitutes the general law of contracts.’22 It is therefore unsurprising that a number of essays address the challenges which both systems face in understanding the scope and objectives of its remedial responses. Poole,23 for example, notes the criticism of the conventional rule against recovery for distress damages in Canada and England and tries to nd a rationale capable of providing a framework for future claims. Davey24 puzzles over the failure of the law to provide an adequate legal response towards late payment of justied insurance claims and, while suggesting a number of possibilities for circumventing this rule, remains frustrated by the ability of precedent to oppose the proper resolution of the losses caused to the insured. Kelly,25 in contrast, seeks a solution for the question of losses resultant on frustration of contract, examining the legislation adopted in England and British Columbia to nd a comparative model for reform. The inability of both systems to provide clear statutory guidance, one Parliamentarian describing the later British Columbian legislation as ‘unintelligible’, serves to remind us that

17

Chapter 11, p. 228. [2001] 1 AC 268 (House of Lords). 19 [2002] 1 SCR 595, (2002) 209 DLR (4th) 257 (Sup Ct (Can)). 20 See chapter 12. 21 See H. Kötz, most recently, in M. Bussani and U. Mattei (eds.), The Common Core of European Private Law (Kluwer Law International, The Hague 2003) 211, and H. Beale, ‘The Europeanisation of Contract Law’ in R. Halson (ed.), Exploring the Boundaries of Contract Law (Dartmouth, Aldershot 1996) 38. 22 L. L. Fuller and W. R. Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ 52, 53. 23 See chapter 13. 24 See chapter 8. 25 See chapter 7. 18

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legislative intervention is not a panacea and that the real answer must lie in an understanding of the very nature of Contract law and its application in practice. Such debates go to the heart of Contract law, its place in the legal system, and its responsiveness to the needs of litigants. In contrast, unjust enrichment is a far more recent entrant to the law of obligations. As Ibbetson notes,26 its history is one of three phases: the award of remedies later to be interpreted as based on unjust enrichment (from the Middle Ages until the middle of the eighteenth century), misclassication as quasicontract (1760 until the middle of the twentieth century) and, nally, recognition of the doctrine. As late as 1978, Lord Diplock had stated in the House of Lords that ‘there is no general doctrine of unjust enrichment recognised in English law.’27 It was only in 1991 that it became clear beyond doubt that unjust enrichment had been accepted: 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.28

In Canada, recognition came earlier, in Deglman v. Guaranty Trust of Canada.29 As McInnes notes, ‘in 1954, Canada became the rst Commonwealth jurisdiction30 to explicitly adopt the unifying principle of unjust enrichment’,31 although the liability imposed in Deglman was not in itself particularly controversial and the acceptance of unjust enrichment required testing through subsequent caselaw.32

26

D. J. Ibbetson, A Historical Introduction to the Law of Obligations (OUP, Oxford 1999) Ch. 14. See also D. J. Ibbetson ‘Unjust enrichment in English law’ in E. J. H. Schrage (ed.), Unjust enrichment and the Law of Contract (Kluwer Law International, The Hague, 2001) 33 ff. 27 Orakpo v. Manson Investments [1978] AC 95, 104. 28 Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548, 578 per Lord Goff. This is described by Virgo as ‘Probably the most important dictum of the modern law of restitution’: The Principles of the Law of Restitution (2nd ed., OUP, Oxford 2006) 7. 29 [1954] SCR 725, [1954] 3 DLR 785 (SCC). 30 Although he also notes that ‘Pride of place within the common law world belongs to the United States of America, where the Restatement of the Law of Restitution: Quasi-Contract and Constructive Trusts adopted the principle nearly two decades earlier: (American Law Institute 1937).’ 31 See chapter 3, p. 34. 32 See Carleton (County) v. City of Ottawa [1965] SCR 663, (1965) 52 DLR (2d) 220 and Storthoaks (Rural Municipality) v. Mobil Oil Canada Ltd. [1976] 2 SCR 147, (1975) 55 DLR (3d) 1, discussed in P. D. Maddaugh and J. D. McCamus, The Law of Restitution (Canada Law Book, Aurora Ontario, 2004) 2:200.

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Nevertheless, Rotman,33 in distinguishing contract and unjust enrichment from duciary duties, notes the common inuences affecting both systems. The judgments of Lord Manseld in Moses v. Macferlan34 and Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd.,35 cited in both Lipkin Gorman and Deglman,36 helped to lay the foundations for the law of unjust enrichment as it is understood today. Yet, despite these common roots, McInnes, MacMillan37 and Bracegirdle38 note the difculties in nding common conceptual maps. Their discussion of the development of unjust enrichment law, in the context of mistake of law and mistake generally, usefully identies a number of themes in this book – the need to recognise the divergence of common law across the Atlantic, the different but overlapping intellectual debate in both jurisdictions, and the manner in which comparative studies may assist in gaining a clearer understanding of the nature of one’s own legal system. At times of legal development, the need to consider other legal systems, notably those with a similar background to one’s own, becomes of increasing importance.39 Both systems have moved towards a reformulation of the principles of unjust enrichment. As McInnes explains, the traditional division between the common law focus on unjust enrichment and the civilian requirement of ‘absence of juristic reason’ has been thrown into confusion by the Supreme Court of Canada in Garland v. Consumers’ Gas Co.40 and Pacic National Investment Ltd. v. Victoria (City) (No. 2).41 The debate in England remains, perhaps characteristically, largely academic, motivated by the analysis of the late Professor Peter Birks in the second edition of his work, Unjust Enrichment42 and his introduction of the concept of ‘absence of basis’. Dismissed by some as causing unnecessary confusion and uncertainty, unsupported by authority, principle or policy,43 it has led others to question where this leaves the English doctrine of unjust enrichment.44 Despite the recent refusal of the House of

33

See chapter 6. (1760) 2 Burr 1005; 97 ER 676. 35 [1943] AC 32, 61. 36 They were also cited in Carleton (County) v. City of Ottawa and Storthoaks (Rural Municipality) v. Mobil Oil Canada Ltd. (n. 32) above. 37 Chapter 5. 38 Chapter 4. 39 Catharine MacMillan’s comments, based on her experience as a qualied lawyer in Canada and as a legal academic in England, are of particular note in this regard. 40 (2004) 237 DLR (4th) 385 (SCC). 41 (2004) 245 DLR (4th) 211 (SCC). 42 (OUP, Oxford 2003); 2nd ed (OUP, Oxford 2005). 43 See G. Virgo, The Principles of the Law of Restitution (n. 28), 130. 44 See K. Barker, ‘The new Birksian approach to unjust enrichment’ (2004) 12 RLR 260, 262–263 and R. Stevens, ‘Absence of basis accepted; Unjust factors rejected’ in ‘Review Article: The New Birksian Approach to Unjust enrichment’ (2004) 12 RLR 260, 270. 34

Diverging or Converging

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Lords to decide the question about the basis of enrichment liability,45 its willingness to leave this question open will only serve to encourage debate as to the role, if any, of ‘absence of basis’ in English law.46 The difculties experienced by the judiciary in mastering these complexities is perhaps understandable, but, as McInnes reminds us Canada ‘will continue to pay a high price for the Supreme Court of Canada’s decision to devise a unique, discretion-based principle of unjust enrichment’.47 The need for internal clarify in formulating the principle of unjust enrichment is further highlighted by the essays of Sheehan48 and Jaffey.49 One particular point of contention, identied by both Sheehan and Waddams, is the use of metaphors by academics which, as Waddams warns, ‘if pressed too far . . . may cease to illuminate and begin to distort’.50 In defending unjust enrichment against the critique of commentators such as Professors Hedley and Samuel, Sheehan thoughtfully analyses Birksian taxonomy and seeks to nd a means of utilising it as a satisfactory interpretative tool. Jaffey, in turn, attempts to nd a means of classication which gives a clear understanding of each concept and its signicance in terms of law and legal reasoning. In favouring classication by means of justicatory category, he seeks to provide a means of clarifying unsettled law and contributing to the development of the law by way of analogical reasoning and, in so doing, challenges the legitimacy of current theories of unjust enrichment. In analysing the nature of unjust enrichment and contract, and, as Waddams demonstrates, their interconnectedness,51 the essays ask us consider the place of these heads of liability in national and private international52 law and to what extent reform is needed to reach a set of satisfactory and coherent principles.

45 See Lord Hoffmann in Deutsche Morgan Grenfell Group Plc v. Inland Revenue Commissioners [2006] UKHL 49, [2006] 3 WLR 781, [22]. 46 Lord Walker, for example, notes at [158] the attractions of a doctrine which would preserve ‘the purity of the principle on which unjust enrichment is founded, without in any way removing (as this case illustrates) the need for careful analysis of the content of particular “unjust factors” such as mistake.’ 47 See p. 48. 48 See chapter 10. 49 See chapter 11. 50 See chapter 2, p. 21. 51 As Professor Waddams states in his introductory essay, ‘the concepts . . . though separate . . . are interrelated, and it would be misleading to assert that one has had nothing whatever to do with the other’: Chapter 2, p. 15. 52 See Chong in chapter 9, who attempts to nd a rule dealing with choice of law for void contracts and their restitutionary aftermath which provides a practical and convenient test which does justice in a logical and pragmatic way.

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3) DIVERGENCE OR CONVERGENCE? The essays thus provide us with numerous examples of the different approaches taken by the English and Canadian courts, be it to the assessment of damages or the theoretical treatment of contract and unjust enrichment. They identify the impact of different constitutional structures and the increasing importance of supra-national bodies such as the European Union. The United Kingdom, as part of the European Union, must now face moves for harmonisation of its laws of contract and unjust enrichment, whilst the proximity of the United States to Canada signies a very different inuence on its jurisprudence. On a purely pragmatic basis, we can see differences in authority, legal structure, legal reasoning and legal argument. Much has changed since 1949. Yet, in highlighting the differences between these systems, it is important not to forget their commonality. Both possess common law systems in close proximity to civilian, or, to be more accurate mixed53 systems, albeit that both have been guilty in the past of trying to ignore this fact. Legal and political independence does not necessarily signify intellectual severance and the extinction of similar values underlying the system.54 While Canada has faced the challenges of Québec, English law must deal with the increasing impact of European law, be it due to Directives which are directly applicable, or proposals for harmonisation. Indeed, a topic such as unjust enrichment, which can loosely be traced back to Roman law,55 demonstrates the existence of principles of law which transcend legal systems, albeit interpreted in a manner reecting the culture and legal traditions of the state. It is therefore with interest that one nds common struggles: in determining the test for unjust enrichment, in ordering the law of obligations, in nding remedies which meet commercial needs and which safeguard the vulnerable in society. Underlying the essays, therefore, is a common belief in the utility of comparison and a hope that bringing together academics from England and Canada will produce an insight into the development of these important areas

53 Scotland is, of course, a mixed legal system: see R. Zimmermann, K. Reid and D. Visser (eds.), Mixed legal systems in comparative perspective: Property and obligations in Scotland and South Africa (OUP, Oxford 2003). 54 See J. W. Harris, ‘The Privy Council and the common law’ (1990) 106 LQR 574, who argues that there are fundamental questions of liberty and responsibility for which there will be a uniquely correct common law answer. 55 See Pomponius Dig 12.6.14, who states ‘For this by nature is equitable, that no one be made richer through another’s loss’. This is despite statements such as that of Viscount Haldane L. C. in Sinclair v. Brougham [1914] AC 398, 415 that ‘so far as proceedings in personam are concerned, the common law of England really recognises (unlike Roman law) only actions of two classes, those founded on contract and those founded on tort’.

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of law. Such a dialogue is of particular value in the eld of contract and unjust enrichment in which recent litigation has raised questions at both a theoretical and practical level. For example, the discussion in the Canadian courts of ‘absence of juristic reason’56 provides both English and Canadian lawyers with an excellent opportunity to analyse critically the operation of this concept and the problems which ensue. By this means, it serves both to enrich and enlighten restitutionary analysis in both jurisdictions. Similarly, dissatisfaction with existing legal rules may be reviewed in the light of criticism by other legal systems with a strong familial link. Thus legislation in British Columbia seeking to rectify the shortcomings of the English Law Reform (Frustrated Contracts) Act 1943 highlights the difculties of reforming this area of law. The use of exemplary damages in the eld of Contract law provides both the opportunity to revisit pre-existing rules and an opportunity to suggest better alternatives to overcome unpopular authority which appears to lead to unjust results. Later essays warn of the difculties of mixed legal cultures and the need to tread with caution and avoid linguistic traps with words as apparently straightforward as ‘compensation’ or ‘indemnity’. It is submitted that the strong procedural, analytical, cultural and historical links between the common laws of England and Canada render a comparative account of particular value in assisting the reader to understand current debates in the law of contract and unjust enrichment. The reader is therefore invited to approach the essays not as an attempt to show the divergence or convergence of English and Canadian law, but as an example of the benets of maintaining a close dialogue between nations sharing a similar legal culture. A common language should not blind us to the individual legal development of these jurisdictions, but differences should not discourage us from examining the application of legal principles in two fundamental areas of law: contract and the law of unjust enrichment. The essays highlight the debates currently occurring in these systems. They reect on the new inuences affecting these legal systems, but also pre-existing civilian inuences, be they the law of Québec or Roman law itself. The reader is therefore not invited to seek ‘the best system’ but to use the analysis to gain a greater understanding of their own. Whilst some of the essays are controversial, all acknowledge the ongoing challenge for the law of contract and unjust enrichment to provide clear and satisfactory principles to guide parties whilst maintaining coherency and an acceptable normative framework. It is for the reader to judge the extent to which each system has been successful in this goal.

56 See M. McInnes, ‘Juristic Reasons and Unjust Factors in the Supreme Court of Canada’ (2004) 120 LQR 554 and ‘Making Sense of Juristic Reasons: Unjust enrichment After Garland v. Consumers’ Gas Co.’ (2004) 42 Alta L. Rev. 399.

PART 1 THE BOUNDARIES OF CONTRACT AND UNJUST ENRICHMENT

Chapter 2 The Relation Between Contract and Unjust Enrichment Stephen Waddams Since the middle of the twentieth century, the attention of those interested in the mutual inter-relationship of concepts in Anglo-American private law has been concentrated on emphasizing the separation of the concepts of contract and unjust enrichment. This emphasis was natural enough when understood as opposition to earlier attempts to subordinate unjust enrichment to contract. The concepts are separate, as is now generally recognized. Nevertheless, though separate, they are inter-related, and it would be misleading to assert that the one has had nothing whatever to do with the other. In a paper published in 1997, Professor MacQueen, while recognizing as a starting point the separate nature of the basic concepts, wrote that ‘it would be a poor lawyer who was not fully aware of the interaction between contract and unjustied enrichment, and it is absolutely necessary . . . to treat the two together at some stage. . . . Enrichment cannot ignore contract, any more than contract can enrichment.’1 MacQueen

1 H. L. MacQueen, ‘Contract, Unjustied Enrichment and Concurrent Liability: a Scots Perspective’ 1997 Acta Juridica, 176, rep. in F. D. Rose (ed.), Failure of Contracts (Hart Publishing, Oxford, 1997) 199, 207–208.

15 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 15–21. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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was writing of Scots law, but, it is suggested, the same is true also of AngloCanadian law. The two concepts interact in several ways, and for several reasons. One cause of interaction is that questions of unjust enrichment have often arisen in a contractual setting. In the leading case on unjust enrichment, Lord Manseld said, in a very much quoted passage: This kind of equitable action, to recover back money, which ought not in justice to be kept, is very benecial, and therefore much encouraged. It lies only for money which, ex aequo et bono, the defendant ought to refund. . . . [I]t lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition, (express or implied;) or extortion; or oppression; or an undue advantage taken of the plaintiff’s situation, contrary to laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.2

Each of the instances given by Lord Manseld commonly (though not, of course, always) arises in a contractual setting, and inevitably raises the question of the relevance to the mutual rights and obligations of the parties of the contract between them. A second reason for the interaction of the two concepts is that avoidance of unjust enrichment has been one of the goals, functions, or effects of contract law itself. MacQueen gives several examples of instances where contract rules operate ‘to prevent enrichment of one side at the expense of the other’.3 Such instances are readily found also in Anglo-Canadian law: the contractual doctrines of misrepresentation, mistake, frustration, duress, undue inuence, unconscionability, rectication, the implication of terms that are fair and reasonable, the avoidance of forfeitures, the doctrine of part performance under the Statute of Frauds, the control of the power to terminate for breach, the willingness to stretch the doctrines of contract formation where benets have been conferred, the reluctance to nd a contract to be illegal where benets have been conferred under it, the willingness in some cases to enforce contracts for the benet of third parties, the determination of the scope of the appropriate remedy for breach. All these doctrines have been sometimes employed in order to avoid what would otherwise be perceived as an unjust enrichment.4 These are not usually classied as ‘restitution cases’ or ‘unjust enrichment cases’, nor

2

Moses v. Macferlan (1760) 2 Burr 1005, 1012; 97 ER 676, 680–681. MacQueen, ‘Contract, Unjustied Enrichment and Concurrent Liability: a Scots Perspective’ (n. 1) 217. 4 See S. Waddams, ‘Restitution as Part of Contract Law’ in A. Burrows (ed.), Essays on the Law of Restitution (Oxford University Press, Oxford 1991) 197. 3

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am I suggesting that they should be so classied, but this does not mean that the general concept of unjust enrichment has been irrelevant. Where a benet is conferred under a valid and enforceable contract there are some circumstances in which a claim for restitution of the benet will be excluded. But there has been a very marked variation in attempts to formulate this idea. Some formulations seem to go so far as to assert that the mere existence of a contract between the parties automatically excludes any restitutionary claim. ‘There is a universal rule which forbids claims in unjust enrichment when there is a subsisting contractual relationship between the parties.’5 ‘It is only when the agreement does not operate, or has ceased to operate, that the law of restitution should have a role to play in any dispute between the parties.’6 Other formulations suggest that the test is whether the benet is conferred ‘in pursuance of’ or ‘under’ the contract: ‘It is a basic tenet of the law of restitution that no recovery can be had for benets conferred in fullment of a valid obligation owed to the recipient. The proposition seems self-evident.’7 ‘Where a benet has been conferred under a binding contract which cannot be rescinded, brought to an end, or rectied, the claimant must seek his remedy under the contract and not in restitution’.8 The variation in these formulations casts doubt on assertions that any of them is self-evident, basic, or universal. Other formulations have been more exible. In their careful discussion of the question Professors Maddaugh and McCamus speak of ‘the well-established idea that it would be open to the defendant in any restitution case to prove that the plaintiff should not recover because the benets had been conferred by the plaintiff under a valid contract’, but they go on to point out that restitution has been available in cases where the claimant mistakenly overpays, and where ‘an event has occurred that was not within the contemplation of the terms of the agreement,’ even though the contract remains valid and has not been rescinded or terminated.9 An earlier formulation, referred to by Goff and Jones in their rst edition of 1966 was that of the Restatement of Restitution (1937):

5

L. Smith, ‘The Mystery of “Juristic Reason” ’ (2000) 12 Supreme Court Law Review 237. 6 G. Virgo, The Principles of the Law of Restitution (2nd ed., Oxford University Press, Oxford 2006) 40. 7 D. Friedmann, ‘Valid, voidable, qualied, and non-existing obligations: an alternative perspective on the law of restitution’ in Burrows (ed.), Essays on the Law of Restitution (n. 4) 247–8. 8 R. Goff and G. Jones, The Law of Restitution (Sweet and Maxwell, London 1966) 21 (printed as black-letter rule). 9 P. Maddaugh and J. McCamus, The Law of Restitution, (Looseleaf ed., Canada Law Book, Aurora 2004) 3:200.30.

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Stephen Waddams A person . . . who pursuant to a contract with another, has conferred a benet upon him, is not entitled to compensation therefor other than in accordance with the terms of such bargain, unless the transaction is rescinded for fraud, mistake, duress, undue inuence or illegality, or unless the other has failed to perform his part of the bargain.10

The crucial phrase here, ‘other than in accordance with the terms of such bargain’ is susceptible of two different meanings. It might mean that the claim fails unless the claimant can show a positive contractual right to repayment; or it might mean that the claim fails only where it is inconsistent with a term of the contract that actually excludes the claim. The distinction is signicant, for very often the contract is silent on the question. Professor Beatson (now Mr. Justice Beatson) suggested that ‘it should, in principle, be possible to bring a restitutionary claim where it would not reallocate risks or reassign value as an alternative to an action for breach of contract even before discharge.’11 He went on to suggest that ‘while . . . before discharge a restitutionary claim will very often be in direct conict or inconsistent with a contractual one or that it would in effect nullify the contractual obligation, [it is not established that] this is necessarily so as a matter of analysis in all cases.’ This was accepted by Professor Birks, who, having described the ‘orthodox’ doctrine as that ‘an enrichment transferred under a valid contract cannot be recovered unless the contract is rescinded or terminated’, wrote:12 Professor Beatson has argued, rightly, that a more sophisticated analysis would conclude that the bar is not absolute. In particular he says that a distinction should be drawn between cases in which restitution would disturb legitimate hopes and fears inherent in the bargain and others where it would not. In the latter the orthodox rule should give way. That seems to be exactly the right way to approach this case [i.e., Roxborough v. Rothmans of Pall Mall Australia Ltd.]13

Though later writings by both Beatson and Birks seem less sure on the point,14 I would support the views just quoted, which I think are consistent with those of Maddaugh and McCamus. Looking at the matter from the point of view of

10

American Law Institute, Restatement of Restitution (1937) s. 107. J. Beatson, ‘Restitution and Contract: Non-Cumul?’ (2000) 1 Theoretical Inquiries in Law 83, 94, 95–6, J. Beatson, ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in W. Swadling and G. Jones (eds.), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (Oxford University Press, Oxford, 1999) 143, 153 and 154. 12 P. Birks, Failure of Consideration and its place on the map (2002) 2 OUCLJ 1, 5. 13 (2001) 185 ALR 335 (HCA). 14 P. Birks, Unjust Enrichment (Oxford University Press, Oxford, 2003) 107–9, P. Birks, Unjust Enrichment (2d ed., Oxford University Press, Oxford, 2005) 124, J. Beatson and G. J. Virgo, note (2002) 118 LQR 352, 356. 11

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principle, a valid claim for restitution should not be defeated by the mere presence of a contract between the parties. Let it be admitted that the claim can be defeated if it is excluded by a valid contract, but the mere existence of a contract between the parties is not sufcient to bring about this result, any more than the mere existence of a contract excludes a tort claim. An otherwise valid restitutionary claim should therefore be excluded if, but only if, the contract, by its terms (express or genuinely implied), actually entitles the recipient to retain the benet. No complicated reason is needed to justify this conclusion: valid contracts should be enforced, but, in interpreting the contract, it should not lightly be inferred that its effect is to exclude an otherwise justied restitutionary claim. In terms of ‘juridical reason’, the contract supplies a juridical reason for the enrichment if, but only if, it can fairly be interpreted to entitle the recipient to retain it. Perhaps the most signicant of Lord Manseld’s instances, quoted above from Moses v. Macferlan, is money paid ‘upon a consideration which happens to fail’. Since the mid-nineteenth century, contract lawyers have used the word ‘consideration’, as a criterion of enforceablity, to mean value given or promised in exchange for the promise sought to be enforced. It is evident that Lord Manseld was using the word in a quite different sense, and it has often been said, by way of glossing his phrase, that consideration there meant contractual performance. However, it is very probable that Lord Manseld was using the word in a still wider sense, to mean the reason or basis for the making of the payment. The passage was so understood by Sir William Evans, who equated it with the declaration causa data causa non secuta of Roman law,15 and was understood in this sense also in the mid-nineteenth century, and applied outside the contractual context.16 Professor Birks in 1985 also understood the word in this wide sense, also making the link with Roman law: The link between ‘consideration’ and contracts makes it easy to suppose that ‘total failure of consideration’ must always refer to a failure in contractual reciprocation, whereas in fact that is only the most common species of the genus so described. In the law of restitution the word ‘consideration’ should be given the meaning with which it rst came into the common law. A ‘consideration’ was once no more than a ‘matter considered’, and the consideration for doing something was the matter considered in forming the decision to do it. In short, the reason for the act, the state of affairs contemplated as its basis. Failure of consideration for a payment should be understood in that sense. It means that the state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist, has failed

15 W. Evans, An Essay on the Action for Money Had and Received (1802) 25, reprinted [1998] Restitution Law Review 1, 9. 16 Martin v. Andrews (1856) 7 El & Bl 1, 119 ER 1148 (money paid for anticipated expenses of subpoenaed witness; expenses not incurred).

20

Stephen Waddams to sustain itself. The language of the Digest for the same phenomenon is causa data causa non secuta (things given upon a consideration, that consideration having failed).17

Failure of consideration may arise, therefore, entirely outside any contractual context, but nevertheless it is often associated with contracts. In the Australian case of Roxborough v. Rothmans, mentioned earlier, a retail seller of cigarettes paid to the wholesaler, as part of the price but separately identied and quantied, an amount of money in respect of a tax thought to be payable by the wholesaler to the government. The tax turned out to be invalid, and the retailer claimed repayment of the money paid for that purpose. Sometimes in such cases a persuasive argument can be advanced that there is an implied term that, in the circumstances that have occurred, the money should be repaid. This argument was accepted by one of the majority judges,18 but rejected by the others. Nevertheless the claim succeeded on the ground of failure of consideration. The argument for restitution is that the money in question was paid for a particular purpose that had failed to materialize, and so was paid ‘upon a consideration which happen[ed] to fail’; the contract could not be construed expressly or impliedly to exclude a claim for restitution, and consequently the claim succeeded.19 Where money is paid in advance by a buyer, as in Dies v. British & International Mining and Finance Co.,20 the buyer, even though in default, is entitled to restitution, subject to any counter-claim for breach of contract, unless the contract can be construed to amount to an actual agreement for forfeiture of the pre-payment. Since the law usually leans against forfeiture, and the prepayment in the Dies case was not described as a ‘deposit’ or by any equivalent word, the conclusion ( justiable, in my view) was that the over-payment should be restored. Again where, as in Sumpter v. Hedges,21 valuable benets other than money are conferred, there is a strong argument for restitution, even where the claimant is in default, unless the contract can be construed as actually entitling the recipient to retain the benet without payment. Some such contracts can be fairly construed to have this effect, for example a contingency contract as, possibly, in Cutter v. Powell,22 where in exchange for a very high

17

P. Birks, An Introduction to the Law of Restitution (Oxford University Press, Oxford 1985) 223, and footnote 13. 18 Callinan J. 19 I am in agreement with Ralph Cunnington, ‘Failure of Basis’, [2004] LMCLQ 234, 250 that there is no justication for ‘a total bar against restitution under subsisting contracts’, though Cunnington differs on the application of this conclusion to the actual facts of the Roxborough case. 20 [1939] 1 KB 724. 21 [1898] 1 QB 673 (CA). 22 (1795) 6 TR 320; 101 ER 573 (QB).

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reward for success the claimant agrees to receive nothing in case performance is incomplete, but not all contracts can fairly be construed to have this effect, and it seems to me doubtful that the contract in Sumpter v. Hedges could be so construed.23 Where prots are derived from a breach of contract, but no corresponding loss is caused to the claimant, recovery of the prots, while usually denied, has occasionally been permitted,24 though whether properly called ‘restitution’ or ‘unjust enrichment’ has been debated. It is suggested that these cases cannot be allocated exclusively to the category ‘breach of contract’, nor exclusively to the category ‘unjust enrichment’. Both concepts have been relevant, together, in some of the cases, with ideas of wrongdoing, infringement of proprietary interests, breach of duciary duty, and contravention of public policy. Many metaphors have been employed in discussing the mutual relation of concepts in private law. Legal concepts, or legal issues, have been envisaged as places on a map, branches of a tree, tributaries of a river, or as different animals in a scheme of biological classication. Metaphors are useful – perhaps unavoidable – in seeking to understand a complex subject, but, if pressed too far, they may cease to illuminate and begin to distort. The metaphors of mapping and of biological classication tend to emphasize the separation of legal concepts. This is a valuable insight that should be welcomed. Contract and unjust enrichment are, indeed, different concepts. But the metaphors can be pressed too far: it would be misleading to say that the one concept has had nothing to do with the other: they have often worked together – sometimes in harmony and sometimes in tension – in resolving a variety of legal issues. Desirable as it is to emphasize their separation, it is necessary also to give attention to their close inter-relation.

23 But a contrary view is taken by B. McFarlane and R. Stevens, ‘In defence of Sumpter v. Hedges’ (2002) 118 LQR 569. 24 Attorney General v. Blake [2001] 1 AC 268 (HL).

Chapter 3 Unjust Factors, Juristic Reasons and Contracts in Anglo-Canadian Law Mitchell McInnes* Lord Wright famously observed that ‘any civilised system of law is bound to provide remedies for . . . unjust enrichment’.1 That is not to say, however, that every system of law must adopt the same conception of unjust enrichment. While the subject must, by denition, pertain to unwarranted benets, the details often differ. And indeed, a legal system may reveal a great deal about itself through its formulation of the unjust enrichment principle. That principle may, for instance, demonstrate the extent to which the relevant community is willing to undermine the security of receipts in order to grant relief from unintended transfers; illustrate a great deal about the manner in which the legal system views the relationship between different areas of private law (such as unjust enrichment and contract); and indicate the strength of the judiciary’s commitment to the rule of law over discretionary decision-making.

* The author would like to thank Daina Young for her assistance. 1 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32 (HL) 61.

23 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 23–49. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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Mitchell McInnes

Because a principle of unjust enrichment is apt to entail broad implications, its formulation requires the resolution of various concerns. The most fundamental of those concerns pertains to the principle’s basic orientation. There are two primary options. Civilian jurisdictions traditionally have presumed that every transfer of wealth is reversible, and consequently have awarded restitution in the absence of a juristic reason for the defendant’s enrichment. The common law, in contrast, has refused to intervene merely because the defendant has received an enrichment from the claimant. It further insists upon proof of an unjust factor that positively justies judicial intervention. The common law approach has, however, come under attack. While English courts continue to hold the traditional line, they recently have been urged to adopt a civilian approach. In deciding whether to accept that invitation, English judges would do well to consider the Canadian experience. After a prolonged period of confusion, the Supreme Court of Canada recently renounced its traditional focus on unjust factors in favour of a hybrid model that leans heavily towards juristic reasons. Unfortunately, as the aftermath of that development demonstrates, the abandonment of unjust factors may have unintended consequences. Unless the shift is undertaken with sufcient research and foresight, it is apt to disrupt traditional patterns of reasoning and generate unexpected results. More specically, given the themes of this collection, revising the grounds for restitution may fundamentally disturb the relationship that has long existed between the common law concepts of contract and unjust enrichment. The ensuing discussion consists of two substantive sections. Part I briey examines the English conception of unjust enrichment and its relationship to the law of contract. Part II considers the same issues from a Canadian perspective, both before and after the seminal decision in Garland v. Consumers’ Gas Co.2 It also addresses some of the problems created by Canada’s novel test of restitutionary liability, with a special focus on difculties arising at the intersection between unjust enrichment and contract.

1) UNJUST ENRICHMENT AND CONTRACT IN ENGLISH LAW There is no need, in the current context, for a detailed exposition of English law. An outline of the relevant aspects of unjust enrichment and contract will sufce.

2

(2004) 237 DLR (4th) 385 (SCC).

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a) Unjust Enrichment It is best to begin with a small, but important, clarication. The phrase ‘unjust enrichment’ often is used ambiguously in reference to two very different phenomena. It sometimes is invoked, in a loose sense, if a claimant, having established the breach of a private obligation, forgoes the usual remedy of compensation for her loss and seeks instead ‘restitution’ of a benet that the defendant acquired by virtue of his wrong. It is, however, misleading to talk of ‘unjust enrichment’ or ‘restitution’ in such circumstances. The operative cause of action is never the action for unjust enrichment (as dened below), but rather some species of private wrong. The list of relevant wrongs remains unsettled, but it is clear that a person may be compelled to hand over a benet acquired by virtue of, say, trespass to land,3 breach of duciary duty,4 or ‘exceptional’ breach of contract.5 Nor should that gain-based remedy be called ‘restitution’. A wrongdoer may be divested of every enrichment that is causally connected to his breach of the claimant’s right, even if the material source of that gain is a third party (as when a trespasser prots by guiding tourists through the claimant’s underground cave).6 That measure of relief must be distinguished from the response that is triggered by the action in unjust enrichment, which (as explained below) is limited to the value of the benet that the defendant acquired from the claimant. While the layperson may refer to both remedies as ‘restitution’, lawyers and judges must, in the interest of clarity, mark the distinction by employing more specic terms of art. The remedy that requires the defendant to give up every benet acquired through breach should be called ‘disgorgement’. The remedy that merely reverses an unjustiable transfer and requires the defendant to give back a benet acquired from the claimant should be called ‘restitution’.7 The focus of this paper is on ‘unjust enrichment’ and ‘restitution’ in the narrow sense. The former phrase refers to the modern re-formulation of a variety of claims that historically reversed unwarranted transfers. As a general proposition, a court today must be satised that (i) the defendant received an enrichment, (ii) from the claimant,8 (iii) in circumstances that render the enrichment

3

Penarth Dock Co. v. Pounds [1963] 1 Lloyds Rep 359 (QB); Ministry of Defence v. Ashman (1993) 2 EGLR 102 (CA). 4 Boardman v. Phipps [1967] 2 AC 46 (HL). 5 Attorney General v. Blake [2001] 1 AC 268 (HL). Cf. Bank of America Canada v. Mutual Trust Co. (2002) 211 DLR (4th) 385 (SCC) 393. 6 Edwards v. Lee’s Administrator, 96 SW 2d 1028 (Ky CA 1936). 7 M. McInnes, ‘The Measure of Restitution’ (2002) 52 UTLJ 163; M. McInnes, ‘Misnomer: A Classic’ [2004] RLR 79. 8 While it commonly is said that the defendant’s enrichment must be acquired ‘at the claimant’s expense’, that phrase is also ambiguous. In a case of ‘unjust enrichment by

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unjust.9 As discussed below, the operative injustice pertains to some defect or deciency in the impugned transfer. Liability is said to be strict (in a narrow sense)10 because it arises without regard to the quality of the defendant’s conduct. Indeed, so long as the defendant has been enriched, he may incur liability even before he becomes aware of the transfer. It accordingly follows that the remedy for unjust enrichment invariably is restitution. While difcult questions may arise as to the form of relief (personal or proprietary), the measure is always the same: the defendant must give back the (value of the) benet received from the claimant. Because liability arises without fault, there is no justication for doing anything more than reversing the transfer and restoring the status quo ante.11 The defendant does not deserve to be punished,12 nor (more controversially) does the claimant deserve to reap a windfall.13

wrongdoing’, the defendant may be said to have acquired a benet ‘at the claimant’s expense’, in a normative sense, even if the defendant materially obtained his enrichment from a third party as a result of breaching an obligation that he owed to the claimant. The cause of action in unjust enrichment, in contrast, presumes that the defendant received a benet ‘at the claimant’s expense’, in an economic or material sense, as a result of a transfer of wealth between the parties. A limited exception to that rule occurs in the context of interceptive subtraction: M. McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs – A Reply to Professor Birks’ (2003) 62 CLJ 697. 9 Banque Financiere de la Cité v. Parc (Battersea) Ltd. [1999] 1 AC 221 (HL) 227. Lord Steyn further contemplated the issue of (iv) defences, and many commentators additionally ask (v) whether restitution should be awarded personally or proprietarily. 10 The form of strict liability that characterizes the action in unjust enrichment must be distinguished from the form of strict liability that characterizes causes of action pertaining to, say, breach of contract or the rule in Rylands v. Fletcher. Liability is strict in the second type of case not because the defendant is innocent of any breach, but rather because his breach need not be either deliberate or careless. 11 Restitution is also the exclusive remedy for unjust enrichment because it is the only measure of relief that makes sense of all three elements of that claim. It would be incoherent to insist upon proof of a corresponding gain and a loss (i.e., a transfer) during the substantive inquiry, but to then quantify relief exclusively by reference to either the defendant’s enrichment or the claimant’s expense during the remedial stage of analysis. Restitution, in contrast, perfectly reects the constituent elements of proof. Wealth unjustiably was transferred (without fault) from the claimant to the defendant – he ought to give it back to her. 12 I.e., by being required to provide compensation for a loss that was not accompanied by a correlative gain for the defendant. 13 I.e., by receiving a prot that the defendant materially acquired from someone other than the claimant. There is, however, a debate within the law of unjust enrichment as to whether the court must be satised not only that the claimant was the material source of the defendant’s gain, but also that the claimant ultimately suffered a loss corresponding in value to the defendant’s enrichment. While Canadian law measures restitution by reference to the highest amount common to the defendant’s ultimate gain and

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i) The Reason for Restitution: Unjust Factors and Juristic Reasons Until very recently, it was (almost) universally accepted that the third element of the action in unjust enrichment required an English claimant to establish an unjust factor. Following the general common law presumptions of self-reliance and non-accountability, the courts did not regard an unexplained transfer of wealth as a sufcient basis for intervention. Instead, they insisted upon proof of a positive reason as to why the defendant’s enrichment should be reversed. And while those reasons have never been thoroughly explained or exhaustively enumerated, it is safe to say that restitution typically has been triggered by a defective intention.14 The claimant’s intention in effecting the impugned transfer might have been impaired by error, qualied by some subsequently disappointed condition, induced by illegitimate pressure, or perhaps absent altogether (as in the case of theft). But in any event, because the law of unjust enrichment takes the notion of autonomous agency seriously, it generally allows a person to resile from a transaction that was not the product of informed choice.15 Against that backdrop, Professor Birks’ last major project, before his untimely death, came as something of a shock. Despite previously defending unjust factors against the threat of civilian incursion,16 he used Unjust Enrichment to renounce the common law approach in favour of a model of juristic reasons.17 That transformation was attributed to (i) his belief that the House of Lords’ judgment in Kleinwort Benson Ltd. v. Lincoln County Council,18 holding

the plaintiff’s ultimate loss, Australian courts have rejected the need for a corresponding deprivation, and English courts generally have followed suit. In those jurisdictions, it is enough that the defendant’s enrichment initially came from the claimant: Air Canada v. British Columbia (1989) 59 DLR (4th) 161 (SCC); 194; cf Kingstreet Investments Ltd. v. New Brunswick (Dept. of Finance) [2007] 1 SCC; Kleinwort Benson v. South Tyneside MBC [1994] 4 All ER 972 (QB); Kleinwort Benson v. Birmingham CC [1996] 4 All ER 733 (CA); Roxborough v. Rothmans of Pall Mall (2001) 208 CLR 516 (HCA); M. McInnes, ‘Passing On in the Law of Restitution: A Reconsideration’ (1997) 19 Syd LR 179; M. McInnes, ‘At the Plaintiff’s Expense’: Quantifying Restitutionary Relief’ (1998) 57 CLJ 472. 14 P. Birks and C. Mitchell, ‘Unjust Enrichment’ in P. Birks (ed.), English Private Law Volume II (OUP, Oxford 2000). 15 The same principle applies, as a matter of integrity, to both parties. Just as the claimant is not held to a transfer that resulted from a defective intention, the defendant is entitled to plead the defence of change of position, and thereby reduce liability, to the extent that he incurred an exceptional expenditure in the good faith belief that he was entitled to retain his receipt. 16 ‘No Consideration: Restitution After Void Contracts’ (1993) 23 UWAL Rev. 195. 17 (OUP, Oxford 2003); 2d ed. (OUP, Oxford 2005) (published posthumously). Birks had cautiously tipped his hand, in ‘Comparative Unjust Enrichment’ in P. Birks and A. Pretto (eds.), Themes in Comparative Law (OUP, Oxford 2002) 137. 18 [1999] 2 AC 349 (HL).

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that a decision may be rendered mistaken by a subsequent retrospective change in the law, had stretched the concept of impaired intention beyond its breaking point, and (ii) his preference for the relative elegance and orderliness of the civil law methodology. An assessment of Birks’ transformation lies beyond the scope of this paper. Sufce to say that while his views were readily accepted by some scholars, scepticism remains19 and English courts have not changed their approach to claims in unjust enrichment. Unless and until the House of Lords clearly adopts a civilian perspective, restitution will continue to be premised upon proof of unjust factors.19a

b) Unjust Enrichment and Contract Notwithstanding its adherence to tradition, the English law of unjust enrichment is a difcult topic. Much of the difculty stems from its relative youth. While precedents date back hundreds of years, and while Lord Manseld had articulated the essential principles by 1760,20 the subject experienced a renaissance in the second half of the twentieth century, and the House of Lords did not formally recognise the independence of the action until 1991.21 Not surprisingly, some details remain unsettled. A second source of difculty arises from the need to situate unjust enrichment within the broader scheme of private law. It is, for instance, necessary to reconcile legal and equitable contributions to the subject,22 and determine the proper relationship between unjust enrichment and property.23 But the most persistent – and perhaps the most complicated – set of issues lies at the intersection of unjust enrichment and contract. That is hardly surprising. Many, perhaps most, transfers of wealth occur under contract. The mechanism may, however, fail for a variety of reasons: an anticipated agreement may never materialize, an apparent agreement may be nullied by the lack of an essential element, an improperly induced agreement may be avoided, an otherwise valid agreement may be rendered unenforceable

19

M. McInnes, ‘Book Review’ [2004] LMCLQ 405; cf. R. Stevens, ‘Absence of Basis Accepted; Unjust Factors Rejected’ in ‘Review Article: The New Birksian Approach to Unjust Enrichment’ [2004] RLR 260, 270. 19a Deutsche Morgan Grenfell Group plc. v. I.R.C. [2006] UKHL 49. 20 Moses v. Macferlan (1760) 2 Burr 1005, 97 ER 676. 21 Lipkin Gorman v. Karpnale Ltd. [1991] 2 AC 548 (HL). 22 P. Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 UWAL Rev. 1; P. Birks, ‘Equity, Conscience, and Unjust Enrichment’ (1999) 23 MULR 1. 23 See, for example, P. Birks, ‘Property and Unjust Enrichment: Categorical Truths’ [1997] NZ L. Rev. 623; R. B. Grantham and C. E. F. Rickett, ‘Property and Unjust Enrichment: Categorical Truths or Unnecessary Complexity?’ [1997] NZ L. Rev. 668.

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by want of some formality, an inherently sound agreement may be discharged for breach, and so on. In such circumstances, a court may be presented with a transfer of wealth that cannot, due to the absence of an effective agreement, be addressed on a contractual basis. And unless the legal system is to adopt the simple, though unattractive, solution of merely allowing gains and losses to lie where they fall,24 it must nd an alternative means of governing such transactions. Enter unjust enrichment.

i) Contractual Bars to Restitution As the preceding paragraph suggests, the law of unjust enrichment undoubtedly may operate in the absence of an enforceable agreement. A corollary of that proposition also enjoys widespread support. It frequently is said that restitution is not available with respect to benets conferred under the terms of an effective contract.25 That view has been justied on various grounds. Professor Burrows, for instance, has said that ‘the most compelling reason . . . is the need to break the circularity of holding a party contractually liable to confer a benet which the law of restitution requires the other to return.’26 By far the most common explanation, however, reects the fundamental principles that underlie contract and unjust enrichment. Contract allows the parties to allocate risks ex ante between themselves. An agreement indicates the burdens to which each side is subject (including the burden of future contingencies, such as shifts in market value) and thereby facilitates an informed determination of price. Unjust enrichment, in contrast, allocates risks ex post by operation of law. It applies default rules to rectify an imbalance that has arisen by virtue of a past transfer. If those two approaches come into conict, society’s general commitment to liberalism ensures that contract trumps unjust enrichment. Respect for personal autonomy generally privileges a voluntary distribution of risk over the allocation of burdens that otherwise would be achieved by operation of law. To award restitution in the face of an effective agreement would upset the parties’ allocation of benets and burdens by allowing the claimant to receive more than she had bargained for. That last sentence requires further attention. The common law’s reluctance to award restitution with respect to benets conferred pursuant to effective

24

Unattractive, but not entirely far-fetched, as evidenced by the common law’s traditional approach to frustrated contracts: Cutter v. Powell (1795) 6 TR 320, 101 ER 573 (QB), Chandler v. Webster [1904] 1 KB 493 (CA). 25 Of course, in the interest of clarity, contractual parties may expressly exclude claims in unjust enrichment, much the same as they may limit or eliminate the possibility of tortious liability. 26 A. Burrows, ‘Restitution from Assignees (The Trident Beauty)’ [1994] RLR 52, 54.

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agreements is not conned to transfers between contractual parties. It also bars recovery of enrichments that are conferred upon third parties in satisfaction of contractual obligations. That means, for instance, that a garage that repairs a vehicle pursuant to a contract with an insurance company cannot demand restitution from the owner of the improved vehicle,27 nor does a sub-contractor who works under agreement with a contractor enjoy a claim in unjust enrichment against the homeowner.28 As those examples reveal, the aim of the rule is not so much to protect a contractual party from extra-contractual burdens, but rather to prevent a contractual party from receiving non-contractual payment for contractual performance. A different explanation has been suggested with respect to three-party situations. Some commentators have invoked the doctrine of privity to insist that a contractual party is conned to relief within the agreement. Indeed, going further, it has been said that, regardless of any contract, restitution should be restricted to immediate parties and that a claimant in unjust enrichment should never be allowed, by means of ‘leapfrogging’, to reach a subsequent enrichee. The better view, however, is that leapfrogging per se is not a problem. Take a simple example.29 The claimant mistakenly pays £1000 into a person’s bank account. In good faith reliance upon that transfer, the recipient gives £1000 from a different account to her son as a gift.30 If sued for unjust enrichment, the initial recipient would successfully plead change of position. The claimant therefore seeks relief from the son. Absent the need to protect the integrity of contractually allocated risks, that action is irresistible. The defendant was enriched as a direct result of the claimant’s mistaken transfer. The only possible basis for denying relief – the bare interposition of the intermediate party – does not bear in a meaningful way on the justice of the claim. Regardless of the mother’s participation in the episode, restitution would simply divest the son of a windfall and allow the claimant to recover value lost through an impaired intention. Liability would, in other words, merely restore the status quo ante.

27

Brown & Davis Ltd. v. Galbraith [1972] 1 WLR 997 (QB); cf. Torts (Interference with Goods) Act 1977 s. 6(4). 28 Hampton v. Glamorgan C. C. [1917] AC 13 (HL). 29 The hypothetical was devised by Professor Tettenborn in ‘Lawful Receipt – A Justifying Factor’ [1997] RLR 1. Tettenborn himself argued against liability on the ground that the son lawfully received his enrichment from his parent. 30 The case would be much easier if the initial recipient had made a gift of the same money that she received (or its traceable proceeds). In that situation, the claimant could rely upon a proprietary connection, and not merely a causal connection, against the son: P. Birks, Unjust Enrichment (2nd edn. OUP, Oxford 2005) 80–81.

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ii) Rening the Principle: Restitution for Un-Allocated Risks Consequently, whether a case involves two or three parties, the governing rule precludes restitution for benets conferred under effective agreements. Or at least, that is how the rule typically is phrased. Principle and precedent, however, actually prefer a more restrictive and rened proposition. The relevant concern is not the existence of contracts per se, but rather the integrity of contractual distributions of benets and burdens. Accordingly, as Professor Beatson has argued, contract should trump unjust enrichment only with respect to risks that the parties have allocated between themselves. By the same token, ‘[w]here all risks have not been . . . distributed, there will be a gap in the contractual allocation and there is room for adjustment . . . by applying the principle of unjust enrichment’.31 The crucial question therefore is whether or not restitutionary liability would be inconsistent with the expectations engendered by the parties’ agreement. While the more nuanced version of the exclusionary rule is better able to address the relevant mischief, it does create an additional problem. Under the broader formulation, a court need merely determine whether or not an impugned transfer occurred pursuant to an effective contract. The narrower formulation, in contrast, requires the court to determine whether or not the transfer pertained to an allocated risk. That question will be answered easily enough if a contractual provision expressly assigned the risk of an erroneous transfer to one of the parties. The issue becomes far more difcult, however, if the contract was silent on point. Restitution should then be denied only if the transferor impliedly agreed that the contract would provide her only means of relief. That issue is apt to be contentious. In the absence of an express term, each side will tender circumstantial evidence in support of their position. The claimant will insist that she never assumed the risk of non-payment; the defendant (whether a contractual counterparty or a stranger to the agreement) will argue that the transfer was one of those events (arising perhaps through error) that comprised the claimant’s contractual consideration. Miles v. Wakeeld MBC 32 provides a controversial example. As part of a ‘work to rule campaign’, council employees refused to perform some of their contractual duties. The defendant council, acting within its rights, announced that it would not pay for any services provided on that basis. The claimant, a registrar employed by the council, satised most of his obligations, but consistent with the industrial action, refused to conduct marriage ceremonies during

31

J. Beatson, ‘Restitution and Contract: Non-Cumul?’ (2000) 1 Theoretical Inquiries in Law 83, 94; J. Beatson, ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in G. Jones and W. Swadling (eds.), The Search for Principle: Essays in Honour of Lord Goff (OUP, Oxford 1999) 152. See also P. Birks, ‘Failure of Consideration and Its Place on the Map’ (2002) 2 OUCLJ 1, 5. 32 [1987] AC 539 (HL).

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his Saturday morning shift. The House of Lords held that the council was entitled, under the terms of the contract, to withhold wages for the time in question. For present purposes, however, the real signicance of the case lies in its dicta. How would the case have been resolved if, instead of refusing to perform some services, the claimant participated in a ‘go slow’ campaign? While they again believed that the council would have been relieved of the obligation to provide contractual remuneration, Lord Templeman and Lord Brightman suggested that the employee would have been entitled to recover, under a quantum meruit (i.e., unjust enrichment), the value of the services that the employer had chosen to accept. That result would appear to violate the broad proposition that the continued existence of an effective agreement bars restitution. As Beatson has suggested, however, the claimant’s services may have fallen outside the parties’ allocation of risks,33 such that recovery would not contradict the contractual distribution of benets and burdens. Other cases are even more difcult.34 Much of the debate centres on the High Court of Australia’s decision in Roxborough v. Rothmans of Pall Mall.35 The state purported to impose a ‘licence fee’ on the sale of tobacco products. The legislative scheme contemplated that the nancial burden would be passed down the line from wholesalers to retailers to consumers. Some time later,

33 ‘Non-Cumul’ (n. 31) 96; ‘The Temptation of Elegance’ (n. 31) 154. Cf. G. Mead, ‘Restitution Within Contract?’ (1991) 11 LS 172. 34 Orphanos v. Queen Mary College illustrates the point: [1985] AC 761 (HL). The student, a citizen of Cyprus, was accepted into the mechanical engineering program at Queen Mary College. Because he had been resident in England since 1978 for educational purposes, he claimed that he qualied for the home student rate of £480 per year. The college insisted, however, that he pay the overseas student rate of £3600. After further discussion, the student capitulated and signed a contract to pay the higher amount. A short time later, the House of Lords decided (in other proceedings) that a person in the student’s position should indeed be considered ordinarily resident in England. Nevertheless, the House also sided with the college in rejecting the student’s subsequent claim for a refund. Applying Beatson’s test of unallocated risks, Birks questioned that decision: ‘Failure of Consideration’ (n. 31) 5. And indeed, it is possible, at least on the threshold issue of liability, that restitution should have been available despite the fact that the parties’ contract survived the discovery of their mutual mistake. Tuition was determined solely on the basis of residence. Consequently, if the error had been revealed earlier, the contract undoubtedly would have appeared in precisely the same terms, with the exception of a lower price. That analysis may not, however, fully reect the fact that the student’s residency status was in doubt at the time of the contract. Orphanos arguably agreed to the college’s terms in order to both (i) acquire the right to attend classes, and (ii) resolve an honest dispute. If so, then he did assume the risk of error on the residency issue. That is the nature of a settlement agreement. 35 (n. 13).

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however, the High Court determined that the charge was, in fact, an invalid tax. At that point, the defendant wholesaler held money that it had received from the claimant retailer (by way of the ultimate consumers), but that it no longer was required to pay to the government. The retailer successfully claimed restitution from the wholesaler. A majority of the court accepted that (i) the global price imposed by the parties’ contract consisted of a charge for cigarettes plus a separate amount representing the tax, and (ii) given the invalidity of the tax, there was a total failure of consideration with respect to the second component. Roxborough is controversial in a number of respects. Most signicantly for present purposes, it appears to violate the rule against restitution for benets conferred pursuant to effective agreements. Indeed, Kirby J. dissented precisely because the payments were made in satisfaction of a contract that remained intact despite the parties’ error. Likewise, Beatson rejected the majority’s conclusion on the basis that ‘there was no evidence . . . that the risk of the licence fee being invalid had been placed on the wholesaler rather than the retailers.’36 That is, however, a substantially different test than Beatson previously had formulated. Rather than being satised by proof that the parties had neither expressly nor impliedly addressed the matter, it requires proof that the relevant risk had been allocated to the defendant. The earlier approach is preferable. The goal is not to enforce a contractual term, but rather, more modestly, to ensure that restitution does not contradict the agreed distribution of benets and burdens. And in that respect, the majority opinion of Gleeson C. J., Gaudron and Hayne J. J. found that . . . the net total amount of each invoice referable to the ‘tobacco licence fees’ [was] a severable part of the consideration, which has failed. . . . [T]he tax component of the net total wholesale cost was treated as a distinct and separate element by the parties. It was externally imposed. It was not agreed by negotiation.37

If, as that passage suggests, (i) the relevant portion of the purchase price was exclusively referable to the purported licence, (ii) the contract would have taken the same form, minus the fee component, if the parties had been fully informed at the outset, and (iii) the claimant had not assumed the risk of the operative error, then Roxborough prima facie might have been an appropriate case for relief.38 Unjust enrichment would have lled a gap that existed within the parties’ allocation of benets and burdens.

36

J. Beatson and G. Virgo, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR 352, 356. 37 Roxborough (n. 13) 527–528. 38 It is arguable, however, that the prima facie right to restitution ultimately should have been defeated by the fact that the claimant did not suffer the requisite expense after shifting the economic burden of the invalid tax onto its customers. The defence of passing on was, unfortunately, rejected by the majority in Roxborough: M. McInnes, ‘Enrichments, Expenses and Restitutionary Defences’ (2002) 118 LQR 209.

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2) UNJUST ENRICHMENT AND CONTRACT IN CANADIAN LAW The modern law of unjust enrichment in Canada is both confused and confusing. The source of the problems lies largely with the Supreme Court of Canada, which has, in the past quarter century, delivered a series of misleading and inconsistent judgments.

a) Unjust Enrichment The circumstances were not always so bleak. With Deglman v. Guaranty Trust Co.39 in 1954, Canada became the rst Commonwealth jurisdiction40 to explicitly adopt the unifying principle of unjust enrichment. Truth be told, however, the immediate effect of that decision was muted and the case did not substantially affect reasoning or results. Both before and after Deglman, Canadian courts closely followed English practice. More specically for present purposes, relief was premised (in fact though not in name) upon proof of an unjust factor. The plaintiff was required to establish a positive reason for reversing a transfer of wealth. Restitution was therefore triggered by mistake,41 compulsion,42 failure of consideration (qualied intention)43 and so on.

i) Pettkus v. Becker: A False Start The situation appeared to change with Pettkus v. Becker 44 in 1980. In formulating the constituent elements of the claim, Dickson J. said that ‘there are three requirements to be satised before an unjust enrichment can be said to exist: an enrichment, a corresponding deprivation and absence of any juristic reason

39

[1954] 3 DLR 785 (SCC). Pride of place within the common law world belongs to the United States of America, where the Restatement of the Law of Restitution: Quasi-Contract and Constructive Trusts adopted the principle nearly two decades earlier: (American Law Institute 1937). 41 R. v. Beaver Lamb & Shearling Co. Ltd. (1960) 23 DLR (2d) 513 (SCC); Carleton (County) v. City of Ottawa (1965) 52 DLR (2d) 220 (SCC); Eadie v. Township of Brantford (1967) 63 DLR (2d) 561 (SCC); Breckenridge Speedway Ltd. v. R. (1969) 9 DLR (3d) 142 (SCC); Storthoaks (Rural Municipality) v. Mobil Oil Canada Ltd. (1975) 55 DLR (3d) 1 (SCC). 42 Stoltze v. Fuller [1939] 1 DLR 1 (SCC); Knutson v. Bourkes Syndicate [1941] 3 DLR 593 (SCC); Peter Kiewit Sons’ v. Eakins Construction Ltd. (1960) 22 DLR (2d) 465 (SCC); George (Porky) Jacobs Enterprises Ltd. v. City of Regina (1964) 44 DLR (2d) 179 (SCC). 43 Deglman (n. 39). 44 (1980) 117 DLR (3d) 257 (SCC). 40

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for the enrichment.’45 The italicised words do, of course, echo the civilian terminology, and many commentators came to believe that Canadian courts had adopted the civilian model of unjustied enrichment. It is, nevertheless, very difcult to accept that the court betrayed its common law heritage. Dickson J. presented the three-part cause of action as the culmination of ‘general principles . . . that have been fashioned by the Courts for centuries’,46 and he imposed liability on the facts only because the plaintiff had established the unjust factor of free acceptance.47 For the most part, subsequent courts followed suit. Restitution was positively justied on the grounds of mistake,48 compulsion,49 failure of consideration,50 free acceptance,51 knowing receipt52 and so on. In some cases, the Supreme Court of Canada relied upon traditional unjust factors without even referring to the concept of juristic reasons.53 Pettkus did, however, spawn another, much smaller, line of cases that applied a literal interpretation of ‘absence of any juristic reason’ and imposed liability following the defendant’s failure to demonstrate a basis for the retention of an

45

Pettkus v. Becker (n. 44) 274 (emphasis added). Pettkus v. Becker (n. 44) 274. After stating the basic test, Dickson J. also went on to say that ‘[t]he common law has never been willing to compensate a plaintiff on the sole basis that his actions have beneted another. . . . It must, in addition, be evident that the retention of the benet would be “unjust” in the circumstances’. That language is, of course, more consistent with the traditional common law approach. 47 Two years before Pettkus v. Becker, Dickson J. suggested the need for ‘an enrichment, a corresponding deprivation, and the absence of any juristic reason – such as a contract or disposition of law’: Rathwell v. Rathwell (1978) 83 DLR (3d) 289 (SCC) 306. And two years before Rathwell v. Rathwell, Dickson J. sat on an appeal from Quebec dealing with the civilian claim for ‘unjustied enrichment’ known as the action de in rem verso (now codied as Civil Code of Quebec, SQ 1991, c. 64, at 1493). Beetz J.’s unanimous judgment held that relief was premised upon, inter alia, ‘the absence of justication’ for the enrichment that the defendant received from the plaintiff: Cie Immobilière Viger Ltée. v. Lauréat Giguère Inc. [1977] 2 SCR 67 (SCC) 77. The words may simply have stuck in Dickson J.’s mind when he wrote Pettkus v. Becker. 48 Air Canada v. British Columbia (n. 13) (relief denied on other grounds). 49 Re Eurig (1998) 165 DLR (4th) 1 (SCC). 50 Palachik v. Kiss (1983) 146 DLR (3d) 385 (SCC). 51 Sorochan v. Sorochan (1986) 29 DLR (4th) 1 (SCC); Peter v. Beblow (1993) 101 DLR (4th) 621 (SCC) (Cory J.). 52 Citadel General Assurance Co. v. Lloyds Bank Canada (1997) 152 DLR (4th) 411 (SCC); Gold v. Rosenberg (1997) 152 DLR (4th) 385 (SCC) (relief denied on facts). 53 Nepean (Township) Hydro Electric Commission v. Ontario Hydro (1982) 132 DLR (3d) 193 (SCC); Canadian Pacic Airlines Ltd. v. British Columbia (1989) 59 DLR (4th) 218 (SCC). 46

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enrichment.54 Although the issue was never explored or even identied, the juristic reason analysis most often arose in new or unusual situations.55 Lawyers perhaps turned to the generalised principle only after they had exhausted the traditional categories of recovery.

ii) Garland v. Consumers’ Gas Co.: A Unique Approach Although Pettkus had little effect on the resolution of restitutionary claims in Canada, the continued existence of the civilian terminology courted disaster. There was always a danger that, if the cases were not carefully read, liability would be thought to turn upon an absence of juristic reason, rather than on the presence of an unjust factor. That risk eventually was resolved in Garland v. Consumers’ Gas Co.56 The defendant, a natural gas provider, was required to apply annually to the Ontario Energy Board (OEB) for approval of its pricing scheme. Beginning in 1975, that scheme included a late payment penalty (LPP) that was xed at a at rate of 5% of unpaid charges. Because the amount did not depend upon the length of time that a debt was overdue, it varied widely when expressed as an annual interest rate. If a customer was at least 38 days late, the rate fell below 60% per annum; if a customer was a single day late, the effective rate was, by one calculation, a staggering 5 400 000 000% per annum. Although neither party grasped the point immediately, the LPP took on a new character in 1981 when the federal government amended section 347 of the Criminal Code to prohibit the receipt of interest at anything in excess of 60% per annum.57 By 1994, however, the plaintiff, one of Consumers’ Gas’s occasionally tardy customers, recognised the connection and commenced proceedings to have the LPP declared illegal. In 1998, the Supreme Court of Canada agreed with that allegation (but did not address its civil implications).58 Astonishingly, the defendant continued for another three years to request, receive and enforce the same LPP scheme. It was not until 2001, when the OEB took the initiative and demanded changes, that Consumers’ Gas eventually abandoned its illegal practice.

54

Atlas Cabinets & Furniture Ltd. v. National Trust Co. (1990) 68 DLR (4th) 161 (BC CA) 172–173; Toronto-Dominion Bank v. Carotenuto (1997) 154 DLR (4th) 627 (BC CA) 636–637; Campbell v. Campbell (1999) 173 DLR (4th) 270 (Ont CA) 278–279. 55 Re: Goods and Services Tax (1992) 94 DLR (4th) 51 (SCC) 71; Peter v. Beblow (n. 51) (McLachlin J.); Garland v. Consumers’ Gas Co. (2001) 208 DLR (4th) 494 (Ont CA) 520, 535–541; Nova Scotia (Attorney General) v. Walsh (2002) 221 DLR (4th) 1 (SCC) 42; cf. Peel (Regional Municipality) v. Canada (1992) 98 DLR (4th) 140 (SCC). 56 (2004) 237 DLR (4th) 385 (SCC). 57 RSC 1985, c. C-46, s. 347. 58 Garland v. Consumers’ Gas Co. (No. 1) (1998) 165 DLR (4th) 385 (SCC).

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By that time, the defendant had illegally collected as much as $150 000 000 over the course of twenty years. The plaintiff accordingly commenced class action proceedings, on behalf of himself and as many as 500 000 other claimants, for recovery of the illegal payments. The prospects for success were promising. Several avenues of relief appeared to be available under the traditional unjust factors. Although Garland himself had realized the truth of the matter by 1994, many customers had paid in the mistaken belief that the LPPs were valid. It was also arguable that the LPPs had been paid for a consideration that failed insofar as the customers provided money in discharge of a debt that did not actually exist.59 Perhaps the simplest solution, however, was based on the illegality itself.60 Although precedents are surprisingly sparse, relief ought to be available where the plaintiff, despite being party to an illegal transaction, was the intended beneciary of the criminal prohibition and consequently was not in pari delicto with the defendant.61 And from a civilian perspective, the case seemed even simpler. Regardless of the OEB’s approval of Consumers’ pricing scheme, it was difcult to see a juristic reason that could support the defendant’s illegal collection of $150 million. Against that backdrop, the plaintiff must have been disappointed by the reception that he received in court. His claim was entirely rejected by the trial judge and the Ontario Court of Appeal,62 and it enjoyed only partial success in the Supreme Court of Canada. The nal outcome was an order that (i) denied recovery with respect to payments made between 1981 and 1994, when the

59

That approach would, however, squarely raise the question with which this paper is concerned: should restitution be available within the context of an otherwise subsisting contract? That question is discussed in great detail below. 60 Browning v. Morris (1778) 2 Cowp 790, 98 ER 1364. Cf. Kiriri Cotton Co. Ltd. v. Dewani [1960] AC 192 (PC) (relief available on basis of mistake of law if plaintiff was not in pari delicto with defendant with respect to illegal transaction). 61 For instance, regardless of any mistake, a tenant may be able to recover ‘key money’ that had been illegally paid to a landlord in order to secure a lease: Gray v. Southouse [1949] 2 All ER 1019 (KB). See also Schellenberg v. Ely Canada Ltd. [1962] OJ No. 195 (HCJ); Jeffrey v. Fitzroy Collingwood Rental Housing Association [1999] VSC 33 [44]. 62 The trial judge dismissed the claim on the basis that it constituted an impermissible collateral attack on the OEB orders: (2000) 185 DLR (4th) 536 (Ont SC). The Ontario Court of Appeal unanimously rejected that reason, but by a majority upheld the result: (2001) 57 OR (3d) 127 (Ont CA). McMurtry C. J. O. (MacPherson J. A. concurring) held, inter alia, that it would be ‘contrary to the equities’ to order restitution because the defendant had acted pursuant to OEB orders (which had not been directly attacked) and because the burden of liability would ultimately fall upon the defendant’s customer base as a whole. Borins J. A. dissented. After reviewing, but not attempting to resolve, the debate as between unjust factors and juristic reasons, he applied the latter and held that the decision in Garland No. 1 (n. 58) had deprived the OEB order of effect and consequently could not provide a juristic reason for the enrichment.

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action was commenced, and (ii) limited recovery of subsequent payments to interest that exceeded 60% per annum.63 The defendant was thereby entitled to retain millions of dollars that it had collected illegally. The result in Garland was surprising; the court’s reasoning shocking. Iacobucci J., writing for a unanimous panel, believed that his judgment involved a mere ‘redenition and reformulation’64 of established principles. In fact, it created an entirely new test of liability: a test that no judge had ever articulated and no academic had ever proposed – a test that is true to neither the common law (because it turns on the absence of juristic reasons, rather than the presence of unjust factors) nor the civil law (because it turns not only on juristic reasons, but also public policy and reasonable expectations). The new test of unjust enrichment is best approached in stages. 1. Restitution ‘is an equitable remedy that will necessarily involve discretion and questions of fairness.’65 2. If the plaintiff establishes an enrichment and a corresponding deprivation, restitution may be available if the transfer occurred without juristic reason. That issue is resolved through a two-part inquiry. (a) The plaintiff bears the burden of proving that the facts do not fall within one of the established categories of juristic reasons: contract, disposition of law, donative intent, or ‘other valid common law, equitable or statutory obligations’. If that burden is discharged, then restitution prima facie is available. (b) Relief nevertheless will be denied if the defendant demonstrates some other reason as to why the impugned transfer ought not to be reversed. Two considerations are especially important at that stage: public policy and the parties’ reasonable expectations.

63

Although Iacobucci J. found that the plaintiff prima facie was entitled to restitution, he ultimately held, under the second branch of the juristic reason analysis, that the defendant was entitled to retain a substantial portion of its enrichment. As a matter of public policy, Iacobucci J. accepted that a party should not be entitled to prot from wrongdoing. As a matter of reasonable expectations, however, he held that (i) the defendant honestly believed that it was entitled to collect the LLP before the plaintiff began his action in 1994 – hence the irrecoverability of payments made prior to that date, and (ii) a reasonable person who pays late must expect to incur a penalty that, inter alia, complies with the provisions of the Criminal Code – hence the irrecoverability of payments representing interest at a rate of 60% or less. Garland accordingly establishes the remarkable proposition that restitution may be denied as long as a criminal honestly believed in the legality of his enrichment. 64 Garland v. Consumers’ Gas Co. (n. 56) 401. 65 Garland v. Consumers’ Gas Co. (n. 56) 401.

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3. Even if there is an absence of juristic reason for the transfer that occurred between the parties, the defendant may defeat liability, in whole or in part, by proving a defence. A thorough examination of that test lies beyond the scope of this paper.66 Sufce to say that it raises far more questions and difculties than it resolves. • Are the ‘established categories’ of juristic reason closed, or will new heads be included on the basis of future cases? • While the concepts of contract and donative intent are reasonably straightforward, how will courts dene ‘disposition of law’ and ‘other valid common law, equitable or statutory obligations’? When will a ‘disposition of law’ not fall within the latter category? • What is the difference between (i) a consideration that falls under the second stage of the juristic reason analysis and (ii) a defence? • Given that, as Iacobucci J. stressed in an earlier judgment, liability in unjust enrichment is strict,67 why would the recipient of an illegally extracted payment be allowed to escape or reduce liability by establishing that money was received in good faith? And if fault is relevant, what level of knowledge will justify restitution? • Given that the vast bulk of the modern action stems from the common law’s writ of indebitatus assumpsit, in what sense is a claim for unjust enrichment ‘equitable’? And even if that claim is thought to be ‘equitable’ in a jurisdictional sense (a persistent and pernicious fallacy, as discussed below), why would Canadian courts – having previously announced that the streams of law and equity have become co-mingled,68 and having previously insisted that unjust enrichment is not ‘a device for doing whatever may seem fair between the parties’69 – presume to resolve restitutionary claims on the basis of ‘discretion and . . . fairness’? • Given that the law of unjust enrichment is intended merely to reverse unwarranted transfers, why are restitutionary claims resolved on the basis of the parties’ ‘reasonable expectations’ (a doctrine that traditionally was conned, for the most part, to the forward-looking principles of contract)?

66

See M. McInnes, ‘Juristic Reasons and Unjust Factors in the Supreme Court of Canada’ (2004) 120 LQR 554; M. McInnes, ‘Restitution, Juristic Reasons and Palm Tree Justice’ (2004) 41 CBLJ 103; M. McInnes, ‘Making Sense of Juristic Reasons: Unjust Enrichment After Garland v. Consumers’ Gas Co.’ (2004) 42 Alta L. Rev. 399. 67 Air Canada v. Ontario (Liquor Control Board) (1997) 148 DLR (4th) 193 (SCC); cf. Citadel General Assurance Co. (n. 52) (fault required for unjust enrichment resulting from knowing receipt of trust property). 68 Canson Enterprises Ltd. v. Broughton & Co. (1991) 85 DLR (4th) 129 (SCC) 149. 69 Peter v. Beblow (n. 51).

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b) Unjust Enrichment and Contract Prior to Garland, Canadian law largely mirrored English law with respect to the relationship between unjust enrichment and contract. Restitution generally could not be used to escape a contractual allocation of risk. While (as previously explained) that rule was somewhat unrened (in the sense that it might be triggered by the mere presence of a contract), it did appropriately prevent the re-distribution of benets and burdens.70 As a prelude to unjust enrichment, the plaintiff was required to prove that the (purported) agreement was, for instance, unenforceable,71 void,72 or discharged for breach.73 At rst glance, Garland would appear to further focus the judicial mind on the intersection of unjust enrichment and contract. And indeed, several recent decisions have turned on the presence or absence of an effective agreement.74 Curiously, however, the Supreme Court of Canada itself has taken a remarkably relaxed approach to the issue. That was true not only in Garland, but also in the subsequent case of Pacic National Investment Ltd. v. Victoria (City) (No. 2).75

i) Garland v. Consumers’ Gas Co.: A Subsisting Illegal Agreement Iacobucci J. said that ‘the only possible juristic reason’ for the defendant’s retention of its enrichment was the ‘disposition of law’ represented by ‘the OEB orders creating the LPPs’.76 And he quite properly rejected that argument on constitutional grounds. The federal Criminal Code provision that rendered the LPPs illegal was paramount over the provincial legislation that empowered the OEB to authorise the defendant’s pricing schemes. Contrary to Iacobucci J.’s condent assertion, however, there was another possible basis upon which the benet might be retained: contract. The plaintiff had paid the late payment penalty pursuant to agreement under which he purchased natural gas from the defendant. And while the specic provision that purportedly imposed the LPP had been struck down and revised to the extent that it was unconstitutional,77 the parties’ contract otherwise persisted.

70

Webb & Knapp (Can) Ltd. v. Edmonton (City) (1963) 3 DLR (3d) 123 (Alta CA). Deglman (n. 39) (SCC). 72 Clarke v. Moir (1987) 82 NSR (2d) 183 (SC TD). 73 Kemp v. Williams (1978) 87 DLR (3d) 544 (Sask CA). 74 See e.g., Dahl v. Royal Bank of Canada (2005) 46 BCLR (4th) 342 (SC); Re Galaxy Sports (2005) 14 ETR (3d) 126 (BC SC); Skookum Ventures Ltd. v. Long Hoh Enterprises Canada Ltd. (2005) 3 BLR (4th) 191 (BC SC). 75 (2004) 245 DLR (4th) 211 (SCC). 76 Garland v. Consumers’ Gas Co. (n. 56) (emphasis added). 77 In conning the plaintiff to the recovery of money representing interest in excess of 60% per annum, Iacobucci J. was following Transport North America Express Inc. v. New Solutions Financial Corp.: (2004) 235 DLR (4th) 385 (SCC). In that case, the 71

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The court effectively re-wrote the term so as to bring it within the Criminal Code limit of 60% per annum. Before doing so, however, the court should have addressed the issues that arise at the intersection of unjust enrichment and contract. Did either party assume the risk of error or invalidity? Would restitution improperly re-distribute the benets and burdens that the parties had voluntarily allocated between themselves? But for the existence of the void term, would the parties have struck a different bargain? The LPP clause was not like the provision that appeared before the High Court of Australia in Roxborough. It did not, in essence, operate outside of the parties’ price calculations, such that there was no contractual impediment to restitution. Nor was there any evidence that Gordon Garland had paid the penalty in order to conclusively discharge an apparent debt, without recourse in the event of error, so as to forego possible claims in unjust enrichment. To the contrary, instead of reaching a global price by adding together costs and desired prots, the defendant worked backwards. A global revenue stream was established each year by regulation. The defendant was required to devise a pricing scheme that would reach that total in a way that satised the OEB. That process was a zero-sum exercise. Every cent collected by way of LLP represented revenue that otherwise would have been received pursuant to higher basic rates.78 It consequently follows that by allowing restitution within the subsisting contract, the Supreme Court of Canada substituted its own contract for the one created by the parties. Its nal order directly contradicted the orthodox view regarding the intersection of unjust enrichment and contract. That is not necessarily to say that restitution should have been denied. There may be circumstances in which the general rule regarding subsisting contracts is displaced by more pressing concerns. Garland arguably was such a case.

court addressed the civil consequences of a loan agreement that violated s. 347 of the Criminal Code. Broadly speaking, there were three options. (i) In an extreme case, the entire agreement might be declared void, thereby preventing the recovery of interest or principal. The facts of Transport North America did not support such an approach. (ii) Blue pencil severance could strike out the offensive contractual term, thereby restricting the lender to the recovery of the principal, as well as interest due under separate and non-offensive interest provisions. (Because he was concerned to protect the integrity of the criminal law and to deter wrongdoers, Fish J. advocated that approach in a strong dissent.) (iii) Notional severance could allow the court to re-write the terms of the parties’ agreement, so as to reduce the interest rate to 60% per annum, thereby allowing for the recovery of principal and interest. Arbour J., writing for the majority, favoured that approach in order to ‘vest the greatest amount of remedial discretion in judges’: 402. She was, in other words, far more concerned in effecting ‘justice’ than in respecting the parties’ allocation of benets and burdens. 78 Garland v. Consumers’ Gas Co. (n. 56) 398. It was on that basis that McMurtry C. J. O., in the Ontario Court of Appeal, erroneously concluded that the defendant had not been enriched: Garland (Ont CA) (n. 55) 518.

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Indeed, given that every relevant enrichment was tainted by illegality, the defendant’s liability probably should have been expanded to include (i) payments received prior to the commencement of the plaintiff’s claim (subject to the operable limitation period), and (ii) the full amount of the LPPs, rather than merely the amounts by which each LPP exceeded the criminally permitted rate.79 It is, nevertheless, worrisome that the Supreme Court of Canada would both formulate and misapply a new conception of unjust enrichment in the very same case. It is even more worrisome that the court may have thereby set a precedent.

ii) Pacic National Investment Ltd. v. Victoria (City) (No. 2): Third Party Agreement The Supreme Court of Canada once again took a casual approach to the issue of contractual integrity in Pacic National Investment Ltd. v. Victoria (City) (No. 2).80 And like Iacobucci J. in Garland, Binnie J. imposed relief in a way that largely disregarded the terms of the parties’ agreement. While the facts of Pacic National are complicated, the essential points will sufce for present purposes. The Province of British Columbia owned a large stretch of the harbour front in the City of Victoria. During the early 1980s, the plaintiff, Pacic National Investment Ltd. (PNI), provided the public authorities with a set of development plans. The province and the city reacted favourably by creating a Master Agreement, between themselves, that was intended to facilitate and govern a series of developments. • For the purposes of the project, the province acted through an alter-ego known as BCEC (the British Columbia Enterprise Corporation). • The Master Agreement envisioned a bustling oceanfront community that combined residential, commercial and recreational components. With respect to that nal component, legislation typically required that 5 per cent of developed land be devoted to public purposes (e.g., parks and walkways). In this instance, however, the city insisted that 30 per cent be set aside for general enjoyment, and that it receive that benet without cost to its taxpayers. • The Master Agreement accordingly required BCEC to, inter alia, construct a seawall, a waterfront walkway and a landscaped park. • Notwithstanding the formal terms of the Master Agreement, all of the parties contemplated from the outset that BCEC soon would be replaced by PNI, which would construct the public amenities alongside a three-storey, multiuse complex.

79

A Criminal Code provision will do little to deter wrongdoers who know that, even if they are prosecuted, they will be able to retain money received as interest up to a maximum of 60% per annum. 80 (n. 75).

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The project initially unfolded as anticipated. Early in the process, BCEC sold its land, and assigned its interest under the Master Agreement, to PNI for total consideration of $5 000 000. That price was divided into two components: (i) $2 500 000 in cash, and (ii) $2 500 000 representing the projected cost of building the seawall, waterfront walkway and parkland. That contract was conditional upon PNI’s receipt of zoning approval for a three-storey commercialresidential complex, but city council, as then constituted, was only too happy to comply. All of the parties further assumed that that zoning would remain in place for as long as necessary. Signicantly, however, none of the various contracts contained a term to that effect. To the contrary, it was general knowledge that that city council could not fetter its successors’ discretion to re-zone. Following negotiations with the city, PNI elected to construct the public amenities before beginning work on the commercial portions of the project. That decision ultimately proved fatal. The public quickly became attached to its new seaside park and vociferously objected to the prospect of commercial development. Those protests found their mark. A municipal election returned a re-constituted city council that promptly re-zoned the area to restrict development to single-storey buildings. Although it had already earned about $2 000 000 in net prots, PNI’s plans for a three-storey complex were dead in their tracks. Disappointed by the outcome, PNI brought two claims against the city. The rst alleged that the city had breached an implied term of the Master Agreement to the effect that it would either (i) maintain appropriate zoning as long as required, or (ii) provide compensation for any resulting losses.81 As discussed in greater detail below, the Supreme Court of Canada rejected that claim on the basis that any term that directly or indirectly fettered the discretion of a successor was ultra vires the city and hence invalid. The court therefore returned the parties to trial for a consideration of PNI’s alternative action claim. That second claim was framed in unjust enrichment. PNI argued (i) that it provided the city with public facilities (i.e., the sea wall, waterfront walkway and parkland) worth $1 080 000, and (ii) that in the absence of an implied term regarding future zoning, there was no juristic reason for that transfer. Liability was imposed at trial,82 but overturned by the British Columbia Court of Appeal.83 Indeed, Southin JA considered the whole claim to be misconceived. She refused to allow PNI to use the same services as both (i) consideration for its contract with BCEC, and (ii) a restitutionary deprivation vis à vis the city. She also held that, regardless of the non-existence of an implied term regarding zoning permission, there was a juristic reason for the city’s alleged enrichment:

81

(2000) 193 DLR (4th) 385 (SCC), aff’g (1998) 165 DLR (4th) 577 (BC CA), rev’g [1996] BCJ No. 2523 (BC SC). 82 (2002) 217 DLR (4th) 248 (BC SC). 83 (2003) 223 DLR (4th) 617 (BC CA).

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the zoning bylaws that prohibited PNI from building a three-storey structure had the same force and effect as provincial legislation. PNI did, however, prevail in the nal installment of the story.84 On further appeal to the Supreme Court of Canada, Binnie J. agreed that the construction services represented an enrichment and corresponding deprivation, and that, in the absence of an enforceable obligation requiring the city to maintain appropriate zoning, there was no juristic reason for the impugned transfer.

(a) Juristic Reasons and Unjust Factors Revisited Pacic National Investment (No. 2) raises a number of difcult issues. Perhaps most remarkably, it calls into question the conception of unjust enrichment that the Supreme Court of Canada had established just six months earlier. In Garland, Iacobucci J. rmly rejected the continued use of unjust factors, and premised the availability of restitution upon a test that combines juristic reasons, public policy and reasonable expectations. And yet, in Pacic National Investment (No. 2), Binnie J. stated: Both the City and [PNI] assumed that the City had legal authority to make zoning commitments the City did not possess. The nding of a common mistake is important to [PNI’s] claim to recover the cost of the extra works and improvements. If there had just been the ultra vires transaction without the added element of common mistake, it would have been a different case and the outcome would not necessarily be the same.85

This is puzzling. Binnie J. appears to be saying that, in some cases at least, the availability of restitutionary relief presumes an absence of juristic reason and the presence of an unjust factor.86 Unfortunately, his comments are cryptic and it is difcult to know precisely where Canadian law stands. When will it be necessary to offer dual proof? Since the two tests serve the same purpose of justifying recovery, why would a court ever require a claimant to satisfy both? Will it ever be sufcient, notwithstanding Garland, to prove an unjust factor only? And given the signicance of these issues, why did the Supreme Court of Canada avoid explicit discussion?

(b) Allocated Risks and Inseparable Terms Leaving aside the potential importance of the parties’ mistake, Binnie J. imposed liability because there was no juristic reason for the city’s enrichment. He reasoned that (i) PNI had provided the amenities in exchange for the city’s (ultimately invalid) undertaking to maintain appropriate zoning, and

84

n. 76. (n. 76) 224. 86 See also RB Grantham, ‘Absence of Juristic Reason in the Supreme Court of Canada’ [2005] RLR 102. 85

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(ii) although the parties’ contracts otherwise remained in force, the relevant exchange was cleanly severable and therefore amenable to restitution. Although neither proposition can be sustained, each reveals an interesting aspect of the court’s approach to reconciling unjust enrichment and contract. (i) Contractual and Non-Contractual Risks As presented by Binnie J., the facts of Pacic National Investment (No. 2) involved a simple failure of contract: PNI conferred a benet in response to the city’s promise; the promise subsequently was declared ultra vires; the apparent basis for the city’s enrichment therefore failed; and the transfer accordingly was reversed. The conclusion followed logically from the premises. The premises were, unfortunately, deeply awed. When dealing with PNI’s contractual claim in Pacic National Investment (No. 1), the Supreme Court of Canada did not nd that the city had given a promise that was ultra vires. LeBel J. merely held that any such promise, if given, would have been invalid. Moreover, while he did not formally resolve the issue, he did strongly suggest, in dicta, that the court below had been correct in denying the actual existence of any such promise. While the trial judge in Pacic National Investment (No. 1) had recognised an implied promise of future zoning, he did so exclusively because he believed that such a term would have improved the parties’ arrangement, and not because it reected their actual intentions. The Court of Appeal overturned that decision on the basis that it was contrary to fact. As Esson J. A. explained, the parties never even discussed the inclusion of such a term because ‘it was taken for granted’, given the city’s repeated warning that it could not fetter its successors’ discretion to re-zone, ‘that [the city] would give no such commitment’. While the parties had non-contractually assumed that zoning would be in place as long as necessary, it was ‘clear that the City would not have agreed to such a term’.87 Signicantly, then, the city’s purported promise failed in both principle and fact. Aside from any issue of inherent invalidity, the city never actually attempted to give PNI a legal assurance of zoning permission. Accordingly, despite Binnie J.’s decision to the contrary, disproof of such an assurance ought to have been irrelevant. PNI essentially was in the same position as a person who, regretful of having given a birthday present, seeks to recover by showing that he had not been contractually obliged to confer the gift. As with the ckle friend, the true basis of PNI’s transfer was not contract, but rather donative intent. Of course, the two types of donors initially react to different motivations. Birthday gifts are given out of affection. Real estate developers act in self-interest. As explained in the court below, however, self-interest may take the form of a calculated risk. Developers occasionally proceed on

87

(n. 82) 595.

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the assumption that they will enjoy favourable zoning, only to subsequently nd the governing bodies uncooperative. The ensuing losses are presumptively non-compensable.88 One who ignores ‘the admonition, “put not your faith in princes” . . . must . . . accept the consequences’.89 That is a risk of doing business. It is also a risk that ought to preclude restitution. (ii) Equitable Severance Even if the parties had intended to exchange a promise of future zoning for the construction of public amenities, PNI’s claim would appear to be barred by the central difculty that arises at the intersection of contract and unjust enrichment – i.e., the danger that restitution will upset the voluntary distribution of benets and burdens. Binnie J. recognized the problem, but thought that it could be overcome. He started from the premise that, as an ‘equitable doctrine,’ unjust enrichment looks to substance, rather than form, and consequently possesses the ‘remedial exibility’ needed to achieve justice on a case-by-case basis. Accordingly, while conceding that the parties’ various ‘commercial agreements are . . . complex, and do not readily lend themselves to “blue-pencil” deletions’,90 he felt entitled, as a ‘Court of Equity’, to ‘relieve against honest mistakes in contracts . . . where not to correct the mistake would give rise to an unconscionable advantage’.91 Turning to the facts, he relied upon the trial judge’s (purported) nding that ‘the “extra” works and undertakings given [by PNI] in exchange for the [city’s] ultra vires zoning commitment [were] clearly separable and identiable’.92 On that view, there was no danger that restitution would distort the bargain that the parties had struck under the remaining terms of their agreements. Binnie J.’s analysis unfortunately fails on several fronts. The most obvious error lies in the view that unjust enrichment is an ‘equitable’ cause of action.93 Equity is, of course, an ambiguous term, but there is no doubt whatsoever that Binnie J. (like many Canadian judges) used it in a jurisdictional sense. He proceeded on the assumption that unjust enrichment derives from the ancient Courts of Chancery. Granted, unjust enrichment – like tort and contract – occa-

88

(n. 87) 584. (n. 82) 250. 90 (n. 75) 225. 91 (n. 75) 226, quoting Burrow v. Scammell (1881) 19 Ch. D 175, 182. 92 (n. 75) 223. 93 See e.g., Air Canada v. British Columbia (n. 13) 167; Peter v. Beblow (n. 51) 642– 643; British Columbia v. Canadian Forest Products Ltd. (2004) 240 DLR (4th) 1 (SCC) 6 (exible ‘equitable analysis [is] omnipresent in the restitution law context’); Garland v. Consumers’ Gas Co. (n. 56) 401 (restitution ‘is an equitable remedy that necessarily involves discretion and questions of fairness’); cf. Communities Economic Development Fund v. Canadian Pickles Corp. (1991) 85 DLR (4th) 88 (SCC) 107 (‘an action for moneys had and received does not lie in equity’). 89

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sionally is supplemented by equitable doctrines. For example, restitution may be ordered proprietarily in the form of an equitable trust, or an enrichment and deprivation may be connected through the equitable rules of tracing. So too, the cause of action may arise within an equitable relationship, as when trust funds are dissipated through an unwarranted transfer.94 But for the most part, unjust enrichment undeniably is a product of law. The primary historical resource is the writ of indebitatus assumpsit (including, amongst others, the sub-species of quantum meruit and the action for money had and received): a legal action that was resolved by courts of law. The relationship between law and equity occasionally becomes somewhat more complicated,95 but that basic point is incontestable historical fact. Binnie J.’s historical error was compounded by his belief that, as compared to their legal counterparts, equitable claims are inherently discretionary. Once again, while his comments reect a common Canadian belief, it is difcult to agree. Equity is not intrinsically and invariably more exible than law. The actions for breach of duciary duty and negligence, paradigmatic of equity and law, are proof to the contrary. The former is notoriously rigid, the latter frustratingly open-ended. Moreover, aside from the general modern trend toward eradicating historical jurisdictional distinctions,96 it seems especially odd to insist upon a discretionary approach to restitution. The action in unjust enrichment long struggled for acceptance precisely because it was often thought to entail a ‘well-meaning sloppiness of thought’.97 The subject gained independence and respectability only after Birks showed that it was ‘downward-looking to the cases’, and did not ‘draw upon an unknowable justice in the sky’.98 And nally, a broadly discretionary approach to unjust enrichment sits uneasily alongside the rule of law, especially in an increasingly pluralistic society that refuses to privilege one set of values over another.99 A litigant should never be forced to hear a judge say, as a substantial reason for judgment, ‘This is what I think is fair’. For present purposes, however, the most signicant problem with Binnie J.’s decision is that, on the actual facts of the case, restitution undoubtedly upset the

94

Citadel General Assurance Co. (n. 52). ‘Juristic Reasons and Palm Tree Justice’ (n. 66) 103, 122ff. 96 Cadbury Schweppes Inc. v. FBI Foods Ltd. (1999) 167 DLR (4th) 577 (SCC); A Burrows, ‘We Do This in Law But That In Equity’ (2002) 22 OJLS 1. 97 Holt v. Markham [1923] 1 KB 504 (CA) 531. See also Baylis v. Bishop of London [1913] 1 Ch. 127 (CA) 140 (‘Whatever may have been the case 146 years ago, we are not now free in the twentieth century to administer that vague jurisprudence which is sometimes styled “justice as between man and man” ’). 98 P. Birks, An Introduction to the Law of Restitution (OUP, Oxford 1985) 19. 99 RDS v. The Queen (1997) 151 DLR (4th) 193 (SCC). 95

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parties’ allocation of benets and burdens. Binnie J. relied upon a purported factual nding to the effect that, as a discrete and isolated part of their arrangement, the parties had exchanged promises to maintain appropriate zoning and construct public amenities. Though he provided no citations, he presumably had in mind Wilson J.’s statement that ‘in return for the excess work PNI was to have some xed development right, some buildable density for the reasonable period of the development.’100 That quotation must, however, be read in context. The same judge also said that ‘each provision of the several contract documents was inextricably bound up with every other provision.’101 And indeed, it is fanciful to believe that the city and PNI (to say nothing of BCEC) would have regarded the relevant terms as ‘clearly separable and identiable’. From the city’s perspective, an oceanfront park, at no cost to its citizens, was central to the entire venture. Likewise, while it had badly miscalculated the risk of re-zoning, PNI would not have entertained the other aspects of the project if it had not believed that it would be entitled to erect a three-storey complex. There is, accordingly, little doubt that, in awarding restitution, the Supreme Court of Canada disturbed the ne balance of benets and burdens to which the parties had agreed.102

3) CONCLUSION This paper has addressed two sets of intersecting ideas. The rst set requires a choice to be made as between two models of unjust enrichment: one positively responds to unjust factors, the other reacts to the absence of juristic reasons. The second set of ideas requires a balance to be struck between two grounds of liability: one protects voluntarily-assumed allocations of risk, the other reverses transfers that ought not to have occurred. Every legal system needs to wrestle with these issues. English courts increasingly are under pressure to re-consider their formulation of the unjust enrichment principle, and in doing so, to re-visit the relationship between contract and restitutionary liability. Canadian law has recently gone through the same exercise, and the resulting experiences provide some hard lessons. Garland v. Consumers’ Gas Co. highlights the need to make a clear choice between unjust factors and juristic reasons. Canadian law unfortunately will continue to pay a high price for the Supreme Court of Canada’s decision to devise a unique, discretion-based principle of unjust enrichment. As

100

(n. 82) 252. (n. 100) 250. 102 That is the point that Southin J. A. made, ultimately unsuccessfully, while rejecting PNIs claim in the Court of Appeal: (n. 83) 627; cf. (2004) 245 DLR (4th) 211 (SCC) 226. 101

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illustrated by both Garland and Pacic National Investment Ltd. v. Victoria (No. 2), particularly difcult issues are apt to arise whenever restitution is sought with respect to benets conferred within subsisting contracts. Despite adopting a principle that stresses the need to respect voluntary allocations of risk, Canada’s highest court has repeatedly re-written bargains through the award of restitution.

Chapter 4 Mistake in Contract Law and in Unjust Enrichment Kate Bracegirdle The theme of this paper is that mistake in contract and mistake in unjust enrichment are fundamentally different and should be retained as quite distinct and separate areas of the law. Over recent times, unjust enrichment has managed, to a large degree, to break free of contract law on this issue and to develop relatively coherently. However contract law has failed to achieve a similar clarity over the same period. With the move of Canadian law to a more civilian approach to unjust enrichment, there is the possibility that we may see a return to a greater convergence of contract law and unjust enrichment in this area. This will inevitably have implications for English Law if it moves towards a civilian approach also. The law on mistake is notoriously complicated. As regards contract law, the courts have been concerned with balancing the general policy in favour of upholding apparent contracts1 and the principle that contract is based on

1 Lord Atkin in Bell v. Lever Bros. [1932] AC 161, 224: ‘. . . it is of paramount importance that contracts should be observed, and that if parties honestly comply with the

51 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 51–59. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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the consent of the parties to it. Whilst in terms of restitution there is a general policy in favour of maintaining security of receipts, it is not necessary to balance those two particularly competitive interests. It is therefore vital to maintain a clear distinction between mistake as it affects contracts and mistake which may justify restitution in the absence of a contract. Mistakes which are not necessarily sufcient to render a contract void (or voidable) may well be sufcient to found a claim in unjust enrichment and this has been recognised by the courts. Waller J., as he then was, observed in Midland Bank Plc v. Brown Shipley & Co. Ltd.:2 . . . the type of mistake necessary to give rise to a right to recover under the restitutionary remedy of money paid under a mistake of fact, need not necessarily be of the same fundamental character that makes a contract totally void.3

However the separation between mistake in contract law and mistake in unjust enrichment has not always been maintained, with the effect that an overly restrictive approach to restitution of mistaken payments was taken until relatively recently. This resulted in the jurisprudence on restitution on the grounds of mistake becoming as confused and contradictory as that on the effectiveness or otherwise of contracts where one or both parties has acted under a mistake. Mistake in the English law of restitution eventually came to be claried in the decision of Barclays Bank v. Simms 4 whereas the law of contract continues to have difculty in nding a truly principled approach to the question of what effect mistakes have on an apparent contract.5

MISTAKE IN CONTRACT LAW The law relating to which mistakes will prevent a contract from coming into being and which mistakes will make a contract void has developed in a confusing manner over a long period of time. Cases which appear to have very similar fact situations have been distinguished from each other on seemingly insignicant details. For example, in Ingram v. Little6 the fraudster gave the name

essentials of the formation of contracts – i.e., agree in the same terms on the same subject-matter – they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them.’ 2 [1991] 1 Lloyd’s Rep 576. 3 Ibid., 584. 4 [1980] QB 677. 5 Cf. C. MacMillan, ‘Rogues, Swindlers and Cheats: The Development of Mistake of Identity in English Contract Law’ (2005) 64 CLJ 711, who examines in detail some of the historical reasons behind the current law. 6 [1961] 1 QB 31.

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and address of a real third party as his own and the details were checked in the telephone directory as being real. The contract to sell a car to the fraudster was held to be void because the claimant was held to have intended to contract with the named third party and not the fraudster. In Phillips v. Brooks,7 the fraudster again gave as his own, the name and address of a well-known person who lived in the locality. The claimant again checked the address and found it to be correct but the court held the contract not to be void because the claimant had intended to contract with the person who had actually been in his shop ie. the fraudster. The types of mistake which have been held to prevent formation of a contract because the parties cannot be said to have reached agreement are: mistakes as to identity of the other contracting party;8 mistakes as to the identity of the subject matter of the contract;9 and mistakes as to the terms of the contract.10 The question of mistake as to the identity of the other contracting party has recently been considered by the House of Lords in the case of Shogun Finance v. Hudson.11 By a majority of 3:2 the House upheld Cundy v. Lindsay12 in deciding that the apparent contract was void because the claimant had intended to make a written contract with the person named in the credit application. That person was in fact an innocent third party whose identity was fraudulently used by the person who took possession of a vehicle and sold it to another innocent third party, the defendant. The contract was treated as different from face to face contracts like that made in Phillips v. Brooks because the fraudster was face to face only with the motor trader who was deemed not to be an agent of the claimant. Can it be said that Shogun has injected some much-needed clarity into the law of contractual mistakes in the way that Barclays Bank v. Simms has done for mistake in unjust enrichment? The fact that we now have a modern judgment from the highest court in the jurisdiction does, of course, bring some certainty. We now know that Cundy v. Lindsay is good law and that a difference in treatment of written contracts and face to face contracts is to be maintained. However, we may not necessarily be convinced of the logic of this, particularly in view of the forceful dissenting opinions of Lords Nicholls and Millett. In

7

[1919] 2 KB 243. For example Cundy v. Lindsay (1877–78) LR 3 App Cas 459 and Ingram v. Little (above n. 6). 9 For example as in Rafes v. Wichelhaus (1864) 2 Hurl & C 906, 159 ER 375 where parties at cross purposes contracting regarding the cargo on a ship called the “Peerless” were talking about two different ships with the same name. 10 For example Hartog v. Colin & Shields [1939] 3 All ER 566 where the seller intended to sell for a price per piece and the buyer accepted on the basis of a price per pound which would result in a total price of around one third what the seller intended. 11 [2003] UKHL 62, [2004] 1 A.C. 919. 12 See (n. 8) above. 8

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addition, the decision concerns just one area of the law of mistake in contract and so cannot be said to have brought clarity to the overall subject. Where the parties have made a fundamental mistake of fact the contract may be held void and the types of mistake which have led to such a nding are: mistakes as to the existence of the subject matter of the contract;13 mistakes as to the possibility of performing the contract; and mistakes as to an essential quality of the subject matter of the contract. This last type of mistake, in particular, causes some difculty as there may be some dispute between the parties to the contract as to what is an essential quality of its subject matter for example, whereas the vendor if asked what he is selling may reply “a painting,” the purchaser when asked what he is buying may reply “a Constable.” The reported decisions in this area are to some extent contradictory although the courts on the whole have taken a restrictive approach, preferring to nd that one party or other has taken the risk that the subject matter of the contract does or does not have a particular quality. The leading decision in this area is that of the House of Lords in the case of Bell v. Lever Bros.14 where agreement was reached between the respondent company and the two appellant directors to terminate the appellants’ service contracts early on payment of signicant sums. It later emerged that the service contracts could have been terminated without payment of any monies because both appellants had previously breached terms of their contracts. The agreements to terminate the service contracts were held not to be void because the respondents had obtained exactly what they bargained for. The fact that they could have obtained the same thing at no cost if they had not been mistaken as to the full facts of the situation was irrelevant.15 Lord Atkin’s famous statement of the law on mistakes as to quality was that: . . . a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.16

A further complication arose with the identication by Denning L. J., as he then was, in the case of Solle v. Butcher 17 of a distinction between mistake at common law and mistake in equity. In the latter case a mistake which would not be considered sufciently fundamental to render a contract void at law could nonetheless render it voidable to be set aside on terms imposed by the court.18 It was

13

For example Strickland v. Turner (1852) 7 Ex 208, 155 ER 919 where the subject of an annuity had already died at the time the parties purported to make a contract of sale of it. 14 See (n. 1) above. 15 Ibid., 223. 16 Ibid., 218. 17 [1950] 1 KB 671. 18 Ibid., 690.

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the opinion of Denning L. J. that much of the confusion surrounding mistake came from the fact that in cases where the contract should have been held voidable, such as Cundy v. Lindsay it was in fact held to be void.19 However in the recent case of Great Peace Shipping v. Tsavliris Salvage 20 the Court of Appeal has held that Solle v. Butcher cannot be reconciled with Bell v. Lever Bros. Lord Phillips of Worth Matravers in giving the judgment of the court cited with approval the conclusions of Toulson J., as he then was, at rst instance, saying: If coherence is to be restored to this area of our law, it can only be by declaring that there is no jurisdiction to grant rescission of a contract on the ground of common mistake where the contract is valid and enforceable on ordinary principles of contract law.21

In this decision,22 it was held that Cooper v. Phibbs,23 on which Denning L. J. primarily based his decision, did not establish an equitable jurisdiction to grant rescission for common mistake in circumstances which would not also mean the contract was void at common law. The House of Lords in Bell v. Lever Bros. could not be considered to have been unaware of the rules of equity and the decision would not have been different in that case if the House had explicitly considered the case on that basis.24 The decision in The Great Peace also indicates that the courts will continue to take a restrictive approach to mistakes as to quality.25 Although elements of mistake in contract law have been rationalised by some of the recent decided cases, there has not been one signicant case equivalent to Barclays Bank v. Simms which has introduced systematic clarity across the whole area of mistake in contract law. It is perhaps also unlikely that this could ever be achieved by a single decision, as the doctrine of mistake in contract law has developed so many ne distinctions over the years.

MISTAKE IN UNJUST ENRICHMENT For a long time the English courts took a highly restrictive approach to allowing restitution of mistaken payments, but many of the old restrictions have been removed in recent years. A series of conditions included rstly, that payments

19

Ibid., 691. [2003] QB 679. 21 Ibid., 725. 22 Subsequently applied several times in the High Court and by the Court of Appeal in Brennan v. Bolt Burdon [2005] QB 303. 23 (1867) LR 2 HL 149. 24 Great Peace (n. 20) 715 and 718. 25 See G. McMeel, ‘Interpretation and Mistake in Contract Law: The Fox Knows Many Things’ [2006] LMCLQ 49. 20

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could only be recovered if made on the basis of a mistake of fact not law, a rule abolished by the House of Lords decision in Kleinwort Benson v. Lincoln City Council;26 secondly, that payments were recoverable only if the mistake related to a supposed liability to pay the money so that, for example, in Morgan v. Ashcroft 27 a bookmaker was unable to recover payment of winnings that he had already paid out because, even if he had not been mistaken as to the fact that he had already paid the winnings, he would have been under no legal liability to make the payment due to the provisions of the Gaming Act 1845. This second restriction was exposed by Robert Goff J., as he then was, in Barclays Bank v. Simms 28 as not forming part of the jurisprudence of the House of Lords.29 In Simms, Robert Goff J. carefully examined the existing authorities and clearly outlined the straightforward principles which govern the question of recovery of mistaken payments, namely that a mistake should have caused the payment;30 that the payer did not intend the recipient to have the money at all events; that the recipient has not provided good consideration for the payment; and that the recipient has not changed his position in good faith in consequence of receiving the payment.31 This analysis of the jurisprudence and statement of the law was accepted as correct by the Court of Appeal in Lloyds Bank plc v. Independent Insurance Co. Ltd.32 The defence of change of position was subsequently recognised as forming part of the English law of unjust enrichment, by a House

26

[1999] 2 AC 349. [1938] 1 KB 49. 28 See (n. 4) above. 29 Simms (n. 4) 688. Doubt has been cast as to whether the approach adopted by Goff J. in the Simms decision has found acceptance in Canadian law: L. Smith et al., The Law of Restitution in Canada, Cases, Notes and Materials (Edmond Montgomery Publications Ltd., Toronto, 2004) 85 where it was noted that the decision had been apparently rejected by the Ontario Court of Appeal in the case of Central Guaranty v. Dixdale (1994) 121 DLR (4th) 53. Modern cases still refer to the four requirements in Royal Bank v. The King [1931] 2 DLR 685: (i) that the mistake is honest; (ii) that it is a mistake between payer and payee; (iii) that the facts as they are believed to be must impose an obligation to pay; and (iv) that the payee has no legal, equitable or moral right to retain the money. 30 This is not uncontroversial. Meier and Zimmermann and Tettenborn have argued that it cannot be true that any payment caused by mistake is recoverable, for example, a gift made for highly subjective reasons which turn out to be mistaken due to no fault of the recipient who simply believes that he has received an unconditional gift. See A. Tettenborn, The Law of Restitution in England and Ireland (3rd edn. Cavendish, London 2002) 76 and S. Meier and R. Zimmermann, ‘Judicial Development of the Law, Error Iuris and the Law of Unjustied Enrichment – A View from Germany’ (1999) 115 LQR 556, 562. 31 Simms (n. 4) 695. 32 [2000] QB 110 27

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of Lords of which Lord Goff formed part, in the later case of Lipkin Gorman v. Karpnale.33 The availability of such a defence should allow the courts to adopt a yet more expansive approach to restitution of mistaken payments as they should be more willing to acknowledge a prima facie case for restitution if they have the comfort of knowing that “innocent” defendants are protected from suffering undue hardship by the defence.33a The accepted formulation of a claim for unjust enrichment in Canadian law is that set down by Dickson J. in Rathwell v. Rathwell 34 and approved by the Supreme Court of Canada in Pettkus v. Becker 35 and comprises: (i) an enrichment of the defendant; (ii) a corresponding deprivation of the claimant; (iii) absence of juristic reason for the enrichment. At rst glance this looks very like the civilian approach to unjust enrichment, however until recently it was a matter of some debate whether this was in fact the case or whether it was simply a different way of describing an approach similar to the unjust factors approach of English law.36 In the recent decision of Garland v. Consumers Gas Co.37 the Supreme Court of Canada decided in favour of a more civilian approach. Iacobucci J., giving the judgment of the court, stated that a two stage approach was required38 with the claimant rst having to show that there was no juristic reason for the enrichment i.e. that there was no contractual provision, disposition of law, intention to make a gift or any other common law, equitable or statutory obligation justifying the enrichment. It was stated that the concerns raised by Professor Smith that this would require the claimant to prove a negative39 were adequately addressed because there was only a limited number of categories of juristic reason that the claimant would have to disprove, although it was also stated that the categories of juristic reason are not closed.40 The second stage of the test allows the defendant the opportunity to prove that there is some juristic reason for the enrichment. It is at this stage that the court will consider the reasonable expectations of the parties and issues of public policy. In the case of Pacic National Investments v. City of Victoria 41 which was also heard by the Supreme Court shortly after the Garland case, this two stage test was applied in holding that the defendant had been unjustly enriched by

33 33a 34 35 36 37 38 39 40 41

[1991] 2 AC 548. See Lord Goff’s comments at p. 581. (1978) 83 DLR (3d) 289. (1980) 117 DLR (3d) 257. L. Smith ‘The Mystery of Juristic Reason’ (2000) 12 SCLR (2d) 211. (2004) 237 DLR (4th) 385. Ibid., [44]. See (n. 36) above. Garland (n. 37) para 46. 2004 SCC 75.

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works done by the claimant in consideration of an implied undertaking which was subsequently held to be ultra vires the defendant. This was held to be a case of common mistake in that both parties were mistaken as to the defendant’s ability to give the undertaking. Binnie J., giving the judgment of the court, stated that the nding of common mistake was important to the claimant’s case and that in its absence the decision in the case would not necessarily have been the same.42 It is not clear why this should be so and there is no further elaboration of this assertion in the judgment. The fact that the contractual provisions which could otherwise have provided a juristic reason for the enrichment were ultra vires the defendant should be sufcient for the claimant to prove its case. There is no reason for a further requirement that both parties be mistaken. Ross Grantham suggests two possible explanations for this approach.43 Firstly, it may be that the SCC is not quite as committed as it rst appeared to the civilian approach it embraced in Garland and is now having second thoughts. Secondly, it may be that the decision in Pacic National is an illustration of what Professor Birks described as the “limited reconciliation”44 of the civilian and common law approaches. This is put forward as the more likely explanation. This raises the question of whether or not it makes any difference whether one employs the approach endorsed in Garland or the English approach of unjust factors? As Professor Birks notes in Unjust Enrichment 45 the same result is nearly always achieved whichever method is used. It can be argued that the civilian approach leads to a greater role for areas of law outside unjust enrichment, for example the law of contract and the law of gifts, in deciding in which circumstances a claimant will be able to obtain restitution. Whereas under the current English law approach of unjust factors we might say that a payment can be recovered because it was only made because the payer was mistaken and therefore his consent and intention to make the transfer was vitiated. Under the civilian approach, we would need to say that the payment was recoverable because there was no juristic reason for it. The question of whether there was a juristic reason would be dependent on the rules of contract or gifts or some other statutory, common law or equitable rules. After unjust enrichment having achieved so much in trying to establish itself as a distinct and substantial body of law, a consequence of moving towards a more civilian approach to unjust enrichment claims could be that unjust enrichment loses some of its autonomy and hands over to other areas of law the responsibility of deciding issues it previously claimed for itself.

42

Ibid., [31]. ‘Absence of Juristic Reason in the Supreme Court of Canada’ [2005] RLR 102, 106–7. 44 P. B. H. Birks, Unjust Enrichment (2nd edn. OUP, Oxford 2005) 116–7. 45 See (n. 44) above, 1st edn., 91. 43

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Contract law and unjust enrichment intersect at the point of mistake to the extent that restitution is often claimed for payments that were made as a result of the payer’s mistaken belief in the validity of contractual obligations. Where a payment has been made in such circumstances it can be said that the payee has been unjustly enriched by the payment. However, this should not be a reason, or an excuse, for a general convergence of the law in these two areas wherever questions of mistake arise. As stated earlier in the paper, the issue of whether a contract’s validity is affected by a mistake is different from the question of whether a payment should be returned due to a mistake: the imperative of upholding the security of contractual transactions is a strong one. It is for this reason that the recent English cases on mistake in unjust enrichment have limited direct signicance for the law of contract and vice versa.46 This is to be welcomed as it should enable both areas of law to develop coherently without the distraction of considerations which are only properly relevant to the other area of law.

46 The decisions do however have some indirect impact in that if, for example, the rules on avoiding contracts for mistake are relaxed, there will be many more cases where payments may be said to have unjustly enriched the recipient and where restitution of payments may therefore be ordered.

Chapter 5 No Longer Taken to be Cognisant of the Law? Mistake of Law in Contract and Restitution in Canada and England Catharine MacMillan For some considerable period the common law of both Canada and England barred the recovery of money paid under a mistake of law.1 In the last decades of the twentieth century, both removed the bar. While the bar was removed because it prevented the restitution of an unjust enrichment,2 the decisions have also been recognised as authority to allow the vitiation of a contract for mistake of law.3 This paper has two purposes. The rst is to consider the relationship between mistake of law in restitution and in contract. The second is to examine the extent to which the Canadian cases concerned with mistake of law are

1 Bilbie v. Lumley (1802) 2 East 469, 102 ER 448; Kelly v. Solari (1841) 9 M & W 54, 152 ER 24. 2 Kleinwort Benson Ltd. v. Lincoln CC [1999] 2 AC 349; while Air Canada v. British Columbia [1989] 1 SCR 1161, 59 DLR (4th) 161 is taken as overruling the bar, it was technically overruled in the companion case of Canadian Pacic Airlines v. British Columbia [1989] 1 SCR 1133, 59 DLR (4th) 218. 3 Brennan v. Bolt Burdon [2004] EWCA Civ 1017, [2005] QB 303, allowing the appeal from Brennan v. Bolt Burdon [2004] 1 WLR 1240.

61 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 61–85. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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of assistance to the development of the English law. Canadian law developed more rapidly than English law in this area and the Supreme Court of Canada has recently reconsidered it in Pacic National Investments Ltd. v. Victoria.4 The paper is arranged in three sections. The rst considers the general role of mistake in contract and restitution. The second examines the development of the law which recognises the efcacy of a mistake of law. The nal section seeks to ascertain what, if any, guidance for contract law in this area can be extracted from restitution law.

1) THE ROLE OF MISTAKE In both Canadian and English common law, mistake stands at the boundary between contract and restitution.5 It is integral to the complex relationship between these two areas of law. Mistake is both an unjust factor allowing restitution and a factor which can vitiate a contract. In addition, a mistake operative in one area of law may take the parties into the other area. For example, a mistake which affects the formation of a contract renders the contract void or voidable.6 If there is, thus, no contract one or more of the parties are likely to have a claim for the restitution of an unjust enrichment. Absent the binding obligation of a contract, an unjust enrichment may well have been conferred.7 In the words of Professor Waddams: ‘If the contract is enforceable, then the enrichment cannot be unjust. But if the enrichment is unjust then the contract must be unenforceable. The circle is inextricable.’8 This ‘dual’ role of mistake

4

[2004] 3 SCR 575, 245 DLR (4th) 211, [2005] 3 WWR 1. Exactly where the boundaries are can be difcult to establish in any given case. See, for example, A. Burrows, The Law of Restitution, (2nd edn., Butterworths, London, 2002) 128–30. 6 To state the possibility that the contract may be voidable for mistake is necessarily to question whether the decision in Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd. (‘The Great Peace’) [2002] EWCA Civ 1407, [2003] QB 679 has effectively removed the equitable relief for a mistake which renders the contract voidable according to the principle identied by Lord Denning in Solle v. Butcher [1950] 1 KB 671. 7 This was the point established by the swaps cases (Hazell v. Hammersmith & Fulham BC [1992] 2 AC 1; Westdeutsche Landesbank Girozentrale v. Islington LBC [1994] 4 All ER 890, varied [1996] AC 669; Guinness Mahon & Co. Ltd. v. Kensington and Chelsea RLBC [1999] QB 215 (CA); and Kleinwort Benson Ltd. v. Lincoln [1999] 2 AC 349). This position is taken by Peter Birks, Unjust Enrichment (2nd edn., Clarendon Law Series, OUP, Oxford 2005) 122 and 126. 8 S. M. Waddams, The Law of Contracts (5th edn., Canada Law Book, Aurora, Ont 2005) 253. 5

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has been criticised as leading to ‘an unfortunate duplication of problems’9 and a manifestation of the inelegance of the common law scheme of unjustied enrichment.

a) Mistake in contract The effect of a mistake upon the formation of a contract is largely the same in England and Canada. In general terms, Canadian courts have followed an English lead in this area, with the exception of mistake in equity.10

i) English law Contracts derive their legal force and legitimacy, in large measure, from the consent of the parties.11 Mistake operates to vitiate this consent and so render the contract void. In the leading decision of Bell v. Lever Bros. Lord Atkin stated that ‘if mistake operates at all it operates so as to negative or in some cases to nullify consent.’12 From this statement developed a conceptualisation of mistake by categorisation, a categorisation dependent upon the factual nature of the mistake. English law accepted that for a mistake to be operative, it needed to be fundamental and usually bilateral. In two circumstances a unilateral mistake would sufce: rst, where a party was mistaken as to the identity of the other;13

9

R. Zimmermann, ‘Unjustied Enrichment: The Modern Civilian Approach’ (1995) 15 OJLS 403, 416. 10 If later English courts follow the lead of The Great Peace (n. 6) English law will refuse to recognise equitable mistakes except in relation to particular forms of remedial relief such as a refusal of specic performance or rectication. It remains to be seen if Canadian courts will adopt the reasoning of Lord Phillips in The Great Peace. Professor McCamus has recommended against the Canadian courts following such a lead: see ‘Mistaken Assumptions in Equity: Sound Doctrine or Chimera?’ (2004) 40 Canadian Business Law Journal 46; and J. D. McCamus, The Law of Contracts (Essentials of Canadian Law Series, Irwin Law, Toronto 2005) 535–553. 11 For a recent reafrmation of this basis, see Shogun Finance Limited v. Hudson [2003] UKHL 62, [2004] 1 AC 919: per Lord Nicholls [6]; per Lord Hobhouse [50]; per Lord Millett [76]; per Lord Phillips [123]; and Lord Walker agreed with the reasons given by Lord Hobhouse [180]. 12 [1932] AC 161, 217. The difculties the case presents are considered in C. MacMillan, ‘How temptation led to mistake: an explanation of Bell v. Lever Brothers, Ltd.’ (2003) 119 LQR 625. 13 Cundy v. Lindsay (1877–78) LR 3 App Cas 459, reafrmed in Shogun Finance Limited v. Hudson (n. 11). I have discussed the difculties associated with the former decision in C. MacMillan, ‘Rogues, Swindlers and Cheats: The Development of Mistake of Identity in English Contract Law’ (2005) 64 CLJ 711.

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and secondly where a party was aware of the mistake of the other and sought to take an unconscionable advantage of this mistake.14 In one instance the bilateral mistake need not be a shared mistake, in the ‘cross purposes’ cases’.15 After a period of some uncertainty, English law insisted that the mistake of the parties should be objective (what was apparent from their words and deeds), rather than subjective (what was their internal perception), mistake.16 Lastly, a party could not rely upon a mistake where they themselves had induced the mistake or bore some responsibility for the mistake.17 To operate, a mistake had to be as to a factual matter rather than a matter of law or a matter of commercial advantage.18 The essential difculty with Bell v. Lever Bros. is that while Lord Atkin strove to recognise the efcacy of contractual mistake in English law, the denial in that case that the mistake was fundamental meant that it was unlikely that mistake as to quality would ever be recognised in any case. It was in an attempt to redress this situation that Lord Denning gave his judgment in Solle v. Butcher.19 Although his method was not without controversy, the effect of his judgment was to establish in the modern law that a mistake could exist in equity which had the effect of rendering a contract voidable upon terms. The relationship between mistake at law and mistake in equity was an uncertain one despite the attempts of Steyn J.20 (as he then was) to clarify the relationship. Lord Phillips has recently denied that equity, on the ground of mistake, could intrude upon a contract valid at law. The acceptance of this decision remains to be seen.21

14

Hartog v. Colin & Shields [1939] 3 All ER 566. Rafes v. Wichelhaus (1864) 2 Hurl & C 906, 159 ER 375. 16 Smith v. Hughes (1871) LR 6 QB 597. The point has been considered in comparison to mistake in restitution by D. Friedman: ‘The Objective Principle and Mistake and Involuntariness in Contract and Restitution’ (2003) 119 LQR 68. 17 Associated Japanese Bank (International) Ltd. v. Crédit du Nord [1989] 1 WLR 255; McRae v. Commonwealth Disposals Commission (1951) 84 CLR 377. 18 Clarion Ltd. v. National Provident Institution [2002] 2 All ER 265. 19 (n. 6). 20 Associated Japanese Bank (n. 17). 21 A range of commentators have expressed differing opinions as to its merits. See, for example: A. Chandler, J. Devenney and J. Poole, ‘Common Mistake: Theoretical Justication and Remedial Inexibility’ [2004] JBL 34; F. M. B. Reynolds, ‘Reconsider the Contract Textbooks’ (2003) 119 LQR 177; S. B. Midwinter, ‘The Great Peace and Precedent’ (2003) 119 LQR 180; A. Phang, ‘Controversy in Common Mistake’ [2003] Conv 247; C. Hare, ‘Inequitable Mistake’ (2003) 62 CLJ 29; and Goff and Jones, The Law of Restitution (6th edn., Sweet and Maxwell, London 2002) 81 (their opinion is given prior to the judgment in the Court of Appeal). See also the criticism of McCamus (n. 10). 15

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ii) Canadian law Canadian common law largely follows English law as to the effect of mistake and has therefore faced the same problem posed by Bell v. Lever Bros. Canadian courts resolved the problem by following the English lead and accepting the equitable mistake doctrine propounded by Denning L. J. in Solle v. Butcher. Canadian law may now be poised to take a different course of development. The most recent English mistake cases have been met with some disquiet by Canadian commentators. It has been recommended that Canadian courts might be better off adhering to Solle v. Butcher and its remedial exibility over the rigidities of The Great Peace.22 Likewise, the re-afrmation of Cundy v. Lindsay has prompted speculation that it might be preferable for Canadian law to follow the dissenting speeches of Lords Nicholls and Millett in Shogun Finance v. Hudson.23

b) Mistake in restitution If mistake in contract law has had a marginal signicance in Canada and England, mistake in restitution has had a central role. Birks describes the case of a mistaken payment as the ‘core case’ establishing a restitution for unjust enrichment.24 While Canadian courts have followed an English lead in the treatment of mistake in contract, the situation is reversed in restitution.25 This Canadian lead in restitution may arise because of the different nature of the cases before the courts: Pettkus v. Becker 26 was not a commercial dispute. The Canadian law of restitution provides a wider judicial discretion than its English counterpart. Such an ambit of judicial discretion is not appealing in litigation involving large commercial interests and with the ability to cause great repercussions in a country with a leading nancial centre. The Canadian conception

22

McCamus (n. 10) and Waddams, (n. 8) 278. McCamus, The Law of Contracts (n. 10) 518. 24 More specically, Kelly v. Solari (n. 1); Birks, Unjust Enrichment (n. 7) ch. 1. 25 For a discussion of the Canadian law of restitution in a comparative context, see B. McLachlin, ‘Restitution in Canada’ and J. Beatson, ‘Restitution in Canada: A Commentary’, both in W. R. Cornish et al. (eds.), Restitution: Past, Present & Future (Hart Publishing, Oxford 1998) and M. McInnes, ‘The Canadian Principle of Unjust Enrichment: Comparative Insights Into the Law of Restitution’ (1999) 37 Alta. L. Rev. 1, 11. Professor McInnes outlines, with a comparison to England and Australia, the difculties faced by Canadian courts by the earlier recognition of a principle of unjust enrichment. Chief Justice McLachlin observed that as Canadians entered the uncharted waters of unjust enrichment ‘to those observing from safer shores, the sight may not be elegant or even edifying’: ‘Restitution in Canada’ 276. 26 [1980] 2 SCR 834, 117 DLR (3d) 257. 23

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of restitution for an unjust enrichment displays remarkable differences with its English counterpart.

i) England English law allows restitution for an unjust enrichment where three conditions are present: First, the defendant must have been enriched by the receipt of a benet. Secondly, that benet must have been gained at the plaintiff’s expense. Thirdly, it would be unjust to allow the defendant to retain that benet.27

Mistake is recognised as an unjust factor which triggers the restitution of the benet. Traditional limitations upon mistake have largely been removed: a mistake can now be one of fact or law 28 and the ‘supposed liability’ test has been replaced by a test of prima facie causation.29 The mistake need not be ‘fundamental’ in the contractual sense.30 A unilateral mistake is sufcient because the issue is whether the mistake has operated to impair the intention of the payor. The mistake need only be subjective and the recipient may be unaware of the mistake. The obligation to make restitution arises by operation of law, independently of the obligation imposed by a contract based on the consent of the parties. Restitution admits a broader category of mistake than contract law. But while restitution admits this broader category of mistake, it allows defences to such a claim where contract does not. The traditional explanation for the basis of the obligation to make restitution in England, the presence of an unjust factor, was challenged by Professor Birks. Birks argued that, following Kleinwort Benson, English law now intervened to reverse the enrichment because there was an absence of basis for it. Unjust factors such as mistake are irrelevant: the only ‘unjust factor’ was an absence of basis. In the absence of unjust factors, mistake is only relevant to the extent that it operates to vitiate a contract 31 and in so doing removes the contract as a basis for the conferment of the benet. Birks’ changed view of why the law imposes an obligation to repay has not been without controversy.32

27

Goff and Jones (n. 21) 17. Kleinwort Benson v. Lincoln (n. 7). 29 Barclays Bank Ltd. v. W. J. Simms, Son and Cooke (Southern) Ltd. [1980] QB 677, per Robert Goff J. The test was accepted by the Court of Appeal in Lloyds Bank plc v. Independent Insurance Co. Ltd. [1999] 2 WLR 986 and the approach was approved, although the authority was not named, by the House of Lords in Kleinwort Benson v. Lincoln (n. 7) 372, 399 and 407–408. 30 A more detailed comparison of the differences between mistake in contract and in restitution can be found in Friedman (n. 16) 84–87. 31 Or negate another form of binding obligation. 32 See, for example, Professor A. Burrows and others, ‘The new Birksian approach 28

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ii) Canada Canadian common law requires somewhat different elements to allow restitution of an unjust enrichment.33 The Supreme Court stated in Pettkus v. Becker 34 that three elements were required: an enrichment to the defendant; a corresponding deprivation to the plaintiff; and an absence of any juristic reason for the enrichment. It has been noted that the ‘awkwardly phrased’ third element ‘pertains to reasons for allowing the plaintiff to recover a benet, rather than to reasons for allowing the defendant to retain a benet.’35 Mistake pertains to the inquiry into the absence of juristic reason and is relevant to the ascertainment of whether or not the plaintiff intended to confer an enrichment upon the defendant. There are similarities with the English treatment of mistake as an unjust factor. Commentators have noted that the Canadian requirement of an absence of juristic reason bears similarities to the civil law requirement of an absence of basis. While it has been considered by some 36 that Canadian restitution law is an example of a civilian inuence upon the common law in a mixed law country, such an explanation has been described as unlikely.37 Whatever the explanation for juristic reason, Canadian restitution law was, until recently, largely common law despite this civilian tone: ‘Canada might be said to have the worst of both worlds, more abstraction, unintelligible to the lay litigant, without the elegant automation that is supposed to be bought at that price.’38 Garland v. Consumers’ Gas 39 has seemingly changed the Canadian position again and the common law dependence upon unjust factors has been replaced with a version

to unjust enrichment’ (2004) 12 RLR 260; and S. Hedley, ‘The Empire Strikes Back? A Restatement of the Law of Unjust Enrichment’ (2004) 28 Melb. U L. Rev. 759. 33 The different treatment is no doubt due to the early inuences upon its development by the context in which it arose: matrimonial disputes over property. Although the development of the law originated in such a context it is now clear that it extends beyond these origins and is of general application. 34 [1980] 2 SCR 834, 117 DLR (3d) 257. 35 M. McInnes, ‘Enrichments and Reasons for Restitution: Protecting Freedom of Choice’ (2003) 48 McGill LJ 419, 423. 36 See, for example, Beatson, ‘Restitution in Canada: A Commentary’ (n. 25) 298. 37 It is simplistic to assume that the civilian inuence of Quebec ‘contaminated’ the Canadian common law because Quebec law itself has a different approach to restitution than European civil jurisdictions: L. Smith, ‘The mystery of juristic reason’ (2000) 12 Supreme Court Law Review 211, 217. A more plausible explanation is that ‘the crucial phrase may simply be an accident of bijuridicalism’: M. McInnes, ‘Making Sense of Juristic Reasons: Unjust Enrichment After Garland v. Consumers’ Gas’ (2004) 42 Alta L. Rev. 399, para 15. 38 P. Birks, ‘Mistakes of Law’ (2000) 53 Current Legal Problems 205, 232. 39 [2004] 1 SCR 629, 237 DLR (4th) 385.

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of the civil law absence of basis.40 Professor McInnes has described the result as ‘the restitutionary equivalent of Frankenstein’s monster’41 comprised of civilian principles grafted onto the common law, a body of law doomed to disaster. The role of mistake in a civilian absence of a basis approach is to invalidate the transaction which would otherwise provide the basis for the benet.

2) THE REMOVAL OF THE MISTAKE OF LAW BAR The Canadian and English rule barring recovery for payments made under a mistake of law was said to have originated in Lord Ellenborough C. J.’s statement in Bilbie v. Lumley: ‘Every man must be taken to be cognisant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case . . . ignorantia juris non excusat.’42 The rule attracted extensive criticisms. The central criticisms of were: (1) the injustice of allowing the payee to retain a payment which would not have been made to him but for the payer’s mistake; (2) the capricious results which owed from a distinction which allowed recovery of a payment made under a mistake of fact but denied it for a payment made under a mistake of law; and (3) the difculty of distinguishing between mistakes of fact and of law and the judicial temptation to manipulate the distinction to achieve practical justice in particular cases.43 The capricious results of the rule were to some extent alleviated by the exceptions to the rule.

a) Removal of the bar in restitution i) Canada It is unsurprising that the bar was removed rst in Canada: the federal nature of the Dominion greatly increases the probability of a government levying an ultra

40 See, for example McInnes, ‘Making Sense of Juristic Reasons’ (n. 37). McInnes observes that Iacobucci J.’s judgment in Garland v. Consumers’ Gas exacerbates the condition which Birks described above. 41 M. McInnes, ‘Unjust Enrichment, Juristic Reasons and Palm Tree Justice: Garland v. Consumers’ Gas Co.’ (2005) 41 Can Bus Law J 103, 107. 42 (1802) 2 East 469, 472. In Kleinwort Benson (n. 7) 371, Lord Goff stated that Bilbie v. Lumley was reconsidered and reafrmed in Brisbane v. Dacres (1813) 5 Taunt 143, 128 ER 641 and it was only the decision in Kelly v. Solari which hardened the rule and attracted attention to Bilbie v. Lumley. 43 Law Commission, ‘Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments’ (Law Com No. 227, 1994) [3.2–3.4].

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vires tax. In Air Canada v. British Columbia 44 this is exactly what occurred. The decision of the Supreme Court in Air Canada to abolish the mistake of law bar was preceded by a strong dissenting judgment in Nepean Hydro-Electric Commission v. Ontario Hydro.45 In this case Dickson J. would have abolished the bar because once a doctrine of unjust enrichment or restitution is recognised, the distinctions between mistakes of law and fact become meaningless. He noted that the Quebec Civil Code explicitly allowed relief for mistakes of law and of fact; such civilian comparisons have not been repeated in the mistake of law cases.46 Dickson J.’s dissent was adopted in Air Canada. The case concerned the payment of an ultra vires tax on fuel sales: several airlines sought the return of their ultra vires payments. A central issue was whether or not the mistake of law barred recovery of the payments. La Forest J, for the majority, followed the invitation of counsel for Canadian Pacic to do away with the mistake of law bar. Her argument was that the distinction between payments made under a mistake of fact and payments made under a mistake of law had resulted ‘in confusion, ambiguity and injustice, and should no longer be recognised’.47 La Forest J had no hesitation in abolishing the bar.48 While there was a distinctly constitutional basis for the abolition: ‘constitutional adjudication invites the formulation of broad principles suitable to the accommodation and resolution of broad social and political values, and this much criticized rule seems singularly unsuited to that purpose,’49 the ruling was not conned to constitutional grounds. The invidious distinction between mistakes of fact and of law ‘should play no part in the law of restitution’ and either mistake should ‘in an appropriate case, be considered as factors which can make an enrichment at the plaintiff’s expense “unjust” or “unjustied”.’50 Certain defences to a claim for a payment made under a mistake of law were recognised: where there was conscious ignorance;51 a conscious assumption of risk;52 where the payment

44

[1989] 1 SCR 1161, 59 DLR (4th) 161. [1982] 1 SCR 347, 132 DLR (3d) 193. 46 One wonders if the reason that the reference has never been made since is that the later two mistake of law cases both originated in British Columbia, geographically much further away from Quebec than Nepean, and an area in which the litigants might have expressed greater concerns over the explicit employment of the Quebec Civil Code. 47 Air Canada (n. 2) 1198–1199. 48 Although the case is taken as overruling the bar, it was technically overruled in the companion case of Canadian Pacic Airlines v. British Columbia [1989] 1 SCR 1133, 59 DLR (4th) 218. 49 Air Canada (n. 2) 1201. 50 Ibid. 51 Nepean Hydro-Electric (n. 45) 370. 52 Ibid. 45

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had been made in settlement of an honest claim;53 and where the defendant had changed his position as a result of the enrichment.54 In constitutional cases, two further defences were also available: rst, one of ‘passing on’ which denied recovery where the costs were passed to another;55 and secondly, a public policy rule precluding the recovery of unconstitutional taxes.56 The Supreme Court recently reconsidered mistake of law in Pacic National Investments Ltd. v. Victoria. Across the harbour from Victoria was a large plot of unsightly, derelict land. A private developer, Pacic National Investments Ltd. (PNI) purchased some of the land from the crown corporation responsible for its development. The purchase was subject to the approval by Victoria of the subdivision of the land into parcels and passing amendments to Victoria’s zoning bylaws to enable PNI to undertake its proposed developments. PNI entered into an agreement with Victoria to construct certain amenities; roads, parks, a seawall and a walking path. PNI constructed these and began its development. Five years later, when PNI attempted to conclude the development local residents (who had grown used to the pleasant and tranquil site provided by the developer) protested. The City Council took note of these protests and rezoned the undeveloped parcels to prohibit further residential development and to greatly reduce the retail development. PNI sued Victoria for breach of an implied undertaking; this claim failed in the Supreme Court.57 The contractual claim was dismissed on the ground that the undertaking was one which Victoria lacked the legislative authority to give and because it was ultra vires, its breach could not give rise to an action for damages. The case came back to the Supreme Court on the alternative claim for restitution of an unjust enrichment, namely the benet of the amenities. Binnie J. gave the only decision. Having outlined the requirements of Pettkus v. Becker, he then considered the new two stage enquiry developed in Garland v. Consumers’ Gas to determine whether or not there was a juristic reason to deny recovery. At the rst of these two stages, the claimant needed to show that ‘there is no juristic reason within the established categories that would deny it recovery’.58 These categories included the existence of a contract, disposition of law, donative intent and other valid common law, equitable or statutory obligation. At the second stage, the onus shifted to the defendant to rebut the prima facie case by showing that there was some other valid reason to deny recovery.

53

Air Canada (n. 2). Ibid. 55 Note the criticism of the defence in P. Michell, ‘Restitution, “Passing On,” and the Recovery of Unlawfully Demanded Taxes: Why Air Canada Doesn’t Fly’ (1995) 53 U Toronto Fac L. Rev. 130. 56 Air Canada (n. 2). 57 Pacic National Investments Ltd. v. Victoria (City) [2000] 2 SCR 919. 58 Pacic National Investments v. Victoria (n. 4) 221. 54

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Having found that Victoria was enriched and PNI had suffered a corresponding deprivation, the Court considered whether or not a juristic reason existed that would act to deny recovery. Mistake is relevant to this determination. The manner in which the Court resolved this issue is intriguing. It had appeared from Garland that the Court had adopted a civil law, absence of basis, approach to unjust enrichment. The rst stage of the inquiry into juristic reason supports this: the question is whether or not there is a juristic reason within the established categories which would deny the claimant recovery. Binnie J. stated that, in the usual course of things, the contract ‘would be a complete answer to the claim for unjust enrichment.’59 Victoria, however, had already succeeded in establishing in their earlier appeal that the relevant contractual arrangements were ultra vires their powers. The contract was not valid.60 Binnie J. stressed in relation to mistake in contract that ‘it is not the function of the court to rewrite a contract for the parties nor was it the role of the court to ‘relieve one of the parties against the consequences of an improvident contract.’61 In this case the mistake of law had the effect of vitiating or avoiding those portions of the contract which were effected by the ultra vires extras. As a matter of equity, the claimant did not need to set aside the entirety of their agreement with Victoria but only that portion which was related to the ultra vires demand. Presumably, although this is not stated explicitly, this is because those portions of the contract which were ultra vires are avoided because of the mistake of law made by the parties. The avoidance of those provisions meant that Victoria could not rely upon them as a basis for the payment. It is here that the signicance for contract law is to be found. The parties had entered into their contract on a common mistake as to the legal authority of Victoria. The mistake of the parties was not an unreasonable mistake.62 It was a mistake of law as to the enforceability of their agreement. Binnie J. relied upon Burrow v. Scammell 63 as authority for the ability of a court of equity to relieve ‘against honest mistakes in contracts . . . where not to correct the mistake would be to give an unconscionable advantage to either party.’64 The result was that the mistake undermined the juristic reason of contract relied upon by Victoria. The relevance of mistake lies entirely within contract law. Although it is not stated explicitly, the effect of the decision is

59

Ibid., 222. See Professor McInnes as to the nature of this premise of a failed contract in ‘Unjust Factors, Juristic Reasons and Contracts in Anglo-Canadian Law’ in this volume. 61 Ibid., 223. 62 In the rst appeal of Pacic National Investments v. Victoria (n. 57) the Supreme Court had divided 4 to 3 on the issue of capacity: the point of law was clearly a difcult one. 63 (1881) 19 Ch. D 175. 64 The quote is from Burrow v. Scammell ibid., 182. 60

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that a contract, indeed portions of a contract,65 can be set aside in equity for a reasonable and mutual mistake of law. While the decision appears to depend upon the civilian concept of absence of basis, Binnie J. then proceeded to consider the common law basis of mistake as an unjust factor. Binnie J. refers to Air Canada and Nepean Hydro-Electric to nd that recovery would be allowed in any case of enrichment at the plaintiff’s expense where the enrichment was caused by a mistake of fact or law provided that the enrichment was caused by the mistake and the payment was not made to compromise an honest claim and subject to the usual equitable and legal defences. The oddity of this case in relation to mistake is, therefore, that the Court considers it relevant in both its restitutionary and contractual roles. Professor Grantham suggests that the case illustrates the deep ‘tension within the Canadian law of unjust enrichment between a common law and a civilian approach’.66 The utilisation of mistake in both its contractual and restitutionary capacities indicates the depth of this tension. Binnie J. concluded that there were no other juristic reasons within the established categories which provided a reason why the claim should not succeed. The second stage of the juristic reason inquiry was also disposed of when Victoria was unable to establish ‘that to allow the claim of unjust enrichment in this case would frustrate the reasonable expectation of the parties.’67 The result of Pacic National Investment v. Victoria is that mistake of law appears to have a dual and simultaneous relevance. The rst of its dual relevances is that it is capable of vitiating an apparent contract and, in so doing, removes the (civilian) basis for the enrichment. Absent basis the enrichment is unjust and, subject to any defences, must be returned. The second relevance of mistake of law is that it is capable of being an unjust factor in the common law approach to restitution. Mistake of law thus operates as the ground for the obligation to make restitution of the benet conferred pursuant to it.

65

Although it is beyond the scope of this paper, such a nding has intriguing prospects for the law of restitution in that it would appear that restitutionary relief is available for those portions of an otherwise valid contract which has failed. The matter is not without controversy. See Birks, Unjust Enrichment, (n. 7) 121–125 and J. Beatson, ‘Concurrence of Restitutionary and Contractual Claims’ in W. Swadling and G. Jones (eds.), The Search for Principle, Essays in Honour of Lord Goff of Chieveley (OUP, Oxford 1999). 66 R. Grantham, ‘Absence of Juristic Reason in the Supreme Court of Canada’ (2005) 13 RLR 102, 106. Professor Grantham advances as the more likely explanation for the decision that it is a limited reconciliation between the civilian juristic reasons approach and the common law unjust factors approach outlined by Birks, Unjust Enrichment (n. 7) 116–117. 67 Pacic National Investments v. Victoria (n. 4) 229.

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ii) England The House of Lords removed the rule barring the recovery of payments made under a mistake of law in Kleinwort Benson v. Lincoln. The case was amongst the last litigated concerning interest rate swaps entered into in large numbers by local authorities in the 1980s.68 In 1992 ‘the time-bomb of universal nullity’69 exploded when the House of Lords declared interest rate swaps agreements ultra vires the powers of the local authorities.70 Throughout Britain losing parties then sought the restitution of the sums they had paid pursuant to nullied contracts. The swaps divided into two groups: those which had been completely performed according to their terms (closed swaps) and those in which some performance remained (open swaps). In Westdeutsche Landesbank Girozentrale v. Islington LBC 71 the House of Lords established that in the case of open swaps, restitution was available.72 The swaps in Kleinwort Benson v. Lincoln were closed swaps: ‘the game had been played out to the end . . . both parties had received exactly what they had bargained for, albeit their bargain had all along been void.’73 The closed swaps initially appeared to be time barred. Kleinwort Benson sought the recovery of the sums paid. Since the swaps were closed, the bank sought the sums on the ground that they had been paid pursuant to a mistake of law, the mistake being the belief that the sums were paid pursuant to a binding contract. Two hurdles had to be overcome. The rst was that the mistake of law bar had to be removed. The second was to establish that the action was not time barred. To overcome this, the bank argued that the Limitation Act 1980 provided that time did not begin to run until the bank ‘had discovered the . . . mistake . . . or could with reasonable diligence have discovered it.’ Kleinwort Benson succeeded by the narrowest of margins. The Law Lords were unanimous in holding that the mistake of law bar should be removed; where they differed was on the retrospective effect of judicial decisions. Lord Goff reviewed the development of the mistake of law bar, the criticisms of it, and noted its rejection in the common law world.74 He observed that European

68

The nancial and political background to the saga is well detailed by E. McKendrick, ‘Local Authorities and Swaps: Undermining the Market’ in R. Cranston (ed.), Making Commercial Law: Essays in Honour of Roy Goode (Clarendon Press, Oxford 1997). 69 P. Birks, ‘Private Law’, in P. Birks and F. Rose (eds.), Lessons of the Swaps Litigation (Manseld Press, Abingdon 2000) 1–46, 2. 70 Hazell v. Hammersmith and Fulham BC (n. 7). 71 [1996] AC 669. 72 At rst instance ([1994] 4 All ER 890) one of the swaps was a closed swap but it subsequently dropped out before the case reached the House of Lords. 73 P. Birks,’ Mistakes of Law’ (n. 38) 208–09. 74 And here he noted with approval the dissenting opinion of Dickson J. in Nepean and the majority opinion of La Forest J agreed in Air Canada (n. 7), 373.

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civil law systems did not require a blanket exclusion on the recovery of money paid under a mistake of law. For all of these reasons, and because the principle of unjust enrichment required it, the rule should not be maintained ‘and that English law should now recognise that there is a general right to recover money paid under a mistake, whether of fact or law, subject to the defences available in the law of restitution.’75 Lord Goff considered and rejected the possibility of a defence that the payments had been made on the basis of a settled understanding of the law which had later been changed by judicial opinion. The complication was the declaratory theory of law. On the one hand this was a ction, but on the other hand it did mean that when judges gave their decision it had a retrospective effect.76 That legal decisions had retrospective effect was adopted only by the narrowest of margins. It was the dividing point with the minority who found that in this case there was no mistake of law. The bank succeeded: it had paid its money under a mistake of law and its action was not time barred because the limitation period began to run only when it was aware of its mistake, namely when the House of Lords declared that the swaps were ultra vires. In this case, the local authority had no defence. It must appear to judges that academic commentators are never satised with judicial decisions. No sooner was the mistake of law bar removed than academics criticised how this had been brought about. It is not the purpose of this work to rehearse these comments, but as the major points have a bearing on our consideration of contract they are set out here. The rst is that it is far from clear that the parties to the swaps were under any mistake. Zimmermann and Meier pointed out that the ‘mistake’ was a ction. ‘If the action is justied with reference to the impaired will of the plaintiff (“I did not mean you to have it”), how can recovery then be justied if the law is changed only after the payment?’77 Hedley observed that ‘it was certainly very convenient for the parties if it was assumed that they had participated in an illegal transaction only ‘by mistake’.’78 Secondly, a distinction was drawn by Birks between mistakes and mispredictions, where a misprediction ‘is the formation and adoption of a belief as to the future which can only be falsied by evidence which comes into existence subsequently.’79 Such a misprediction needed to be distinguished from decisions taken on the basis of factors which were already false. The distinction needed to be made because in the former case there was no impairment of the decision.

75

(n. 7), 375. Commentators have been critical of the employment of such a device in these circumstances. See, for example, E. McKendrick, ‘The Reason for Restitution’ in Lessons of the Swaps Litigation (n. 69) 94–97. 77 R. Zimmermann and S. Meier, ‘Judicial Development of the Law, Error Iuris, and the Law of Unjustied Enrichment – A View from Germany’ (1999) 115 LQR 556, 564. 78 Hedley (n. 32) 70. 79 Peter Birks, ‘Mistakes of Law’ (n. 38) 224. 76

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There was no operative mistake in Kleinwort Benson because for a mistake to operate as an unjust factor it had to ‘impair the decision to transfer, and it is the impairment that cannot be backdated.’80 It was only in hindsight that the parties were mistaken in their interpretation of the local authorities’ powers. Thirdly, it was observed that the majority had recognised an operative mistake of law broader than an operative mistake of fact.81 Fourthly, it was by no means clearly established as to what kind of mistake of law would generate a claim in unjust enrichment.82 Fifthly, the rejection of a defence of a change of position or a settled view of the law meant that there was an incomplete protection of the interests in nality of transactions.83 The complexities of the law in this area are increased when Kleinwort Benson is compared with Pacic National Investments v. Victoria. In both cases private companies entered into contracts with public bodies. Both sides of each of these transactions must have believed that the public body possessed contractual capacity. This belief was a mistake of law. In the Canadian case this operated to vitiate the formation of the contract. In England it operated as a reason for returning the unjust enrichment. The reason for this difference lay in the arguments of counsel. Counsel for Kleinwort Benson did not argue his case in contract but in restitution. He needed to have the mistake of law bar removed. It was advantageous to do this in restitution rather than contract for two reasons. The rst was that the rule was abolished in England (as in Canada) on the ground that the principle of unjust enrichment required it. Such an analysis would not have been available if the mistake of law had been characterised as contractual. The second was that the tight ambit of an operative mistake in contract law was such that it was unlikely that English courts would expand it by adding mistakes of law.

b) Removal of the bar in contract? The longstanding rule in contract was that a contract could not be avoided in law where it was entered into under a mistake of law. It was also thought that equity would not set aside a contract formed under a mistake of law.84 Courts developed numerous exceptions to the general rule. The rst exception was

80

Ibid., 225. P. Birks and W. Swadling, ‘Restitution’ [1998] All ER Annual Review 390, 393. 82 L. Smith, ‘Restitution for Mistake of Law (Kleinwort Benson v. Lincoln) (1999) 7 RLR 148, 155. Smith points out that the matter was claried by the later decision in Nurdin & Peacock plc v. D. B. Ramsden & Co. Ltd. [1999] 1 All ER 941 in which it was accepted that a ‘but for’ test for the cause of the payment was to be applied. 83 (n. 38), 222–223. 84 Midland Great Western Ry of Ireland v. Johnson (1858) 6 HLC 798, 810–811. 81

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to characterise a mistake of law as one of fact.85 A second was to categorise the mistake as one as to a private right.86 A third was to allow equitable relief where the mistake was a mistake of pure law which induced the contract.87 A fourth was that where the mistake was as to the construction of a document; it was said that law and equity could give relief where a contract is made under a mistake of law as to private rights arising from an earlier document specifying those rights. A fth was that a mistake of foreign law was regarded as a mistake of fact.88 The mistake of law bar in contract shared a common development with its counterpart in restitution. Because of this common heritage, the removal of the bar in restitution created the possibility that it would be removed in contract. This possibility has arisen but it has done so with little consideration of the applicability or consequences of removing the bar. In Canada, Air Canada is taken as authority for the abolition of the bar,89 but the application of mistake of law as a vitiating element in the formation of a contract has not occurred with any frequency in the reported cases. While the Supreme Court considered the mistake of law in Pacic National Investments v. Victoria to operate upon the formation of the contract, this was accepted without consideration of the attendant contractual ramications. In England, Kleinwort Benson has been considered in a contractual context twice.90 In Pankhania v. London Borough of Hackney,91 the judge commented in obiter that following Kleinwort Benson, the distinction between fact and law could not stand in contract. It had been created by analogy to the mistaken payment cases in restitution and was interdependent with it. ‘The rules of the common law should, so far as possible, be congruent with one another and based on coherent principle’.92 Brennan v. Bolt Burdon93 concerned the effect of a mistake of law upon the formation of a contract. Brennan entered into a compromise agreement with the defendant because of the Recorder’s decision in favour of the other two defendants in the action and based upon an earlier precedent which indicated that Brennan’s claim had not been properly served. Subsequently, however, the earlier precedent was successfully appealed and Brennan brought an action to set aside the compromise.

85

See, for example, Solle v. Butcher (n. 6). Cooper v. Phibbs (1867) LR 2 HL 149. 87 Allcard v. Walker [1896] 2 Ch. 369. 88 The Amazonia [1990] 1 Lloyd’s Rep 236, 250. 89 Waddams, The Law of Contracts (n. 8) 278. 90 An academic analysis of the effect of the removal of the mistake of law bar to contract law has been undertaken by D. Sheehan, ‘Vitiation of Contracts for Mistake and Misrepresentation at Law’ (2003) 11 RLR 26. 91 [2002] EWHC 2441, [2002] NPC 123. 92 Ibid., [57]. 93 (n. 3). 86

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The parties were mistaken as to the validity of the original action: could the agreement compromising it be set aside on the basis of a mistake of law? The Court of Appeal held that while a contract could be set aside for a mistake of law following Kleinwort Benson that this contract could not. The contract had been entered into where there was doubt as to the law, but not mistake. Each justice gave separate reasons for his decision; common reasons and concerns emerge from these. It was necessary to remove the rule barring mistakes of law in contract because of the removal of the bar in restitution. The desire for coherent principles throughout the common law required a congruence between contract and restitution on this point.94 Contract law should treat a mistake of law in the same way as it treated a mistake of fact. Here, however, there were problems in applying the decision in The Great Peace to mistakes of law.95 Two difculties were present. The rst was the lack of consideration of Kleinwort Benson in related cases, notably Bank of Credit and Commerce International SA v. Ali (No. 3) 96 and The Great Peace. It was difcult to extract coherent principles from relevant cases which appeared to differ in certain material aspects. The second difculty was that the case before them concerned a contract formed for the purpose of compromising a legal claim. The subject matter of the contract was based on an evaluation of the relevant law. There were inherent dangers in allowing a mistake of law to vitiate a contract of compromise. The rst was that it created an inherent tension between, on the one hand, the disruption of apparent transactions for a mistake of law and, on the other hand, adhering to contractual certainty and the objective of holding parties to their apparent agreements. While this is also true with regard to a mistake of fact, the problem is exacerbated in the case of a mistake of law because of the decision in Kleinwort Benson on the declaratory effect of judgments. The grave danger was that a ‘change’ in the law by a later decision involving other parties would vitiate previous agreements. To prevent such an unacceptable outcome the Court considered two possible courses of action. The rst was to simply declare, on broad public policy grounds, that a mistake of law could not operate on its own to vitiate a compromise of legal rights. This consideration was not implemented. It was also noted that in both Kleinwort Benson and Nepean Hydro-Electric concerns had been expressed about the applicability of an operative mistake of law in relation to a compromise agreement. The second consideration was to not avoid this contract. Sedley L. J. alluded to two types of compromises of legal claims.97 One type occurs where there is a general surrender of all rights which exist or could exist because of subsequent judicial decisions. This was what arose in BCCI v.

94 95 96 97

Per Kay L. J. [10], per Bodey J. [26] and per Sedley L. J. [56] (by implication). Per Kay L. J. [10], per Bodey J. [38] and per Sedley L. J. [58]. [2002] EWCA Civ 82, [2002] 3 All ER 750. (n. 3) [61–64].

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Ali and in these cases ‘clear and appropriate language’ is required to surrender all rights which might arise through subsequent judicial decisions. The other type is where there is a possibility that the law, as understood, might change and parties need to negotiate with this possibility in mind. Here there was ‘a shift in the understanding of the law subsequent to the compromise’.98 The compromise could not be undone because of this shift in understanding because it did not create an operative mistake of law which vitiated the contract. Although his work was not referred to, this is very close to Birks’ analysis of a misprediction as to a future state of affairs rather than a mistake as to the existing state of affairs. The Court of Appeal was guided towards its result by a factual concern and a legal concern. The factual concern was the role of Brennan’s solicitor and whether or not he had done everything possible to ascertain the existing state of the relevant law and the possibility of subsequent decisions to change this understanding. The legal concern was the application of The Great Peace to a mistake of law. The Great Peace allowed mistake of fact to operate only where there was an impossibility of performance and here the compromise was always possible to perform ‘albeit to the disadvantage of Miss Brennan’.99 Sedley L. J. considered the problem posed by The Great Peace to a mistake of law. He concluded that ‘in cases of mutual mistake of law a different test may be necessary. The equivalent question needs to be whether, had the parties appreciated that the law was as what it is now known to be, there would still have been an intelligible basis for their agreement.’100 Finally, Sedley L. J. pointed out that the real difculty was that they were required to incorporate the ction that the law always was as it now is. Were it not for this, the present problem would not have arisen and the Court would not be forced to carve out a major exception to the new rule ‘almost at birth’ on the grounds of practicality and public policy.

3) WHAT GUIDANCE CAN BE TAKEN FROM THE MISTAKE OF LAW RESTITUTION CASES FOR APPLICATION IN CONTRACT LAW? An answer to this question involves a consideration of ve related areas: should mistake of law be available in contract; what are the essential differences between contract and restitution as regards mistake; when might a contract be avoided by a mistake of law; does the adoption of mistake of law as a vitiating element make any substantive difference in contract law; and what is the utility of the Canadian case law to English courts?

98 99 100

Ibid., [63]. Per Kay LJ[ 22]. Ibid., [60].

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a) Should mistake of law be available in contract law? It is advantageous to accept that a mistake of law can avoid a contract for two reasons. First, logic compels such acceptance given the analogous development of the bar in restitution and contract. The second reason lies in the interests of promoting legal consistency. It does the development of the common law little good if rules recognised as based upon obscurities or which no longer serve a useful purpose are removed in one area of law and retained in another. The treatment of mistake in one area of law will greatly inuence the course of future legal development. If mistake of law is given a particularly expansive treatment within the law of restitution, especially if English law proceeds to develop along the lines of basing recovery upon the existence of an unjust factor, it will be a more appealing claim for a potential litigant than a contract law which recognises a narrow (or almost non-existent) mistake of law in contract law. English law recognised a very broad ambit for mistake in restitution in the decision in Kleinwort Benson. Not only was the mistake of law bar removed, but there was also no defence in this case to protect the local authority against claims on an entirely concluded contract. In contrast, English law has narrowed the ambit of mistake in contract law signicantly in The Great Peace. A return to the rigidities of Bell v. Lever Bros. and the apparent requirement that the contract must be impossible to perform leaves almost no role for mistake in contract law. Furthermore, by purporting to remove the ability of a court to deal with mistake in equity, The Great Peace removed the remedial exibility necessary to protect not only the reasonable expectations of the contracting parties but also the rights of third parties. It is not immediately apparent why this dichotomy between restitution and contract exists in England. Canadian contract law has yet to question the decision in Solle v. Butcher and there is, therefore, a similarity in the ambit of mistake in Canadian restitution and contract law. Given the inter-relationship between contract and restitution, the reason for restitutionary relief has signicance for contract law. The choice, as indicated above, is between restitution of an unjust enrichment because of an unjust factor (the common law approach) and restitution of a benet conferred where there is an absence of basis for that benet (the civil law approach). In both Canada and England a mistake of law was recognised as an unjust factor. If, however, restitution is made because there is an absence of basis for the conferment of the benet, mistake as an unjust factor disappears. The relevance of a mistake of law lies only in contract where it assumes a new importance as a vitiating element. It can only act to vitiate an apparent basis for the conferment of the benet. This can be seen in the decision in Pacic National Investments v. Victoria. The ironic result is that the mistake of law bar was removed to facilitate the principle of unjust enrichment, but the signicance of mistake

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now lies only in contract law. Thus mistake of law may have a much bigger role to play in contract than it ever does in restitution and for this reason alone the question of how this is incorporated into contract law assumes an important signicance.

b) The purposes of restitution and contract The substantial differences between these two areas of law means that a concept cannot simply be imported without reection from restitution and into contract. These two bodies of private law serve different ends. Restitution is backward looking, focussing on a gains based recovery. It seeks to cause the disgorgement of a prot or the restitution of an unjust benet. In contrast, contract law is forward looking. It exists to enforce the performance of a contract and it provides a recovery based compensation. While restitutionary obligations are imposed by operation of law upon the parties, contractual obligations are assumed by the parties. Contracts are formed by agreement and courts are unwilling to disrupt an agreement freely entered into by the parties. Parties have chosen to contract to allocate certain risks. To nd that a mistake vitiates the agreement by which this allocation has been made disrupts this allocation of risks. It may also have a deleterious effect upon third parties if the only possible result of an operative mistake is to render a contract void. The manner in which mistake operates in these two areas means that English courts will be less likely to nd a mistake of law in contract. Since mistake has a different effect within each area of law the requirements of an operative mistake need to be different. Mistake in contract law must usually be mutual; in contrast, it need only be unilateral in restitution. Mistake in contract law must be mutual as mistake goes to the consent of each of the parties. In addition when both of the parties are mistaken, neither will have a reasonable expectation deserving protection from the court. Pacic National Investments v. Victoria required that the mistake of law be a mutual one and it is likely that an English court would reach the same conclusion. In those rare instances in which contract law recognises a unilateral mistake of fact it only does so in circumstances where the non-mistaken party is aware of the other’s mistake. Any attempt to vary this requirement of mutuality in contract law, or a unilateral mistake known to the other party, in the application of a mistake of law in contract is to be resisted because it would upset the legitimate and reasonable expectations of contracting parties. Contract, unlike restitution, requires that the mistake must be fundamental because of the effect of nding an operative mistake. An operative mistake in contract law renders the contract void; in restitution, it acts as an unjust factor which can be met with a defence. The mistake does not operate in an entirely unfettered fashion but is balanced against other considerations. The require-

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ment in Pacic National Investments v. Victoria that the mistake of law had to be a fundamental mistake is equally applicable in England. This is particularly true if The Great Peace is followed, because it removes the possibility that mistake operates in equity and in a fashion which provides a remedial discretion. The equitable treatment of mistake in contract law provides courts with a discretion as to the effect of a mistake. This discretion is not dissimilar from the ability of a court in a restitution case to allow a defence to the claim. In short, if mistake cannot operate in equity, this reinforces the requirement that the mistake is a fundamental one. Neither the Supreme Court nor the House of Lords has explicitly considered whether a mistake of law in contract is subjective or objective.101 Mistake in restitution is an entirely subjective matter. Only the intent of the transferor is relevant and a subjective mistake is sufcient. In contrast, mistake in contract law must be an objective mistake and this requirement must be retained in the case of a mistake of law. It is consistent with the requirements that the mistake be mutual and fundamental. It serves to uphold transactions freely entered and based upon consent. It serves the commercial purpose of protecting third parties who would otherwise not be protected. Finally, to require an objective mistake in the case of fact and a subjective mistake in the case of law would be highly anomalous. Mistake of law in contract needs to be mutual, fundamental and objective. This will necessarily limit the number of contracts avoided by a mistake of law. This limitation will serve to reduce the particular problems presented to contracts by mistakes of law as opposed to a mistake of fact. Four particular problems are mentioned here. First, it has been noted102 that the effect of removing the mistake of law barrier is to take the emphasis away from the state of mind of the payer and towards the validity of the obligation. This can be clearly seen in Kleinwort Benson and may partly explain why the case was categorised in terms of a mistake in restitution rather than in contract. Birks advocated that where the parties had obtained what they wanted the mistake was spent and no longer a reason for restitution. Contract law largely recognises the nality of transactions and generally refuses to nd a mistake ‘operative’ where the contracted is executed. This is a large part of the reason why Bell v. Lever Bros. was decided as it was. Pacic National Investments v. Victoria offers no guidance on this point because the contract in question had not been fully executed. A second particular problem associated with a mistake of law in contract is that it has a much broader scope than a mistake of fact. It has the potential to effect

101

On this point see Friedman (n. 16). T. Krebs, ‘In Defence of Unjust Factors’ in D. Johnston and R. Zimmermann (eds.), Unjustied Enrichment: Key Issues in Comparative Perspective (CUP, Cambridge 2002) 76, 84. 102

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countless transactions and agreements. A mistake of fact rarely extends beyond the particular parties to a particular agreement. It may be that courts are less willing to nd a mistake of law in contract cases because of the potential to disrupt transactions not before them. A third problem particular to mistake of law, which arises from Kleinwort Benson, is the recognition and acceptance of the retroactive application by judicial decision. It has been noted by commentators that such a recognition within restitution has the potential to re-open settled matters, on the basis of a ction. It has the same potential in contract law, with even more invidious results. Parties employ contract in an attempt to settle liabilities based on predictions of the law and they also use contract to allocate risks that they gauge according to the existing state of the law. Allowing relief for a mistake of law has the potential to disrupt the nality of their transactions. It is by no means certain that the requirements mentioned above will be adequate to protect transactions in these circumstances. In addition, contract law requires that a mistake of fact is as to a fact at the time the contract was entered into.103 The interpretation placed upon the retroactive effect of judicial decisions complicates this situation and means that mistakes of law cannot be treated in entirely the same fashion as mistakes of fact. Fourth, a mistake of law is elusive and more difcult to ascertain than a mistake of fact. For example, it is relatively straightforward matter to determine that horsebeans are not feveroles,104 it is far more complicated to ascertain the legal capacity of a party.105 Mistakes of law in contract cannot be treated in exactly the same fashion as in restitution because there are no defences available in contract as there are in restitution.

c) When will a contract be avoided by a mistake of law? Lord Goff recognised that restitution divided into two separate and distinct regimes involving the repayment of money paid under a mistake of law: the repayment of taxes and all other cases, broadly described as those concerned with repayment of money paid under private transactions. Mistake of law in contract is only concerned with this latter category. The question is, however, what kind of contracts will be avoided by a mistake of law? This question is linked to a second question. What will occur to the situations previously dealt with as exceptions to the bar preventing a mistake of law from avoiding a contract? An examination of the ways in which a contract could be effected

103

Per Steyn J., Associated Japanese Bank (n. 17). The mistake made by the parties in Rose (Frederick E) (London) Ltd. v. William H. Pim Junior & Co. Ltd. [1953] 2 QB 450. 105 The Supreme Court in Pacic National Investments Ltd. v. Victoria (n. 57) was divided by 4:3 as to the capacity of the City to enter the contract it purported to have entered. 104

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by a mistake of law and the existing exception reveals that the removal of the mistake of law bar in contract law is not likely to have as dramatic an effect as might rst be thought. It is suggested that there are four major ways in which a contract might be avoided by a mistake of law. The rst arose in Kleinwort Benson and Pacic National Investments v. Victoria where the mistake involves the legal capacity of a party to enter into the contract. Where there is a mistake as to legal capacity, there exists the possibility that the resulting contract could be avoided on the grounds of a mistake of law. A mistake as to capacity is fundamental and will generally extend to both parties; where the mistake is made only by the party with capacity there is no legitimate interest to protect on the part of the party who lacks capacity. A second way in which a contract could be affected by a mistake of law is in the case of illegality. In this instance, parties could form what contract law has traditionally viewed as an illegal contract. It may be open to them, depending upon the facts, to argue that the contract is void because of the mistake of law. In other words, the parties thought that the performance of their contract was legal when it was not. A third way in which a contract could be affected by a mistake of law lies in a mistake as to some form of legal requirements or rights. There are two variants of this form of mistake. In the rst instance, the parties are mistaken as to the legal rights arising from their particular relationship. Viewed in this light, it is possible to say that the mistake in Bell v. Lever Bros. was a mistake of law: the mistake lay in the supposition that the employment contracts were valid. In actuality, they were voidable at the option of Lever Bros. The second instance lies in a general legal requirement of some sort. It may be that it is thought that the law requires all motorists to carry a yellow warning triangle in their car. The merchant sells and the consumer buys such a triangle on the assumption that this is the law. If it is not the law, their contract may well be void because of a mistake of law. The fourth is a contract of compromise; one settling supposed legal liabilities. In such a contract, an understanding of the law forms the basis of contract. The assessment of liability is based upon an understanding or prediction of the law. If this is mistaken, particularly where the ’mistake’ is only revealed by later judicial decision, the difcult question arises as to whether or not the contract can be avoided by a mistake of law. It is suggested that it is in regard to this area that there is the greatest potential for change in English contract law. We will return to this consideration after we have examined the possible future of the older exceptions to the mistake of law bar in contract.

d) Does the removal of the bar in contract make any difference? It remains to be determined what will happen with the existing exceptions to the rule precluding the efcacy of a mistake of law in contract. One matter which will undoubtedly change is the categorisation of some mistakes of law as fact.

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For example, the difculty facing the court in Solle v. Butcher, that they were dealing with a mistake of law and a mistake which extended to vast numbers of post-war housing cases,106 would not face a contemporary court. Likewise, the categorisation of mistakes of law as pertaining to ‘private rights’, as the mistake in Cooper v. Phibbs has been categorised, would not arise. There can be little purpose in retaining the exceptions to a rule which no longer exists; such a state of affairs will only cause confusion. What will cause some trouble is that the placing of a particular mistake within an exception was an exercise of judicial discretion. If the case was not placed within such an exception the action could disguise the real reason for dismissing an unmeritorious claim. The loss of this discretion and its ability to disguise reasons will disappear. It seems likely that the common law will need to develop more principled explanations as to why certain mistakes are not in themselves sufcient to avoid a contract. It is the case, however, that a large number of cases concerned with a mistake of law were tted within existing exceptions to the bar. It is therefore unlikely that the removal of the bar will produce large numbers of contracts avoided by a mistake of law. The one notable exception to this statement is the contract of compromise, a contract which courts were traditionally wary of placing within an exception to the mistake of law bar. Such a contract is entered into on an understanding of the law. If this understanding is erroneous, there will be great reservations in avoiding the contract. The very purpose of the contract was to allocate risk on the basis of the law as understood by the parties. English contract law has always been reticent to disrupt an allocation of risk because of a mistake of fact. When the contract has been formed under a mistake of law, and with the possible consequence of avoiding numerous contracts of compromise, it seems likely that there will be even greater reservations. In addition, the apparent reinstatement of the strict test in Bell v. Lever Bros. is likely to mean that only in the most egregious cases will a court nd that a mistake of law vitiates a contract of compromise. It was with this very point that the Court of Appeal struggled in Brennan v. Bolt Burdon. If compromises of doubtful rights are excluded from those situations where a mistake of law can vitiate a contract, it leaves a very small ambit indeed for mistake of law to operate in contract law. What will occur is that the mistake of law will operate openly, rather than under the disguise of an exception to the bar.

106 I have considered the background to the case in ‘Solle v. Butcher (1949)’ in C. Mitchell and P. Mitchell (eds.), Landmark Cases in the Law of Restitution (Hart: Oxford 2006).

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e) The relevance of the Canadian law to English law Does Pacic National Investments v. Victoria provide English courts with guidance as to how to resolve similar cases in England? Canadian law has advanced somewhat farther than English law at this point. The Supreme Court has already considered the effect of a mistake upon the formation of a contract. The requirements set out by Binnie J. for the mistake to be operative are likely to be the same requirements an English court would seek to establish. As we have considered, to conform with the existing English requirements for an operative mistake of fact, the mistake must be mutual, fundamental, objective and not unreasonable. Where the Canadian law differs substantially from the English law is that the Supreme Court found that the court operated in equity to alleviate the harshness of holding a party to a bargain entered into under a mistake of law. The operation of this rule in equity ensures that remedial exibility is present and it offers the usual equitable defences. Foremost amongst these is, of course, that relief will be barred where there is the intervention of a third party. If The Great Peace is followed, English courts will not operate in equity in a mistake of fact. It seems improbable that they would do so with a mistake of law. Because of this substantial difference it seems unlikely that English courts will follow the Canadian decisions. In conclusion, despite the supercial similarities of contract law between these two countries, they are poised at a point where they may well diverge substantially. Canada will go its own way in providing equitable relief for a mistake of law. In so doing the Canadians are likely to discover a far greater number of contracts avoided by a mistake of law. It remains to be seen if English courts will discover any at all.

Chapter 6 The Fiduciary Concept, Contract Law, and Unjust Enrichment: A Functional Comparison Leonard I. Rotman INTRODUCTION The duciary concept has a peculiar status in Canadian law. While the Canadian law of duciaries traces its origins to the same foundation as duciary jurisprudence emanating from other common law jurisdictions, the duciary concept has been applied more aggressively (i.e., to a wider range of circumstances and in more unique ways) in Canada than elsewhere. Sir Anthony Mason, former chief justice of the Australian High Court, once made the colourful extra-curial suggestion that Canadian duciary jurisprudence is divided into three parts: ‘[t]hose who owe duciary duties, those to whom duciary duties are owed and judges who keep creating new duciary duties.’1

1

Sir A. Mason, as quoted in A(C) v. Critchley (1998) 166 DLR (4th) 475 [74] (BCCA). See also E. Cherniak, ‘Comment on paper by Professor Jeffrey G. MacIntosh’ in Fiduciary Duties, Law Society of Upper Canada Special Lectures, 1990 (De Boo, Toronto 1991) 275, who relates the story of how Mason told then-Chief Justice Brian Dickson of the Supreme Court of Canada that ‘he understood that in Canada there were only three classes of people; those who are duciaries; those who are about to become

87 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 87–108. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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Despite the growth of the duciary concept in Canada and elsewhere, a signicant sense of uncertainty still plagues the duciary concept.2 Even a cursory glance at existing duciary jurisprudence and commentary indicates this phenomenon. Curiously, this state of affairs has not impeded the duciary concept’s continued use. This is not an exclusively modern development. Nor, for that matter, is it peculiarly Canadian.3 There has long been a greater interest in the ends to be achieved through the application of the duciary concept than in infusing it with greater certainty to guide its use.4 This is a problematic development, because, as former Chief Justice Bora Laskin of the Supreme Court of Canada once said: . . . important as it is to know what the law is, it is at least equally important to know what the law is for. The distinction that I draw is between a purely formal, mechanical view of the law, antiseptic and detached, and a view of the law that sees it as purposive, related to our social and economic conditions, and serving ends that express the character of our organized society.5

The growth in use of the duciary concept in the face of questions over its application and implications has created what I call the ‘duciary paradox.’6 As Justice La Forest bluntly states in LAC Minerals Ltd. v. International Corona Resources Ltd., ‘[t]here are few legal concepts more frequently invoked but less conceptually certain than that of the duciary relationship.’7 While there is

duciaries; and judges.’ Note also the comments of Meagher J. A. in Breen v. Williams [1994] 35 NSWLR 522, 570. 2 It is suggested that the present uncertainty that surrounds the duciary concept is more perceived than real; it is the product of its unexplained and unquestioned application rather than the result of any substantive uncertainty inherent in the duciary concept itself. See the discussion on this topic in L. I. Rotman, Fiduciary Law (Thomson/ Carswell, Toronto 2005) 39. 3 Indeed, the difculties associated with the duciary concept’s use in Canadian jurisprudence appear in other jurisdictions as well. Some of these difculties are rather obvious, as, for example, in the problematic applications of the duciary concept to achieve particular results observable in Chase Manhattan Bank v. Israel-British Bank [1981] Ch. 105 and English v. Dedham Vale Properties [1978] 1 All ER 382 (Ch). 4 As Sealy indicates in an early article, ‘judges in most cases have been more ready to nd that the type of duciary situation upon which their decision depends does or does not exist, than to say what, for that purpose, amounts to such a duciary position’: L. S. Sealy, ‘Fiduciary Relationships’ [1962] CLJ 69, 73–4. 5 B. Laskin, ‘The Function of the Law’ (1973) 11 Alta L. Rev. 118, 119. 6 See the more detailed discussion in Rotman, Fiduciary Law (n. 2) ch. 2. 7 (1989) 61 DLR (4th) 14, 26 (SCC). In A(C) v. Critchley (n. 1) [75], McEachern C. J. blames the Supreme Court of Canada for its failure to clarify the confused state of the duciary concept: ‘Our Supreme Court of Canada has led the way in the common law

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international confusion over the appropriate scope and application of the duciary concept, a solution to this situation does not necessitate throwing the baby out with the bath water. To retain its status as an important legal tool, the duciary concept must be used judiciously and only where it is warranted by the circumstances rather than in any situation it may be squeezed into given the right amount of persuasion. As Sir Robert Megarry once warned, ‘[t]he traditional beauty of a land owing with milk and honey is marred by the realisation that it would be very sticky. What of a land awash with duciary relationships?’8 Indeed, overly broad applications of the duciary concept both lessen its impact and lend credence to criticism that it may annex elds traditionally belonging to areas of law such as contract or tort.9 Birks has cogently observed that ‘[t]hings are . . . not understood unless they are articulately differentiated from others which they closely resemble.’10 This paper articulates a vision of the duciary concept that distinguishes it functionally from the contiguous areas of contract and unjust enrichment. It suggests that the duciary concept’s broad social and economic goals are far more ambitious than those of either contract or unjust enrichment, which are primarily designed to facilitate individual justice between parties.11 Thus, the very purpose of the duciary concept will be shown to justify its doctrinal separation from contract, unjust enrichment and, indeed, other areas of law.

in extending duciary responsibilities and remedies but it has not provided as much guidance as it usually does in emerging areas of law. The law in this respect has been extended by our highest court not predictably or incrementally but in quantum leaps so that judges, lawyers and citizens alike are often unable to know whether a given situation is governed by the usual laws of contract, negligence or other torts, or by duciary obligations whose limits are difcult to discern. Many lawyers plead cases in the alternative not knowing where the line should be drawn.’ 8 The Rt. Hon. Sir R. E. Megarry, ‘Historical Development’ in Fiduciary Duties (n. 1) 11. 9 Such criticism is evident, for example, in P. Birks, ‘The Content of Fiduciary Obligation’ (2000) 34 Isr L. Rev. 3, 5; P. D. Finn, ‘The Fiduciary Principle,’ in T. G. Youdan (ed.), Equity, Fiduciaries and Trusts (Carswell, Toronto 1989) 28; J. D. McCamus, ‘The Evolving Role of Fiduciary Obligation,’ in 1998–99 Meredith Lectures, Faculty of Law, McGill University (Yvon Blais, Cowansville PQ 2000) 204–5, 209–10; and Breen v. Williams (1996) 186 CLR 71, 95 (HC Aust). 10 Birks (n. 9) 12. 11 This is accomplished by the essentially restitutionary focus of contract law to enforce the rights of contracting parties or the design of the action in unjust enrichment to reverse improperly made gains.

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1) THE FUNCTION OF THE FIDUCIARY CONCEPT The duciary vision articulated herein differs from much of contemporary duciary orthodoxy.12 It suggests that the duciary concept is a tool that facilitates the construction and preservation of social and economic interdependency.13 Specically, the duciary concept maintains the viability of interdependent societies by preserving the integrity of important social and economic interactions of high trust and condence that facilitate specialization and lead to scal and informational wealth. The interdependency that allows for this broad form of wealth creation is constructed upon the trust of its participants. Yet, where one party holds power over another’s interests, the latter may become vulnerable to the use, misuse, or abuse of that power. Thus, this process of interdependency and specialization runs the risk of creating what Anderson calls ‘distorted incentives,’ which arise when specialists realize the personal benets from taking advantage of others’ trust.14 Where trust is abused, the interdependency premised upon it is jeopardized. Protecting the trust that underscores this interdependency is no small task. The common law is largely ill-equipped for this purpose; its goals are, for the most part, relatively modest and direct, focussing on individual rights and their enforcement.15 The duciary concept’s prescription of other-regarding behaviour looks beyond the limitations and immediacy of self-interest and allows individuals to trust that their interests will be cared for by others in particular forms of association. Thus, the policy underlying the duciary concept and the interests it protects are rather distinct from what exists under the common law. This is reective of the distinction between the approaches of the common law and Equity, of which the duciary concept is arguably its most doctrinally-pure expression.16

12 This discussion is adapted from Rotman, Fiduciary Law (n. 2) ch. 5, where a more detailed and nuanced account of this theory, described as the ‘operational vision’ of the duciary concept, may be found. 13 See also P. D. Finn, ‘The Fiduciary Principle,’ in T. G. Youdan (ed.), Equity, Fiduciaries and Trusts (De Boo, Toronto 1989) 26, who states that duciary law ‘. . . has been used, and is demonstrably used, to maintain the integrity, credibility and utility of relationships perceived to be of importance in a society. And it is used to protect interests, both personal and economic, which a society is perceived to deem valuable.’ 14 A. G. Anderson, ‘Conicts of Interest: Efciency, Fairness and Corporate Structure’ (1977–78) 25 UCLA L. Rev. 738, 794. 15 This is not to suggest that the common law does not also seek to promote broadbased social and economic goals, but that it does so in a profoundly different manner than equitable doctrines and is often limited by its focus on individuals’ rights. 16 See Rotman, Fiduciary Law (n. 2) 154, describing the duciary concept as ‘Equity’s darling.’ See also G. E. Dal Pont and D. R. C. Chalmers, Equity and Trusts in Australia

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The distinction between the common law and Equity, to paraphrase Keeton, is not just one of history, but one of attitude.17 As he explains: [t]he common law was concerned with the establishment and enforcement of rights. Equity looked farther, and sought to make the parties conform to a standard of social conduct prescribed by itself. It operated upon the ‘conscience of the wrongdoer.’ The Chancery is a Court of Conscience, and to purge a guilty conscience it was rst necessary that the wrongdoer should redress the harm done, so far as that was possible and compellable.18

The common law’s proscriptive focus, which generally dictates what individuals are not to do, is profoundly illustrated by Oliver Wendell Holmes’ ‘bad man’ approach to law described in ‘The Path of the Law’: ‘[i]f you want to know the law and nothing else, you must look at it as a bad man, who cares only for the material consequences which such knowledge enables him to predict, not as a good one, who nds his reason for conduct, whether inside the law or outside of it, in the vaguer sanctions of conscience.’19 Holmes’ ‘bad man’ approach contrasts sharply with the prescriptivism of Equity, which stresses modes of behaviour that are to be aspired to because of Equity’s focus on conscience and its emphasis on substance rather than form. Equity’s emphasis renders it more ideologically suited to the task of maintaining the trust needed for the type of interdependency described above than the common law’s narrower focus on individual justice. The duciary concept accentuates the unique aspects of individual relations, thereby facilitating an expansive understanding of the nature of obligations existing between parties – or what is sometimes referred to as their ‘spirit and intent’ – that transcends their strict, common law characterization. Thus, its focus is rather distinct from that of the common law.20

and New Zealand (2nd ed., LBC, Sydney 2000) 71, who describe the duciary concept as ‘arguably the premier equitable concept which illustrates equity’s jurisdiction.’ 17 G. W. Keeton, An Introduction to Equity (6th edn., Pitman, London 1965) 43–4. 18 See ibid. 22. 19 O. W. Holmes Jr., ‘The Path of the Law’ (1897) 10 Harv L. Rev. 457, as reproduced in Holmes, Collected Legal Papers (Peter Smith, New York 1952) 167, 171. 20 See Mr. Justice R. P. Meagher and A. Maroya, ‘Crypto-Fiduciary Duties’ (2003) 26 UNSWLJ 348, 353: ‘when one has regard to the particular interests that duciary duties traditionally have protected – control over the property, the interests, the condences, even, perhaps, the person, of another – one realises that these are different interests to those secured by the law of tort or contract’; S. Worthington, ‘Fiduciaries: When Is SelfDenial Obligatory?’ (1999) 58 CLJ 500, 504: ‘The policy imperatives which underpin duciary obligations are quite different from those underpinning tort, and neither mirror those underpinning unjust enrichment. These differences have ensured that the remedial consequences for all three remain appropriately distinct.’

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As a creature of Equity, the duciary concept presupposes the goodness of conscience and seeks to maintain or restore that goodness. Where individuals stray from their otherwise intrinsically good nature, Equity intervenes to purge their consciences of the effects of their bad behaviour.21 The duciary concept, as with Equity generally, looks to law as a good person does,22 with an emphasis upon the larger social or economic benets that may be enjoyed by society as a whole by following certain prescriptions designed to foster and enhance interdependency. Not all interactions where one party has power over the interests of another are properly described as duciary, though. The duciary concept is applied only where there are compelling policy reasons, rooted in Equity or statute, to preserve and reinforce the integrity, vitality, and value of important social and economic relationships.23 Relations that are appropriately subject to duciary scrutiny may be identied by their substance (i.e., their more-than-eeting nature), important social or economic character, and the high trust and condence that exists within them. They are also conspicuous by the power held by one party over the interests of another that results in the latter’s implicit dependency upon and peculiar vulnerability to the former within the duciary element(s) of their interaction.24

21

As a court of conscience, the primary object of the Court of Chancery was to ‘purge the corrupt conscience of the defendant’ not to redress the wrong done to the plaintiff: W. Ashburner, Principles of Equity (Butterworth & Co., London 1902) 38. See also D. E. C. Yale, ‘Introduction,’ in Yale (ed.) Lord Nottingham’s Chancery Cases (Selden Society, London 1957) Vol. I, cvi–cvii: ‘Equity is concerned not to enforce or even primarily assist legal rights but is rather concerned to prevent their abuse.’ In spite of its different focus than the common law, Chancery’s cleansing of a wrongdoer’s conscience did generally have the ancillary effect of redressing wrongs perpetrated against the complainants. 22 See D. Hayton, ‘Fiduciaries in Context: An Overview’ in P. Birks (ed.), Privacy and Loyalty (Clarendon, Oxford 1997) 306: ‘Equity, with its “good man” philosophy, prevents a defendant subjected to the duciary duty of loyalty from denying that he was a good man and did what he did in the interests of his beneciaries.’ 23 This is emphasized as well in Justice E. W. Thomas, ‘An Afrmation of the Fiduciary Principle’ [1996] NZLJ 405, esp. 406. 24 It is axiomatic that not every incident of a relationship with duciary components is, itself duciary: see, for example, the statements made in Quebec (Attorney General) v. Canada (National Energy Board) [1994] 1 SCR 159, 183 regarding the duciary obligations of the federal Crown to Aboriginal peoples: ‘It is now well settled that there is a duciary relationship between the federal Crown and the aboriginal peoples of Canada: Guerin v. The Queen [1984] 2 SCR 335. Nonetheless, it must be remembered that not every aspect of the relationship between duciary and beneciary takes the form of a duciary obligation: Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 SCR 574. The nature of the relationship between the parties denes the scope, and the limits, of the duties that will be imposed.’

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Where the duciary concept is appropriately invoked, strict duties are imposed upon the duciaries who hold the seat of power within the duciary element(s) of an interaction.25 These duties include, inter alia, duties of utmost good faith, full and complete disclosure, the avoidance of conicts, and the inability to prot. Fiduciaries must serve those beneciary interests that are tangibly related to their duciary interactions and eschew any correlative personal or third party interests. Whether the duciaries’ personal interests or the interests of third parties are complementary or antagonistic to the beneciaries’ interests is immaterial.26 Fiduciaries may only act in self-interest or in the interests of parties other than their beneciaries with the express and fully-informed consent of their beneciaries.27 In matters outside the duciary nature of their associations, duciaries may do whatever they wish.28 As will be seen in the sections below, these characteristics evidence the duciary concept’s functional distinction from contract law or unjust enrichment.

2) THE FIDUCIARY CONCEPT AND CONTRACT LAW Over the years, some have attempted to understand the duciary concept by reference to contract law.29 Fiduciary interactions are thus sometimes said to be bargains between actors pursuant to which one party becomes obliged to act in the interests of another within certain prescribed boundaries. For the most part, though, the understanding of duciary interaction as contract centres

Further, as Bryson J. explains in Noranda Australia Ltd. v. Lachlan Resources NL (1988) 14 NSWLR 1, 15 (SC), it is ordinarily the case that ‘a person under a duciary obligation to another should be under that obligation in relation to a dened area of conduct, and exempt from the obligation in all other respects.’ 25 Insofar as the power in duciary interactions resides exclusively with the duciaries in both unidirectional and reciprocal (i.e., where parties are both duciaries and beneciaries, as in partnerships) duciary associations, there is no need to look beyond the duciaries’ conduct in order to ensure the integrity of duciary associations. See Rotman, Fiduciary Law (n. 2) ch. 6 ‘Exclusive Focus on Fiduciaries’ Actions’ 298–303. 26 As stated in Rosenfeld v. Black 445 F 2d 1337, 1342 (2d. Cir. 1971), ‘no matter how high-minded a particular duciary may be, the only certain way to insure full compliance with that duty is to eliminate any possibility of personal gain.’ 27 What constitutes adequate beneciary consent is considered in Rotman, Fiduciary Law (n. 2) ch. 6. 28 Beyond the connes of duciary interactions, these duciaries are no longer duciaries to the people who are their beneciaries in those associations, thus they can plausibly owe no duciary duties to those persons outside of their duciary relationship. Refer back to the comments in Noranda Australia Ltd. v. Lachlan Resources NL (n. 24). 29 This use of contract law may initially be traced to early work by Austin Scott: see A. W. Scott, ‘The Fiduciary Principle’ (1949) 37 Cal L. Rev. 539.

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around the notion of a quid pro quo 30 and the express acceptance of duciary responsibility.31 The use of contract law to explain the duciary concept has some rather obvious aws. In contract law, the agreement itself is the centre of judicial attention. The duciary concept, as indicated above, is concerned with the relationship of the parties to each other and the circumstances under which one is alleged to have a duty to act in the other’s interests. Contract law’s good faith standard of behaviour is of lesser magnitude than the duciary concept’s requirement of the utmost good faith, or uberrima des,32 on the part of duciaries.33 For present purposes, though, the most important distinction between contract law and the duciary concept is that contract law is premised upon self-regarding behaviour, whereas the duciary concept requires other-regarding conduct on the part of duciaries vis-à-vis the duciary element(s) of an association. The contractual relationship is a two-way street, or, more accurately, an amalgamation of reciprocal one-way interests. The parties are each entitled, and expected, to pursue their self-interest within the connes of the restrictions

30 Under this quid pro quo the beneciary transfers certain powers to the duciary in return for the latter’s promise of delity to the former’s interests. The quid pro quo is most likely more complex than this, but this is the essential element. For present purposes, the details surrounding the parties’ agreement is less important than the fact that they have agreed to enter into this form of interaction. 31 See, for example, Scott, ‘The Fiduciary Principle’ (n. 29) 540: ‘A duciary is a person who undertakes to act in the interests of another person. It is immaterial whether the undertaking is in the form of a contract. It is immaterial that the undertaking is gratuitous.’ 32 See, for example, Cox v. Delmas 33 P. 836 at 839 (Cal. 1893); Hemenway v. Abbott (1908) 8 Cal. App 450, 463; David Welch Co. v. Erskine & Tulley 250 Cal Rep 339, 341 (CA 1988): ‘The relation between attorney and client is a duciary relation of the very highest character, and binds the attorney to most conscientious delity – uberrima des’; M. V. Ellis, Fiduciary Duties in Canada (Carswell, Toronto 2002) looseleaf, 1.4(1)(a). 33 E. A. Farnsworth, Farnsworth on Contracts (2nd ed., Aspen, New York 1998) Vol. II, §7.17b, 378 states, of the contractual standard of good faith: ‘[c]ertain it is that the standard is not as exacting as the standard of good faith applied to agents and other duciaries.’; R. P. Meagher, W. M. C. Gummow, and J. R. F. Lehane (eds.), Equity: Doctrines and Remedies (3rd ed., Butterworths, Sydney 1992) 70: ‘. . . a higher standard has long been required of duciaries than of parties merely liable in contract and tort.’ Note also the comments in: R. C. Clark, ‘Agency Costs Versus Fiduciary Duties,’ in J. W. Pratt and R. J. Zeckhauser (eds.), Principals and Agents: The Structure of Business (Harvard Business School Press, Boston 1985), 76: ‘[f]iduciary law is stricter on duciaries than contract law is on ordinary contracting parties in at least four fundamental respects. There are stricter rules about disclosure, more open-ended duties to act, tighter delineations of rights to compensation and to benets that could ow from one’s position, and more intrusive normative rhetoric.’

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imposed by contract law on that pursuit. The duciary relationship, meanwhile, is a one-way street, with all focus and obligation directed from duciaries to their beneciaries.34 Fiduciaries must act selessly and completely in the interests of their beneciaries regarding the duciary components of their interaction. Beneciaries have no obligations to their duciaries imposed upon them by the duciary concept, nor must they monitor the latter’s activities.35 Instead, they remain entitled to focus upon and pursue self-interest. As a result of its basis in self-interest, contract law allows greater leeway for the parties to engage in private ordering than what is allowed by the duciary

34 See also T. Frankel, ‘Fiduciary Duties as Default Rules,’ (1995) 74 Ore L. Rev. 1209, 1228–9: ‘A contract party abuses its powers not by extracting benets for itself but only by extracting unreasonable additional benets. A duciary abuses its power by appropriating any benet for itself.’ 35 Requiring beneciaries to monitor their duciaries’ activities would largely eliminate the benet of entrusting others that is foundational to the duciary concept. See for example, The Shropshire Union Railways and Canal Co. v. The Queen (1875) LR 7 HL 496, 507–8 (Lord Cairns L. C.): ‘. . . the arguments at your Lordships’ Bar on behalf of the Respondent appeared to me to go almost to this, that . . . the equitable owner is under some measure of obligation with regard to his duty of watching his trustee, an obligation which does not lie upon a limited owner. I nd no authority for such a proposition, and I feel satised that your Lordships will not be disposed to introduce, for the rst time, that as a rule of law.’ See also ibid. 515 (Lord O’Hagan): ‘an individual cestui que trust . . . is held warranted in reposing full condence in the trustee to whom he commits a power which may be used to his own great detriment’; In re Vernon, Ewens & Co. (1886) 33 Ch. D 402, 410 (CA): ‘the cestui que trust is entitled to trust in and place reliance upon his trustee, and is not bound to inquire whether he has committed a fraud against him unless there is something to raise his suspicion’; Carl B. Potter Ltd. v. Mercantile Bank of Canada (1980) 8 ETR 219, 227–8 (SCC); D. Hayton (n. 22) 284: ‘[a] beneciary is entitled to expect his trustees to act loyally in his interests so as to be under no duty to check up on them’; T. Frankel, ‘Fiduciary Law,’ (1983) 71 Cal L. Rev. 795 at 824; J. D. Davies, ‘Equitable Compensation: Causation, Foreseeability and Remoteness,’ in D. W. M. Waters (ed.), Equity, Fiduciaries and Trusts, 1993 (Carswell, Toronto 1993) 317 [‘Equitable Compensation’]: ‘[a] party to whom duciary obligations are owed will not ordinarily be expected to check on what the duciary is doing. It is his privilege to be able to rely’; M. V. Ellis, Fiduciary Duties in Canada (Carswell, Toronto 2002) looseleaf, 2.4(4) (2–22 to 2–23). An obvious exception to this statement exists in the context of determining the validity of a defence of laches or acquiescence, which necessarily requires an examination into the actions or motivations of the beneciary of a duciary relationship. Relieving beneciaries of the need to inquire into their duciaries’ activities also compensates for the power imbalance that exists within duciary associations that allows duciaries to conceal the existence of fraud or other improper activities from their beneciaries.

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concept.36 While commercial standards of reasonableness and other market inuences play an important role in determining acceptable standards for contracting parties, the duciary concept is unaffected by such pressures. This foreshadows Chief Justice Cardozo’s famous statement in Meinhard v. Salmon: Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by duciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honour the most sensitive, is then the standard of behavior. As to this there has developed a condition that is unbending and inveterate. Uncompromising rigidity had been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. . . . Only thus has the level of conduct for duciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.37

In the Supreme Court of Canada’s majority judgment in Hodgkinson v. Simms, La Forest J. stresses similar ideals: The desire to protect and reinforce the integrity of social institutions and enterprises is prevalent throughout duciary law. The reason for this desire is that the law has recognized the importance of instilling in our social institutions and enterprises some recognition that not all relationships are characterized by a dynamic of mutual autonomy, and that the marketplace cannot always set the rules. By instilling this kind of exibility into our regulation of social institutions and enterprises, the law therefore helps to strengthen them.38

As Brudney explains it, ‘[c]onventional contract doctrine entails a substantially different analytic framework and normative import than does traditional duciary doctrine.’39 Frankel also emphasizes distinctions in the ideological underpinnings of contract law and the duciary concept: In the world of contract, self-interest is the norm, and restraint must be imposed by others. In contrast, the altruistic posture of duciary law requires that once an

36

For discussion on this point, see Fiduciary Law (n. 2) ch. 6, 374–94. 164 NE 545, 546 (NYCA 1928). 38 Hodgkinson v. Simms (1994) 117 DLR (4th) 161, 186 (SCC). 39 V. Brudney, ‘Contract and Fiduciary Duty in Corporate Law’ (1997) 38 Bos. Coll. L. Rev. 595, 663. See also Re Goldcorp Exchange Ltd. [1994] 2 All ER 806, 821 (JCPC), where the Judicial Committee of the Privy Council states that the ‘essence’ of a duciary relationship ‘creates obligations of a different character from those deriving from the contract itself’; Norberg v. Wynrib (1992) 92 DLR (4th) 449, 488 (SCC) (McLachlin J.): ‘The freedom of the duciary is limited by the obligation he or she has undertaken – an obligation which “betokens loyalty, good faith and avoidance of a conict of duty and self-interest”: Canadian Aero Service Ltd. v. O’Malley . . . To cast a duciary relationship in terms of contract . . . is to diminish this obligation.’ 37

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individual undertakes to act as a duciary, he should act to further the interests of another in preference to his own.40

These distinctions are magnied by the respective positions of contract law and the duciary concept on the principle of efcient breach. The idea of efcient breach is premised upon the proposition that it is sometimes preferable to breach a contract and pay damages41 rather than carrying out a bargain as agreed to.42 Such a breach is said to be efcient because it presumes to satisfy all parties’ interests while simultaneously freeing up capital that can be put to better use elsewhere.43 Consequently, a breach of this sort is not only condoned, but encouraged.44 Whether this breach would cause a fundamental

40

T. Frankel, ‘Fiduciary Law,’ (1983) Cal L. Rev. 795, 830. See also ‘Fiduciary Duties as Default Rules,’ (n. 34) 1276–7; S. Fitzgibbon, ‘Fiduciary Relationships are not Contracts,’ (1999) 82 Marq L. Rev. 303, 305: ‘Though duciary relationships may, like marriage relationships, be part of the same genus [as contracts] they are, like marriage relationships, members of a different species. They differ in doctrinal structure. They differ in ethical basis’; Brudney, (n. 39) 663–4: ‘Conventional contract doctrine entails a substantially different analytic framework and normative import than does traditional duciary doctrine in dening the loyalty obligations of the participants and their power to authorize departure from them. The former focuses on a party’s entitlement to benet himself, and the limits of that entitlement. The latter addresses the obligation of the duciary to serve the beneciary, and the resulting disability from beneting himself except as specied expressly.’ 41 Unless, of course, the damages equate to the price that would have to be paid by the other contracting party to obtain similar goods from another manufacturer/ distributor – owing, for example, to increased costs of obtaining the goods subsequent to the contract’s conclusion – in which case the party in breach would be better off fullling the deal and not incurring the additional costs associated with litigation or arbitration emanating from the breach. 42 M. A. Eisenberg, ‘Actual and Specic Performance, the Theory of Efcient Breach, and the Indifference Principle in Contract Law,’ (2005) 93 Cal L. Rev. 975 at 997 provides the following description: ‘The theory of efcient breach holds that the breach of contract is efcient, and therefore desirable, if the promisor’s gain from breach, after payment of expectation damages, will exceed the promisee’s loss from breach.’ 43 See R. Posner, Economic Analysis of Law (6th ed., Aspen, New York 2003) 120: ‘. . . in some cases a party [to a contract] would be tempted to breach the contract simply because his prot from the breach would exceed his expected prot from completion of the contract. If his prot from breach would also exceed the expected prot to the other party from completion of the contract, and if damages are limited to loss of expected prot, there will be an incentive to commit a breach. There should be.’ 44 See, for example, R. Birmingham, ‘Breach of Contract, Damage Measures, and Economic Efciency’ (1970) 24 Rutgers L. Rev. 273, 284: ‘Repudiation of obligations should be encouraged where the promisor is able to prot from his default after placing his promisee in as good a position as he would have occupied had performance been rendered.’

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breakdown in the relationship between the parties or serve as a basis for diminishing the importance of cooperative ventures is not accounted for in determining whether breaching a contractual duty in such a scenario is ‘efcient.’45 The duciary concept’s goal of maintaining the integrity of important social and economic relationships of high trust and condence stands in direct opposition to the notion of efcient breach. This is expressed in Mason P.’s dissenting judgment in Harris v. Digital Pulse: ‘there is no principle of efcient breach underpinning remedies for breach of duciary relationship: indeed the deterrent function of remedies like account of prots shows that equity repudiates the type of efciency encompassed in the contractual notion of efcient breach.’46 Fiduciaries are prohibited from enjoying any benet stemming from their breach of duty. Thus, a duciary who breaches duciary duties in order to gain prot or avoid loss is liable to account for the benet obtained or to make good the loss avoided as a result of the breach. No justication, even one supported by veriable indicators of increased efciency, can avoid this result. The duciary concept’s opposition to the concept of efcient breach does not entail that the duciary concept is any less efcient than contract law, only that its efciency is premised upon different values. The duciary concept’s efciency stems from its preservation of important social and economic relationships. The duciary concept also instills a greater degree of predictability in these interactions by providing a stronger basis for the parties’ condence that the integrity of the relationship in question (and its consequences) will be upheld through the imposition of duciary norms.47 Indeed, since would-be beneciaries may properly rely upon the delity of those who would be their duciaries rather than having to monitor the self-interested activities of contracting parties,48 beneciaries’ condence in their duciaries is enhanced by the imposition of duciary, as opposed to contractual, norms.

45 In Eisenberg, ‘Actual and Specic Performance, the Theory of Efcient Breach, and the Indifference Principle in Contract Law’ (n. 42) 1012, the author states that the theory of efcient breach: ‘if widely adopted, would decrease the efciency of the contracting system in three ways. First, it would increase the need to resort to litigation, which is very expensive, as opposed to achieving performance of contracts through the internalization of the moral norm of promise-keeping, which is very inexpensive. Second, it would lead contracting parties to make greater use of costly noncontractual measures, such as security deposits, to ensure performance. Third, it would diminish the force of reputational constraints, because such constraints rest in signicant part on moral norms.’ 46 46 (2003) 56 NSWLR 298, 334 (CA). 47 This is noted, for example, in Graham v. Mimms 444 N.E. 2d 549 at 555 (Ill. App. Ct. 1982), where it is said that ‘[t]he law of duciary obligations facilitates commercial efciency by imposing a duty of loyalty on duciaries . . .’ 48 Refer back to (n. 35).

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Put simply, contract law and the duciary concept have vastly different functions. Consequently, the benets to be obtained from invoking contract theory to assist the understanding of the duciary concept are signicantly outweighed by the dangers inherent in its use for such a purpose.49

3) THE FIDUCIARY CONCEPT AND UNJUST ENRICHMENT One would be rather hard pressed to nd much discussion of the duciary concept and unjust enrichment,50 notwithstanding the important connections of the duciary concept and unjust enrichment to restitution,51 the fact that the

49

As De Mott maintains, ‘[r]esorting unreectively to contract rhetoric is insidiously misleading and provides no rationale for further development of the law of duciary obligation’: D. A. De Mott ‘Beyond Metaphor: An Analysis of Fiduciary Obligation’ (1988) 5 Duke LJ 879, 879–80. 50 As McCamus observes in ‘The Evolving Role of Fiduciary Obligation’ (n. 9) 186, ‘elaborate discussion of the relationship between duciary obligation and unjust enrichment has not been a recurring feature of recent Canadian jurisprudence on duciary obligation.’ Nor, for that matter, is discussion of the relationship between these doctrines evident in recent jurisprudence on unjust enrichment. 51 The duciary concept is one of the primary means by which relief for unjust enrichment may be obtained. For this reason, it is a part of the modern law of restitution. See, for example, McCamus, ibid. 186–7; Justice B. McLachlin, ‘Restitution in Canada,’ in W. Cornish, R. Nolan, J. O’Sullivan, and G. Virgo (eds.), Restitution Past, Present and Future: Essays in Honour of Gareth Jones (Hart, Oxford 1998) 278: ‘If the law of civil remedies is divided into contract, tort and restitution, as the authorities suggest, then remedies for breach of duciary duty – the duty of loyalty or trust – would seem to fall under the heading of restitution and the three requirements for recovery enunciated in Deglman.’ See Deglman v. Guaranty Trust Co. of Canada and Constantineau [1954] SCR 725. However, as an equitable construct, the duciary concept also occupies an important role under the sphere of Equity. Unjust enrichment, meanwhile, is often regarded, although not without controversy, as the common or uniting theme of restitution. Those who advocate that unjust enrichment is the unifying theme of restitution include W. A. Seavey and A. W. Scott, Restatement of the Law of Restitution: Quasi-Contracts and Constructive Trusts (American Law Institute, St. Paul, Minn 1937) 12; R. Goff and G. Jones, The Law of Restitution (6th edn., Sweet & Maxwell, London 2002) 3; G. Palmer, The Law of Restitution, (Little, Brown, Boston 1978) §1.1 at 2–5; P. D. Maddaugh and J. D. McCamus, The Law of Restitution (2nd ed., Canada Law Book, Aurora 2004) 3; and A. Burrows, The Law of Restitution (2nd ed., Butterworths, London 2002) 1. For opposition to this proposition, see, for example, J. M. Perillo, ‘Restitution in a Contractual Context,’ (1973) 73 Colum. L. Rev. 1208, 1222; J. P. Dawson, ‘Restitution Without Enrichment’ (1981) 61 BUL Rev. 563, 621; S. Hedley, ‘Unjust Enrichment as the Basis of Restitution: An Overworked Concept’ (1985) 5 LS 56; C. T. Wonnell, ‘Replacing the Unitary Principle

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frontiers of duciary interaction and unjust enrichment are no more limited than the categories of negligence at common law,52 and their basis in similarly broad, foundational postulates. The leading duciary case of Keech v. Sandford 53 did by no means create a fully-eshed out concept of duciary obligation. Rather, in nding that a trustee held the benets of a protable lease for his infant beneciary even though the lessor had refused to renew it for the infant, Lord Chancellor King indicates both the selessness required of duciaries and that, in situations of intimate and trusting relations, courts must not guard only against actual harm or abuse of a beneciary’s interests, but also the potential harm and abuse of those interests. The strictness of the principle in Keech v. Sandford is necessary to maintain the integrity and viability of duciary interactions by promoting the good faith discharge of one’s duty to another and deterring those with authority over the interests of others from using their positions or their knowledge for the benet of persons other than those individuals they are bound to serve. The history of unjust enrichment may be traced to the ancient Roman maxim, attributed to Pomponius, which states ‘For this by nature is equitable, that no

of Unjust Enrichment’ (1996) 45 Emory LJ 153, 219: ‘A unitary principle of liability based upon unjust enrichment is not coherent or normatively plausible and should be abandoned.’ Still others suggest that unjust enrichment is only part of the function of restitution: see, for example, D. Laycock, ‘The Scope and Signicance of Restitution’ (1988–89) 67 Tex L. Rev. 1277. There is, however, an important distinction to be drawn between viewing unjust enrichment as a unifying theme of restitution versus having it serve as a standard for judicial decision making. Note the important clarications on this matter in A. Kull, ‘Rationalizing Restitution’ (1995) 83 Cal. L. Rev. 1191, 1196; E. Sherwin, ‘Restitution and Equity: An Analysis of the Principle of Unjust Enrichment,’ (2000–1) 79 Tex L. Rev. 2083, 2084. 52 The open-ended nature of the duciary concept may be seen, for example, in Laskin v. Bache & Co. (1971) 23 DLR (3d) 385, 392 (Ont CA); Guerin v. The Queen (1984) 13 DLR (4th) 321 at 341 (SCC); Frame v. Smith (1987) 42 DLR (4th) 81, 97 (SCC); M(K) v. M(H) (1992) 96 DLR (4th) 289, 326 (SCC). See also Goldex Mines Ltd. v. Revill (1975) 54 DLR (3d) 672, 679–80 (Ont. C.A.); Hospital Products Ltd. v. United States Surgical Corp. (1984), 55 ALR 417, 432 (H.C. Aust.) (Gibbs C. J.), 458 (Mason J.). See also the discussion in Fiduciary Law (n. 2) 283–6. The similar characterization of unjust enrichment scenarios may be seen, for example, in James More & Sons Ltd. v. University of Ottawa (1974) 49 DLR (3d) 666, 676 (Ont HCJ); G. B. Klippert, ‘The Juridical Nature of Unjust Enrichment’ (1980) 30 UTLJ 356, 369; M. P. Gergen, ‘What Renders Enrichment Unjust?’ (2000–1) 79 Tex L. Rev. 1927, 1978; G. H. L. Fridman, ‘Unjust Enrichment (Dis)Contented’ in J. W. Neyers, M. McInnes, and S. G. A. Pitel (eds.), Understanding Unjust Enrichment (Hart, Oxford 2004) 44. 53 (1726) Sel Cas T. King 61, 25 ER 223 (Ch).

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one be made richer through another’s loss.’54 This sentiment is also evident in the two foundational cases establishing the concept of unjust enrichment. In Moses v. Macferlan, Lord Manseld states: If the defendant be under an obligation, from the ties of natural justice, to refund, the law implies a debt, and gives this action, founded in the equity of the plaintiff’s case, as it were upon a contract (‘quasi ex contractu’ as the Roman law expresses it) . . . This kind of equitable action, to recover back money, which ought not in justice to be kept, is very benecial and therefore much encouraged. It lies only for money which, ex aequo et bono, the defendant ought to refund . . . In one word, the gist of this kind of action is that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.55

Meanwhile, Lord Wright indicates in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., that ‘any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benet, that is to prevent a man from retaining money of, or some benet derived from, another which it is against conscience that he should keep.’56 Thus, like the broad notion of duciary obligation observed in Keech v. Sandford, neither Moses v. Macferlan nor Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. distill anything resembling a fully-formed conception of unjust enrichment. Nonetheless, each of these cases establish or reiterate a foundational postulate that is the basis from which more specic governing principles are derived.57 Keech v. Sandford establishes the basis for the duciary concept’s broad postulate of protecting the integrity of important social and economic interactions of high trust and condence. Both Moses v. Macferlan and Fibrosa Spolka illustrate unjust enrichment’s similarly broad postulate that one party ought not benet at the expense of another where retaining such benet is improper.58

54 As cited in J. P. Dawson, Unjust Enrichment (Boston: Little, Brown, 1951) 3. This maxim has also been translated as ‘It is by nature fair that nobody should enrich himself at the expense of another’: Dig. 12.6.14 (Pomponius, Sabinus 21) (A. Watson, ed., P. Birks trans., 1998), as cited in H. Dagan, The Law and Ethics of Restitution (CUP, Cambridge 2004) 17. See also D. J. Ibbetson, ‘Unjust Enrichment in English Law’ in E. J. H. Schrage (ed.), Unjust Enrichment and the Law of Contract (Kluwer, The Hague 2001) 35. 55 (1760) 2 Burr 1005, 1008, 1012, 97 ER 676, 678, 680–1 (KB). 56 [1943] AC 32, 61 (HL(E)). 57 This is consistent with Seavey and Scott’s characterization of unjust enrichment as a postulate underlying the law of restitution and the need to formulate more specic principles to esh out a functional law of restitution: see Seavey and Scott, Restatement of the Law of Restitution: Quasi-Contracts and Constructive Trusts (n. 51). 58 While, in its simplest form, unjust enrichment refers to a defendant’s possession of a wrongful gain made or obtained at the expense of the plaintiff that must be

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In this sense, both the duciary concept and unjust enrichment distinctly parallel the genesis of the modern law of negligence and Lord Atkin’s formulation of the ‘neighbour’ principle in Donoghue v. Stevenson.59 Rather than providing a list of ‘neighbours,’ Lord Atkin’s judgment provides criteria for determining who is a neighbour that are fashioned out of the broad postulate that one must not injure one’s neighbour. These criteria function like the principles fashioned out of the broad postulates established for the duciary concept and unjust enrichment.60 They also provided a basis for the further renement of the broad

reversed, it may create liability in two distinct ways. The rst is on the basis of restitution for wrongs, whereby an individual is improperly beneted by the commission of a wrong, such as by way of the commission of a tort or a breach of duciary duty. On this branch, unjust enrichment is dependent upon proof of some other cause of action. The second exists where one party receives a benet corresponding to a deprivation to another in circumstances where it would be unjust to allow the defendant to retain the benet. This form is alternately described as autonomous unjust enrichment, substantive unjust enrichment, or enrichment by impoverishment. Unlike restitution for wrongs, this method does not require proof of the elements of some other cause of action. 59 [1932] AC 562 (HL). Analogizing the development of the broad principle-based approach of the duciary concept and unjust enrichment to the development of modern negligence law has been recognized by other commentators. For instance, in relation to the duciary concept, see J. R. M. Gautreau, Q. C., ‘Unjust Enrichment, Fiduciary Loyalty, and Remedies,’ (1986) 5(2) Adv Soc J. 4, 5: ‘Dening when and where duciary duties arise is like dening when and where a duty of care arises in the law of negligence. Despite the formulation of a general theory of negligence, a visceral approach is still involved. We sense the meaning of neighbour and duty in light of a general principle, society values and a sense of fairness. And so with duciaries.’ In relation to unjust enrichment, note the comments in Goff and Jones, The Law of Restitution (n. 51) 14: ‘It has been said that the principle of unjust enrichment is too vague to be of any practical value. Nevertheless, most rubrics of law disclose, on examination, an underlying principle which is almost invariably so general as to be incapable of any precise denition. Moreover, in a search for unifying principle at this level we should not expect to nd any precise “common formula,” but rather an abstract proposition of justice which is “both an aspiration and a standard for judgment.” Unjust enrichment is no more vague than the tortious principle that a man must pay for harm which he negligently causes another, or the contractual principle that pacta sunt servanda. The search for principle should not be confused with the denition of concepts.’ 60 By articulating negligence in light of the broad notion that liability ought to be imposed upon persons whose actions might foreseeably cause harm to others likely to be harmed therefrom in Donoghue v. Stevenson, Lord Atkin established an overarching principle to provides structure and coherence to the previously disparate strands of negligence law. This approach was necessary because of the innite number of scenarios where negligence could arise based on the foundational principle articulated in Donoghue v. Stevenson. While the vagueness of the standard enunciated initially caused frustration and confusion, this abated over time as subsequent applications and academic

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principle of negligence enunciated in Donoghue v. Stevenson rather than leaving individual applications to the whim of judicial discretion. Transforming foundational postulates into governing principles is no simple process; it is gradual and evolutionary. The growing pains currently being experienced by unjust enrichment are, at least in this respect, similar to those that still affect the duciary concept and that have also been experienced by the law of negligence.61 The broad, conceptual approach used by the duciary concept and unjust enrichment is rather distinct from that undertaken by more traditional civil obligations such as contract law that employ taxonomy to facilitate their emphasis on narrower issues. This distinctiveness in approach arose purposefully and in response to the inadequacies of the common law and the body of civil obligations that it had created. Thus, the relationship of either the duciary concept or unjust enrichment vis-à-vis civil obligations such as contract law and tort is much like the relationship between Equity and the common law. The authority of law requires the elucidation of positive criteria for implementation so that its standards are clear and intelligible. Because it is not possible to foresee all potential situations in which particular legal rules or presumptions ought to apply, law must be articulated in a determinate and general manner.62 Inevitably, situations will arise that fall outside of the garden variety

examinations supplied the details omitted from the broader conceptualization articulated by Lord Atkin. See the discussion in Fiduciary Law (n. 2) 69–71. 61 See also Klippert, ‘The Juridical Nature of Unjust Enrichment’ (n. 52) 358. 62 See T. F. T. Plucknett and J. L. Barton (eds.), St. German’s Doctor and Student, Publications of the Selden Society, vol. 91 (Selden Society, London 1974) 97: ‘It is not possyble to make any generall rewle of the lawe but that it shall fayle in some case. And therfore makers of lawes take hede to such thynges as may often come and not to euery particuler case for they coulde not though they wolde And therfore to folowe the wordes of the lawe were in some cases both agaynst Iustyce & the common welth: wherfore in some cases it is good and even necessary to leue the wordis of the lawe & to folowe that reason and Justyce requyreth & to that intent equyties is ordeyned that is to say to tempre and myttygate the rygoure of the lawe.’ (Loosely translated, this quote states that ‘in some cases . . . to leave the words of the law and to follow what reason and justice requires and to that intent equity is ordained, that is to say to temper and mitigate the rigour of the law.’) See also W. Lambarde in C. H. McIlwain and P. L. Ward (eds.), Archeion (Harvard University Press, Cambridge, Mass. 1957) 43: ‘For written Lawes must bee made in a generalitie, and be grounded upon that which happeneth for the most part, because no wisdome of man can fore-see every thing in particularitie, which Experience and Time doth beget. And therfore, although the written Law be generally good, and just; yet in some speciall case, it may have need of Correction, by reason of some considerable Circumstance falling out afterwards, which at the time of the Law-making was not fore-seene: Whereas otherwise, to apply one generall Law to all particular cases, were to make all Shooes by one Last, or to cut one Glove for all Hands, which how unt it would

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of scenarios that the law in question was designed to respond to. As a result, gaps are created. As responses to the inadequacies of the basis of civil obligations seen in contract and tort, the duciary concept and unjust enrichment supplement them and smooth over their deciencies much like Equity augments and corrects the common law.63 These functions serve as the basis for the description of the duciary concept and unjust enrichment as gap-llers.64 Although both the duciary concept and unjust enrichment complement the common law and ll in gaps where the common law is decient, the gaps they ll and the manner in which they ll them are distinct. The duciary concept’s

prove, every man may readily perceive. And hereof this Equitie hathe name in Greek , of  secundum, and o conveniens, vel rationi consentaneum; because it doth not onely weigh what is generally meet for the most part, but doth also consider, the person, time, place, and other circumstances in every singular case that commeth in question, and doth thereof frame such judgement as is convenient and agreeable to the same: So that in sum the written Law is like to a stiffe rule of Steel, or Iron, which will not be applied to the fashion of the Stone or Timber whereunto it is laid: And Equitie (as Aristotle saith well) is like to the leaden rule of the Lesbian Articers, which they might at pleasure bend, and bow to every stone of whatsoever fashion.’ 63 One of the primary proponents of the use of unjust enrichment as a gap ller is Laycock, who states that ‘[t]he rules of restitution developed much like the rules of equity. Restitution arose to avoid unjust results in specic cases – as a series of innovations to ll gaps in the rest of the law’: Laycock (n. 51) 1278. See also J. Gordley, Foundations of Private Law: Property, Tort, Contract, Unjust Enrichment (OUP, Oxford 2006) 417: ‘I don’t think it is helpful to speak about a “law of restitution,” as though it were a coherent entity, when it rests, not on some coherent principle, but on the need in disparate cases to ll the gaps left by other branches of law.’ 64 As gap llers, the duciary concept and unjust enrichment necessarily arose after much of the law of civil obligations had already been formed and its inadequacies had revealed themselves. This idea is articulated, in respect of unjust enrichment, in J. H. Langbein, ‘The Later History of Restitution’ in Cornish et al. (n. 51) 59: ‘. . . the law of unjust enrichment is in a sense historically contingent upon the rest of the law of obligations, and especially of contract. Only when the nineteenth-century legal systems had worked out the contours of the modern law of contract was it possible to see the range of unjust enrichment problems that contract law – honest contract law – could not solve . . . [L]earning the limits and the shortcomings of the law of contract was a precondition for developing the law of restitution.’ In making this assertion, Langbein references J. Beatson, The Use and Abuse of Unjust Enrichment (Clarendon Press, Oxford 1991) 244: ‘Forty years ago in his important Rosenthal lectures, Professor Dawson showed that the prevention of unjust enrichment as a distinct and independent principle tends to be recognized late in the development of any legal system, after provision has been made for the primary institutions through which society is organized. It has to struggle for a place in the legal rmament because, as a latecomer, “it cuts across other principles already expressed in doctrines and reinforced by rules.” ’

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function of preserving the integrity of important social and economic interactions of high trust and condence lls a void left by the common law’s emphasis on achieving individual justice. Unjust enrichment’s foundational notion that one party ought not retain a benet obtained at the expense of another in the absence of legal justication lls a void in the law of civil obligations by establishing liability where the law of contract or tort cannot,65 as, for example, in the situation of mistaken payments.66 More fundamentally, however, unjust enrichment possesses a far more limited and much less ambitious mandate than the duciary concept. While the duciary concept seeks to maintain the integrity of the interactions that fall within its mandate for broader social and economic purposes, unjust enrichment undertakes only to reverse improper gains obtained at the expense of another in order to facilitate individual justice between parties. As indicated by Gummow, ‘the concepts of unjust enrichment involving restitution for a benet derived at the expense of a plaintiff . . . cannot readily accommodate equitable doctrines which exist, not so much to adjust the rights of parties, as to protect the public at large.’67 Thus, whereas the duciary concept looks beyond the immediate needs of the parties in favour of the broader purpose of maintaining the vitality of the important social and economic interactions that those parties are involved in, unjust enrichment turns its attention inward in order to fulll the narrow and more immediate goal of providing relief for aggrieved parties.68

65

This important function is explicitly noted in Laycock (n. 51) 1278, as reproduced (n. 63). See also McLachlin, ‘Restitution in Canada’ (n. 51) 275: ‘Courts in Canada were quick to see the value of the new doctrine of restitution. It promised conceptual unity for what had been a hodgepodge of categories of recovery and offered the possibility of providing relief in cases where contract and tort were inadequate.’ Finally, as Kull explains in ‘Rationalizing Restitution’ (n. 51) 1192, ‘A complete account of civil liability in our legal system requires the inclusion of restitution or some functional equivalent, because there are important instances of liability that contract and tort, conventionally dened, cannot adequately explain.’ 66 See Seavey and Scott (n. 51) 35: ‘. . . in many of the situations in which there is a right to restitution there is no right upon any theory of the law of contracts or of tort. Thus, where a person pays a debt twice, the recipient being ignorant of the prior payment, it is purely ctional to state that the recipient manifested a promise to pay it back. It is even clearer . . . where a person in the belief that a duty is his own, performs another’s duty . . . If it were not for the principle of restitution there would be no remedy.’ 67 The Hon. Mr. Justice W. M. C. Gummow, ‘Unjust Enrichment, Restitution and Proprietary Remedies,’ in P. D. Finn (ed.), Essays on Restitution (Law Book Co., Sydney 1990) 71. 68 To characterize the matter another way, it could be said that the duciary concept is premised upon distributive justice, whereas unjust enrichment is premised upon corrective justice. The duciary concept’s focus on the preservation of interdependency and broad social and economic goals is more consistent with distributive justice’s multilateral

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CONCLUSION The duciary concept has been argued to be a tool to facilitate and maintain social and economic interdependency. Few legal principles are premised upon such grand aspirations. This makes encapsulating the duciary concept with the explicitness generally desired by legal actors a rather formidable, if not impossible, task. There is always great difculty in law in maintaining a proper balance between certainty and exibility. Too much certainty can result in excessive rigidity and inexibility that may leave just claims that exist outside of the garden variety of cases without remedy. Too much exibility, however, results in insufcient knowledge and predictability about expected standards and legal outcomes. This conundrum profoundly affects the duciary concept, which is applauded for its inherent ability to respond to an innite variety of circumstances, but which is also criticized for its lack of certainty. This paper began with a quote from former Chief Justice Mason of the Australian High Court and it ttingly ends with another because of his attraction to Canadian use of the duciary concept. He once suggested that ‘[t]he duciary relationship is a concept in search of a principle.’69 His sentiments were cited approvingly in La Forest J.’s minority judgment in LAC Minerals Ltd. v. International Corona Resources Inc.: ‘[i]n specic circumstances and in specic relationships, courts have no difculty in imposing duciary obligations, but at a more fundamental level, the principle on which that obligation is based is unclear.’70 While the concern underscoring these statements is valid, the characterizations themselves are inaccurate. ‘Fiduciary’ is not a concept in search of a principle, but a ‘vibrant and exciting facet of law whose potential is only beginning to be tapped.’71 The duciary

orientation than unjust enrichment’s focus on the reversal of gains that both effects individual justice and reects the bilaterality of corrective justice. There is, however, debate over whether unjust enrichment is properly founded on corrective justice or distributive justice, a debate that cannot be entertained within the limited scope of this paper. One of the primary proponents of the former is Weinrib: see, for example, E. J. Weinrib, The Idea of Private Law (Harvard University Press, Cambridge, Mass 1995); Weinrib, ‘Restitutionary Damages as Corrective Justice,’ (2000) 1 Theoretical Inq. L. 1; see also L. Smith, ‘Restitution: The Heart of Corrective Justice,’ (2000–1) 79 Tex L. Rev. 2115. The primary proponent of the latter proposition is Dagan: see H. Dagan, The Law and Ethics of Restitution (n. 54); Dagan, ‘The Distributive Foundations of Corrective Justice’ (1999) 98 Mich L. Rev. 138. 69 Sir A. Mason, ‘Themes and Prospects’ in P. D. Finn (ed.), Essays in Equity (Law Book Co., North Ryde, NSW 1985) 246. 70 (n. 7) 26. 71 L. I. Rotman, ‘Fiduciary Doctrine: A Concept in Need of Understanding’ (1996) 34 Alta L. Rev. 821, 852.

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concept is neither ‘a wholly illusory wrong’72 nor ‘a blot on our law’73 as Birks has characterized it; moreover, it should not be ‘feared for its unpredictability’ as Davies has suggested.74 While the duciary concept may well be a ‘taxonomic nightmare,’75 it is, as Mitchell has observed, possible to ascertain the content of the duciary concept even in the absence of rigid rules: [i]t may be that duciary doctrine is not crystal clear, in the sense of a rule requiring trafc to stop at red lights. But the argument from certainty can be overblown. . . . For lawyers to argue that duciary duty creates signicant uncertainty is specious. Anybody reading the cases soon develops a sense of what is and what is not allowed.76

The duciary concept is organic; thus, like the living tree analogy of Canadian constitutional law put forward in Edwards v. AG Canada, it is ‘capable of growth and expansion within its natural limits.’77 As suggested earlier, the difculties that plague the duciary concept are not reective of any inherent problems, but, rather, stem from the curt and unreective manner in which the duciary concept has been applied as well as the continued dissatisfaction of those who seek to replace its innate and requisite exibility with rigid rules.78 The duciary concept’s emphasis on seless behaviour, utmost good faith, and conscience distinguishes it from contract law and unjust enrichment. The duciary concept promotes seless behaviour in its attempt to ensure the integrity of important social and economic interactions of high trust and condence. Thus, its focus is on relationships rather than the parties to them.79 Contract law, meanwhile, expects and encourages self-interested behaviour. As the principle of efcient breach indicates, contract law allows for deviations from its general premise that promises are to be kept provided that the party in breach of contract adequately compensates for the effects of any breach. Thus, it is not terribly concerned about the integrity of interactions if the interests of the parties to them may nonetheless be satised. Unjust enrichment, like contract, is also primarily designed to facilitate individual justice between parties. Its

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Birks, ‘The Content of Fiduciary Obligation’ (n. 9) 5. Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 W Aust L. Rev. 1, 18. 74 J. D. Davies, ‘Keeping Fiduciary Liability Within Acceptable Limits’ (1998) SJLS 1, 1. 75 Birks, ‘Equity in the Modern Law’ (n. 72) 18. 76 L. E. Mitchell, ‘The Naked Emperor: A Corporate Lawyers Looks at RUPA’s Fiduciary Provisions’ (1997) 54 Wash & Lee L. Rev. 465, 485–6. 77 [1930] AC 114, 136 (JCPC). 78 Note, for example, Birks, ‘The Content of Fiduciary Obligation’ (n. 9). 79 To the extent that the duciary concept addresses the interests of the parties involved in duciary interactions it does so only indirectly, through prescriptions designed to foster the integrity of the type of relationship in question. 73

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concern is simply to reverse improper shifts of wealth, not to promote social or economic interdependency. The duciary concept connects the narrow or rigid vision of law and what it can accomplish to a fuller conceptualization of law that integrates its rigour and lls in gaps where it is decient, giving strength to the spirit of the law and not merely its letter. This is effected through the broad postulate underscoring the duciary concept. Unjust enrichment shares this vital gap-lling role with the duciary concept, although, in some ways, it has more in common with contract law. Thus, it may be said that unjust enrichment occupies a middle ground between contract and duciary law along the broad spectrum of legal obligations.80 This paper has attempted to foster a greater appreciation for the duciary concept by distinguishing it functionally from contiguous areas of law. Contracts and unjust enrichment have been the comparators for this paper, but others exist as well.81 While the brevity of this paper has necessitated the simplication of compound ideas resting at the foundation of complex areas of law, they nonetheless reveal profoundly different functions. By distinguishing the duciary concept from contract law and unjust enrichment, the former may be more effectively and appropriately used in Canadian jurisprudence and elsewhere. Certainly, further efforts to augment current understandings of the duciary concept would be favourably received and may go some ways to eliminating the duciary paradox described earlier. This would be a most welcome development for the duciary concept.

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The idea of a spectrum of legal obligation is referenced from Finn, ‘The Fiduciary Principle’ (n. 13) 3. 81 For example, tort law may also provide a useful basis of comparison and contrast for the duciary concept. As McCamus has suggested, in ‘The Evolving Role of Fiduciary Obligation’ (n. 9) 204–5: ‘No longer conned to the traditional disgorgement remedies, duciary obligation now appears in the guise of a sort of free-wheeling tort. It is not simply a tort, of course, but an equitable kind of tort with respect to which common law constraints on tortious liability may or may not apply. It is, in this sense, a curious amalgam or blend of common law and equitable concepts.’

Chapter 7 Drafting an Irish Frustrated Contracts Act: Lessons from British Columbia Cliona Kelly INTRODUCTION Unlike most other common law jurisdictions, Ireland does not have legislation to deal with the restitutionary implications of frustration of contract. Any attempt to draft an Irish Frustrated Contracts Act will inevitably draw from the experiences in other jurisdictions. This paper analyses the British Columbia Frustrated Contracts Act,1 both in terms of its basis in principle and its practical application. It suggests that although many of the objections of the British Columbia Law Reform Commission to the English Law Reform (Frustrated Contracts) Act 1943 were valid, some of the Commission’s nal recommendations, particularly as regards equal apportionment of loss, were ill-conceived. It will be shown that the Act itself is badly drafted and unclear, and that its application in the British Columbia courts has been haphazard and has caused further uncertainty. The article concludes by suggesting that the British Columbia Frustrated Contracts Act should not form the basis of legislative reform in Ireland, or elsewhere.

1

RSBC 1996, Chapter 166.

109 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 109–132. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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1) THE ENGLISH LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943 The British Columbia Frustrated Contracts Act is substantially different to the English Law Reform (Frustrated Contracts) Act 1943. In order to fully understand how and why this is so, it is important to briey review the 1943 Act. Section 1(2) of the 1943 Act provides that sums paid under the contract in advance of the frustrating event may be recovered by the payor. If the payee has incurred expenses the court may allow him to retain part or all of the advance sum to cover these expenses, if the court ‘considers it just to do so having regard to all the circumstances of the case.’ Section 1(3) provides that where one party obtains a valuable, non monetary benet from the other party before the time of discharge, then the latter party may recover part or all of the value of the benet to the party obtaining it. The court here again is to award an amount it ‘considers just, having regard to all the circumstances of the case.’ In particular the court is to have regard to the amount of expenses incurred by the beneted party2 and ‘the effect, in relation to the said benet, of the circumstances giving rise to the frustration of the contract.’3 Attempts to glean a general principle from the Act have been made. In BP Exploration Co. (Libya) Ltd. v. Hunt (No. 2)4 Goff J. stated: The fundamental principle underlying the Act itself, is prevention of unjust enrichment of either party to the contract at the other’s expense.5

Various commentators have also held the view that the inspiration for the Act is ‘no doubt Lord Wright’s valuable exposition of unjust enrichment in the Fibrosa decision.’6 Thus, concepts normally discussed in relation to the doctrine of unjust enrichment, such as the defence of change of position, have found their way into commentary on the Act. This approach has been criticised, both by the Court of Appeal, which in BP v. Hunt found ‘no help from words which are not used in the statute’,7 and by other commentators who feel that an approach based on unjust enrichment is too rigid and would only serve to place the Act in a ‘conceptual strait jacket.’8 In general, differences in opinion

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S. 1(3)(a). S. 1(3)(b). 4 [1979] 1 WLR 783. Hereinafter BP v. Hunt. 5 Ibid., 799. 6 A. McNair, ‘The Law Reform (Frustrated Contracts) Act 1943’ (1944) 60 LQR 160. See also J. D. Falconbridge, ‘Frustrated Contracts: The Need for Law Reform’ (1945) 23 Can Bar Rev 469; R. Goff and G. Jones, The Law of Restitution (6th ed., Sweet & Maxwell, London 2002) 20–059. 7 [1981] 1 WLR 232, 243 (Lawton LJ). 8 A. M. Haycroft and D. M. Waksman, ‘Frustration and Restitution’ [1984] JBL 207, 225. Hereinafter Haycroft and Waksman. 3

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as to the interpretation of the Act stem from this difference in approach – that is, whether the commentator feels the Act limits the court to the principles of unjust enrichment or allows the court a broader discretion to do what is just. Although the use of language such as ‘unjust enrichment’ is probably best avoided in relation to this Act, for fear that it may unduly restrict the scope of the Act or cause confusion, it cannot be denied that the Act can be ‘accommodated within a restitutionary framework.’9 The general approach of the Act is to ‘allow a restitutionary claim in respect of benets conferred by one party upon another prior to the frustration of the contract.’10 The application of the Act hinges on whether or not there has been a benet: a remedy can only be claimed under the Act where one party has received a benet from the other. Simply put, the recipient of the benet must pay the other for it, with an allowance for their expenses. However, the net amount that is payable is subject to the discretion of the court, and, as illustrated by Gamerco v. ICM/Fair Warning,11 the court will make use of that discretion. In Gamerco the plaintiffs had made an advance payment of $412,500 to the defendants before the contract between the two was frustrated. The plaintiffs brought an action to recover this advance payment. The defendants had incurred $50,000 in lost expenses, and sought to retain this amount. However, the plaintiffs had also incurred expenses of $450,000. Garland J. held that the advance payment of $412,500 was recoverable in full by the plaintiffs, and that the defendants could not retain any of the $50,000 spent on expenses. The fact that the plaintiffs had incurred such heavy losses weighed heavily on Garland J., who held that justice would be done by making no deduction under section 1(2). In practical terms this meant that each party shouldered its own reliance losses. Although the decision has been criticised12 it is submitted that the result is correct. It seems fair that the plaintiffs, having incurred large expenses of their own, should not also have to shoulder the expenses of the defendant. An important feature of the 1943 Act is that there can be no claim for expenses unless the claimant is the recipient of a benet and a claim is made against them for the value of the benet:13 thus ‘expenses are almost exclusively

9 E. McKendrick, ‘Frustration, Restitution and Loss Apportionment’ in A Burrows (ed.), Essays on the law of Restitution (Clarendon Press, Oxford 1991) 147, 155. 10 Ibid., 148. 11 [1995] 1 WLR 1226. 12 J. W. Carter and G. J. Tolhurst, ‘Gigs N’ Restitution: Frustration and the Statutory Adjustment of Payments and Expenses’ (1996) 10 JCL 264, 269. 13 The only exception to this, if it could even be considered an exception, is where a contract provides for the payment of money before the frustrating event and the payment is not made. Here a claim may be made for expenses in the absence of the receipt of a benet. However, even then the claim is only available because there should have been a benet, and the claim is limited by the amount of the stipulated payment.

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relevant as limits on restitution claims against the party who has incurred them.’14 Despite the claims of some that the Act is ‘designed to provide a exible machinery for the adjustment of loss’15 there is simply no room for such adjustment except as a set-off or defence to a restitutionary claim.

2) THE REPORT OF THE BRITISH COLUMBIA LAW REFORM COMMISSION In 1948, the Conference of Commissioners on Uniformity of Legislation in Canada adopted the English Frustrated Contracts Act 1943, with some minor modications, as a model Act.16 The 1948 Uniform Frustrated Contracts Act was subsequently adopted in every common law Canadian state except British Columbia, Nova Scotia and Saskatchewan. In 1971, the British Columbia Law Reform Commission produced a report on the need for frustrated contracts legislation in British Columbia, which recommended that, although legislation was desirable in this context, the English Frustrated Contracts Act, and hence the Uniform Frustrated Contracts Act, did not form a proper basis for any such legislation.17 The Commission recognised various difculties with the 1943 Act, including the wording of the conicts of law provision in section 1(1),18 the retroactive effect of the Act 19 and the exclusion of contracts avoided under the Sale of

14

G. Treitel, Frustration and Force Majeure (Sweet & Maxwell, London 1994) 555. Haycroft and Waksman (n. 8) 225. 16 Proceedings of the Thirtieth Annual Meeting of the Conference of Commissioners on Uniformity of Legislation in Canada (1948) 18, 70–75. A Report of the Proceedings of the 1948 Conference is available online at: , accessed on 30/10/2006. 17 British Columbia Law Reform Commission, Report on the Need for Frustrated Contracts Legislation in British Columbia (LRC 3, 1971). Hereinafter BC Report. Available online at: , accessed on 30/10/2006. 18 S. 1(1) provides that the Act applies to a ‘contract governed by English law’. This provision has been acclaimed by some as ‘ingenious’ (A. McNair, ‘Law Reform (Frustrated Contracts) Act 1943’ (1944) 60 LQR 160, 161) and an ‘innovation in legislation’ (J. D. Falconbridge, ‘Frustrated Contracts: The Need for Reform’ (1945) 23 Can Bar Rev 469, 471) and criticised by others as being a ‘parasitic legislative [phenomenon]’ (J. Unger, ‘Capacity to Marry in the Conict of Laws’ (1952) 15 MLR 88) and a ‘bastard hybrid’ of domestic rules and conict rules (J. H. C. Morris, ‘The Choice of Law Clause in Statutes’ (1946) 62 LQR 170, 172). The Commission agreed with the latter sentiments, and recommended an alternative wording: BC Report (n. 17) 48–53. 19 The English Act applies to contracts entered into before or after the Act came into force, although the frustrating event must have occurred after this. The Commission recommended that any frustrated contracts legislation should only be applicable to 15

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Goods Act 1893.20 However, its main objections concerned the basis of restitution and the apportionment of losses in the 1943 Act.

a) The Basis of Restitution The Commission was critical of the focus of the 1943 Act on restitution for benets obtained by the person required to make restitution. In this regard, the Commission seems to have interpreted section 1(3) of the Act in a similar way to Goff J. in BP v. Hunt – in other words, it seems to have been assumed that the Act focuses on benets or end products actually obtained, and not on performance rendered. Hence, where an artist contracts to paint a picture, but dies before the picture is completed, the artist’s estate can have no claim to restitution under the Act. Similarly, where the benet provided is destroyed by the frustrating event itself, as in Appleby v. Myers,21 the party who provided that benet has no remedy under the Act.22 The Commission indicated dissatisfaction with this approach, and proposed that frustrated contracts legislation in British Columbia should make it clear that performance or part performance of an obligation is sufcient for a restitutionary claim, and there should be no need to base such a claim on any benet received. It is clear that ‘performance-based’ restitution, as opposed to ‘benet-based’ restitution, means there can be relief even if the person for whom the performance was done has nothing to show for it, for example, because the work was destroyed by re. It was stressed

contracts entered into after it comes into force. Thus parties could freely contract out of the effects of the statute. Interestingly, when the Act was debated – or, more accurately, briey discussed – in the Legislative Assembly of British Columbia, it was questioned whether the Act would apply to a contract already in existence between the Province of British Columbia and Seattle City Light for the ooding of the Skagit Valley, given that the contract was now likely to not go ahead and many payments had already been made under the contract. The Attorney General argued that the Act would not apply on the basis that there was (at least according to the government) no enforceable contract between the two parties, but it is clear that he could equally have relied on the fact that the Act was not to have retrospective effect. See: Ofcial Report of the Debates of the British Columbia Legislative Assembly (Hansard) March 18, 1974, p. 1300. Available at , accessed on 30/10/2006. 20 S. 2(5)(c) of the 1943 Act. The Commission recommended that no exception should be made concerning contracts for the sale of goods, and that any contracts avoided under the Sale of Goods Act should be governed by frustrated contracts legislation: BC Report (n. 17) 44. 21 (1867) LR 2 CP 651. 22 If the artist or provider of the benet was paid in advance, he or she, or their estate, may be able to retain some of the money paid in advance under the proviso to s. 1(2) of the 1943 Act.

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that such relief would be on the basis of ‘reasonable expenditure’ and that if the performance involved something that could be and is returned in specie to the performer within a reasonable time, the amount of the claim should be reduced by the value of what has been returned. It is submitted that this performance-based approach is preferable to the English approach. The English approach seems unnecessarily complicated, with the court having to rst identify the benet received, and then attempt to attach a value to it. More objectionable, however, is the fact that the 1943 Act essentially puts the risk that the services requested will result in a fruitful and valuable benet on the provider of the services, rather than on the person who requested them in the rst place! In BP v. Hunt Goff J. indicated dissatisfaction with this result, and indicated that in certain circumstances it could be circumvented: . . . the plaintiff may have undertaken building work for a substantial sum which is, objectively speaking, of little or no value – for example, he may commence the redecoration, to the defendant’s execrable taste, of rooms which are in good decorative order. If the contract is frustrated before the work is complete, and the work is unaffected by the frustrating event, it can be argued that the defendant has obtained no benet, because the defendant’s property has been reduced in value by the plaintiff’s work; but the partial work must be treated as a benet to the defendant, since he requested it and valued it as such.23

Although this is most likely the correct result, it would appear to go against the wording of the 1943 Act. It would no doubt be simpler to provide that restitution should be available where a party has performed all or part of their contractual obligations, and that the risk that such performance is of no benet or value should be on the party who requested such performance.

b) The Recovery of Expenses The idea that the recipient of a money payment should be able to retain some of the money to cover his lost expenses stemmed from the Fibrosa 24 decision in the House of Lords.25 There, Lord Wright commented that the recovery of an advance payment at common law might work a ‘rough justice’ if the recipient

23 24

[1979] 1 WLR 783, 802. Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1942] 2 All ER

122. 25 In earlier cases, the possibility that the recipient of the advance payment had incurred expenses was used as part of the justication for the retention of the entire prepayment by the payee. See, for example, Blakeley v. Muller & Co. [1903] 2 KB 760, 761n.

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of the payment has already incurred expenses.26 This perceived deciency in the common law was remedied in the 1943 Act, with its provision for set off in section 1(2). The Commission criticised this aspect of the 1943 Act, as it essentially means that the payer of an advance payment is expected to shoulder all the expenses of the payee who had to return the advance payment. To illustrate, if X contracts to do work for Y for $5,000, payable in full in advance, and after Y pays the contract is frustrated, Y is entitled to the return of $5,000 under section 1(2). However, if X incurs expenses of $4,000, X may keep $4,000 under the proviso to section 1(2) and Y only recovers $1000. In this situation, X recovers all of his expenses and suffers nothing but lost prot, whereas Y is expected to fully cover X’s loss of $4,000. The Commission agreed with the criticism of Goff and Jones that provision for advance payment does not necessarily indicate that the payer is to stand the risk of expenditure lost by the payee because of the frustration of the contract.27 It could be argued that the Commission’s view of the proviso was overly narrow, and did not reect the amount of discretion available to the court under the English Act to apportion loss of expenses. However, it must be remembered that the Commission’s assessment of the state of the law was hindered by the lack of case law relating to the proviso at the time of the report. In the absence of a decision such as Gamerco,28 in which the discretion afforded to the judiciary by the 1943 Act was utilised to good effect, the Commission could only assume that ‘[it] must be doubtful . . . if a court would apportion loss in the exercise of its discretion.’29 Regardless of its inaccurate assessment of the English law, the Commission was clearly dissatised with the concept of a system which shifts reliance loss from the shoulders of the person who suffered the loss initially (X, in the example above) to the other, equally innocent, contractual party (Y) for no discernible reason. However, having disregarded one system, it sought to replace it with another. The approach favoured by the United States Restatement, that is, restitution of benets received by either party but no apportionment of reliance loss, which simply lies where it falls, was stated to be preferable to the English Act, but still inadequate as regards its failure to apportion any loss.30 Any

26

Fibrosa (n. 24) 141. Lord Roche mentions incidentally that the machines were realisable by the sellers without loss ‘but it seems this was not an essential factor in the decision’. See G. Williams, ‘The End of Chandler v. Webster’ (1942) 6 MLR 46, 48. 27 R. Goff and G. Jones, Law of Restitution (Sweet & Maxwell, London 1966) 332. Cited in the BC Report (n. 17) 34. 28 Gamerco v. ICM/Fair Warning [1995] 1 WLR 1226. 29 BC Report (n. 17) 35. 30 Ibid., 37. See s. 108 of the American Law Institute, Restatement (First) of Restitution (1937) and the corresponding s. 468 of the American Law Institute, Restatement

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approach based on judicial discretion was seen as undesirable; the Commission arguing that ‘it is preferable that persons should know what their rights are.’31 The Commission nally agreed with Glanville Williams’ argument in favour of equal apportionment of lost expenditure: The situation with which the Act is concerned is the familiar one in which one of two parties has to suffer loss for which neither is responsible. In my submission, natural justice does not indicate either of such parties as the one to bear the whole of the loss. Natural justice neither says that the loss shall lie where it falls, nor yet says that the loss shall be picked up from where it happens to fall and transferred to the shoulders of the other party who would otherwise not have borne it. Either natural justice, on my understanding of it, is altogether silent on a case of this sort, or it decrees that the distribution of loss shall be equal. Equal division of loss is also economically sounder than the placing of loss on one party only, for each of the two parties may be able to bear half the loss without serious consequences when the whole loss might come close to ruining him . . . It may be suggested, therefore, that in the normal case the just course, as required by the Act, and also the socially desirable course, would be to order the retention or repayment of half the loss incurred (subject to the overriding limits already stated), not the whole of it. To shift the whole loss in respect of expenses to the other party would, it is submitted, be as objectionable as shifting none.32

This approach is unsatisfactory in several regards. First, it is unclear why it would be ‘objectionable’ to shift none of the loss in respect of expenses to the other contractual party. It is submitted that one of the fallacies surrounding the Fibrosa decision, the 1943 Act and the Commission’s report was the notion that a contractual relationship necessarily implies that each party agrees to cover the expenses or losses of the other party in the event that the contract cannot be fully completed through no fault of either party. No reason is given for this assumption, other than a vague concept of ‘justice’ and an entirely unconvincing passing reference to economics. In contrast, there is much to favour of an approach which simply lets reliance losses lie where they fall. It cannot be said that it is within the business expectations of parties to a contract that they should cover the other party’s reliance losses. Contractual parties do not embark on a joint venture, with a sharing of all prots and losses, and there is to date no generally recognised doctrine of post – contractual good faith, never

(First) of Contracts (1932). See now ss. 272, 240, 377 of the American Law Institute, Restatement (Second) of Contracts (1981). 31 BC Report (n. 17) 35. 32 G. L. Williams, The Law Reform (Frustrated Contracts) Act 1943: The Text of the Act with an Introduction and Detailed Commentary (Stevens, London 1944) 35–36. This view is shared by B. J. Reiter, ‘Real Estate – Agreement of Purchase and Sale – Down-zoning Before Closing: How Frustrating?’ (1978) 56 Can Bar Rev. 98, 113.

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mind one which ordains that one party should cover the reliance losses of the other! It is submitted that the Commission should have favoured the approach of the United States Restatement in this regard. Furthermore, general restitutionary principles do not indicate that there should be an apportionment of loss. Although in the Court of Appeal in Westdeutsche Landesbank v. Islington B. C.33 it was presumed that the defence of change of position would be available in a situation where money was paid under a contract which was subsequently frustrated, it is submitted that the defence is not suitable to a situation where there is a failure of contractual performance. From a commercial point of view, the defence of change of position has a practical importance in ensuring the security of receipt of money:34 parties who receive payment in good faith should be free to deal with it as they choose and not fear that at some point in the future they will have to return it to the payor or donor.35 However, in cases of failure of consideration, the argument based on security of receipt is not particularly strong. Where a contractual party receives payment for goods or services, but has not yet provided the corresponding goods or services, they should accept the possibility that they may not be able to provide those services and thus may have to return the money. A party should only be able to rely on security of receipt of payment when that payment has been earned. When the money has been earned, the principle of security of receipt of the earned money is guaranteed, not by the defence of change of position, but rather simply by the fact that there is no basis for a restitutionary claim. Even if one accepts that some form of apportionment of reliance losses is required, it is extremely difcult to provide in legislation for equal apportionment of all those losses. It will be seen below that the British Columbia Frustrated Contracts Act, in fact, fails to provide for equal apportionment of loss, and instead provides for an equal division of some losses and not others.

33

[1994] 4 All ER 890, 914. R. Goff and G. Jones, The Law of Restitution (n. 6) 40–001; P. Birks, ‘Change of Position: The Nature of the Defence and Its Relationship to Other Restitutionary Defences’ in M. McInnes (ed.), Restitution: Developments in Unjust Enrichment (LBC Information Services, North Ryde, NSW 1996) 49, 50–51. 35 This is viewed as particularly important in contracts of reinsurance. See, for example, Farmers Mutual Insurance Ltd. v. American International Underwriters Ltd. [1993] 3 NZLR 305. AIU was re-insurer of certain risks for FMI. AIU paid more money that it should have under the agreement and sought return of moneys paid. However, in reliance on the fact that its reinsurers had paid up, FMI changed its position by settling an insurance claim and abandoning its right of appeal to the Privy Council. The Court in particular focused on the importance of security of receipt in these contracts: ‘The certainty of reinsurance is important; this must be so when it comes to settlement negotiations’ [1993] 3 NZLR 305, 316 (Baker J.). 34

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Finally, insistence on a rigid system of equal division of loss is inexible and will not always be appropriate. Haycroft and Waksman, whilst claiming to support the equal division approach, merely claim that it is ‘often’ but not ‘always’ just 36 and that the ‘court is clearly able to deviate from such a course of action in particular cases if it thinks t.’37 Williams similarly envisages that equal division will not always work. For example, if a rm of publishers engages a struggling author to write a book and agrees to advance him a weekly sum for maintenance, but the author dies before the book is nished, Williams argues that his estate clearly ought to be allowed retain the whole of the advance payment.38 It is unclear exactly on what basis Williams advocates this exception, other than, again, the ever-vague concept of ‘justice’ or the unequal bargaining position of the parties, but it would seem that even the strongest advocates of equal apportionment of losses would recognise that some judicial discretion is necessary. Instead of introducing an element of general judicial discretion, however, the Commission sought to introduce a qualication to the general rule: where it was understood that the risk of loss of expenditure should be borne by one of the parties to the contract, no apportionment was to take place. In particular, such an understanding could be implied by the taking out of insurance against the kind of event that caused the loss. However, it is difcult to differentiate between (a) a situation where parties have expressly or impliedly allocated the risk of a particular supervening event, in which case the doctrine of frustration will most likely not apply if that event occurs; (b) a situation where the parties have not contemplated the risk of that supervening event, but have nonetheless provided for what is to happen if the contract is frustrated, in which case, if the contract is frustrated, the method of restitution stipulated by the parties will apply and not the legislation, which is not mandatory; and (c) a situation where the parties have not contemplated a particular supervening event, or even what is to happen generally if the contract is frustrated, but nonetheless, the risk of certain loss can be said to be on one party alone. It is this nal situation which the Commission would appear to have had in mind. Thus, for example, if a manufacturer contracts to build machinery according to the buyer’s specications, which call for a certain component available from a single source, and it subsequently becomes impossible to obtain the component from the source, the contract may be frustrated on the basis that neither the manufacturer nor the buyer undertook the risk of that event. Despite this, it may be appropriate that the buyer should fully bear the expenses incurred (or fully bear certain

36 37 38

Haycroft and Waksman (n. 8) 216. Haycroft and Waksman (n. 8) 225. G. L. Williams (n. 32) 37.

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expenses incurred) by the manufacturer, since it was the buyer who called for that particular design.39 However, it has to be questioned whether in reality this is just a disguised form of judicial discretion? If equal apportionment of loss is not always an appropriate solution, would it not just have been simpler to allow a certain amount of judicial discretion within a basic restitutionary framework, rather than making use of a device which smacks heavily of an implied term? To summarise, the English Act focused on restitution for the value of benets received, with expenses recoverable as set off against any such claim for restitution, but within these parameters left a certain amount of judicial discretion. In contrast, the British Columbia Law Reform Commission recommended performance based restitution, equal division of reliance loss between the parties to the frustrated contract, at least unless a contrary intention could be found, and minimal judicial discretion. However, as shall be seen, the British Columbia Frustrated Contracts Act fails to reect these principles.

3) THE BRITISH COLUMBIA FRUSTRATED CONTRACTS ACT The British Columbia Frustrated Contracts Act purports to give effect to the recommendations of the British Columbia Law Reform Commission, but in actuality fails to do so. Section 5 is probably the most important part of the Act for present purposes, as it provides for the adjustment of the rights and liabilities of the parties after the contract is frustrated. Section 5 states: (1) In this section, ‘benet’ means something done in the fulllment of contractual obligations, whether or not the person for whose benet it was done received the benet. (2) Subject to section 6, every party to a contract to which this Act applies is entitled to restitution from the other party or parties to the contract for benets created by the party’s performance or part performance of the contract. (3) Every party to a contract to which this Act applies is relieved from fullling obligations under the contract that were required to be performed before the frustration or avoidance but were not performed, except in so far as some other party to the contract has become entitled to damages for consequential loss as a result of the failure to full those obligations. (4) If the circumstances giving rise to the frustration or avoidance cause a total or partial loss in value of a benet to a party required to make restitution under subsection (2), that loss must be apportioned equally between the party required to make restitution and the party to whom the restitution is required to be made.

39

This example was given by the Law Reform Commission of Saskatchewan, Report on Frustrated Contracts Legislation (1988) 17.

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Thus, with the exception of a situation where one party is entitled to damages for breach of contract before the contract is frustrated, each party is discharged from any contractual obligations which remained before the contract was frustrated, and each party is entitled to restitution from the other party for any performance which has been rendered. There is no equivalent of section 1(2) of the English Act, with its potential for set – off for expenses incurred. Instead, section 5(4) provides that the loss in value of the benet to the party required to make restitution is to be apportioned equally between the parties. However, it will be shown below that this unclear, convoluted provision does not in fact reect the principle of equal apportionment of loss advocated by the Commission. The Act makes it clear that the entitlement to restitution is not dependent on the other party having actually derived a benet from that performance; it is enough that something was done in fullment of contractual obligations. However, as shall be seen, the mention of the word ‘benet’ throughout the section, even with its denition based on performance rendered, has caused difculties, and it is unclear why reference was not simply made to restitution for ‘performance rendered.’ Note should also be made of section 6, which states: A person who has performed or partly performed a contractual obligation is not entitled to restitution under section 5 in respect of a loss in value, caused by the circumstances giving rise to the frustration or avoidance, of a benet within the meaning of section 5 if there is (a) a course of dealing between the parties to the contract, (b) a custom or a common understanding in the trade, business or profession of the party so performing, or (c) an implied term of the contract, to the effect that the party performing should bear the risk of the loss in value.

Section 6 initially appears to simply be an extension of section 2, which provides that the Act does not apply where the parties have provided for the consequences of a supervening or frustrating event. However, there is an important difference between the two sections: if applicable, section 6 does not affect a party’s right to restitution of benets created by that party’s performance under the contract, but merely prevents the equal division of the loss in the value of the benet between the parties. If section 2 applies, however, the Act can have no application whatsoever. Section 6 is clearly intended to reect the Commission’s qualication to the principle of equal apportionment of losses. The British Columbia Frustrated Contracts Act has been relied upon by counsel in argument relatively frequently, but is not always applied by the judiciary. This is largely because in order for the Act to apply, a party has to rst prove that the contract was in fact frustrated, and quite often this proves to be too big an obstacle.40 It would also partly seem due to a judicial reluctance

40

See, for example, the following cases where there was no need to apply the Act

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to apply the Act too strictly, when arguably a fairer or simpler result can be achieved by ignoring its provisions. This liberal interpretation of the Act, or, occasionally, complete circumvention of the Act, makes it difcult to properly analyse the effect of the Act, but it could indicate a general judicial dissatisfaction with its provisions. Alternatively, the confused manner in which the Act is applied could simply indicate a lack of understanding as to its provisions. Indeed, the Act was once described, albeit by a Parliamentarian and not a lawyer, as ‘unintelligible.’41 Nor is interpretation of the Act guided in any meaningful way by academic commentary: the Act has not been afforded much attention by commentators since its promulgation. The discussion in Fridman and McLeod’s 1982 work Restitution, for example, focuses mainly on the English 1943 Act and only makes passing comments regarding the British Columbia Act.42 It is doubtful whether the authors believed there was any real substantial difference between the two Acts: it is stated that the British Columbia Act was drafted differently simply to avoid ‘the kind of difculties in interpretation that were said to arise from the language of the earlier statutes.’43 Other commentators have at least recognised that the Act made a substantial departure from the English Act: [The] Act effectively requires a performing party to be indemnied against the reasonable cost of performing their obligation, subject to apportionment of any diminution in the value of that performance.44

as the contract was held not to be frustrated: Buttereld v. Leonard Estate 1994 Can LII 3200 (Supreme Court of British Columbia) which involved an agreement to make a down payment on the purchase of a house, where the promisor died before the payment was made. It was held that the contract was not a contract of personal service which could be frustrated by the death of one of the parties, and hence the Frustrated Contracts Act did not apply). Also Allen v. Taku Safari Inc. 2003 BCSC 516 Can LII (Supreme Court of British Columbia) which involved a claim for the return of a deposit of $3,383 which was paid towards a guided mountain goat hunt in September 2001. The plaintiff’s ight to the hunt site was delayed by the cancellation of a ight after terrorist attacks of September 11 2001. It was held that the contract was not frustrated: the unanticipated circumstances did not make performance impossible, but simply delayed performance for two days. 41 Ofcial Report of the Debates of the British Columbia Legislative Assembly (Hansard) June 5, 1975, 3152, per Mr. McGreer: ‘To rule something out because it is unintelligible in this House is absolute nonsense. We have been passing unintelligible legislation for years. We have the precedent. Take the Frustrated Contracts Act.’ Available at: , accessed on 30/10/2006. 42 G. H. L. Fridman and J. McLeod, Restitution (Carswell, Toronto, 1982) 320–325. .43 Ibid., 322. 44 J. W. Carter and A. Stewart, ‘Frustrated Contracts and Statutory Adjustment: The Case for a Reappraisal’ (1992) 51 CLJ 66, 82.

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However, detailed analysis is thin on the ground, and nowhere in the commentary is there any suggestion as to how the Act would actually be applied in practice. For the sake of convenience, in the following analysis of the Act, the method of restitution is examined rst, and then the issue of apportionment of loss. This reects the layout of the Act itself: unlike the English Act, which mixes up the issues of restitution and apportionment, but separates obligations to pay money (section 1(2)) from non-monetary contractual performance (section 1(3)), the British Columbia Act seeks rst to allow recovery for any contractual performance, and then to apportion the loss incurred, without distinction between monetary and non monetary performance.

4) RESTITUTION UNDER SECTION 5 OF THE BRITISH COLUMBIA ACT The method of restitution contemplated by section 5(2), with the wide denition of a ‘benet’ in section 5(1), is fairly straightforward. Example 1: X agrees to pay Y $1000 to paint a picture. X is to pay the $1000 by September 1 and the painting is to be done by Christmas. X pays the $1000 on time, but Y dies in October, before any work is done on the painting. Under section 5(2) X is entitled to the return of the $1000.

An example of such a straightforward application of the Act can be seen in KBK No. 138 Ventures Ltd. v. Canada Safeway Ltd.45 In that case, the plaintiff had paid a deposit of $150,000 under an agreement for the sale of land. Both parties contemplated the development of the land, but the subsequent rezoning of the land prevented the possibility of any such development, and the contract was held to be frustrated.46 It was further held that the plaintiff had partly performed the contract by paying the instalment of $150,000 and was entitled to restitution from the defendant in that amount by virtue of section 5 of the Frustrated Contracts Act. Similarly, in British Columbia (Minister of Crown

45

(2000) 185 DLR (4th) 650 (Court of Appeals of British Columbia); 1999 Can LII 5876 (Supreme Court of British Columbia). 46 The nding that a contract for the sale of land can be frustrated before closing has Canadian precedent. See, for example, Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1975) 9 OR (2d) 617, 629. In contrast, see Victoria Wood Development Corp. v. Ondrey (1978) 22 OR (2d) 1, 7 RPR 60. See B. J. Reiter, ‘Real Estate- Agreement of Purchase and Sale – Down-Zoning Before Closing: How Frustrating?’ (1978) 56 Can Bar Rev. 98. See also in the United States, the Uniform Land Transactions Act, 1975, which provides in Section 2–406 that the risk of loss remains on the seller until the conveyance is complete.

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Lands) v. Cressey Development Corporation47 a payment of $2,000,000 for a piece of land was recoverable by the purchaser when the contract for the sale of land was frustrated, again by an unexpected change in the zoning and planning laws before the transaction closed. In neither case was there any suggestion that the payee should be able to retain any of the original payment as set-off for expenses incurred. Example 2: X agrees to pay Y $1000 to paint a picture. X is to pay the $1000 when the painting is complete. Y subsequently dies, having completed half of the painting. Under section 5(2), Y’s estate is entitled to a quantum meruit for the work done by Y, even though the picture is incomplete and X has not really received any benet. What is perceived as important by this statute is remuneration for the partial performance of contractual obligations, rather than remuneration for benets actually received.

A good example of a successful claim for quantum meruit under section 5(2) is in Cassidy v. Canada Publishing Corporation.48 The plaintiff, C, a social studies teacher, joined a team of textbook authors formed by the defendant textbook publisher, CPC, which was preparing a proposal to be submitted to the British Columbia Ministry of Education to publish a grade 10 social studies textbook. C was told that if CPC was awarded the contract, she would be paid out of royalties from the sale of the textbook. C attended author team meetings, collected materials, wrote a detailed outline and began to organise the sample chapter. However, subsequently, the grade 10 curriculum was revised, and changed to such an extent that C’s chapter was not to be included in any publication and C’s expertise was no longer needed. C sued CPC, alleging that she was entitled to compensation, either for royalties or compensation for work done. Cohen J. in the British Columbia Supreme Court held that the ‘wholesale’ revision of the school curriculum ‘constituted such a change in the state of affairs between the parties as to amount to a frustrating event’ and that ‘in such circumstances the parties must be excused from further performance.’49 The frustration of the contract precluded C from recovering damages in the form of royalties. C argued that by virtue of section 5 of the Frustrated Contracts Act she was entitled to compensation for the work she performed up to the frustrating event. CPC argued that they did not receive any benet from C’s contribution, and that her sample chapter was not included in the proposal or any subsequent publication. However, this was rejected on the basis that C did what was expected of her in the contract, and was thus entitled to compensation based on quantum meruit:

47 48

[1992] 4 WWR 357. Supplementary reasoning at (1993) 97 DLR (4d) 380. (1989) 41 BLR 223. Supplementary reasoning available at: (1989) 14 ACWS (3d)

426. 49

Ibid., para 33.

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Cliona Kelly [T]here can be no doubt that [the defendant] did receive a benet from Ms. Cassidy’s contribution. She made a contribution to the overall detailed outline. The fact that her sample chapter was not ultimately included in [the defendant’s] proposal is immaterial . . . Ms. Cassidy did all that was asked of her by [the defendant]. [The defendant] kept her on a string from 1982 until it received the contract from the Ministry, all the while providing her with assurances of her continued participation as an author. It hardly lies in the mouth of [the defendant] now to assert that it did not receive a benet from Ms. Cassidy’s contribution and therefore is not obligated to her in law.50

There are hints in this dictum that Cohen J. was inuenced not only by the legislative provisions, but by the fact that C has relied on the representations of the defendants, who were now effectively estopped from claiming that they had no obligation to pay her any compensation. The defendants further argued that the valuation of the plaintiff’s services should be made according to the contract terms, which provided for compensation calculated on the basis of royalties. According to the defendant, the plaintiff would thus be entitled to $10,000, as opposed to the $18,257 which was awarded as quantum meruit. However, the court rejected the idea that the contract consideration would be a limit to the quantum meruit: Even though the contract consideration is always relevant as providing some evidence of what will be a reasonable sum to be awarded in respect of the plaintiff’s work, in and of itself it is not determinative . . . there is language in the BP Exploration Co. case which suggests that where a contract for services has been frustrated, quantum meruit is the appropriate measure of damages.51

The ‘language’ referred to was the following quote from Goff J. in BP v. Hunt: In such cases, where (as in the case of a benet conferred under a contract thereafter frustrated) the benet has been requested by the defendant the basic measure of recovery in restitution is the reasonable value of the plaintiff’s performance – in a case of services, a quantum meruit or reasonable remuneration.52

Hence, it was held that the plaintiff’s right to quantum meruit should not be determined or limited by the contractual agreement. Two comments need to be made in this regard, one general and one relating to the judgment at hand. First, whereas there is no limitation in the BC Frustrated Contracts Act, requiring that the amount awarded in quantum meruit be no more than would have been paid out under the contract itself, it is submitted that such a limitation should have been imposed in the statute. It seems unreasonable that a party, through no fault

50 51 52

Ibid., para 37. (1989) 14 ACWS (3d) 426, para 8. (1979) 1 WLR 783, 805.

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of their own, should have to pay out more than they originally agreed to pay, particularly when they are not receiving the benet of the work! Secondly, it is submitted that Cohen J. is overly reliant on decisions relating to the 1943 Act. In particular, he focuses on the following statement of Goff J.: However, under section 1(3) [of the 1943 Act] as it stands, if the defendant’s actual benet is less than the just or reasonable sum which would otherwise be awarded to the plaintiff, the award must be reduced to a sum equal to the amount of the defendant’s benet.53

Cohen J. tries to quantify the benet received by the defendant from the work performed by the plaintiff, and to decide whether it amounts to something less than the plaintiff’s quantum meruit claim. In the end, he is unable to assess a gure, and thus abandons the attempt. However, it is unclear why the attempt was made in the rst place: unlike the English 1943 Act, the British Columbia Act does not limit the amount awarded to the plaintiff with reference to the benet received by the defendant. If anything, the British Columbia Act makes it clear that, for the purposes of restitution under section 5(2) at least, it makes no difference that the defendant has received no ‘valuable’ benet, and the plaintiff is simply entitled to restitution for performance carried out as required under the contract. Other decisions highlight further difculties the British Columbia judiciary has encountered in the application of section 5(2) as regards restitution for work done under the contract, where that work results in no ‘valuable’ benet for the party who requested the work. In British Columbia v. Cressey Development Corporation,54 for example, where a land sale contract was frustrated when rezoning which was necessary for the development of the land did not occur, the would-be purchaser of the land claimed it was entitled to recover for the work it did in relation to the land before the contract was frustrated. The defendant purchaser had expended time, money and energy in preparing for the rezoning and development of the land. However, the vendor denied that they received any benet and argued that, other than the down payment of $2m which was returned, the purchaser had not performed any aspect of the contract. Hutchinson J. agreed with the vendor and refused the purchaser’s claim for restitution: The defendant’s efforts were directed at implementing the frustrated contract, but in this case, once the contract was rescinded those efforts have no value. It has not been established, on the evidence, that a benet accrued to the land, to the plaintiff, or anyone who may develop the land in the future.55

53 54 55

Ibid. (1993) 97 DLR (4d) 380. Ibid., 383.

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It is submitted that whilst the result of this decision was the correct one, it was reached by dubious means. The focus of the court should have been on the vendor’s argument that the purchaser had not performed any specic contractual obligations, rather than on the fact that the vendor had received no valuable benet. Similar difculties were encountered in Benson Construction Management Corporation v. Great Canadian Casinos Inc. et al.56 There, the defendant casino company retained the plaintiff to provide construction management services, such as arranging the purchase of land for casino facilities, nancing and construction. The plaintiff was to receive a fee based on a percentage of total construction costs. The contract was subsequently frustrated as a result of a radical change in the local government gaming policy, which prevented the construction and development of the new casinos. The plaintiff claimed it was entitled to be paid for its part performance of the contract before the contract was frustrated. This was despite the fact that no casino was built as a result of the plaintiff’s efforts and the defendant received no valuable benet from the plaintiff’s work. The defendants initially maintained that they were not prepared to pay anything for arrangements that never came to fruition. Later, however, the defendant agreed to pay out a certain amount in an attempt to maintain friendly commercial relations with the plaintiff: the plaintiff had performed valuable services in the past with respect to other casino developments, and they acknowledged that they might wish him to perform similar services in the future. The plaintiff still pressed for the remainder of the fees, claiming that he was entitled to be paid regardless of whether or not the project went through. This, however, was rejected by the court, which stated that such assertions ‘defy common sense.’57 It was held that the amount already paid out by the defendant was a ‘complete answer’58 to the defendant’s claim, and that the plaintiff could have no further claim to quantum meruit for work done. Unfortunately, it is not made clear whether or not the plaintiff would have had a claim to quantum meruit for work done if the defendants had initially refused to pay anything, i.e., whether the defendants would have had to pay the plaintiff at all, had they not already done so. The court certainly seemed to have serious difculty with the idea that the plaintiff should be awarded for work done when that work resulted in no benet for the defendant. In particular, the court focused on the fact that the contract provided that the plaintiff would be paid when the project was completed, on the basis of a percentage of the construction costs. The completion of the project is treated as a condition precedent to payment. It is submitted that such an approach is in direct conict with the

56 57 58

2003 BCSC 1033. Ibid., para 36. Ibid., para 46.

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wording of the Act, and that, in reality, the provision as to payment on completion in this case was no different to the provision as to payment of royalties in the Cassidy case, discussed above. In summary then, it can be seen that, although recovery of a monetary payment under section 5 has not caused much difculty, in awarding restitution for non monetary performance, the courts have been unwilling to adhere to the strict wording of the Act, and have focused on other factors, such as representations made by the parties and, in particular, whether or not a valuable benet had been received by the defendant. Furthermore, the decision in Cassidy highlights a serious deciency in the British Columbia Act; namely, the absence of a ceiling on the amount that can be awarded under the Act.

5) APPORTIONMENT OF LOSS UNDER SECTION 5 OF THE BRITISH COLUMBIA ACT Section 5(4) of the British Columbia Act provides for the apportionment of certain losses incurred. To recap, it states: If the circumstances giving rise to the frustration or avoidance cause a total or partial loss in value of a benet to a party required to make restitution under subsection (2), that loss must be apportioned equally between the party required to make restitution and the party to whom the restitution is required to be made.

It would appear, although it can not be stated with any decisiveness, that this section is intended to operate as follows: Example 1: X agrees to pay Y $1000 to paint a picture. X is to pay the $1000 by September 1st and the painting is to be done by Christmas. X pays the $1000 on time. Y then purchases material (for example canvas, paints) worth $200 in preparation for the painting, but dies in October, before any work is done on the painting.

It will be remembered that, under section 5(2), X is entitled to restitution for the benet he conferred on Y. The benet in this case is the $1,000, and hence Y must pay X for that benet i.e. X is entitled to recover $1,000 from Y. However, there was a ‘partial loss in value’ of that benet caused by the circumstances giving rise to the frustration: Y incurred expenses of $200, thus reducing her overall benet by $200. It could be argued that this expenditure was not caused by the frustrating event, i.e. by her death, but the loss was caused by her death, as this expenditure was rendered useless once she died. This loss will be divided between X and Y equally, so each suffers a loss of $100. Hence, X will recover $900 from Y. Example 2: X agrees to pay Y $1000 to paint a picture. X is to pay the $1000 when the painting is complete. Y subsequently dies, having completed half of the painting.

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Under section 5(2), Y’s estate is entitled to a quantum meruit for the work done by Y, even though the picture is incomplete. X is said to have received a benet purely from the fact that Y has fullled some of her contractual obligations. However, there is clearly a loss in the value of that benet to X, in the sense that half a painting is not likely to have much – if any – monetary value. If, for example, the value of the painting is now $0, the loss to X is equivalent to the entire amount recoverable by Y. Thus, if Y is entitled to $500 in quantum meruit, the loss in value of X’s benet is $500. If this loss is to be divided equally between the parties, Y will be entitled to $250 from X. It can be seen that there are several serious problems with the provision for apportionment under section 5(4). Most obviously, the language used is a major barrier to its application. Indeed, it refers to a ‘total or partial loss in value of a benet to a party required to make restitution’ rather than simply referring to reliance loss or expenses. As can be seen from the examples above, any attempt to apply the section involves an immensely technical and articial analysis of the parties’ transactions and dealings, in order to decide whether there has been a ‘benet’ and a loss in the value of that benet, which is caused by the frustrating circumstances. The section is in fact so ‘user unfriendly’ that is difcult to see how anybody could realistically take advantage of it. Furthermore, there are so few instances of section 5(4) being even argued, never mind applied, in the British Columbia courts, that it leads one to hypothesise that it is being overlooked by lawyers who simply do not understand what it is trying to achieve. From a quick reading of the Act, the reference to a loss in value of benet caused by the frustrating event would lead most to the conclusion that it is there to deal with a situation where the frustrating event physically damaged or destroyed the benet, thereby causing a direct loss to the party who has to pay for that benet. It is suspected that few lawyers would realise that it was intended to apportion the lost expenses of the recipient of an advance payment, particularly given that at no point in section is the word ‘expenses’ even mentioned. However, rather bizarrely in this author’s opinion, in Cassidy v. Canada Publishing Corporation, Cohen J. reached the opposite conclusion. There, the defendant attempted to argue that section 5 provided for an equal apportionment between the defendant and plaintiff of the total quantum meruit awarded to the plaintiff for the work which she did before the contract was frustrated. The plaintiff’s award would thus have been reduced to half its size.59 It is submitted that, based on the wording of the Act, this argument is a logical one which should have been accepted by the court: the benet (the work done by

59

Indeed, this would have provided a partial answer to the objection made above that there is no ceiling on the amount awarded by the court. It is, however, only a partial answer, as there is no guarantee that, even with a 50% reduction, the amount awarded would be less than the contract rate.

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the plaintiff) was reduced in value by the frustrating event to zero, hence the loss to the defendant was the total amount of the quantum meruit. This would have apportioned the loss of the parties equally, as contemplated by the Law Reform Commission. However, this argument was rejected by Cohen J.: In my opinion, the operation of [section 5(4)] of the Act does not dictate this result. Rather, what is contemplated by [section 5(4)] is a situation in which prior to frustration of the contract, the beneted party (i.e. the defendant in this case) has incurred some cost in anticipation of, and related to the plaintiff’s “benet” – in effect reducing the value of the benet provided by the plaintiff. In such a situation, the defendant would be entitled to set off 50% of this cost against the plaintiff’s damage award.60

Cohen J. seems to think that section 5(4) deals only with the expenses (or reliance loss) of one party, and has nothing to do with a mere reduction in the value of a benet. With respect, it is submitted that this is an incorrect reading of section 5(4), which does not restrict or enumerate the type of losses to which it applies, except to state that it must be a partial or total loss in the value of the benet, caused by the frustrating circumstances. Although a correct application of the Act in Cassidy would have resulted in the equal apportionment of losses between the parties, the wording of section 5(4) does not always provide for this result. In particular, section 5(4) only provides for the apportionment of the losses of the party who is required to make restitution. Thus, in a situation where only one party has to make restitution, there is no provision for the apportionment of the losses of the other party, even though such losses may be substantial. In fact, this party not only has to shoulder his own expenses alone, but also has to contribute to the other party’s expenses! The harshness of such a result can be seen if the British Columbia Act is applied to the facts of Gamerco v. ICM.61 There, it will be remembered, the plaintiffs had made an advance payment of $412,500 to the defendants before the contract between the two was frustrated. The plaintiffs brought an action to recover this advance payment. The defendants had incurred $50,000 in lost expenses, and sought to retain this amount. However, the plaintiffs had also incurred expenses of $450,000. If the British Columbia Act was applied to this situation, the defendants’ loss would be apportioned equally between the two parties, so that the defendants could retain $25,000 of the advance payment. However, no provision is made in the Act for the apportionment of the (substantially larger) expenses of the plaintiff. The plaintiffs would not only suffer their own loss, but would be forced to shoulder half of the defendants’ expenses as well! Essentially, then, what the British Columbia provides for is not the equal apportionment of all loss, but the equal apportionment of some loss. It is unclear why this is so, and doubtful whether it was intended.

60 61

(1989) 14 ACWS (3d) 426, para 13. [1995] 1 WLR 1226.

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This illogical consequence of the wording of section 5(4) was only narrowly avoided in British Columbia (Minister of Crown Lands) v. Cressey Development Corporation.62 There, a land sale contract between the Crown and Cressey Development Corporation (CDC) was frustrated when the land in question was not rezoned for development, as had been contemplated by both parties to the contract. It was held that CDC could recover the price paid for the land from the Crown. However, the issue remained of the loss to CDC of property purchase tax, amounting to $308,800, which was paid by it when the land was conveyed.63 On a strict application of section 5(4), this expense could not have been apportioned between the two parties, but would have been shouldered by CDC alone. Even more bizarrely, if CDC for some reason had to make restitution to the Crown, for example payment for work done, it could have forced the Crown to contribute to at least half of that loss. It seems utterly illogical that a party’s liability to pay for the other’s expenses should depend on whether or not the former has a right to recover under section 5(2). The facts of this case were, however, relatively unique, in that the reliance loss involved was a tax which was being paid to the Crown, who, furthermore, was a party to the proceedings. It was held that in this situation the Crown should return the full amount of the tax to CPC. Otherwise, it would be unjustly enriched by the retention of tax recovered from a void transaction.64 It is arguable that the result suggested above could be avoided by making use of section 6, which provides that a party is not entitled to restitution in respect of a loss in value if there is an implied term of the contract that the party performing should bear the risk of the loss in value. However, here, too, there are serious difculties of interpretation. For example, it is unclear whether, if section 6 applies, the Court has a broad discretion to apportion some losses but not others, or if the risk of all loss in the value of the benet must be on the shoulder of the party who has performed. Nor is the language of the section consistent with section 5. Section 6 refers to the entitlement of ‘a person who has performed or partly performed a contractual obligation’ to restitution in

62

(1992) 97 DLR (4th) 380 (BCSC). When the contract was frustrated, the property had to be reconveyed to the Crown, but the Crown, as purchaser, would be exempt from paying the tax. Hence, only CDC incurred expenses in this regard. 64 CPC had also paid property taxes to the District of North Vancouver. An order for the return of these taxes was not ordered, as the District was not a party to the proceedings, and it was said that CPC would have to petition the District for relief. There is no mention of the possibility of this expense being apportioned between the two parties and it was not pointed out that the Act simply didn’t provide for such an apportionment. It would appear that the issue of this tax just wasn’t argued or there was an assumption that there was an onus on CPC to recover this money, and that it would be successful in this attempt. 63

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respect of a loss in value of a benet, when section 5(4) makes it clear that the person who is entitled to retain money to cover a loss in the value of a benet does not have to have performed any contractual obligation, but must have been required to make restitution under section 5(2). Section 6 also suffers from a lack of acknowledgement on the part of the judiciary. There would not appear to be a single case in which it has been applied, even though the facts of some cases – and indeed, the results reached in those cases – would seem to indicate that it should have been expressly applied. For example, Hull and Yagi v. Kang et al.65 the claimants were employed by the defendants to teach in a school in China. It was a fundamental understanding of the contract that its performance was dependent on the claimants being issued work visas by the Chinese government. The claimants went to China and began to teach there on the basis that the visa would be issued within a reasonable time, but after two weeks the visa was still not forthcoming. It was held by Romilly J. in the Provincial Court of British Columbia that this caused the contract to be frustrated, and that under the Frustrated Contracts Act the claimants were entitled to be paid for the teaching over the course of the two weeks. However, there remained the issue of the expense of the claimants’ return tickets home, a total expense of $2008.66 This expense was actually incurred by the defendants, as they paid for the claimants’ ticket home. However the defendants claimed they were entitled to deduct the cost of the tickets from the amount they paid the claimants. If section 5(4) applied, the cost of the tickets would presumably have been apportioned equally between the parties, so the defendants would be able to retain $1004 to cover the expense of the ticket. However, Romilly J refused to apportion the expense in this way, holding that there was an implied term of the contract that the claimants were entitled to be returned home by the defendants:

65

2003 BCPC 0312. It could be argued that this expense was incurred after the contract was frustrated, and it is not entirely clear whether section 5(4) applies to such expenses. It is submitted that strictly speaking, the wording of the Act does not prohibit such an application, once there is a causal connection between the frustrating event and the expenses. Section 5(4) provides that if the circumstances giving rise to the frustration or avoidance cause a total or partial loss in value of a benet to a party required to make restitution under subsection (2), that loss must be apportioned equally between the two parties. Here, the expense of the ight home was incurred because of the frustrating event, i.e., because no work visa was acquired. The mere fact that the expense occurred after the frustrating event would appear to be irrelevant. It is equally arguable that it wasn’t a ‘loss’ caused by the frustrating event, as the claimants would have had to y home at some point anyway! However, it is submitted that this is a loss because it was incurred to no valuable end once the contract was frustrated. This difculty again shows how less confusion would be caused if the word ‘expense’ or ‘wasted expense’ was used in the rst place. 66

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Cliona Kelly I nd that it must have been understood that in the event of frustration of the contract for whatever reason, the Claimants, having been invited to China, and being forced to relocate in a foreign country to comply with the terms of their contract, are entitled to be returned home by the person inviting such relocation. Failing this, there could be the unfair result of a contractor being stranded in a foreign country without resources or the requisite visa, and probably subject to detention by the authorities.67

Section 6 is not referred to in the decision – indeed, it would appear to have been deliberately omitted whilst most other sections of the Act are quoted in full. The same result appears to have been reached by the application of a degree of common sense, but it perhaps unfortunate that it was not acknowledged that the Act provided for this situation.

CONCLUSION The British Columbia Law Reform Commission sought to draft a Frustrated Contracts Act, based on principles of restitution for performance rendered, rather than benets received, with an equal division of reliance losses between the contractual parties. Although the former principle is appropriate, in that it places the risk of loss of a benet on the party who requested that benet, and ensures that a party who performs in part is paid for that work, it is submitted that the latter principle should not have been adopted. There should be no ‘splitting’ or division of the lost expenses. Instead, each party should bear the burden of their own reliance losses. This is in accordance with the commercial expectations of the parties and there does not appear to be any logical, commercial or moral reason why one party should pay for another party’s losses when neither party is at fault. Even if the basic proposals of the Commission are accepted, the British Columbia Frustrated Contracts Act has failed to reect them. The Act is badly drafted, and its application has caused much confusion in the courts. In particular, the concept of performance based restitution has almost disappeared, and the provision for equal apportionment of loss, even if it were to be applied correctly, apportions merely some of the loss incurred. In conclusion, the British Columbia Frustrated Contracts Act is fraught with difculties and should not form the basis for legislative reform in Ireland.

67

Hull (n. 65) para 44.

Chapter 8 Once More unto the Breach: Remedies for the Non-Payment of Insurance Claims after Blake James Davey* INTRODUCTION Across the common law world, judges have struggled to nd a suitable cause of action to restrain opportunistic behaviour by insurance companies and, in particular, where this is manifested in an unjustied refusal to meet an objectively valid claim. Responses to this dilemma can be mapped across a linear scale, from the timidity of the English judiciary to the (reputedly) rampant bad faith jurisdiction in the United States. However, the lines are shifting as our conception of damages and their function changes. In Canada, important questions on the limits of punitive damages have been raised by the insurance non-payment case of Whiten v. Pilot Insurance.1 The UK Financial Services Ombudsman has seriously mooted granting damages for non-pecuniary losses against insurers who turn a drama into a crisis of their own making. The English judiciary

* The author is grateful to Professors David Campbell and Peter Jaffey for their comments on an earlier draft. The usual caveat applies. 1 [2002] 1 SCR 595 (Sup Ct of Canada).

133 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 133–153. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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seems less concerned. However, whilst the United Kingdom remains far from the vanguard, AG v. Blake 2 has provided new avenues for developing restraints on insurer behaviour. Whilst Blake and its successors may cast something of a pall over contract damages in general, this paper goes in search of a small but signicant silver lining for insurance law.3

1) THE ORTHODOX REMEDY FOR NON-PAYMENT OF INSURANCE CLAIMS Despite the characterisation of insurance policies as contracts of mutual good faith, there is only limited authority on the insurer’s obligations to the insured.4 This is true both of the obligations under the doctrine of utmost good faith5 and those derived solely from the contract. The uneven development of insurance contract law is regrettable, not least because it reinforces the impression that the law favours the insurer. The limited consideration of insurer-side obligations can be traced to at least two inuences. First, insurance policies are often incomplete as to the obligations on the insurer to handle claims promptly and efciently. Any such obligations need to be implied into the contract. Secondly, English courts have been timid, and often followed a mirror-image approach to extending beyond established principle. This has limited the obligations and remedial sanctions imposed on the insurer to those that the courts are prepared to impose on the insured. There has been little attempt to ensure that contractual obligations are functionally, rather than formally, equivalent. This is in direct contrast to contracts with similarly one-sided agreements, such as employment and landlord and tenant relations. Nowhere is the lopsided nature of insurance law starker than at the claims stage. The consequences of late notication of an insurance claim have long troubled the courts, and, at least, the insurer will be entitled to reduce the claim to the extent that late notication causes prejudice, by means of set-off.6 Furthermore, this is often extended by an express contrac-

2

[2001] 1 AC 268. Hereafter, ‘Blake’. Whilst the Law Commission is currently undertaking a review of insurance contract law, a judicial solution to this problem has a greater chance of success. The Law Commission failed to achieve parliamentary reform with its previous reports, see Law Commission, ‘Insurance Law, Non-Disclosure and Breach of Warranty’ (Law Com No. 104, 1980). 4 See Weldon v. GRE [2000] 2 All ER (Comm) 914, where Nelson J. implied a term that imposed an obligation on the insurer to competently handle direct debit mandates. 5 See J. Lowry and P. Rawlings, ‘Insurers, Claims and the Boundaries of Good Faith’ (2005) 68 MLR 82. 6 See J. Lowry and P. Rawlings, ‘Innominate terms in insurance contracts’ [2006] LMCLQ 135. 3

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tual provision that prompt notice is a condition precedent to recovery. However, the late payment of a justied insurance claim (or the unjustied refusal to accept liability) does not afford a similar range of remedies in favour of the insured. First, express contractual obligations to make prompt payment are not commonly incorporated in insurance contracts. Insureds will therefore have to establish an implied obligation. This is despite the prevalence in insurer’s advertising of the role of insurance in securing peace of mind.7 Moreover, even where breach is established there is long-standing authority at the highest level that the only remedy for late payment of an insurance claim under an indemnity policy is the award of interest.8 This latter point deserves fuller explanation, and is largely due to the legal reasoning adopted to explain contractual indemnities in insurance law.

a) The Juridical Nature of Indemnities As with many common law disciplines, insurance practice developed ahead of insurance law. There was therefore a need for courts to nd legal explanations for established behaviours. In indemnity insurance, the underwriter will normally be expected to make monetary payment to the insured as indemnication for the loss, provided the cause of the loss is within the risks covered. Finding a juridical basis for the insurer’s obligation to make this payment, within the existing parameters of private law, was not straightforward. In essence, the courts of Lord Manseld’s time needed to construct an obligation from within the doctrines of debt and damages. The prevailing view was that the insured claims the indemnity by means of unliquidated damages.9 This approach, established in early authority, remained largely unchallenged by counsel for over a

7

The narrative of mutual reliance and incompatible need at the heart of insurance is well described in T. Baker, ‘Constructing the Insurance Relationship: Sales Stories, Claims Stories, and Insurance Contract Damages’ 72 Tex L. Rev. 1395 (1993–94). 8 A distinction must be drawn here between contingent and indemnity policies. The former provide a set payment on the occurrence of uncertain event (such as death for life assurance), and takes the form of a debt. The latter provides an indemnity, although this is often capped by policy limits. 9 There are other explanations offered – ‘It seems to me that the best way to dene an indemnity insurance is that it is an agreement by the insurer to confer on the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of an event insured against, to be put by the insurer into the same position in which the insured would have been had the event not occurred, but in no better position’: Callaghan and Another v. Dominion Insurance Co. Ltd. and Others [1997] 2 Lloyd’s Rep 541 (QBD) 544 (Sir Peter Webster).

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century.10 Despite the early cases being decided on the basis of issues of civil procedure (such as the availability of set-off), the unliquidated damages rule became venerated simply by being venerable. The approach taken by the early authorities depended on three assumptions, each of which was questionable. First, that the nature of an insurance indemnity is that of a secondary obligation to pay unliquidated damages up to the contractual indemnity set. This means that limitation periods run from this moment, and not, for example, the rst presentation of the claim.11 However, in order to award unliquidated damages, a breach must be found. This leads to the second assumption: that the insurer’s primary obligation under the contract is to prevent the loss from occurring (often characterised as a promise to ‘hold the insured harmless’).12 In Chandris v. Argo, Megaw J. noted: The claim, since it is not for a debt or liquidated sum due under the contract, is presumably a claim for breach of contract. If so, the insurer may technically be in breach of his contract before any demand is made on him and before it is possible for him, or the assured, to compute the amount which he ought to pay. Yet that, as I see it, is the necessary result of the claim being for unliquidated damages.13

On this basis, when a loss does eventuate, the insurer is in breach (presumably of a contractual warranty) and is liable in unliquidated damages. The expectation to be protected (under this analysis) is to be placed in the position as if the loss had been prevented – thereby providing the indemnity assumed in practice. That the insurer takes no steps to protect the insured, and would normally breach this obligation without knowledge of the circumstances, shows the peculiar nature of this approach.14 Modern case law shows a lack of consistency in this regard. In England v. Guardian Assurance the payment was referred to as ‘debt’ but resolved by reference to the case law on unliquidated damages.15 By contrast in McHugh, Mance J. said ‘I doubt whether [the express policy wording] changes the basic nature of insurers’ liability or means that their liability is no longer a liability in damages for having failed to hold the insured harmless against the relevant liability or loss’.16 In modern parlance, the

10

See Chandris v. Argo [1963] 2 Lloyd’s Rep. 65 (QBD) 74. Virk v. Gan Life Holdings Plc [2000] 1 Lloyd’s Rep IR 159 (CA). 12 The Fanti and The Padre Island [1991] 2 AC 1 (HL) 35 (Lord Goff). 13 [1963] 2 Lloyd’s Rep. 65 (QBD) 74. 14 Raiffeisen Zentralbank Österreich AG v. Five Star Trading LLC [2001] QB 825 (CA) 844 (Mance L. J.). 15 [2000] 1 Lloyd’s Rep IR 404, 422. For a more principled refusal to follow the norm, see Transthene Packaging v. Royal Insurance [1996] LRLR 32 (QBD) 41: ‘it is open to me to hold that an insurer under a policy of property insurance does not necessarily contract that the relevant contingencies will not occur.’ 16 ICCI v. McHugh [1997] 1 Lloyd’s Rep 94 (QBD) 137. See also Normhurst Ltd. v. Dornoch Ltd. [2005] Lloyd’s Rep IR 27 (QBD) 29: ‘the obligation of the insurers . . . 11

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judiciary is uncertain whether the insurers’ primary contractual duty is to prevent the loss from occurring, or to make good the loss.17 Whilst the latter would appear the more natural interpretation, it is not the orthodox one for insurance indemnities. The nal assumption made represents the consequence of the ‘unliquidated damages’ model. Where the insured fails to pay promptly, it has merely failed to pay damages promptly, and there is good authority that consequential losses are not recoverable on this basis.18 If it were classied as a debt, or in an equivalent class, then consequential losses would be recoverable, subject to the principles of remoteness and mitigation. What is absent here is a primary obligation on the insurer to handle claims promptly, or a further remedial regime to reect losses caused by the late payment of damages. As such, the law fails to impose on the insurer any contractual incentive to pay on time. Whilst reputational and regulatory factors may bite, this represents one of ‘those bad cases where the rules for quantication of damages give the defendant an incentive to breach because they underestimate the claimant’s loss’.19 Why then was this analysis adopted? Though not expressly discussed in the early authorities, it appears that the insurer was not held liable in debt due to the unascertained nature of the amount payable. However, as Neil Campbell notes, similarly ‘unliquidated’ claims for payment of a reasonable price of goods were not so classied.20 Consequently, the orthodox explanation adopted that the insurer had contracted to prevent loss from arising was not a necessary choice.21 The difculty with this approach arises when the insurer fails to pay the damages promptly. There is no common law authority that the insured must pay a claim promptly22 and, unless the insured seeks immediate judgment (and insurance disputes, like most, are more likely to be settled than litigated), the insured is left with no effective remedy against the underwriter. There are no damages for late payment of damages – in the eyes of the law the claimant should pursue their rights more vigorously.

remained an obligation to pay damages for loss arising from the breach of the indemnity.’ 17 See R. Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 JCL 54. 18 President of India v. Lips Maritime Corp. (The Lips) [1988] AC 395 (HL) 425 (Lord Brandon): ‘There is no such thing as a cause of action in damages for late payment of damages. The only remedy which the law affords for delay in paying damages is the discretionary award of interest pursuant to statute’. 19 I. D. Campbell, ‘The Treatment of Teacher v. Calder in AG v. Blake’ (2002) 65 MLR 256, 264. 20 N. Campbell, ‘Monetary remedies for wrongful declinatures of insurance claims’ (2004) ILJ LEXIS 5, in n. 8. 21 Ibid. 22 H. N. Bennett, The Law of Marine Insurance (2nd edn. OUP, Oxford 2006) [22.120].

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b) The Policy Consequences of an ‘Unliquidated Damages’ Model of Indemnities The expression of policy concerns relating to the unliquidated damages rule is not novel. Whilst Luckie v. Bushby 23 is commonly cited as early authority for the proposition that an insurance claim takes the form of unliquidated damages,24 there is an earlier decision that shows the difculties this can cause claimants. In Lear v. Heath,25 the defendant insurer asserted that it could not be ‘holden to bail’26 as the cause of action that arose for an unpaid insurance claim was not debt. The claimant’s position was that as he sought a total loss of the vessel following a shipwreck there was no need to establish the magnitude of the loss, and the action could be treated as akin to an unpaid debt. He therefore claimed a sanction used for securing a debt. Lord Manseld C. J. disagreed, on the basis that the statutory authority governing payments into court similarly treated insurance claims as unliquidated damages and not a liquidated debt. This was despite an argument from counsel for the claimant that the insurer was acting opportunistically: The Defendant also apprized the Plaintiff before the action brought that if he would accept 701. [i.e., 70% of the value of the claim] he might have it, but that if he would not, the Defendant would use every endeavour to delay the payment as long as possible.27

What is evident even at this early stage is the pressure that a tardy insurer can bring to bear on an insured to accept a settlement at less than full value. Moreover, these policy concerns did not help shape the legal rules, and Manseld’s formalist approach is mirrored in decisions over the next two centuries. This issue was considered in modern times in the Court of Appeal in Sprung v. Royal Assurance,28 and is often cited by the judiciary as authority for this point,29 although there were only limited submissions by counsel in argument, not least because the claimant appeared as a litigant in person. Sprung was the owner and operator of a small family business, processing animal waste. Whilst the market was in decline, there was a predator company actively seeking market share through consolidation and the business remained valuable. The company was insured under two policies – one covering theft and the other ‘sudden

23

(1853) 13 CB 864; 138 ER 1443. See J. Lowry and P. Rawlings, ‘Insurers, Claims and the Boundaries of Good Faith’ (2005) 68 MLR 82, 86. 25 (1813) 5 Taun 201; 128 ER 664. 26 This was a form of arrest to secure payment. 27 (1813) 5 Taun 201, 203; 128 ER 664, 665. 28 [1999] 1 Lloyd’s Rep IR 111. 29 Normhurst Ltd. v. Dornoch Ltd. (n. 16) 28. 24

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and unforeseen damage’ to certain property causing an interruption to business activities. During the period of cover, Sprung’s business premises were badly damaged by an apparent attack by vandals. The insurer denied liability, and the loss adjuster appeared to reject the claim without valid reason, insisting that wilful damage was not covered.30 Without payment, or at least an admission of liability, Sprung was unable to raise sufcient nance to restore the machinery to operation. There followed a delay of nearly four years, described by Evans L. J. as a ‘not altogether unfamiliar . . . history of correspondence and discussions when an insurance claim is made and the insurance company, for whatever reason, is clearly most reluctant to pay.’31 By the time Sprung brought the issue to court the business had collapsed, a further loss estimated at £75,000. Despite clear indications that the Court of Appeal was dissatised with the result,32 it felt obliged to follow authority and rule that there was no remedy for the late payment of an insurance claim. Similarly, Sprung failed to establish the existence of an implied term that the insurer should accept liability within a reasonable period. In subsequent cases, judges have declared themselves bound by Sprung and that only the House of Lords can reverse the rule. However, this orthodox view ignores the possibility of working around Sprung, rather than formally overturning the decision. This paper therefore considers alternative mechanisms for the award of damages beyond the indemnity provided for in the contract. We begin in Part 2 by detailing the unsuccessful attempts to gain damages for consequential losses. Moreover, this will provide some further examples of alleged bad faith behaviour by insurers, lest it be thought that Sprung is an isolated example. We conclude with a review of the remedies that have been reconsidered since Blake – exemplary damages, disgorgement and hypothetical release fees – in search of a new model for late payments.

2) PAST CHALLENGES TO THE ORTHODOX REMEDY FOR THE LATE PAYMENT OF INSURANCE CLAIMS The rule in Sprung has been consistently cited as a rule in need of reform.33 Moreover, its lack of efciency has created a vacuum into which counsel and academics have sought to introduce a whole range of solutions, from a variety of legal disciplines. It has acted as a fertiliser for the legal imagination. The

30

(n. 28) 113–14. (n. 28) 114. 32 (n. 28) 118. Evans L. J. nding against the claimant with ‘undisguised reluctance’. 33 Those critical of the rule include judges (Rix L. J. in Mandrake Holdings v. Countrywide Assured Plc [2005] EWCA Civ 840, [25]), academics (Lowry and Rawlings (n. 5)) and the Financial Services Ombudsman (n. 56). 31

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characterisation of an insurer’s obligation as sounding in unliquidated damages has potential consequences for limitation periods34 and private international law35 in addition to controlling the sanction for late payment. It therefore can arise as an issue in litigation in a variety of factual circumstances. The reaction to the rule is worthy of note across a range of common law jurisdictions – it has proved a fertile area for development of legal principle. The English rule has been challenged directly in Scotland36 and Australia,37 and indirectly in the remainder of the United Kingdom,38 the United States,39 and Canada.40 As will be seen in Part 3, specic recent developments in Canadian and English contract law may herald a new era in this area of law. However, before considering the likely future response of the English courts after Blake, we should examine the past attempts to secure reform.

a) Express and Implied Contractual Provisions The rule that damages are not available for late payment of damages arose in the context of carriage of goods by sea, and specically in the late payment of demurrage.41 The payment of demurrage recognises the loss caused to a shipowner when a vessel is unjustiably delayed in port whilst loading goods beyond the period specied in the contract. It is now common for the default rule to be displaced by an express contractual provision. Thus in the Gencon (1994) charterparty, clause 7 requires consequential losses caused by the late payment of demurrage to be payable if payment occurs more than 96 hours from the giving of notice.42 No functionally equivalent clause is normally included in an insurance policy. Despite this, counsel have sought to rely on policy wording to nd a primary obligation to pay monies, to which consequential loss liability might attach. This would mean recasting the insurer’s obligation to pay as a form of primary obligation. This has been largely unsuccessful, such as in

34

Callaghan v. Dominion Insurance Co. Ltd. [1997] 2 Lloyd’s Rep 541. Raiffeisen Zentralbank Österreich AG v. Five Star Trading LLC (n. 14) 844. 36 Strachan v. Scottish Boatowners Mutual Ins Assoc [2001] Scot CS 138, [16]. 37 See the discussion of CIC Insurance Ltd. v. Bankstown Football Club Ltd. (1997) 141 ALR 618 in N. Campbell, ‘Monetary remedies for wrongful declinatures of insurance claims’ (2004) ILJ LEXIS 5. 38 This is considered in the remainder of Part 2. 39 See K. S. Abraham, ‘The natural history of the insurer’s liability for bad faith’ 72 Tex L. Rev. 1295 (1993–94). 40 See the discussion of Whiten v. Pilot Insurance in Part 3. 41 President of India v. Lips Maritime Corp. (The Lips) [1988] AC 395 (HL). 42 I am grateful to David Glass and Anthony Rogers for their assistance on matters of carriage law. 35

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Normhurst v. Dornoch 43 where the description of the insurer’s obligation as a use of word ‘liability’ did not transform the orthodox secondary damages obligation into a primary duty to pay. However, the moment at which the insurer is in breach can be affected by policy terms. In Virk v. Gan Life Holdings Plc,44 the critical illness cover for strokes was dependant on the insured surviving 30 days. On this basis, the insurer was only liable once the time period had elapsed and not from the moment of the stroke. In most cases, counsel has sought to evade the orthodox classication of the insurer’s obligation by seeking an implied term, and seeking extended remedies for breach of that term. This tactic has been occasionally successful, but only resulted in a Pyrrhic victory. In Sprung, Evans L. J. was prepared to imply a term requiring the insurer to inspect the property and consider the need for repairs promptly. However, the insured was not entitled to substantive damages as the insurer’s failure to act promptly was not viewed as the cause of the subsequent loss of the business. As Evans L. J. stated ‘in such circumstances the cause of any loss which the plaintiff suffered must be regarded as the consequence of his own decision not to proceed with repair or reinstatement, whether that decision was voluntary or not’.45 Thus, the insurer’s refusal to accept liability was not the true cause of the loss of the business – it was the insured’s inability to obtain nance to repair the damage. Quite how Sprung can be classed as having made a ‘decision’ that was involuntary is not explained and the application of the causation rules in this case is questionable. By contrast, Mance J. in McHugh refused to imply any term as to the prompt handling of claims.46 In a fully reasoned discussion, Mance J. made much of the difculties that such a duty would cause to insureds, on the assumption that it would have to be mutual. This, he felt, would go beyond the limits of the proper implication of terms: Just as insurers would be obliged not reasonably to refuse or delay indemnity, so, presumably, the insured would be under a duty not unreasonably to delay, misstate or overstate his case. The reasonableness of each party’s conduct would, if necessary, be susceptible of review at each point. I think both parties would have hesitated before agreeing any such mutual obligations, and that they are certainly not to be implied.47

In more recent times, the courts have developed an extensive series of rules relating to the insured’s prompt submission of claims and co-operation with the

43 44 45 46 47

[2005] Lloyd’s Rep IR 27. [2000] 1 Lloyd’s Rep IR 159. (n. 28) 118. Ins. Corp. of the Channel Islands Ltd. v. McHugh [1997] LRLR 94. Ibid., 136.

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insurer during the claims process.48 These are both express and implied,49 so it appears that Mance J.’s mutuality argument is less cogent today. However, Mance L. J. continued that it would be an unusual implied obligation that the insurer was obliged to pay claims promptly when, as a matter of strict law, it was obliged to pay it immediately on the occurrence of the loss.50 Whilst Mance L. J. is correct as a matter of formal law, he ignores the farcical nature of the orthodox interpretation of the contract, a practice that he described as ‘articial’ in a later case.51

b) Non-Pecuniary Compensation: Pain and Suffering The English courts have been restrained in awarding damages for distress caused by the late payment of an insurance claim.52 Whilst this will not be a viable component in many routine claims, recovery under this head of damages following a signicant delay in the handling of a claim related to destruction of the family home or to disruption of a small business is not inconceivable. However, in England v. Guardian Insurance,53 Thornton QC 54 rejected liability for pain and suffering losses on two grounds. First, that such loss was not expressly covered by the policy. This would be a valid point if the claimant was seeking to recover because of losses caused by another party, and the claim was for indemnication under the policy. But, of course, the insurer caused the loss here and it should be liable as any other contracting party would be. The secondary obligation to pay damages can be rebutted by contractual terms, but is not dependent on an express promise to compensate. The second issue was that insurance contracts are not analogous to contracts for personal service or enjoyment.55 This analysis is highly questionable, and the refusal to award pain and suffering damages for insurance contracts has been doubted by the Financial Services Ombudsman, who noted ‘their [insurers] marketing suggests the aim is to give the buyer reassurance and peace of mind against future uncertainties’.56

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See J. Lowry and P Rawlings (n. 6). Friends Provident Life and Pensions Ltd. v. Sirius International Insurance Corp. [2005] EWCA Civ 601, [2005] 2 Lloyd’s Rep 517. 50 McHugh (n. 46) 137. 51 Raiffeisen Zentralbank Österreich AG v. Five Star Trading LLC (n. 14) 844. 52 On the basis of Watts v. Morrow [1991] 1 WLR 1421. 53 [2000] 1 Lloyd’s Rep IR 404. 54 Sitting as a High Court Judge. 55 (n. 53) [73]–[75]. 56 See . 49

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c) Utmost Good Faith Academic commentary on the failure to provide a remedy for the late payment of insurance claims has often focused on the good faith nature of insurance contracts. For Lowry and Rawlings a broader view of the doctrine of utmost good faith could be manifested in the extension of duciary, contractual or tortious obligations.57 However, English law has rmly rejected the granting of damages for a breach of the utmost good faith on a tortious, duciary or a contractual basis.58 Rather than pushing at the closed door of pure economic loss in search of a bad faith tort, the extension of contract damages would appear a more opportune route. There is a further tactical advantage in ‘piggybacking’ this claim on the back of Blake. English courts have been reticent in extending the post-contractual duties of utmost good faith.59 At present, it would appear to be limited to cases of proven dishonesty, and has not even been supported in all cases of fraud.60 The difculty lies in the remedial framework – English statute and case law has considered the duty as a contingent rather than a promissory obligation. To succeed, a claimant would have to extend both the ambit of the rule and the remedy normally awarded, in the face of substantial authority. Whilst the doctrine of utmost good faith may provide the ‘aggravating factor’61 that persuades a court to extend Blake to this area, it is unlikely to be sufcient in itself.

d) Regulatory Controls: the FSA’s ‘Insurance Conduct of Business’ Sourcebook Following the adoption of the Financial Services and Markets Act 2000, the Financial Services Authority issued a code of practice for insurer conduct.62 As

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J. Lowry and P. Rawlings, ‘Insurers, Claims and the Boundaries of Good Faith’ (2005) 68 MLR 82, 109. 58 La Banque Financière de la Cité SA v. Westgate Insurance Co. Ltd. [1990] QB 665 (CA). 59 Manifest Shipping Co. Ltd. v. Uni-Polaris Ins Co. Ltd. (The Star Sea) [2003] 1 AC 469 (HL). 60 In Axa General Ins. Ltd. v. Gottlieb [2005] 1 Lloyd’s Rep IR 369 (CA), Mance L. J. preferred to resolve the impact of a fraudulent claim on a contractual rather than good faith basis. 61 In Blake (n. 2), the result was justied in part by treating the claimant as a quasiduciary and many of the subsequent cases have demonstrated a similar desire to establish that the circumstances go beyond a simple breach of contract. 62 An on-line version is maintained at , accessed on 30/10/2006. Hereafter ‘ICOB’.

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McMeel notes, within this is a series of explicit obligations related to claims handling.63 By virtue of Schedule 5 of ICOB, and section 150(1) of the 2000 Act, non-compliance with these provisions is actionable by a private person as breach of statutory duty. There is a general obligation that claims are handled ‘promptly and fairly’,64 but this is extended for retail customers to an entitlement to a rapid response to a claim65 and the giving of reasons for a claim being rejected (in whole or in part).66 Finally, there is a duty to make prompt payment.67 Guidance in the code suggests that both response and payment should be made within ve working days.68 The crucial limiting factor in this regime is the denition of a ‘private person’, as that is the class to which the remedy is restricted. Under the FSMA 2000 (Rights of Action) Regulations 2001, legal persons are excluded where they suffer ‘the loss in question in the course of carrying on a business of any kind’.69 This would deprive the business claimant in Sprung of a cause in action in the courts, although some commercial complainants would still have access to the Ombudsman.70 It remains to be seen whether the Ombudsman would, as a matter of ‘good practice’ rather than law extend the same remedy to commercial complainants.71

3) BEYOND INDEMNIFICATION: DAMAGES FOR LATE PAYMENT AFTER BLAKE A direct challenge to the decision in Sprung is hamstrung by the authorities that precede it. It is clear that the Court of Appeal feels itself bound by that decision, and that only a House of Lords decision will lead to it being overruled. Where leave to appeal to the Lords has been given, the insurer has had an incentive to settle that case to preserve the status quo rule.72 What claimants are now likely to seek is a path of less resistance. An opportunity to do so was created by AG

63 G. McMeel, ‘The FSA’s insurance conduct of business regime: a revolution in (consumer) insurance law?’ [2005] LMCLQ 186, 204. 64 ICOB 7.3.1R. 65 ICOB 7.5.1R. 66 ICOB 7.5.13R. 67 ICOB 7.5.17R. 68 ICOB 7.5.3G and 7.5.18G. 69 SI 2001/2256, reg 3(1). 70 McMeel (n. 63) 206. 71 The Ombudsman decides cases on a mixture of law and good practice. 72 Pride Valley Foods v. Independent Ins. Co. Ltd. [1999] 1 Lloyd’s Rep IR 120.

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v. Blake73 (and its subsequent case law), which marked ‘a new start in this area of law’.74 The potential for remedies claimed on a gains-based rather than claimant loss model to supplement compensatory damages has now been fullled in a variety of contractual situations. The fundamental question for this paper is whether non-payment of an insurance claims might be added to that list. The difculty is that whilst almost all commentators agree that these remedies will be justied in certain circumstances, the precise limits of those justicatory factors are unsettled. Whilst a detailed survey of the possible interpretations of Blake is beyond the scope of this paper, it will consider some credible explanations of the factors required. Many of these indicate that the Sprung situation ought to be resolved by some form of extended damages rule inuenced by Blake.75 It certainly ts within the general comments made by Peter Smith J. in the WWF litigation: It is part of the bargain between the State and its citizens . . . that the State provides a court system to which its citizens can have access to judges to enable disputes between them to be resolved in a forum that ensures all parties have an opportunity fully to present their cases and an independent person pronounces on that dispute and decides the case . . . [T]he nal part of this analysis is that the courts must provide remedies for wrongs that are inicted that give a genuine relief as opposed to something akin to a Pyrrhic result.76

This extended search for practical justice77 for breach of contract should not be confused with the author’s own views on that line of authority. To be clear, this paper does not seek to demonstrate that it is desirable that Blake be extended to insurance cases, but that it is not unlikely. To those who would argue that Blake is bad law, or economically inefcient,78 comes the answer that those are not issues over which individual claimants should have any concern. They must pursue their own selsh interests. If a litigant in the position of Sprung can restrain opportunistic behaviour by its insurer by reliance on Blake in the lower courts, why should it seek to go further and overturn Sprung directly in

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[2001] 1 AC 268. Experience Hendrix LLC v. PPX Enterprises Inc. [2003] EMLR 25 (CA) [16]. 75 Moreover, even those commentators who fundamentally disagree with the ad hoc extension of such remedies accept that the courts are engaged in developing a new paradigm: see I. D. Campbell and J. Devenney, ‘Damages at the Borders of Legal Reasoning’ (2006) 65 CLJ 208, 224–25. 76 World Wide Fund for Nature v. World Wrestling Federation Entertainment Inc. [2006] EWHC 184 (Ch.) [129]. 77 Blake (n. 2) 292 (Lord Steyn); Experience Hendrix (n. 74) [42] (Mance L. J.). 78 I. D. Campbell (n. 19). 74

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the House of Lords? This is a clear example of the danger that Blake created – despite the assurances that it would not spread into commercial cases – that bad law will be used to challenge bad law. Following Blake, three distinct categories of additional damages have been developed. The rst two, disgorgement and exemplary damages, are treated by the author as gains based and non-compensatory. The nal category of ‘hypothetical release’ damages79 is not easily classied, but does go beyond the normal boundaries of compensation, even if it is partially compensatory in nature. Each of these remedies will be considered in turn for suitability in resolving the Sprung conundrum. We start at the head of the sliding scale, with exemplary damages, as they are likely to lead to the greatest quantum award.

a) Exemplary Damages Until recently, it was reasonably well established that exemplary damages were not available for a simple breach of contract. The personal relationship created by contract is not viewed as providing a suitable context for the deterrence of breach.80 Whilst this remains the formal position in English law – although the extraordinary approach of the Court of Appeal in Borders 81 may call that into question – Canadian law has moved on. In Whiten v. Pilot Insurance,82 the Supreme Court of Canada was faced with a consumer-based and exaggerated form of Sprung. An insured family home was destroyed by re, and Pilot Insurance repudiated liability for the claim, despite the absence of any indication of arson from re ofcials or its own loss adjuster. This left the claimants homeless, as the lease on the substitute rental property paid for by the insurer was terminated without notice to the insureds. In addition to the contractual indemnity, an award of $1 million of punitive damages was made for the failure to full an implied contractual obligation to handle claims in good faith. The good faith characterisation of insurance contracts was fundamental to this decision, as it transformed a simple breach of contract into the kind of breach that, in the eyes of the court, rationally required deterrence.83 Whilst the author would con-

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Also referred to as ‘licence fee’ damages. See J. D. McCamus, ‘Prometheus Bound or Loose Cannon? Punitive damages for Pure Breach of Contract in Canada’ (2004) 41 San Diego L. Rev. 1491, 1493. 81 Borders (UK) Ltd. v. Commisioner of Police of the Metropolis [2005] EWCA Civ 197. See further R. Cunnington, ‘Should Punitive Damages be part of the Judicial Arsenal in Contract Cases?’ [2006] LS 369. 82 [2002] 1 SCR 595 (Sup Ct of Canada). 83 The application of the limiting factor of rationality to non-insurance commercial transactions is instructive. See Performance Industries Ltd. v. Sylvan Lake Golf and Tennis Club Ltd. [2002] 1 SCR 678 decided on the same day as Whiten v. Pilot 80

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tend that the mere provision of the contractual indemnity and statutory interest in such a case would under-compensate the claimant, this award leaves them with an undeserved windfall. Even if we permit the intrusion of deterrence into some aspects of breach of insurance contracts, as judges have declared the need to deter fraudulent and exaggerated insurance claims,84 the measure of damages is problematic. As Laskin J. A. stated in the Ontario Court of Appeal in Pilot, punitive damages must sting, and not merely represent a licence fee for breach.85 However, insurance companies are forced by law to be asset rich, in order to meet likely future claims. Consequently, they tend to form large corporate groups with substantial annual prots. If damages are to sting, should they be stripped of a percentage of their annual prots? This might reward a claimant with tens or hundreds of millions of dollars, pounds or euros.86 The property insurance arm of the German insurer Allianz reported prots of €1.78 billion in 2006.87 The group that now incorporates the insurer in Sprung, Royal and Sun Alliance, reported an annual net prot of £685 million in 2005.88 Even a brief survey of the insurance bad faith decisions since Whiten shows courts straining to keep the oodgates closed, particularly in the face of damages assessed by a jury. The cases to date have largely arisen in two distinct factual circumstances. The rst scenario involves ongoing support for a person claiming payments under an employment disability policy, where the insurer alleges that the claimant is exaggerating their symptoms.89 The second normally concerns allegations of arson in respect of property insurance. In each case such allegations by an insurer will affect the standing of the claimant in the community. The courts have been explicit in stating that a mere failure to pay is not of itself the kind of act that needs to be deterred by punitive damages, but that some aggravating element is needed. Binnie J. in Whiten listed ve factors to be considered and these have provided the basis for subsequent decisions.90

Insurance. I am grateful to Catharine Macmillan, QMUL for bringing the decision in Performance Industries to my attention. 84 See J. Davey, ‘Unpicking the Fraudulent Claims Jurisdiction in Insurance Contract Law: Sympathy for the Devil?’ [2006] LMCLQ 223. 85 (1999) 42 OR (3d) 641, 661. In Binnie J.’s analysis in the Supreme Court, the damages needed to ‘sting’, but to remain within rational bounds: (2002) 1 SCR 595, [39]. 86 I am grateful to Professor Waddams for an enlightening discussion on this point. 87 ‘Allianz’s property-casualty division sees prots increase’, Lloyd’s List (22/03/06). 88 Source: , accessed on 30/10/2006. 89 E.g., Fidler v. Sun Life Ass. Co. of Canada [2006] SCC 30 (Sup Ct of Canada). 90 The non-exhaustive list includes: ‘blameworthiness of the defendant’s conduct’; ‘the degree of vulnerability of the plaintiff’; ‘harm or potential harm directed specically at the plaintiff’; ‘the need for deterrence; even after taking into account the other penalties, both civil and criminal, which have been or are likely to be inicted on the

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However, these limiting factors are difcult to apply to an adversarial negotiation, such as the settlement of an insurance claim. In Hart v. Combined Ins. Co. of America,91 the Nova Scotia Supreme Court gave an indication of the rule in practice: Punitive damages may be awarded against an insurer who ignores undisputed facts and/or persists in advancing a defence with no reasonable likelihood of success in order to intimidate a plaintiff to the extent that the case will be abandoned or inappropriately compromised.

Where punitive damages have been awarded, they often outweigh the indemnity. In an alleged arson case, Plester v. Wawanesa Mutual Ins. Co.,92 the main claimants received $50,000 aggravated damages in addition to $525,000 punitive damages, on a claim for indemnication for $319,000. The bad faith claim focused on the lack of clear evidence from the insurer that the claimants were complicit in the re. However, this was no Whiten – the State re service believed it to be a deliberate re, and only the claimants had access to the property. The insurer was found in breach of its good faith obligations by failing to maintain a detailed investigation of the facts, and then denying the claim. Moreover, the jury was provided with evidence of the nancial status of the defendant insurer prior to setting the quantum for punitive damages. The Ontario Court of Appeal found that the award was high, but not outside the bounds of a rational response. The potential impact of a suspicion of fraud on the Plester’s position within a small community was noted. However, the award of punitive damages provides the insured with an unearned bonus, although any compensation required could have been achieved by existing legal regimes, such as defamation of character or aggravated damages. In the relatively short period since Whiten, numerous cases have pleaded but failed to show bad faith,93 but those that have succeeded have received substantial damages.94

defendant for the same misconduct’ and the ‘advantage wrongfully gained by a defendant from the misconduct.’ 91 [2005] NSJ No. 508 (Nova Scotia Sup Ct) [85]. 92 [2006] OJ No. 2139. 93 See e.g. Brown v. Mutual Life Ass. Co. of Canada [2005] AJ No. 1003 (Alberta Ct of QB); Conte v. The Canada Life Assurance Company [2005] O.J. No. 3451 (Ontario Sup Ct of J) and Iakoupov v. Pilot Insurance Company [2005] OJ No. 5146 (Ontario Sup Ct of J). 94 Khazzaka v. Commercial Union Ass. Co. of Canada [2002] 66 OR (3d) 390 (Ontario CA), (indemnity of $175,000 and punitive damages of $200,000) and Pereira v. Hamilton Township Farmers’ Mutual Fire Insurance Co. [2006] OJ No. 1508 (Ontario CA) (total of $2.5 million in punitive damages awarded at rst instance, retrial ordered on the merits).

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What would ‘sting’ these corporations without vast windfalls for claimants is the bite of regulatory powers held by nancial services regulators, such as the FSA, as it can impose nes for regulatory offences, and ultimately, remove the licence of the insurer to act in the market. It is to be sincerely hoped that part of the considerations of the English judiciary after Blake will be to consider the regulatory and criminal powers available to deter undesirable conduct. What is not needed is a root and branch revision of the law of exemplary damages in contract law, in search of practical justice. Having considered the possibility of damages of general deterrence, as punitive damages, we can move down the sliding scale to those that provide specic deterrence for this breach of contract – the remedy in Blake itself – disgorgement and its role in insurer bad faith.

b) Disgorgement An unexplored avenue for claiming damages beyond the mere insurance indemnity lies in a claim for disgorgement of prots attributable to the breach of contract, under the line of authority developed in AG v. Blake.95 This requires the breaching party to be stripped of its prot gained by breach, even if this would over-compensate the innocent party for its loss. Following the award of disgorgement on the exceptional facts in Blake, the precise limits of the availability of this remedy remain unclear. A variety of factors have been suggested, but rejected or restricted on reconsideration. These include ‘the cynical or deliberate nature of the breach’;96 that ‘the defendant did the thing he contracted not to do’;97 and that ‘the claimant had a legitimate interest in preventing breach’.98 Rather than undertake a fruitless search in pursuit of judicial principle and clarity, we will start with a consideration of a commercial case applying Blake. This at least demonstrates that Blake is not limited to its own facts or cases of exceptional public policy, nor limited to non-commercial cases. In Esso Petroleum v. Niad, Morritt V. C. identied three factors that justied the use of gains based remedies.99 First, that damages on the normal scale were an

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[2001] 1 AC 268. Rejected by Lord Nicholls in Blake (n. 2) 286, but treated as a necessary but not sufcient factor by Gibson L. J. in Experience Hendrix (n. 74) [56], [58]. 97 Rejected by Lord Nicholls in Blake (n. 2) 286; suggested by Lord Woolf M. R. in the Court of Appeal in Blake [1998] Ch. 439 (CA) 458. 98 This has been reinterpreted by some as a requirement that the obligation is capable of literal enforcement in some circumstances. See M. Graham, ‘Restitutionary Damages: The Anvil Struck’ (2004) 120 LQR 26, 28–29. 99 Unreported, 22 November 2001 (Ch D) at [63]. 96

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inadequate remedy. Second, the obligation was fundamental in nature, from the perspective of the claimant. Finally, that the breaches continued to occur even after complaints were made of the earlier breaches, despite assurances that this would no longer be the case. If this list of factors were exhaustive, then almost all cynical non-payments of an insurance claim would attract disgorgement. It was clearly established above that damages as currently assessed on the orthodox model are inadequate. Moreover, the payment of a valid claim is the fundamental obligation in insurance and, in cases such as Sprung, there is evidence of repeated demands by the insurer to pay, which are ignored. This would therefore meet the three factors identied as pre-conditions to wider liability. Whilst these factors have not been approved in the subsequent case law (as disgorgement has not been awarded on the facts), neither have they been expressly disapproved. Indeed, the lack of rigour in ensuring consistency of principle as cases are decided on the anvil of commercial cases has been striking. At this stage in the development of the law, all that can be said with certainty is that an appeal for practical justice to the Court of Appeal on the facts of a case like Sprung would not appear a hopeless task. If we do go in search of a principled approach to disgorgement in the academic literature we discover a wide range of responses.100 Amongst those that are at least internally consistent in attempting to provide a clear framework for disgorgement, Jaffey proposes that the remedy should be available where at the moment of breach the contracting party: knows or ought to know that in the absence of performance the other contracting party will be unable to procure a substitute for the contractual benet from elsewhere; that is, that the other contracting party will incur loss for which damages are an inadequate remedy.101

To assess the chances of a Sprung style claim we need to assume that this represents what the courts are (or will be) doing, even if they are not saying so. Given the nature of insurance, the criteria established by Jaffey will almost always be met in cases of the late payment of claims. At the moment of loss, the insured has sunk the investment of the premium. Unless the fact or magnitude of the loss is genuinely uncertain, such as to generate sufcient doubt to make ‘after the loss’ insurance possible, the insured will not normally be able to enter the market to seek cover from an alternative provider. Assuming this to be the norm, the insurer will know (or certainly ought to know) that by failing

100

The sliding scale of remedies after Blake is mirrored by a sliding scale of views from those who would restrict disgorgement and related remedies to breach of extracontractual obligations (such as duciary relationships) to those who would advocate it for all breaches of contract. 101 P. Jaffey, “Disgorgement and ‘Licence Fee Damages’ in Contract” (2004) 20 JCL 57.

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to prevent a loss it will be placed in a monopolistic position. This will make damages recoverable not only on an indemnity basis, by means of the expectation interest, but also by disgorgement. This will be the case even where the insurer acts in perfectly good faith – it is the nature of the contract that makes the insurer’s performance key and not any animus on its part. However, if the insurer is motivated by the limited nature of the indemnity rules to seek to gain a prot by forcing a settlement on terms favourable to the insurer, then it will be forced to disgorge those additional benets. What can be seen is that many commentators, both judicial and academic, would view the Sprung situation as deserving of disgorgement under the Blake line of authority – it is ‘exceptional’ in those terms.102 However, a further question remains as to whether this remedy would effectively restrain insurers in those circumstances. At rst sight, the ‘account of prots’ or disgorgement remedy appears unhelpful for the non-payment of insurance claims. The insurer can be forced, by litigating, to pay the indemnity. The insured would then have deprived the insurer of its main benet from not paying the sum due. However, it would also entitle the insured to recover any sums the insurer gained by holding the money during the period of breach. In circumstances where the insurer has beneted above and beyond the statutory interest available at the discretion of the court, the claimant could recover further damages to strip the insurer of that benet. Moreover, given the uncertain basis on which the courts have operated the disgorgement remedy, insurers should not assume that this could not be manifested as an effective penalty.103 Despite this, such a claim is problematic on matters of proof alone. The magnitude of costs involved in undertaking sufcient research to establish the prot made by investing a small sum of money in an investment-driven organisation as complex as an insurer might well be greater than the benet to be removed. The disgorgement principle appears to provide too little disincentive to an insurer considering a deliberate late payment: it is likely to fail to provide substantial redress for the uncompensated claimant and is cost heavy. We must therefore move on to other unorthodox remedies.

c) Licence Fee/Hypothetical Release Fee Damages The nature of punitive damages and an order for disgorgement necessarily treat the breach as a wrong, deserving of general or specic deterrence. The judicial

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The Sprung principle continues to attract critical academic comment. See J. AlAsady, ‘Damages, Late Payment and Indemnity Insurance’ [2006] JBL 396 and C. Ying, ‘Damages For Late Payment Of Insurance Claims’ (2006) 122 LQR 205. 103 I. D. Campbell, ‘Hamlet without the Prince: How Leng and Leong Use Restitution to Extinguish Equity’ [2003] JBL 131, fn. 27 warned defendants to ‘be scared; be very, very scared’ in facing such claims.

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conception of licence fee damages has been more variable. Mance L. J. has stressed their suitability for commercial cases, as it has, in his view, the merit of directing the court’s attention to the commercial value of the right infringed and of enabling it to assess the sum payable by reference to the fees that might in other contexts be demanded and paid between willing parties.104 This is not centered on the need for deterrence, and is better suited to mitigating the failures of the general damages regime to provide compensation. That said, as will be noted below, the assessment of the quantum of damages awarded has been undertaken in a less than scientic fashion. The extension of this remedy is therefore only the ‘least bad’ operation of the Blake case law, for a case such as Sprung. The circumstances in which a court will award hypothetical release fee damages are as uncertain as those for disgorgement.105 Jaffey has asserted that they should be restricted to cases where the term breached was designed to create some form of licensable property, and on this basis insurance payments would fall outside the ambit of this remedy.106 However, he operates on the assumption that these damages will always be assessed as a percentage of the prots that the defendant gains by breaching. In late payment cases such as Sprung, the insurer only prots where the insured fails to enforce their full contractual entitlements, and settles for less. The benet to the insurer is that across a sufcient wide pool of claims this will still generate an advantage. In such cases the release fee can be assessed according to the losses of the claimant, and need not have the restitutionary element complained of in disgorgement. What is missing in insurance contract law is proper compensation for breach, and hypothetical release fee damages could ll this gap. Of course, it is trite to repeat that this would be better done by reforming the initial rule, rather than extending an extraordinary remedy, but precedent gets in the way of good sense. However, as in such cases the breach is discrete rather than on-going, many of the concerns relating to the setting of quantum in cases such as Hendrix will not apply. The magnitude of such damages was described by Mance L. J. in the recent Hendrix litigation as ‘such sum as might reasonably have been demanded’ by [the claimant] ‘as a quid pro quo for agreeing to permit [the breach of contract made by the defendant]’.107 Applied to a late payment case, it would be such sum that the insured would reasonably demand from the insurer for late payment or acceptance of liability. The assessment of this just sum in the cases in which it has been operated has not been on a scientic basis.108 Indeed,

104

Experience Hendrix (n. 74) [45]. I. D. Campbell and O. P. Wylie, ‘Ain’t No Telling (which circumstances are exceptional)’ (2003) 62 CLJ 605, 622–23. 106 Jaffey (n. 101) 71. 107 Experience Hendrix (n. 74) 534. 108 See I. D. Campbell and O. P. Wylie (n. 105). 105

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Mance L. J. recognized that the test had an ‘element of articiality’.109 Rather, the courts have tended to award a percentage of the prots gained by breach. In cases such as Sprung, a better model would be a reasonable estimate of the likely costs of late payment, and this would include (but would not be restricted to) the high cost of raising nance in such cases or the risk to the future prospects of the business. In many consumer cases, the potential loss to the insured will be far less, as the item will be of less importance to the insured. This would allow a degree of proportionality to be brought to bear in assessing damages. When combined with the normal principles of mitigation and causation, this would only be a minor extension to the Blake development. That said, given that many wish to raze the entire structure, Blake and all, even this minor reform would be built on questionable foundations. Nevertheless, for an individual claimant in the position of Sprung, this represents a realistic opportunity for proper compensation, even if it results in further disruption of legal principle.

CONCLUSION The proper resolution of the losses caused to the defendant in Sprung lies in a recasting of the insurer’s promise to permit recovery of consequential losses subject to remoteness, mitigation and the expressed intentions of the parties. That precedent denies this route, at least without the intervention of Parliament or the House of Lords Judicial Committee, is regrettable. Consequently, individual claimants are likely to rely on those appellate decisions that are in their favour such as Blake, Hendrix and Borders, rather than rely on leave to appeal being granted. In some ways, the spectre of uncertain, extended liability might at least force insurers to concede the existing rule in favour of a balanced compromise. As noted above, the shipping industry has contracted around the ‘no damages for late payment of damages’ rule in respect of demurrage claims.110 Insurers would be wise to follow suit, lest judicial policymaking on the hoof take them places they would rather not go.

109 110

Experience Hendrix (n. 74) 534. Gencon (1994) cl. 7.

Chapter 9 Choice of Law for Void Contracts and Their Restitutionary Aftermath: The Putative Governing Law of the Contract Adeline Chong* INTRODUCTION Void contracts are an oxymoron. They are ‘contracts’ which do not exist; in other words, ‘contracts’ which are, in fact, not contracts at all. Void contracts give rise to some of the most demanding issues of choice of law as they yield logically intractable problems which have to be resolved by reference to putative factors and concepts. There are two parts of the equation when looking at choice of law for void contracts: rst, establishing voidness; and secondly, the aftermath of voidness. The initial question of which law determines whether a contract is void is generally answered by the putative governing law of the contract.1 Once a contract

* This paper is based on my doctoral dissertation supervised by Prof. J. Harris and Prof. A. Simester. I am grateful to them both and also Prof. J. Fawcett for helpful comments on an earlier version of this paper. All errors remain my own. 1 Article 8(1) of the Rome Convention on the Law Applicable to Contractual

155 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 155–181. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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is adjudged void, a claim that may be pursued in its aftermath is a personal unjust enrichment claim. The general choice of law rule in this area is also the putative governing law of the contract.2 Thus, the concept of the putative governing law of the contract plays a central role in both parts of the equation where void contracts are concerned. This paper will examine issues surrounding the concept of the putative governing law of the contract by studying its role in establishing a void contract and personal unjust enrichment claims arising in the aftermath of voidness. In particular, the use of the concept, how such a law is and should be identied, and the justication for the pivotal role that is delegated to it despite its inherent illogicality, will be studied.

1) THE ROLE OF THE PUTATIVE GOVERNING LAW OF THE CONTRACT IN DETERMINING THE VOIDNESS OF A CONTRACT a) An overview Questions arising from a contract, such as whether the parties have fullled their mutual obligations, or the interpretation of certain terms used in the contract, are referred to the governing law of the contract. However, when the very question is the validity of the contract itself, there can apparently be no governing law of the contract unless and until the contract is pronounced valid. This classic conicts conundrum is resolved by recourse to the concept of the putative governing law of the contract. The choice of law solution here is to apply the law which would have governed the contract if it were valid, to determine whether the contract is valid. Unless the governing law of the contract can be said to be separable from the contract,3 the illogicality of this approach is obvious: one is ‘seeking to

Obligations (hereafter the Rome Convention), enacted into English law by the Contracts (Applicable Law) Act 1990; Albeko Schumaschinen v. The Kamborian Shoe Machine Co. (1961) 111 LJ 519. According to P. Nygh, Autonomy in International Contracts (Clarendon Press, Oxford 1999) 84, the putative governing law approach is adopted in ‘virtually all legal systems’. 2 Rule 230(2)(a) in L. Collins (gen. ed.), Dicey, Morris and Collins on the Conict of Laws (14th edn. Sweet & Maxwell, London 2006); Commission (EC), ‘Amended proposal for a European Parliament and Council Regulation on the Law Applicable to Non-Contractual Obligations (“Rome II”)’ COM (2006) 83 nal, 21 February 2006, Article 10(1). 3 An argument that is considered by Nygh (n. 1) 84–86; A. J. E. Jaffey, ‘Offer and Acceptance and Related Questions in the English Conict of Laws’ (1975) 24 ICLQ 603; J. Harris, ‘Does Choice of Law Make Any Sense?’ (2004) 57 Curr Leg Prob 305,

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establish something by rst presuming it to be in existence’.4 This approach has been variously condemned as displacing carts and horses,5 being a ‘bootstraps’ rule,6 and a confusing concept.7 Despite these obvious truisms, practical considerations make application of the putative governing law a desirable option.8 It breaks the vicious circle of, on the one hand, not being able to identify the governing law of the contract before a contract is deemed to exist; and, on the other hand, not being able to afrm a contract’s existence until a governing law is identied. It is a clear-cut rule which promotes business efcacy.9 It is also convenient to have the same choice of law rule applying whether or not a contract has been created.10 These pragmatic considerations have entrenched the putative governing law concept in English law. Article 8(1) of the Rome Convention states that: ‘The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Convention if the contract or term were valid.’11 Furthermore, Article 3(4) goes on to state that the existence and validity of the consent of the parties as to the choice of the applicable law shall also be determined according to the putative applicable law.12 There is also support for application of the putative governing law prior to the Rome Convention. In Albeko Schuhmaschinen v. The Kamborian Shoe Machine Co.,13 an English offeror posted an offer to a Swiss offeree concerning

318–319; J. Bird, ‘Choice of Law’ in F. Rose (ed.), Restitution and the Conict of Laws (Manseld Press, Oxford 1995) 125; P. Brereton, ‘Restitution and Contract’ in F. Rose (ed.), Restitution and the Conict of Laws 162. 4 A. Briggs, ‘The Formation of International Contracts’ [1990] LMCLQ 192, 198. 5 Harris (n. 3) 317. 6 P. Kaye, The New Private International Law of Contract of the European Community: Implementation of the EEC’s Contractual Obligations Convention in England and Wales under the Contracts (Applicable Law) Act 1990 (Dartmouth Publishing, Aldershot 1993) 270–274. 7 Mackender v. Feldia [1967] 2 QB 590 (CA) 602 (Diplock L. J.). 8 ‘The justication for that is not logic, but pragmatism’: Nygh (n. 1) 95. 9 P. M. North and J. J. Fawcett, Cheshire and North’s Private International Law (13th edn. Butterworths, London 1999) 588. 10 Cf. Briggs (n. 4) 198 (footnote 20). 11 M. Giuliano and P. Lagarde, ‘Report on the Convention on the Law Applicable to Contractual Obligations’ OJ 1980 C282, 28 (hereafter the Giuliano-Lagarde Report), make it clear that this article is intended to apply to questions of formation of the contract. According to section 3(3)(a) of the Contracts (Applicable Law) Act 1990, the Giuliano-Lagarde Report ‘may be considered in ascertaining the meaning or effect of any provision’ of the Convention. 12 Thereby being ‘almost a “double-bootstraps” rule’: Kaye (n. 6) 272. Both Articles 8(1) and 3(4) are subject to Article 8(2), on which, see section 1(d)iii. 13 (1961) 111 LJ 519. For criticisms of this case, see A. J. E. Jaffey, Topics in Choice

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appointment of the latter as the former’s agent. The latter claimed that he had posted an acceptance though the English offeror never received it. Under English law, this constituted a valid acceptance, while under Swiss law it did not. Salmon J. found on evidence that it was not proven that the letter of acceptance was posted and thus by both English and Swiss law no contract was created. However, his Lordship went on to discuss what would have happened if the Swiss offeree had posted the acceptance. His Lordship held, obiter, that as the offer was communicated in Switzerland and the contract of agency was to be performed there, the proper law of the contract was Swiss law and thus no contract would have been formed.14

b) Problems with application of the putative governing law There is much to be said for not exaggerating the importance of logical solutions to legal conundrums. While the pursuit of intellectually logical solutions is commendable, this must never be at the expense of legal certainty. Therefore, use of the concept of the putative governing law of the contract in establishing voidness should not be anathema. However, problems do arise. These problems do not stem from reliance on the concept itself, but rather, how the concept is applied in practice. There is a distinct lack of sophistry as to how the putative governing law is identied. For example, if there is a choice of law clause in the disputed contract, the combined effect of Article 8(1) and Article 3(4) is that the law specied in the clause is straightforwardly identied as being the putative governing law. In The Lankya Abbaya,15 the German Bundesgerichtshof held that the validity of a choice of law clause for Sri Lankan law, which was alleged by the plaintiff to be ineffective because it was illegible, was to be determined in accordance with Sri Lankan law.16 If reference is made in the disputed contract to certain Articles in the French Civil Code, the putative implied governing law of the contract would be French law without further question.17 The most controversial situation would be where there is no express or implied choice of law. In these situations, the governing law is the law of

of Law (The British Institute of International and Comparative Law, London 1996) 67–68. 14 See also The Parouth [1982] 2 Lloyd’s Rep 351; The Atlantic Emperor [1989] 1 Lloyd’s Rep 548; Union Transport Plc v. Continental Lines SA [1992] 1 WLR 15 (HL). 15 BGH December 15, 1986, [1988] I Prax 26; cited by R. Plender and M. Wilderspin, The European Contracts Convention : The Rome Convention on Choice of Law for Contracts (2nd edn. Sweet & Maxwell, London 2001) 206 (para. 10.03). 16 However, the existence of an agreement was not disputed in this case. 17 See the Giuliano-Lagarde Report (n. 11) 17 for a list of other possible indications of an implied choice of law for the purposes of the Rome Convention.

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closest connection.18 Under the common law, the law of closest connection is determined by weighing connecting factors such as the place of contracting, the places of residence or business of the parties, the nature and subject matter of the contract, and the place of performance of the contract.19 These are factors which can only be construed by looking at the alleged terms in an alleged contract. The Rome Convention presumes that the law of closest connection is the law of habitual residence of the characteristic performer of the contract;20 but again, this cannot be determined until one looks at the terms of the purported contract.21 Therefore, whether the parties have allegedly made an express or implied choice of law or made no choice at all, no attempt is made to identify the putative governing law of the contract on a principled basis. Any alleged express or implied choice, or law of closest connection derived from alleged terms, will straightforwardly be identied as the putative governing law of the contract. The problems with this approach can be set out as follows. The lack of thought that goes into identifying the putative governing law of the contract favours the party who alleges validity. As Jaffey has pointed out, why should the law of country A decide whether the parties had agreed on a contract merely because X claims that there was an agreement governed by the

18 Article 4 of the Rome Convention; Bonython v. Commonwealth of Australia [1951] AC 201 (PC) 219. 19 Re United Railways of Havana and Regla Warehouses Ltd. [1960] Ch. 52 (CA) 91, aff’d [1961] AC 1007 (HL). 20 Article 4(2). The characteristic performer of a bilateral contract is the party who carries out performance for which payment is due: Giuliano-Lagarde Report (n. 11) 20. If the contract is entered into in the course of the characteristic performer’s trade or profession, Article 4(2) goes on to provide that the country of closest connection shall be the country in which the principal place of business, or the place of business in which performance is to be effected under the terms of the contract, is situated. 21 The presumptions are rebuttable in accordance with Article 4(5) if it appears from the circumstances as a whole that the contract is more closely connected with another country. See Bank of Baroda v. Vysya Bank [1994] 2 Lloyd’s Rep 87; Denitely Maybe (Touring) Ltd. v. Marek Lieberberg Konzertagentur GmbH [2001] 1 WLR 1745; Samcrete Egypt Engineers and Contractors SAE v. Land Rover Exports Ltd. [2001] EWCA Civ 2019, [2002] CLC 533; Kenburn Waste Management Ltd. v. Bergmann [2002] EWCA Civ 98, [2002] CLC 644; Marconi Communications International Ltd v. PT Pan Indonesia Bank Ltd [2005] EWCA Civ 422, [2005] 2 All ER (Comm) 325. Plans are ongoing to convert the Rome Convention into a Regulation (commonly known as the proposed Rome I Regulation). Under the current draft of the proposed Rome I Regulation, the series of presumptions indicating the law of closest connection have been replaced by xed rules; see the draft Article 4: Commission (EC), ‘Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I)’ COM (2005) 650 nal, 15 December 2005. The UK has indicated that it is opting out of the negotiations over the proposed Rome I Regulation.

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law of country A, while Y denies it?22 Furthermore, the danger of the party who wishes to maintain the existence of the contract manipulating the terms of the alleged agreement so as to lead to a favourable law and thus favourable result is ever present.23 Even if this was not the case, it could be said that the issue is much deeper and goes towards the principle of autonomy of parties in the contractual sphere. Why should a party have a law foisted upon him with which he did not agree?24 In addition, another area for which a straightforward application of the putative governing law does not cater is the situation where there are conicting terms, or what is commonly referred to as a ‘battle of forms’ situation under English domestic law. If A makes an offer to B with a choice of law clause for Ruritanian law and B replies with a counter-offer with a choice of law clause for Utopian law, which law should be applied to determine whether a contract has been concluded? There are two putatively governing laws present.25 Another criticism that can be made against a straightforward application of the putative governing law can be illustrated by reference to the facts of Albeko.26 On the alternative scenario that the Swiss offeree had posted a letter of acceptance, Swiss law would have been deemed the proper law and the alleged contract would have been adjudged void. This means that, strictly speaking, Swiss law should never have been applied in the rst place; in which case, should the validity of the contract be examined all over again on the basis that Swiss law is no longer putatively applicable?27 Since the putative governing law approach means applying the law which would apply if the contract is valid, the answer appears to be ‘yes’. Swiss law would never nd the contract valid. Thus, it is not the putative governing law. However, taken to its inexorable end, this would mean that the whole process of determining validity must commence over and over again until a law is applied that would give the result

22

(n. 13) 63. Kaye (n. 6) 274. 24 Although presumably a party denying agreement would not protest against application of a law that he did not agree to, but which would ultimately hold the contract void. 25 Both the authors of Dicey, Morris and Collins (n. 2) 1578 (para. 32–103), 1602 (para. 32–165) and Nygh (n. 1) 96, suggest the application of the objective proper law (ignoring any choice of law clauses). This was adopted in Evialis SA v. SIAT [2003] EWHC 863 (Comm), [2003] 2 Lloyd’s Rep 377 [38]. However, English and Australian courts have on the whole tended to apply the lex fori: Dicey, Morris and Collins 1602 (para. 32–164). See The Heidberg No. 2 [1994] 2 Lloyd’s Rep 287, 308. Cf. G. Dannemann, ‘The “Battle of Forms” and the Conict of Laws’ in F. Rose (ed.), Lex Mercatoria: Essays on International Commercial Law in Honour of Francis Reynolds (LLP, London 2000) 210. 26 Facts above, text to n. 13. 27 Harris (n. 3) 317. 23

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that the contract is valid,28 unless, of course, no law would ever nd that a contract has been created. In which case, this raises the question of just how many bites of the cherry should be offered to the person alleging the validity of the contract before holding that the contract is void.29

c) When is a law the putative governing law? It is clear that the putative governing law needs to be accorded some role in any solution which prizes pragmatism and certainty in determining voidness. However, if the putative governing law is the law which would be applicable if the contract is valid, why should one automatically assume that a choice expressed or implied from the putative contract, or law of closest connection of the putative contract, is the putative governing law? There is a need for a preliminary stage whereby the putative governing law needs to be properly identied.30 Essentially, what is required is a two-stage approach31 which has as its aim the identication of what one may call a ‘legitimate’ putative governing law of the contract. There has to be an initial stage whereby the parties are found to have come to a prima facie agreement according to what will be called here a ‘neutral’ law before the concept of the putative governing law steps in. This ‘neutral’ law has the task of identifying the putative governing law and ascertaining that both parties have agreed to this law. Once this ‘legitimate’ putative governing law has been so identied, it can then be applied to test the validity of the contract under the second stage. This scheme would counteract the problems identied above. It would preserve the scales of justice between the parties as the courts will not be initially

28 Cf. Jaffey (n. 3) 609, who argues that offer and acceptance cases are not an area for the application of any presumption of validity. P. Lagarde, ‘The Scope of the Applicable Law in the EEC Convention’ in P. M. North (ed.), Contract Conicts: The EEC Convention on the Law Applicable to Contractual Obligations – A Comparative Study (North-Holland Publishing Co., Oxford 1982) 50, remarks that the Convention rejected such a presumption because it would have affected the predictability of the solution. PreRome Convention however, there were some who supported a presumption in favour of the validity of the contract ie application of a law which would nd the contract valid as opposed to void. See E. Crawford, ‘The Uses of Putativity and Negativity in the Conict of Laws’ (2005) 54 ICLQ 829, 849–850. 29 The preferable solution is that once a contract has been adjudged void, that should be the end of the matter. No further law should be applied to try and make it valid. 30 Harris (n. 3) 317. 31 A two-stage approach is also favoured by Briggs (n. 4); Harris (n. 3) 316–324; D. F. Libling, ‘Formation of International Contracts’ (1979) 42 MLR 169; Nygh (n. 1) 92–98.

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taking the side of the party who is alleging validity. In addition, it would resolve a ‘battle of forms’ situation in that this neutral law would rst decide whether the parties have come to an agreement and on which parties’ terms. Having this preliminary stage would also get rid of the absurdity that arises when application of the putative governing law results in a void contract. This is because if a neutral law has decided that the parties have reached a prima facie agreement to a contract governed by Swiss law, one could be more condent that Swiss law is the putative governing law and accept its verdict that the contract is void.

d) The preferred scheme: the two-stage approach i) Identification of the neutral law Nygh suggests that the preliminary question of whether the parties had reached a consensus ad idem on a choice of law is a mere matter of fact.32 This cannot be supported. Whether silence would be sufcient to constitute agreement with a unilateral proposal of a choice of law clearly involves application of a rule of law. The effect of, for example, mistake, on consent would also be a matter of law. Whether an acceptance that is lost in the post is effective is another matter concerning a proposition of law. The preliminary stage of whether the parties have reached prima facie agreement cannot be considered as a mere factual issue but is a question that needs to be answered by a law. As North notes, ‘agreement’ consists of legal as well as factual elements.33 The three possible laws that could play this neutral role at the preliminary stage are the objectively determined governing law of the contract, the lex locus transactionis and the lex fori. The suitability of each will now be examined in turn.

(a) The objectively determined governing law of the contract This would be the law of closest connection to the alleged contract. There are two options if the parties have allegedly chosen a governing law. One is to take into account the alleged choice of law clause along with the other alleged terms but to accord it no special weight. As Lord Denning has put it, the parties’ intention is ‘only one of the factors to be taken into account.’34 The other method is to apply the law which would be applicable in the absence of an

32

(n. 1), 93–94. Private International Law Problems in Common Law Jurisdictions (Nijhoff Publishers, Dordrecht 1993), 116. 34 Boissevain v. Weil [1949] 1 KB 482 (CA) 491. 33

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express or implied choice of law. In other words, one would ignore the alleged choice of law.35 Both methods should be rejected. Whether one follows the common law weighing of all factors method or the Rome Convention’s presumptions, one should consider the position of the party who denies that he agreed to a choice of law and a contract. In both versions, the court will be looking at the alleged terms in the alleged contract in their bid to discover the law of closest connection, that is, the very terms to which that party says that he did not agree. In doing so, the court is assuming that the terms are valid. No neutrality can be offered by applying the objectively determined putative governing law.36

(b) Lex locus transactionis According to Garner, the existence and terms of a contract should be determined by the law of the country that has the most real and substantial connection with the transaction alleged to give rise to the contract.37 Garner recognises that looking at alleged terms in an alleged contract is patently unfair on the party denying the existence of both terms and contract. Instead, he suggests that the only factors that can be legitimately looked at would be factors such as the place where the relevant acts38 of the parties took place, and the residence or place of business of the parties; that is, factors whose legitimacy do not hinge on a purported contract.39 The great strength of Garner’s model is that it removes the favouring of the party who alleges that the clause and contract is valid. Nevertheless, he

35 L. Collins, ‘Contractual Obligations – The EEC Preliminary Draft Convention on Private International Law’ (1976) 25 ICLQ 35, 53. Application of the putative objective proper law of the contract which is derived without reference to any alleged choice of law clause also seems to be supported by Dicey and Morris and Cheshire pre-Rome Convention. See J. H. C. Morris, Dicey and Morris on the Conict of Laws (9th edn. Stevens & Sons Ltd., London 1973) 764; G. C. Cheshire, Private International Law (7th edn. Butterworths, London 1965) 203. 36 Cf. A. Thompson, ‘A Different Approach to Choice of Law in Contract’ (1980) 43 MLR 650. 37 ‘Formation of International Contracts – Finding the Right Choice of Law Rule’ (1989) 63 ALJ 751. 38 Relevant acts being presumably making the offer, negotiations, if any, and the purported acceptance. 39 Garner (n. 37) 759–760, cites Deane J.’s judgment in Oceanic Sun Line Special Shipping Co. Inc. v. Fay (1988) 165 CLR 197 (High Court of Australia) 255, as support. His Lordship had held that the question whether the transaction gave rise to a binding agreement between the parties should be determined in accordance with the law of New South Wales, which was the place where the parties’ actions and transactions led up to the contract.

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acknowledges that a weakness of his theory is that the locus contractus or rather, the locus transactionis, could be entirely fortuitous. But, as he argues: ‘it nevertheless might be a relevant “connecting factor” or “point of contact” indicating the country with which the transaction has the most real and substantial connection.’40 However, the greater problem with his theory is the scarcity of factors which the courts may look at to discover the law of closest connection. Other than those he mentions, that is, the place of transaction and the residence or place of business of the parties, it is difcult to think of other factors which could be looked at without prejudicing the party alleging invalidity. What if the transaction took place in country A, one party is from country B, and the other party is from country C? To which factor should the court give predominant weight? A case could be made that the place of the transaction should be the most important factor, but this would be akin to resurrecting the now discredited locus contractus rule with all its problems.41 In addition, as Garner himself concedes, it would be difcult to apply this rule if the relevant acts of the parties took place in more than one country.42 Therefore, Garner’s model, whilst admirable in its attempt to achieve a balance of fairness between the parties, would not be altogether practicable in reality.

(c) Lex fori The lex fori has the best credentials to decide upon the question of whether the parties have reached a prima facie agreement. It is, however, important to emphasise again that what is advocated here is a two-stage approach.43 First, the lex fori determines whether there is a good arguable case44 that the parties

40

(n. 37), 760. Reliance on the presumption that the proper law of the contract is synonymous with the lex loci contractus or the lex loci solutionis have been discarded: L. A. Collins (gen. ed.), Dicey and Morris on the Conict of Laws (11th edn. Stevens, London 1987) 1192 (footnote 92); E. Sykes and M. C. Pryles, Australian Private International Law (3rd edn. Law Book Co., Sydney 1991) 608. 42 (n. 37), 760. 43 A two-stage approach with a role for the lex fori, albeit with varying details, is also favoured by Briggs (n. 4); Harris (n. 3) 316–324; Libling (n. 31); Nygh (n. 1) 92–98. 44 Cf. J. Harris, ‘Contractual Freedom in the Conict of Laws’ (2000) 2 OJLS 247, 254 (footnote 38) and n. 3, 320 (footnote 50), who favours the higher threshold of ‘balance of probabilities’. However, it is submitted that the lower standard of ‘a good arguable case’ is more practical, bearing in mind that this is merely a preliminary stage. It is also suggested that it is by no means clear that the imposition of this lower standard would signicantly affect the level of protection offered to the party alleging invalidity. 41

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have reached an agreement; if this rst stage is answered afrmatively, then this prima facie agreement would have a putative governing law. Secondly, this ‘legitimate’ putative governing law is then applied to determine the contract’s voidness. This approach differs from the suggestion that the lex fori should alone decide the validity of the contract, a suggestion which is one of the more popular alternative solutions to the conundrum of which law determines whether a contract is void.45 Under this latter approach, the lex fori determines the existence of a contract and identies the contract’s proper law.46 However, advocating such a large-scale role for the lex fori is unnecessarily parochial in nature. In addition, it is unclear why the lex fori should be applied to deem a contract void47 as it may have little connection with the transaction which gave rise to the purported contract: ‘the accident of the forum should not be decisive on so fundamental an issue of conict of laws as the existence and validity of a contract . . .’.48 Furthermore, it raises the problem of forum shopping and that the parties would litigate at the jurisdictional stage to avoid an unfavourable law being applied to the substantive case.49 The last point about forum shopping could be argued also to pose a problem under the two-stage approach. However, it is important to realise the limited extent of the role that is accorded to the lex fori under the two-stage approach. The lex fori would have responsibility only over the question of whether a prima facie agreement exists at all. In other words, its role is conned to the identication of a ‘legitimate’ putative governing law of the contract, not the legal validity of the alleged contract itself. Thus, fears of forum shopping would be exaggerated.50

Furthermore, the standard of ‘a good arguable case’ as to whether a contract exists or not is sufcient for the purpose of establishing jurisdiction under the Order 11 context: Seaconsar Far East Ltd. v. Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438. 45 Judicial obiter dicta which suggest approval of this approach include Mackender v. Feldia (n. 7) 603 (Diplock L. J.); Oceanic Sun Line (n. 39) 225 (Brennan J.), 260–261 (Gaudron J.). In the latter case, despite the fact that both judges referred to Libling (n. 31), who advocates a two-stage approach, their dicta do not indicate acceptance of the more subtle two-stage approach. 46 As opposed to identifying the putative governing law of the prima facie agreement, which is the role advocated for the lex fori here. 47 This is as opposed to the legitimate application of the lex fori’s public policy and mandatory rules to strike down a contract. 48 The Heidberg No. 2 (n. 25) 307 (Judge Diamond QC). 49 North (n. 33) 116. Attempts to raise the applicable law at the jurisdiction stage would be rmly rebuffed: Benincasa v. Dentalkit Case 269/95 [1997] ECR I-3767, [1998] All ER (EC) 135. 50 See also text to nn. 54–57 below.

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ii) The most appropriate neutral law to determine the existence of a prima facie agreement: the lex fori (a) Justications for applying the lex fori The justications for delegating this question to the lex fori can be set out as follows. When it is alleged that a contract is in existence, there can be no applicable law until the assertion is borne out. Once so proven, any questions arising from the contract are rightfully the domain of the applicable law. However, pending a nding that a contract is in existence, it is difcult to see what other law, other than the lex fori, has the best claim to determine any questions that may arise, such as whether there has been agreement on a choice of law clause contained in the alleged contract. Such a question involves the identication of a connecting factor and ‘[t]he interpretation of a connecting factor is always a matter exclusively for English law as the lex fori. This is elementary, axiomatic, and could not be otherwise.’51 Applying the lex fori can be justied jurisprudentially. Where a contract is only alleged to exist, the parties’ purported intention is but one factor which the court may take into account. Otherwise, determination of the governing law of the alleged contract is a legal matter of which the court is the nal arbiter. As an organ of the state, the court cannot be bound by or have its jurisdiction ousted by the parties’ intention or purported intention.52 This still stands even though, in reality, the court clearly chooses to be so bound. This also links up with the idea that it is the lex fori which allows the parties to choose the applicable law in the rst place; thus the governing law originates from the lex fori 53 and it is only right that recourse is had to the lex fori when there are doubts as to what that governing law is or even whether a governing law exists at all. In addition, operation of the jurisdictional rules should ensure that England is the most appropriate forum for the trial of the action. Spiliada Maritime Corpn. v. Cansulex Ltd.54 established that a stay of proceedings which has been started as of right in England should only be granted on the ground of forum non conveniens. This infers that application of English law as the lex fori would be fair as it has already been established that England is the natural forum for the action. It is suggested that post-Spiliada, the case for application of the lex fori at this preliminary stage is strong. Admittedly, under the Brussels I Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters,55 defendants may be sued in England solely on the basis of

51

J. G. Collier [1989] All ER Rev. 49, 61. Kaye (n. 6) 273. 53 Briggs (n. 4) 198. 54 [1987] AC 460 (HL). 55 Council Regulation (EC) No. 44/2001 of 22 December 2000, OJ L 12 (16.01. 2001). 52

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their domicile even if the claim has no other connections with England.56 However, the Regulation does attempt to confer jurisdictional competence on courts of Member States which have a substantial connection with the case,57 so that a defendant could be sued in a forum with a strong connection to the claim. Moreover, if the parties do not or are unable to prove that a foreign law is applicable, the lex fori is always applied.58 Other advantages would be expediency and simplicity: judges are obviously most familiar with their own domestic law.59

(b) Judicial authority for applying the lex fori Most of the authorities in support of a role for the lex fori advocate a wholesale application of the lex fori to the question of whether a contract exists, instead of a more subtle two-stage approach.60 The closest that one may get to authority for what is proposed here is The TS Havprins.61 This case involved an application for a stay of proceedings which had been commenced pursuant to leave given to serve out of jurisdiction in accordance with Order 11 of the Rules of the Supreme Court.62 Staughton J. held that English law as the lex fori was to be applied to determine whether there was a contract between the parties and whether it was governed by English law, there being a disputed clause in favour of English law.63 There are a couple of things to note about this decision. First, given that the choice of law clause provided for application of English law, it could be said that application of English law to determine the existence of the agreement to the clause was in line with the straightforward application of the putative governing law approach. However, Staughton J. stressed that determination of a connecting factor, such as a purported choice of law, is always for the lex fori 64 and there is no doubt that his Lordship applied English law as the lex fori to decide whether such a choice was made.

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Article 2. Notably, Articles 5 and 6. 58 Warner Bros. v. Nelson [1937] 1 KB 209; The Marinero [1955] P 68, [1955] 2 WLR 607 (PDAD). 59 Nygh (n. 1) 93. 60 Mackender v. Feldia (n. 7) 603 (Diplock L. J.); Oceanic Sun Line (n. 39) 225 (Brennan J.), 260–261 (Gaudron J.). 61 [1983] 2 Lloyd’s Rep 356. 62 Now CPR 6.20. See Briggs (n. 4) 202 for the argument that Order 11 cases are wholly unsuitable as a line of authority for choice of law questions. 63 There was ultimately no dispute that a contract was made but rather a dispute as to the time it was made, the question of whether the choice of law clause was agreed upon hinging on the latter issue. It is clear that, should the validity of the contract have been in issue, Staughton J. would have applied the lex fori to decide that issue as well. 64 (n. 61), 358. 57

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Secondly and importantly, Staughton J. appeared to be proposing a two-stage approach to determination of the governing law. His Lordship stated that: . . . if I hold that there was a contract between the parties [according to English law] . . . I might in theory still conceivably reach the conclusion that it was governed by Norwegian law. In such circumstances . . . when it came to the trial of the action, it would be necessary to re-examine in accordance with Norwegian law, as the putative proper law, whether there was a contract between the parties.65

The difference between this and the scheme that is proposed in this paper is, of course, in allocating that initial role for English law as the lex fori, Staughton J. was dealing with a jurisdictional issue as this was an Order 11 case primarily concerned with the question of whether the English court had jurisdiction. The reference to Norwegian law re-examining the question of the contract’s validity is a question of the applicable law arising at the choice of law stage once it has been established that the English court has jurisdiction. Nevertheless, although the roles advocated for the lex fori and the putative governing law are split between the jurisdictional and choice of law stages in Staughton J.’s dictum, if one takes the dictum as a whole, there is little practical difference between Staughton J’s approach and the approach advocated in this paper.

iii) The two-stage approach in comparison with Article 8 of the Rome Convention It is by no means obvious that where the existence of a contract is in dispute, the law specied in an alleged clause of the disputed contract, or alleged implied choice of law of closest connection derived from disputed terms, should inevitably be the ‘putative governing’ law.66 As long as one accepts that the determination of connecting factors is for the lex fori,67 one must also arguably accept that it is within the rights of the lex fori to insist on being satised that there is a prima facie agreement before a ‘legitimate’ putative governing law can be identied. For example, if there is a choice of law clause for Ruritanian law in a disputed contract, the lex fori must rst be satised that there is a good arguable case of consensus on the choice for Ruritanian law before Ruritanian law can be deemed as the putative governing law of the contract. This stage can be seen as part of the process of determining the connecting factor of choice. Once the putative governing law has been so identied, then and only

65

Ibid., 359. Cf. Collins (n. 35) 53; D. G. Pierce, ‘Post-Formation Choice of Law in Contract’ (1987) 50 MLR 176, 179–183. 67 Unless the argument is that the lex fori chose to adopt the Rome Convention rules and requirements for determining connecting factors. 66

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then should Article 3(4) and Article 8(1) of the Rome Convention be operative so that Ruritanian law is applied to determine whether the contract is valid. However, this does not appear to be the approach taken by the Rome Convention. It has been seen that courts assume that if there is a disputed choice of law clause, the law pin-pointed by that clause is automatically deemed as the putative governing law for the purposes of Article 8(1).68 One may argue that this straightforward approach does no harm as the balance of fairness between the parties is preserved under the Rome Convention by Article 8(2). Article 8(2) enables a party to rely upon the law of his habitual residence to establish that he did not consent if it would not be reasonable to determine the effect of his conduct in accordance with the putative governing law.69 This proviso was formulated to cover the situation where silence by one party as to the formation of the contract would be construed as consent by the putative governing law but not by that party’s law of habitual residence; it was thought to be unfair to hold the party bound under these circumstances.70 Therefore it could be said that there is no need for the lex fori playing a preliminary role in determining whether the parties have reached a good arguable case of agreement. Nevertheless, under the two-stage scheme, the parties start out even-handedly, whereas the function of Article 8(2) is akin to imposing retrospective fair-play between the parties when one party denies validity. Of the two, it is submitted that the former is preferable as it is far better to have a level playing eld at the outset. In addition, the two-stage approach resolves the problems mentioned above: the ‘battle of forms’ situation and the absurdity that arises if what is automatically deemed as being the putative governing law nds the contract void. Furthermore, one could not be sure that the law of habitual residence of the party who denies validity will protect him in all cases; it appears that a high burden of proof will be imposed on the person wishing to invoke Article 8(2).71 Hence, it is suggested that the two-stage scheme is preferable to the position adopted under the Rome Convention.

68

The Lankya Abbaya (n. 15). See also Article 10(3) of the Hague Convention on the Law Applicable to Contracts for the International Sale of Goods 1986. 70 However, Article 8(2) is not limited to silence; the wording is wide enough to cover also action by the party in question: Giuliano-Lagarde Report (n. 11) 28. Thus, Article 8(2) would also offer protection to a party, Y, whose acceptance of an offer gets lost in the post; Y being bound by the law specied in the choice of law clause in the offer but not bound by the law of his social and legal environment: example given by Lagarde (n. 28) 50. 71 Egon Oldendorff v. Libera Corporation (No. 1) [1995] 2 Lloyd’s Rep 64 (QBD Comm Crt). 69

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e) Conclusion to Section 1 Logically ‘pure’ solutions are hard to nd when the subject matter itself is a contradiction in terms. Instead, pragmatism comes to the fore when one attempts to formulate a choice of law rule for establishing voidness. This has led to the putative governing law concept. However, too little attention has been paid as to what exactly constitutes a putative governing law. There is a need for a prior stage whereby a neutral law would identify a ‘legitimate’ putative governing law of the contract. The lex fori is the law that is best suited to play this neutral role: its role can be justied logically and jurisprudentially as well as for the reasons of justice between the parties and expediency. Once the putative governing law has been so identied, it would be a law which one could condently apply without forsaking the logical foundations for its use. It will not be a mere badge of convenience, but will function as a proper tool to resolve conicts problems.

2) THE ROLE OF THE PUTATIVE GOVERNING LAW IN PERSONAL UNJUST ENRICHMENT CLAIMS ARISING IN THE AFTERMATH OF VOIDNESS The concept of the putative governing law of the contract also plays a big role in relation to a personal unjust enrichment claim that may arise in the aftermath of a void contract.72 This section will look at the criticisms, justications and authorities for the continued role of the putative governing law after the contract has been adjudged void. Another issue that will be looked at is whether the putative governing law should still provide the choice of law rule if another law strikes down the contract.

a) Criticisms against application of the putative governing law The criticism of illogicality which dogged the use of the putative governing law concept in relation to establishing voidness surfaces here too73 and, indeed,

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Of course, if one party denies agreement, only a law that is identied as being putatively applicable in accordance with the two-stage approach as set out in section 1 has the necessary credibility to go on to govern the aftermath of voidness. However, if the lex fori determines that no consensus exists such that a principled putative governing law of the contract cannot be identied, then there is much to be said for a default rule in favour of the law of the place of enrichment to govern the restitutionary obligation. This issue is, however, outside the scope of this paper. 73 J. Blaikie, ‘Unjust Enrichment in the Conict of Laws’ [1984] Jur Rev. 112, 127; G. Williams, Law Reform (Frustrated Contracts) Act, 1943 (Stevens, London 1944)

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has been argued to apply a fortiori in relation to the restitutionary aftermath of voidness.74 This is because application of the putative governing law to determine the validity of a contract occurs before the validity or voidness of the contract is established; in which case it could be argued that such application is more intelligible than applying the putative governing law once one knows that the contract is denitely a nullity.75 Bird counters that ‘this is just a question of degree’76 and, indeed, the important point is that while the concept of the putative governing law is manifestly not ‘logical’, it is a recognised tool in resolving intractable conicts problems. As Zweigert and Müller-Gindullis put it: ‘it has always proved a mistake to employ in legal science categories of thought developed in the natural sciences.’77 In addition to the criticism of illogicality, another criticism stems from the contention that the restitutionary obligation is an independent obligation which does not arise from the contract itself but is imposed by law. This line of argument goes on to reason that, therefore, application of the putative governing law of the contract to the restitutionary aftermath undermines the independence of the claim.78 This argument ‘misses the mark’:79 the putative governing law of the contract is the preferred choice of law rule to govern the restitutionary consequences of a void contract not because such consequences are contractual in nature, but because the putative governing law happens to be, for the practical reasons that will be set out below, the best choice of law rule for unjust enrichment claims arising from void contracts. A backwards reasoning that the application of the law which would apply if the claim is contractual in nature implies that the

19–20 (in the context of restitution following frustration); K. Lipstein in H. C. Gutteridge and K. Lipstein, ‘Conict of Law in Matters of Unjustiable Enrichment’ (1939/41) 7 CLJ 80, 86 (although by 1949, Lipstein appears to have changed his view when he acted as the author of the choice of law rule for quasi-contract in J. H. C. Morris (ed.), Dicey’s Conict of Laws (6th edn. Stevens, London 1949), Rule 167: as noted by Blaikie, 119 (footnote 37); Bird (n. 3) 113 (footnote 291)). 74 R. Stevens, ‘Conict of Laws’ in P. Birks and F. Rose (eds.), Lessons of the Swaps Litigation (Manseld Press, London 2000) 344; Harris (n. 3) 325. 75 J. Bird, ‘Choice of Law and Restitution of Benets Conferred Under a Void Contract’ [1997] LMCLQ 182, 184. 76 Ibid. 77 ‘Quasi Contract’ in K. Lipstein (ed.), International Encyclopaedia of Comparative Law, Vol. III (Tübingen, The Hague 1974) 12 (para. 22). 78 S. Cohen, ‘Quasi Contract and the Conicts of Laws’ (1956) 31 LA Bar Bull 71, 74; A. Burrows, The Law of Restitution (2nd edn. Butterworths, London 2002) 619; G. Panagopoulos, Restitution in Private International Law (Hart Publishing, Oxford 2000) 147, 263. 79 J. G. Collier, ‘The Draft Convention and Restitution or Quasi-Contract’ in K. Lipstein, Harmonisation of Private International Law by the EEC (Institute of Advanced Legal Studies, London 1978) 88.

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restitutionary obligation is being subsumed under a contractual claim would be entirely misguided. One should not make the mistake of assuming that applying the putative governing law of the contract to an unjust enrichment claim regresses to the discredited implied contract reasoning. A more valid criticism that could be made is that application of the putative governing law to the aftermath should not be sanctioned if the contract is set aside on grounds which impugn the parties’ agreement to any choice of law clause.80 For example, if English were the chosen law,81 it is generally conceded that it would be inappropriate to apply the expressly chosen governing law of the contract when the contract is set aside on grounds such as fraud or duress.82 The fraud or duress would also be operative with respect to the agreement as to the choice of law if the clause was agreed under the same circumstances as the main contract. The same is true of non est factum. Bird would also forbid application of the chosen law where the contract is void because of a fundamental mistake, as ‘there is no true meeting of minds . . . there is in fact no genuine attempt to enter into contractual relations.’83 However, as Dicey, Morris and Collins point out, if the fundamental mistake relates to something such as a mistake regarding the subject-matter of the contract, there may be no objection to giving effect to the parties’ choice of English law; their intentions as to the applicability of the chosen law to govern their contract and any consequences arising from its invalidity are unaffected by a mistake which does not directly relate to the choice of law clause itself.84 Similarly, a choice of law clause in a contract which is void because of one party’s incapacity should be considered to ‘survive’ the voidness as the choice remains essentially valid although some other factor (the incapacity) renders the contract void.85

80 Harbour Assurance Co. (UK) Ltd. v. Kansa General International Insurance Co. Ltd. [1993] QB 701 (CA) 724 (Hoffmann L. J.). If the ground of invalidity of the contract similarly impugns a choice of law clause, then it is suggested that the law of the place of enrichment should apply to govern the restitutionary obligation. 81 The effect of the ground of invalidity of the contract on any choice of law clause is a choice of law question which must be answered by the putative governing law of the contract. 82 Dicey, Morris and Collins (n. 2) 1875 (para. 34–024); Bird (n. 75) 187; Panagopoulos (n. 78) 145; Harris (n. 3) 326. It should be noted that both these grounds merely render the contract voidable, not void, under English domestic law: H.G. Beale (gen. ed.), Chitty on Contracts, Vol. 1, General Principles (29th edn Sweet & Maxwell, London 2004) 47 (para. 1-072), 494 (para. 6-126), 533 (para. 7-045). 83 (n. 75), 187. 84 (n. 2), 1875 (para. 34–024). See also Harris (n. 3) 326. 85 Cf. Stevens (n. 74) 344.

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b) Practical justications for application of the putative governing law Unless the ground of voidness similarly impugns the putative governing law of the contract, practical justications call for the proper law of the restitutionary obligation to be the putative governing law when an unjust enrichment claim is pursued in the aftermath of voidness. These justications will now be set out. First, in most circumstances, the putative governing law of the contract would be the law of closest connection to the unjust enrichment claim.86 The enrichment takes place because it was intended or assumed that there was a valid legal relationship between the parties and, thus, any claim for restitution of the enrichment has its roots in this putative relationship. The conduct of the parties was based on the terms of the void contract and it is the void contract which is the basis upon which the transfer of assets takes place.87 Lord Penrose has observed that: at very least the attempt of parties to make a contract governed by or putatively governed by a chosen system of law, or by a system selected on conventional conict principles, remains a reality irrespective of whether or not they succeed in that attempt, and in particular remained a reality at the date of the performance tendered.88

Put differently, the contract exists still as a factual entity which can explain the nature of the parties’ actions. Thus, the terms of the void contract may be referred to by the court in order to establish that the defendant has been enriched or to take the contractual price as an indication of the restitutionary measure that should be awarded to the claimant.89 Secondly, application of the putative governing law of the contract to a personal unjust enrichment claim would diminish the importance of the debate

86

Zweigert and Müller-Gindullis (n. 77) 7 (para. 14). Alaska Airlines v. United Airlines 902 F 2d 1400 (United States Court of Appeals, Ninth Circuit, 1990); Zweigert and Müller-Gindullis, ibid.; Collier (n. 79) 88. Cf. Blaikie (n. 73) 127. 88 Baring Brothers v. Cunninghame District Council [1997] CLC 108 (Court of Session: Outer House) 126. However, it should be noted that Lord Penrose, at 127, ultimately preferred a exible choice of law rule in favour of the ‘law of the country with which in the light of the whole facts and circumstances, the critical events have their closest and most real connection’, under which the parties’ attempts to enter into a contract will be relevant and material, but not determinative of what is the proper law of the restitutionary obligation. 89 Bird (n. 75) 185; Brereton (n. 3) 145. 87

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as to the proper characterisation of the claim or issue.90 It would not matter whether the claim is characterised as being contractual or restitutionary as the same choice of law rule, that is, the putative governing law of the contract, would be applied. This is advantageous, as the boundary between contract and restitution sometimes may not be delineated clearly. For one, Zweigert and Müller-Gindullis state that some legal systems allow a contractual claim for restitution.91 For another, it has been argued that rescission under English domestic law is not only a contractual remedy in the sense that it wipes away a contract, but also often a restitutionary remedy when benets have been conferred under the contract in that it involves the restitution of those benets.92 Related to this is the idea that restitution arising out of a void contract is, in a sense, akin to a contractual remedy as it seeks to rectify an unwarranted situation arising from performance of a purported contract.93 This idea is bolstered by the fact that the terms of the void contract remain relevant in determining whether and to what extent restitution should be ordered.94 For example, the fact that the parties made an attempt, albeit a faulty one, to conclude a contract would be evidence that any performance rendered was intended to be remunerated. All this leads to a blurring of the division between restitution and contract which could mislead the court into wrongly characterising the claim. Therefore, a choice of law rule which sidesteps this problem has much to commend it. Thirdly, the parties’ legitimate expectations would be protected.95 This is because parties would ordinarily expect the law they chose to govern their relationship, that is, the law governing the contract or purported contract, or law of closest connection in the absence of party choice, to include all claims arising out of that relationship.96 Their expectations would normally extend to a restitutionary claim arising as a consequence of failure of that relationship as any shift of assets constituting the enrichment would have been based on the terms of the void contract. It is doubtful that the parties would distinguish between restitution and contract in this context, or even foresee where the divide between

90

Cheshire and North (n. 9) 679; Dicey, Morris and Collins (n. 2), 1873 (para. 34–021); Bird (n. 3) 123; Collier (n. 79) 88; R. Stevens, ‘The Choice of Law Rules of Restitutionary Obligations’ in F. Rose (ed.), Restitution and the Conict of Laws (Manseld Press, Oxford 1995) 194. 91 (n. 77), 14 (para. 27). 92 Burrows (n. 78) 56–60. 93 J. Bird, ‘Bribes, Restitution and the Conict of Laws’ [1995] LMCLQ 198, 201; Bird (n. 3) 124; Zweigert and Müller-Gindullis (n. 77) 14 (para. 27). 94 Brereton (n. 3) 162. 95 Bird (n. 3) 123; Brereton (n. 3) 156; Stevens (n. 90) 193–194. 96 In Dimskal Shipping Co. SA v. International Transport Workers’ Federation (The Evia Luck) [1992] 2 AC 152 (HL), the parties accepted that a restitutionary claim arising from a contract set aside for duress under the governing law of the contract, English law, was also to be governed by English law.

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restitution and contract is, as: ‘Restitution in the context of a bargain would be regarded as part of the law affecting the bargain.’97 They may not have anticipated restitution when they agreed on a choice of law clause, but that is not the same as saying that the parties would not have anticipated the law they chose to govern their contract also to govern a restitutionary claim which arose out of their purported relationship.98 Fourthly, as the putative governing law is generally acknowledged to be the most appropriate choice of law rule to establish a contract’s voidness,99 the same law will govern both matters relating to establishing voidness and matters relating to the aftermath of voidness.100 This has the advantage of the same law governing matters arising from a unitary factual situation, which is desirable for reasons of practicality and convenience,101 in addition to ensuring logically consistent outcomes.

c) Authorities The UK entered into a reservation against Article 10(1)(e) of the Rome Convention which states that the consequences of nullity of a contract are to be governed by the applicable law of the contract, as determined under the Rome Convention.102 The reservation was entered into on the grounds that the consequences of nullity belonged in the province of the law of restitution and not contract.103 Be that as it may, it is still recognised that the putative governing law of the contract is the best choice of law option to govern unjust enrichment claims arising in the aftermath of voidness. Dicey, Morris and Collins’s Rule 230 states that: (1) The obligation to restore the benet of an enrichment obtained at another person’s expense is governed by the proper law of the obligation. (2) The proper law of the obligation is (semble) determined as follows: (a) If the obligation arises in connection with a contract, its proper law is the law applicable to the contract;104 ...

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Brereton (n. 3) 156–157. Cf. Bird (n. 3) 126–127. 99 Article 8(1) of the Rome Convention; Rule 206(1) of Dicey, Morris and Collins (n. 2) 1598 (para. 32R-154). 100 Unless the contract was struck down by some law other than the putative governing law of the contract. This issue is discussed below; see section 2(d). 101 Zweigert and Müller-Gindullis (n. 77) 14 (para. 27); Collier (n. 79) 88. 102 Section 2(2) of the Contracts (Applicable Law) Act 1990. 103 Hansard HL vol. 513 cols. 1258–1259, 1271. 104 (n. 2), 1863 (para. 34R-001). 98

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The commentary makes it clear that Rule 230(2)(a) would cover instances of unjust enrichment claims arising from a void contract.105 In addition, Article 10(1) of the proposed EC Regulation on the Law Applicable to Non-Contractual Obligations, commonly known as the proposed Rome II Regulation,106 provides that: If a non-contractual obligation arising out of unjust enrichment . . . concerns a relationship previously existing between the parties, such as a contract or a tort or delict . . ., which is closely connected with the non-contractual obligation, it shall be governed by the law that governs that relationship.

The Explanatory Memorandum which accompanied a previous draft of the proposed Rome II Regulation elaborates that the concept of a pre-existing relationship ‘applies particularly to . . . void contracts.’107 Furthermore, § 221 of the Restatement (Second) of Conict of Laws lists ‘the place where a relationship between the parties was centered, provided that the receipt of the enrichment was substantially related to the relationship’ as a contact which, ‘as to most issues, is given the greatest weight in determining the state of the applicable law.’108 The authors of Scoles and Hay interpret § 221 as covering both actual and intended contractual relationships,109 and thus, a putative governing law of the contract would be given effect under this provision.110

d) What if another law strikes down the contract? It has sometimes been asked whether, if the contract is void under a law other than the putative governing law of the contract, should the aftermath be governed by this law or the putative governing law? A number of academics

105

(n. 2), 1873 (para. 34–020). (n. 2); Council (EU), ‘Common Position adopted by the Council with a view to the adoption of a Regulation of the European Parliament and of the Council on the law applicable to non-contractual obligations (“ROME II”)’ 9751/06, 11 August 2006. 107 Commission (EC), ‘Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Non-Contractual Obligations (“Rome II”)’ COM (2003) 427 nal, 21 (22 July 2003). 108 Comment d, 730. 109 F. Scoles and others, Conict of Laws (Hornbook Series, 4th edn. West Group, St Paul Minn 2004), 1043–1045. In an earlier article, ‘Unjust Enrichment in the Conict of Laws : A Comparative View of German Law and the American Restatement 2d’ (1978) 26 Am J Comp Law 1, 44, Hay doubted whether the wording of § 221(2)(a) covered ‘supposed’ relationships, although he was in favour of such an extension. 110 Alaska Airlines v. United Airlines Airlines (n. 87). 106

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support application of the law which nullies the contract to the restitutionary consequences.111 Certain comments by Jenkins L. J. could also be construed as supporting this conclusion. His Lordship has stated, without elaboration, that it would be ‘logical’ to look at the law which renders a contract void for the consequences of such voidness.112 Examples of situations where the contract is struck down by a law other than the putative governing law are where one of the parties lacks capacity to enter into that particular contract; the contract is void owing to a failure to full formal requirements; or the contract is void as being against the public policy of the forum. For ease of discussion, the last situation will be focussed on here in examining whether the putative governing law should continue to play a central role in these circumstances. However, the arguments of principle made below apply equally to the other situations where a law other than the putative governing law of the contract deems the contract void. As mentioned above, one of the advantages of having the putative governing law of the contract govern both matters relating to establishing voidness and matters relating to the aftermath is that one system of law would govern matters arising from a unitary situation. Extension of this principle could mean that if the contract is void by a law other than the putative governing law, this law should also govern the consequences of voidness. More signicantly, if the contract is struck down because it is against the public policy of the forum, ignoring what the lex fori has to say about restitution in such a situation could detract from the purpose of the rule which struck down the contract in the rst place. To put it in another way, allowing the lex fori to govern the consequences of voidness maintains the integrity of the rule which imposed the invalidity.113 Otherwise, inconsistency could ensue. For example, if Ruritanian law governs the restitutionary aftermath of a contract void as being against English (forum) public policy, it may be that the contract would not be void under Ruritanian law itself. This would then mean that the restitutionary rules are framed against an ‘incorrect’ set of background assumptions and lead to a distortion of Ruritanian law. As Lord Penrose has observed: ‘The scope for incompatibility between the grounds for nullifying a contract and the restitutionary remedies must be greater where they are the products of different systems of law.’114

111 Stevens (n. 90); E. Rabel, The Conict of Laws: A Comparative Study, Vol. 3 (2nd edn. University of Michigan Law School, Ann Arbor 1964) 386; A. Dickinson, ‘Restitution and the Conict of Laws’ [1996] LMCLQ 556, 571; Panagopoulos (n. 78) 145. 112 Arab Bank Ltd. v. Barclays Bank [1953] 2 QB 527 (CA) 572; but note that this comment was obiter and that his Lordship refrained from giving a ‘decided answer’. 113 Dicey, Morris and Collins (n. 2) 1876 (para. 34–026). 114 Baring Brothers (n. 88) 124, although Lord Penrose went on ultimately to reject the appeal to consistency as being ‘misleading’.

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English v. Donnelly115 is a case in point. In this Scottish case, the parties had chosen English law as the law governing the contract. This choice was held to be an illegitimate attempt to contract out of the Hire Purchase and Small Debt (Scotland) Act 1932, and hence, the contract was void. Lord Penrose commented that: ‘It is hardly conceivable that the Scottish court would have proceeded to apply English law in resolving any quasi-contractual issues that had arisen between parties in the circumstances.’116 While acknowledging that a restitutionary choice of law rule in favour of the putative governing law would have the advantage of certainty, his Lordship thought that such a rule would lead to substantial illogicality or injustice.117 Nevertheless, it is submitted that the grounds for applying the lex fori in this situation are not as strong as they would appear to be and that the application of the putative governing law, as opposed to the lex fori, is still the better choice of law rule. This can be illustrated by utilising an example. Let us assume that a contract for the sale of certain drugs is void under English law because they are classied as prohibited drugs. England is the forum, but the contract is valid under the governing law of the contract, Dutch law, as the drugs are not prohibited under that law. Money has changed hands and the defendant seller is faced with an unjust enrichment claim. It is suggested that, in such a case, Dutch law as the putative governing law of the contract, and not English law, should govern the restitutionary obligation. The reasons will now be set out. First, one must be careful not to make the leap into assuming that just because the contract offended forum public policy, the consequences from the failure of the contract would too. This, it is suggested, would rarely be the case because it is arguable that the interest of the lex fori in this situation is limited to the nding that the contract is void. The heart of the issue in the aftermath is in whose hands the money or goods should end up. That being so, it is not clear whether it would be less objectionable from the lex fori’s point of view if restitution is allowed or rejected. To return to the example above, in English eyes, both parties are guilty of making an illegal contract. Although English law would have a preference as to which result should prevail if it was also the governing law of the unjust enrichment claim, it is suggested that English law may not be offended if application of Dutch law either upholds or denies the restitutionary claim to the purchase price.118 This is because in neither case could it be said that the English policy against upholding the validity of contracts for the sale of prohibited drugs has been undermined. The policy was

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1959 SLT 2. Baring Brothers (n. 88) 124. 117 Ibid. 118 If the result offended English public policy, then only in that subsidiary role should English law be allowed to have a say as to the restitutionary consequences; see text to n. 121. 116

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directed primarily at the contract itself, not the movement of any monetary enrichment that resulted from the contract. What if Dutch law concludes that restitution is not available because, as there is a valid contract under its law, there is no ‘unjust’ enrichment? In this case, unless English law concludes that this result would be against its public policy and applies English law to grant restitution, the claimant could be left without any remedy. To deal with this situation, one must be clear of the exact role to be played by the proper law of the restitutionary aftermath. It is suggested that the question here is to ask of Dutch law: ‘given that the contract is void, should restitution follow?’ and not, ‘on these facts, should restitution follow?’119 The role of Dutch law here is merely to determine the availability of any restitutionary remedies. The contract’s voidness is already established and there is no basis for Dutch law revisiting this question. Some may raise the counter-argument that this stance would lead to a distortion of Dutch law and amount to the application of a law that no other state might apply. This is an unfortunate drawback, but, at the same time, one must remember that the role of the proper law of the restitutionary obligation is to determine whether such an obligation exists, not consider anew the validity of the contract giving rise to the unjust enrichment claim. Secondly, for those who insist that there is an unbroken bond between the law which strikes down the contract and the law governing the aftermath of voidness, it should be noted that the question of the contract’s voidness is primarily answered by the putative governing law.120 The lex fori only plays what is arguably an incidental role in striking down the contract; that is, when the putative governing law leads to an unacceptable result, the secondary law, the lex fori, steps in. By analogy, it is suggested that the restitutionary consequences arising from the voidness should also primarily be for the putative governing law of the contract. There is no strong reason for promoting the lex fori, which has only played an incidental role in the rst part of the equation, to play the primary role in the second part of the equation, that is, the aftermath of voidness. This, however, is not to say that the public policy of the forum has no role to play here. As per normal, English public policy is relevant in a subsidiary capacity: if application of the relevant foreign law, in this case the putative governing law, to the restitutionary aftermath leads to a result which is against forum public policy, then and only then should the lex fori step in to disapply

119 Phrasing from R. Stevens, ‘Restitution and the Rome Convention’ (1997) 113 LQR 249, 251. 120 Article 8(1) of the Rome Convention.

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the offending rule.121 Thus, it is suggested that in English v. Donnelly,122 English law as the putative proper law of the contract should have been applied to any restitutionary claim that may have arisen, with Scottish law only having a role to play if the result of applying English law to the restitutionary consequences was against the public policy of Scotland. Thirdly, to advocate that the lex fori should govern the aftermath of a void contract would diminish the independence of the restitutionary claim. This stance would arguably be tantamount to treating the restitutionary claim as only ancillary to the question of establishing the contract’s voidness, which is classied as a contractual matter.123 For example, Brereton contends that in at least some cases where the law which renders the contract void is not also the law which governs the contract: ‘the basis for nullity will also preclude restitution, irrespective of the law which would apply to the restitution claim. If this is so, choice of law is irrelevant.’124 With respect, choice of law is relevant here; the question as to whether restitution should be allowed is a question which should be answered by the law governing the restitutionary obligation and not, as Brereton assumes, by the law under which the contract was adjudged void. The proper law of the restitutionary obligation may or may not decide that the basis of nullity precludes restitution. The important point is that it is for this proper law so to decide, not the law which establishes nullity. To promote the lex fori as the preferred choice of law rule to govern the restitutionary aftermath when the contract is void as being against forum public policy is to give too little weight to the independence of the law of restitution.125 Fourthly, in the admittedly exceptional case where more than one legal system renders the contract void, a choice of law rule in favour of the law striking down the contract would not work.126 For example, if the contract is void because it is against the public policy of the lex fori and one of the parties lacks

121 It is suggested that this would be a fairly rare occurrence for reasons set out above, text to and directly after n. 118. For an argument in favour of a more extensive role for the public policy of the forum, see S. Lee, ‘Restitution, Public Policy and the Conict of Laws’ (1998) 20 UQLJ 1. 122 (n. 115). 123 The question of the contract’s validity falls within the scope of the Rome Convention, Article 8(1). 124 (n. 3), 169. 125 It is interesting to note that some would turn this argument on its head. They might argue that to advocate the application of the putative governing law of the contract to the restitutionary aftermath actually undermines the independence of the restitutionary claim as the putative governing law is the choice of law rule for contractual claims. This argument has already been dealt with; see text after n. 79. 126 T. W. Bennett, ‘Choice of Law Rules in Claims of Unjust Enrichment’ (1990) 39 ICLQ 136, 161; Zweigert and Müller-Gindullis (n. 77) 15 (para. 29); Stevens (n. 119) 253.

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capacity by his or her own personal law, there would be two competing systems of law to apply to the aftermath.127 Thus, even if another law strikes the contract down, it is argued that the putative governing law of the contract remains the most appropriate law to govern any personal unjust enrichment claims arising in the aftermath of a void contract.

e) Conclusion to Section 2 One could argue that in cases of void contracts, the putative governing law of the contract has little to do with the restitutionary claim because the contract is non-existent. However, it is unnatural to divorce the void contract from its restitutionary aftermath. Restitution takes place precisely because the contract is void and the reality is that the void contract provides much more than just a background to the consequential restitutionary claim. The circumstances surrounding the purported creation and failure of the ‘contract’ are the very circumstances that help to constitute the unjust enrichment claim. Thus, it has been seen above that the putative governing law of the contract continues to play a central role in relation to the restitutionary consequences of a void contract.

OVERALL CONCLUSION One of the themes of this paper is that there has to be a recognition of the impact that pragmatic considerations should have on choice of law formulations. This is particularly acute in the area of void contracts as they produce complex and controversial choice of law issues. The key to the conundrums raised by void contracts is the putative governing law of the contract. Despite its inherently illogical nature, it offers a pragmatic solution to the logically intractable problems that arise when one deals with void contracts. However, at the same time, it is important to have choice of law rules that are grounded on sound theoretical reasoning and which operate fairly between both parties. This is another theme pursued in this paper. Despite the paradoxical subject-matter, it is hoped that this paper has illustrated that it is possible to devise solutions which do justice to the twin virtues of logic and pragmatism.

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Similarly, if both parties lack capacity by each other’s (different) personal laws, it is unclear which party’s personal law should be applied to the aftermath.

PART 2 CLARIFYING THE LAW OF UNJUST ENRICHMENT

Chapter 10 Implied Contract and the Taxonomy of Unjust Enrichment Duncan Sheehan Peter Birks developed a taxonomy over a period of twenty years, which he described by the use of various grids.1 He was also a major player in the development of the law of restitution. The two elements of his work proceeded in parallel. Birks attempted to use his taxonomy to help justify and explain the separation of unjust enrichment from other areas of law. He also used it to analyse the internal workings of the law of restitution. One consequence is the division of the law of restitution into unjust enrichment and restitution for wrongs, based on different causative events.2 Birks’ attempts at classication, and his use of classication as an analytical tool, have attracted criticism from several quarters. Samuel has suggested that

1 Starting with P. B. H. Birks, An Introduction to the Law of Restitution (Clarendon Press, Oxford 1985) 39–44. 2 P. B. H. Birks, Unjust Enrichment (2nd edn. Clarendon Press, Oxford 2005), P. B. H. Birks, ‘Misnomer’ in W. R. Cornish et al. (eds.), Restitution: Past Present and Future (Hart, Oxford 1998) 1. But see A. S. Burrows, ‘Quadrating Restitution and Unjust Enrichment: A Matter of Principle’ [2000] RLR 259, R. Goff and G. Jones, The Law of Restitution (6th edn. Sweet and Maxwell, London 2002) 47–48.

185 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 185–212. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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comparing zoological schemae with legal schemae is awed, although not that classication is pointless.3 Waddams suggests that the law’s messy historical development renders neat classications misleadingly simple.4 Hedley has for the past twenty years been a consistent critic of what he calls ‘the unjust enrichment school’.5 It is on Hedley’s views that we primarily concentrate. He has criticised Birks’ views on two grounds. Firstly he claims that the taxonomic model is awed, and provides at best spurious precision. The law simply does not delineate itself as sharply as Birks suggests. Alongside his critique of the grid therefore Hedley criticises the notion of unjust enrichment. Just as in Birks’ work exposition of the grid and unjust enrichment parallel each other, so do their critiques in Hedley’s. The issues are linked and we deal with them both in this chapter. He has proposed an alternative, implied contract, which is nowhere near as precise.6 Lawyers have, however, traditionally criticised the implied contract theory of restitution as being ctional.7 The rst part of the chapter concentrates on the critique of the grid. It acknowledges that some of the criticisms levelled against the grid and the methodology it implies are sound. The second part of the chapter demonstrates that Hedley’s implied contract theory impacts unhelpfully on the taxonomy; it does not provide a coherent category and Hedley’s critique of unjust enrichment lawyers’ view of contract as based on consent fails to prove its point.

1) HEDLEY AND SAMUEL’S CRITIQUE OF THE GRID In a 1988 article8 Hedley lists an eclectic sequence of interests that the law protects, such as personal dignity and land. The Birksian grid9 looks at law from a very high degree of generality. It does not explicitly include the interests that

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G. Samuel, ‘Can Gaius really be Compared to Darwin?’ (2000) 49 ICLQ 297. S. M. Waddams, Dimensions of Private Law (CUP, Cambridge 2003) Ch. 1. 5 For instance S. Hedley, ‘Ten Questions for Unjust Enrichment Theorists’ (1997) 3 Web JCLI , accessed 30/10/2006. 6 S. Hedley, ‘Implied Contract and Restitution’ (2004) 63 CLJ 435. 7 Goff and Jones (n. 2) 5–11. Hedley describes the historical development of the subjects. S. Hedley, ‘Restitution: Contract’s Twin’ in F. D. Rose (ed.), Failure of Contracts (Manseld Press, Oxford 1997) 247, 250–252. 8 S. Hedley, ‘On Contract Tort and Restitution; or Cutting the Legal System down to Size’ (1988) 8 LS 137, 150–168. 9 P. B. H. Birks, Unjust Enrichment (2nd edn. Clarendon Press, Oxford 2005) ch. 2, P. B. H. Birks, ‘The Law of Restitution at the End of an Era’ (1999) 29 U Western Australia L. Rev. 13, P. B. H. Birks, An Introduction to the Law of Restitution (Revised edn. Clarendon Press, Oxford 1989) ch. 2, P. B. H. Birks, ‘Equity Conscience and Unjust Enrichment’ (1999) 23 Melbourne U L. Rev. 1. 4

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the law protects, but rather divides the law into events and responses. Their theories are simply different. Jaffey, however, sees an anti-theoretical approach in Hedley’s work,10 for instance in the claim that the restitution category is ne ‘on the basis that we have to split the law of obligations on some basis or it will swamp us’.11 It is, however, unfair to say that Hedley downplays the importance of principled legal reasoning.12 Hedley argues the cases contradict the unjust enrichment theory.13 Hedley has praised much scholarship, saying, ‘A huge amount of work in clarifying the law has been done, which is undoubtedly valuable from any point of view.’14 His claim is merely that unjust enrichment does not help this process of clarication. This section is divided into two. The rst part looks at the critique raised against the Birksian grid and Birks’ use of it as an analytical tool from which answers about the law can be inferred. We concentrate on the developed theoretical attack of Geoffrey Samuel, but Hedley has made much the same point in a less overtly jurisprudential manner. We analyse the grid from a Dworkinian perspective; Birks’ views sit relatively easily within a Dworkinian framework. However, although the broad framework is defensible, some of the rhetoric about logic is not. The second part examines a number of specic criticisms that have been levelled against the particular form of the grid.

a) General Criticism: The Purpose of a Taxonomy The Birksian grid divides private law into events and responses.15 Events are things that happen. They generate rights in parties. Those rights may be legal or equitable, personal or proprietary. They are the responses. Birks suggests that there are four events. Consent is an event. I may consent to sell you my car. A wrong is an event. I run you over in my car because I’m not looking where I’m going, and break your leg. Unjust enrichment is an event. I pay you £100, thinking I owe you it, and I do not. Responses follow. You have a right that I transfer my car. You have a right to compensatory damages for the loss caused by the broken leg. I may recover the mistakenly paid money. The

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P. Jaffey, The Nature and Scope of Restitution (Hart Publishing, Oxford 2000) 25. S. Hedley, ‘Unjust Enrichment as the Basis of Restitution: An Overworked Concept’ (1985) 5 LS 56, 56. 12 A. S. Burrows, The Law of Restitution (2nd edn. Butterworths, London 2002) 14–15. 13 S. Hedley, Restitution: Its Division and Ordering (Sweet and Maxwell, London 2001) ch. 5; Hedley (n. 6) 439. 14 Hedley (n. 13) 217. 15 P. B. H. Birks, Unjust Enrichment (2nd edn. Clarendon Press, Oxford 2005) 21–28. 11

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fourth causative event is a miscellaneous catch-all category. Birks suggests that responses may be compensatory, punitive, declaratory, restitutionary and so on. Alternatively they may be legal, equitable, personal or proprietary. Restitution lawyers see the heart of their subject as being the restitutionary response to unjust enrichment.

i) Birks’ Use of the Grid Hedley’s point is that scientic enquiry is different from legal enquiry.16 This is a reply to Birks’ analogies between zoology and law. According to Birks, just as proper classication is essential in zoology so it is in law. We require a good map of the law, or we will be led into error. A sequence such as terrestrial, arboreal, aquatic is wrong; arboreal is also terrestrial.17 If we do not understand this, we will misclassify beasts and understand less about the world. Similarly if we cannot see the distinction between a wrong and an unjust enrichment we may well nd ourselves making parallels that are supercial at best and making analytical errors. We misclassify, or classify the same thing twice, and understand less about the law. According to Hedley, the disparate nature of modern enquiry into law and zoology makes it hard to believe that they have much in common. There is little reason to believe that all knowledge must conform to one methodology.18 He accuses Birks of getting lost in his metaphors and not ‘arguing’ for his position.19 Samuel develops the point, arguing that legal science is quite different from natural science. Legal science invents the objects of its classication. Zoology does not invent birds. Law invents contracts.20 If contracts do not t our classication, we can change the classication, or the concept of contract. If a bird does not t our classication, the classication is wrong, not the bird. Samuel argues a legal taxonomy is not veriable in the same way as a scientic one, and perhaps impossible to verify at all.21 The taxonomy assumes verication, a point also made by Hedley.22 Legal science, according to Samuel ‘can simply construct or deconstruct its objects to achieve a desired solution.’23 Birks, however, offers little in the way of verication of the taxonomy.24

16 S. Hedley, ‘The Taxonomic Approach to Restitution’ in A. Hudson (ed.), New Perspectives on Property Law Obligations and Restitution (Cavendish, London 2003) 151, 153. 17 Birks (n. 15) 20. 18 Hedley (n. 16) 153–154. 19 Ibid., 154; Samuel (n. 3) 324. 20 Samuel (n. 3) 311–312. 21 Ibid., 298. 22 Hedley (n. 11) 57. 23 Samuel (n. 3) 312. 24 Ibid., 323.

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According to Samuel, it is implicit in Birks’ views that we should make greater use of deductive logic, rather than ‘argumentation’. Samuel uses argumentation to mean a social phenomenon whereby one party persuades another.25 Deductive logic by contrast is a formal process; it only works where premises are uniquely true or false.26 Birks’ theory, and use of the grid as guiding us to the answer, depends on our being able to characterise the facts of a case in one particular way, and deducing the result from that. Samuel denies this is possible. He also rejects the proposition, necessary for law to be a purely logical phenomenon, that the data or propositions acting as the premises of the lawyer’s reasoning must be ‘an abstract totality’.27 That is, that the propositions link together in a way that allows sufcient interaction to produce an inferred conclusion. Perfect deduction has no need for recourse to outside experience. It is this that Samuel and Hedley nd impossible to accept. Birks’ views, according to them, necessitate an overly precise axiomatic view of law, which cannot be sustained in the real world.28 Samuel discusses Ruxley Electronics v. Forsyth.29 In that case the defendants had a swimming pool dug for them. It was the wrong depth; the claimants who had dug the pool claimed for the balance of the purchase price. The defendants counterclaimed for the cost of cure – digging the pool deeper. They failed to obtain those damages. It was clearly a breach of contract, but the cost of digging the pool deeper was disproportionate to the benet that the deeper pool would bring. The damages awarded were the diminution in value and loss of amenity. The quantum of damages was different, and Samuel thinks the court re-characterised the loss suffered. It viewed the facts differently. Legal reasoning according to Samuel draws its strength from its ability to switch between systems, conceptual schemes and taxonomies within a set of facts.30 Law is not therefore reducible to a single system. It is not sufcient for Birks to talk of conicting taxonomies battling to the death until one system wins out.31 However, the classication of the dispute in Ruxley Electronics v. Forsyth as a breach of contract case, a wrong, does not compel any particular response. We could, consistently with the logic of its being a wrong, cut the wrongdoer’s head off. We don’t. Samuel is right to say that taxonomic reasoning does not compel any particular recovery. However, granting the cost of re-digging the

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Ibid., 303. Ibid., 303–304. 27 Ibid., 304–305. 28 Hedley (n. 16) 154–155; Hedley (n. 6) 435. 29 [1996] 1 AC 344 (HL); Samuel (n. 3) 326–327. 30 Samuel (n. 3) 317; G. Samuel, ‘English Private Law: Old and New Thinking in the Taxonomy Debate’ (2004) 24 OJLS 335, 360. 31 P. B. H. Birks, ‘Equity, Conscience and Unjust Enrichment’ (1999) 23 Melbourne U L. Rev. 1, 22. 26

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pool would be disproportionate. We seek another quantum of relief. Whether we see that as re-characterisation of the loss suffered, or a decision that full compensation is too much makes no difference. What is important for present purposes is that taxonomy only has a limited impact on the result of cases. It does have some impact. In some categories there is only one rational response. The only response to unjust enrichment is restitution. This statement, Hedley says, has never been justied; he asks, ‘Where does the logic come from?’32 We cannot, however, sensibly decide the enrichment is unjust and not return it. Cutting the defendant’s head off does not help. The problem we have identied is the enrichment, which now devolves to the enrichee’s legatees. This is a use of categories that Samuel accepts as proper; however, he does not accept that logic can determine taxonomy.33 Samuel though accepts the place of deductive logic in law.34 We might have both an unjust enrichment and a wrong. There is then a concurrent cause of action. Birks sees this.35 Samuel points out that the law would be stultied if there were no intersecting categories.36 It may be that categories cannot interlock perfectly because they derive from different questions. Birks claims, however, that a classication which does not respect the principle of exclusivity is unsound. Birks’ application of this is occasionally difcult to make sense of, partly because he at times seems to refer to events as merely being the facts that happen. They cannot be; they must be interpretations of the facts. Samuel refers to Birks’ comment that the law of tort is in need of rationalisation. He takes Birks’ example of Spring v. Guardian Insurance.37 That case involved the careless provision of a reference to a future employer, hinting at unspecied problems with the candidate. There had been none. Negligence succeeded. Defamation could not have done. The communication was protected by qualied privilege and malice would have been required to establish defamation. Birks argues that the law cannot tolerate torts named so as to intersect. His problem is that there is an infringement of the reputation interest, and a wrong based on fault.38 Such intersection is inevitable. The two torts are based on different questions. One is based on the question whether loss caused

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Hedley (n. 16) 157–158. Samuel (n. 3) 302; Hedley (n. 16) 154–155. 34 Samuel (n. 3) 305–306. 35 P. B. H. Birks, ‘The Law of Unjust Enrichment: A Millennial Resolution’ [1999] SJLS 318, 329–330; Birks (n. 15) 83–86. See also Samuel (n. 30) 353. 36 Samuel (n. 3) 316. 37 [1995] 2 AC 296 (HL). 38 P. B. H. Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 U Western Australia L. Rev. 1, 5–6; P. B. H. Birks, Harassment and Hubris: The Right to an Equality of Respect (UCD, Dublin 1996) 39. 33

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through the defendant’s fault should generally be compensated, and the other whether the reputation interest should be protected. Samuel is correct that facts can be reanalysed.39 Sets of facts almost never give rise to only one response,40 and need not therefore only be classiable in one category. Samuel also suggests that Birks sees unjust enrichment and wrongs as mutually exclusive categories. Unjust and wrong, however, are triggered by the same facts, and we can look at the facts through either lens.41 Birks recognised this in his talk of alternative analysis. It may therefore be that only some categories are mutually exclusive. Hedley indeed comments in the context of a discussion of absence of basis that only some bases for recovery are incompatible according to Birks.42 ‘Absence of basis’ is the view that restitution follows because there is no legal justication for the enrichment. Hedley suggests this approach can co-exist with the traditional unjust factors approach. Absence of basis is, however, incompatible with mistake if both cover the same facts. Shorn of the zoological metaphors Birks employs,43 it is a necessary condition of a mistake claim that there be no basis for the payment. If absence of basis is sufcient, mistake is superuous. That does not, however, explain Birks’ refusal to countenance concurrency of defamation and negligence, nor why if that is unacceptable concurrency of wrongs and unjust enrichment is acceptable. The importance of taxonomy is not therefore that it bans concurrent causes of action in defamation and negligence, tort and breach of contract, or wrongs and unjust enrichment. The law works perfectly by allowing election between inconsistent or alternative analyses.44 Birks suggests, however, that allowing a negligence claim in Spring v. Guardian Insurance undermines qualied privilege. Damages for defamation, which are not dependent on proof of actual damage, and serve to vindicate the claimant’s reputation, are unavailable.45

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Birks (n. 35) 330. Samuel (n. 30) 357. 41 Ibid., 353. 42 S. Hedley, ‘The Empire Strikes Back? A Restatement of the Law of Unjust Enrichment’ (2004) 28 Melbourne UL Rev. 759, 770; K. Barker, ‘The New Birksian Approach to Unjust Enrichment’ [2004] RLR 260, 262–263. 43 Birks (n. 15) 112; Deutsche Morgan Grenfell v. IRC [2005] EWCA Civ 78, [2006] Ch. 243. The House of Lords [2006] UKHL 49 reversed the Court of Appeal, allowing the actions to co-exist. The only meaningful advantage was the possible extension of limitation periods under Limitation Act 1980, s. 32(1)(c). In tax cases this has been reversed by Finance Act 2004, s. 320, removing the need to plead the additional mistake requirement. 44 A. S. Burrows, ‘Solving the Problem of Concurrent Liability’ in A. S. Burrows (ed.), Understanding the Law of Obligations: Essays on Contract Tort and Restitution (Hart, Oxford 1998) 16. 45 Clerk and Lindsell on Torts (19th edn. Sweet and Maxwell, London 2006) paras. 22.224–22.227. 40

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Damages for negligence are available, but depend on actual damage. Because of the remedial differences, and the different purposes they serve, defamation is not undermined. Fact scenarios can be reinterpreted to bring out different aspects of the facts; animals cannot be. Birks’ zoological analogies take him astray. This is not though the fatal error Samuel and Hedley claim it to be.

ii) A Dworkinian Analysis of Birksian Taxonomy Gergen has suggested Birks’ main target was critical legal theory. Crudely that is the view that law does not constrain judgment and that there is no unique right answer.46 Dworkin, however, argues that law is veriable. Dworkin’s views are, like all philosophical positions, controversial.47 They have been the subject of intense debate for many years. Nonetheless Dworkin’s views are rooted in the way lawyers behave. As such a Dworkinian view of the law can help analyse the methodology of the grid, which, as Hedley has pointed out,48 is aimed at describing, or prescribing how lawyers reason. Dworkin’s theory is rights-based, as is Birks’. Dworkin suggests that it is the claimant’s rights that justify the award.49 If so, Birks’ point that the object of classication should be rights and reasons why rights arise must be correct.50 It is also important in the context of Hedley and Samuel’s critique that Dworkin’s theory, like Birks’, implies the exclusivity of concepts. The concepts, or propositions, must be paired with contradictories elsewhere, which exhaust the logical space. There is a t therefore in the aims both of Dworkin and Birks that justies an inquiry into whether one can explain the other. Samuel suggests that Dworkin is outside the scope of his debate with Birks, citing a distinction between legal systematics and interpretation theory.51 Dworkin cannot act as a model for legal reasoning because he has nothing to say about facts.52 Dworkin accepts that he has nothing to say about some factual matters, but he does have something to say about the application of law to

46

P. Gergen, ‘What Renders Enrichment Unjust?’ (2001) 79 Texas L. Rev. 1927, 1976; P. B. H. Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 U Western Australia L. Rev. 1, 4. 47 E.g., L. E. Wolcher, ‘Ronald Dworkin’s Right Answer Thesis through the Lens of Wittgenstein’ (1997) 29 Rutgers L. J. 43; G. McCallum, ‘Dworkin on Judicial Discretion’ (1963) 60 J Philosophy 638; C. R. Sunstein, Legal Reasoning and Political Conict (OUP, Oxford 1996) Ch. 2. 48 Hedley (n. 16) 152–155. 49 R. Dworkin, Taking Rights Seriously (Duckworth, London 1978) 85. 50 P. B. H. Birks, ‘Introduction’ in P. B. H. Birks (ed.), English Private Law (OUP, Oxford 2000) xxxvi. 51 Samuel (n. 3) 328–329. 52 G. Samuel, Epistemology and Method in Law (Ashgate, London 2003) 83.

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facts.53 Samuel argues that the phrase ‘no vehicles in the park’54 contains no information about ‘vehicles’, or ‘in’, or ‘park’. Yet Dworkin would treat it as an interpretative question like any other.55 Dworkin would refute Samuel’s critique of Birks that law is not reducible to a single system. Samuel argues that a system is an organised totality in which each element can only be understood by reference to relations with others; the system is dynamic in the sense that each element both modies other elements and can be modied by them in turn. The system has the capacity to develop.56 This seems rather neatly to t Dworkin’s thesis. Cases are in fact to use Samuel’s phrase, ‘dots on a map waiting to be connected up,’ albeit not in the purely deductive fashion Samuel rightly criticises.57 Law develops and works itself pure. What prevents the reduction to a single system in Samuel’s eyes appears to be the need to look beyond the law, as in fact he says Dworkin does.58 Samuel’s references to truth as correspondence with external fact are not, however, sufcient proof of the non-veriability of Birks’ model.59 Dworkin after all eschews a correspondence theory. He is clearly troubled by the question of external viewpoints on law, but arrays a number of arguments to the effect that either there is no distinction between an internal and external view, or if there were it would be irrelevant, because the sceptic would need to operate within the system to make any claims about what the law is, or should be.60 Treating like cases alike is at the heart of Dworkin’s original exposition of his theory.61 It is an important reason for taxonomy.62 Only by interpreting cases can we decide if they are alike. Analogy is important in this process, although Dworkin does not much discuss it, believing analogies reducible to principles.63 The difference between rules and principles is that rules have

53

Ibid., 197; see R. Dworkin, A Matter of Principle (HUP, London 1985) 128–129; R. Dworkin, Law’s Empire (HUP, London 1986) 11–12. 54 Samuel (n. 30) 343. 55 M. S. Moore, ‘Metaphysics Epistemology and Legal Theory’ (1987) 60 Southern California L. Rev. 453, 478–479. 56 G. Samuel, ‘Classication of Obligations and the Impact of Constructivist Epistemologies’ (1997) 17 LS 448, 467. 57 G. Samuel, ‘Can the Common Law be Mapped?’ (2005) 55 U Toronto LJ 271, 293; R. Dworkin, A Matter of Principle (HUP, London 1985) 134–137. 58 Samuel (n. 30) 343. 59 Ibid., 341–342; Dworkin (n. 57) 141; Moore (n. 55) 476. 60 R. Dworkin, Law’s Empire (HUP, London 1986) 82–83. 61 Dworkin (n. 49) 113. 62 E. McKendrick, ‘Taxonomy: Does it Matter?’ in R. Zimmermann and D. Johnson (eds.), Unjustied Enrichment: Key Issues in Comparative Perspective (CUP, Cambridge 2001) 627, 633–637. 63 S. Brewer, ‘Exemplary Reasoning: Semantics Pragmatics and the Rational Force of Legal Argument by Analogy’ (1995) 109 Harvard L. Rev. 923, 960.

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immediate dispositive force; principles do not; law is therefore an argumentative practice. Taxonomy helps to conne, and dene the principles. Taxonomy is created and justied by interpretation, and used as a model for interpretation. Interpretation and taxonomy feed off each other; there is a ‘chicken and egg’ relationship. As new cases arise taxonomy may shift. Birks accepts this, talking of ‘constant suspicion of its possible inaccuracy’.64 Dworkin posits a superhuman judge, Hercules. Hercules in deciding a case must nd a theory such that a single ofcial could have reached the decisions that the precedents report.65 Indeed ideally Hercules creates a theory that explains the entire law. On one level that is what Birks is doing, creating a theory of the whole of English private law. Hercules does so with two dimensions of interpretation – t and justication, which make up ‘Law as Integrity’. The rst part asks how the theory ts with decided case law, and the second asks how good a moral theory it is objectively. There may be no theory which accords with all the cases.66 If two or more explanations satisfy the t requirement, Hercules turns to justication. Questions of t continue to be important in that a judge cannot mechanically ask how many cases must be dismissed as being wrong.67 One answer will be proven to be right.68 Dworkin suggests that the law ‘works itself pure.’69 Courts make mistakes, but they always approach the right answer. Law as integrity is hostile to the compartmentalisation of law, but recognises it as a practical phenomenon in a discussion of local priority, and the consequent need to identify areas of law.70 The Birksian grid sits relatively easily within this pragmatic appreciation of the law. Birks’ description of the taxonomy has very Dworkinian language about better and best taxonomies,71 although Birks does not seem to have grappled fully with relevant jurisprudential ideas. Samuel argues, ‘The structure of legal systems cannot be veried by reference to terms such as ‘logic’ and ‘rationality’.’72 Samuel goes on, ‘No legal scheme is probably capable of being veried except in terms of the factors that are extrinsic to law’. Dworkin, however, claims it is impossible to stand

64 Birks (n. 46) 4; Dworkin’s acceptance of the dynamic nature of law Dworkin (n. 60) 400–401 supports this point. 65 Dworkin (n. 60) 240. 66 Dworkin (n. 49) 119. 67 Dworkin (n. 60) 247. 68 Ibid., 283. See also R. Markovits, ‘Legitimate Legal Argument and Internally Right Answers to Legal Rights Questions’ (1999) 74 Chicago-Kent L. Rev. 415. 69 Dworkin (n. 60) 400–401. 70 Ibid., 251–253. 71 Birks (n. 46) 4; Birks (n. 15) 20; Birks (n. 50) xlviii, l. 72 Samuel (n. 3) 323; Hedley (n. 16) 152–155.

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outside the legal system. The system may shift as the law works itself pure, but the right answer is, and always was, true.73 This does not answer Samuel’s objections. In order to get at the right answer, we do not need deductive logic reducible to symbols. Rather we use a reasoning process based on rules and principles.74 Birks argues that law should be detached from the judge’s views of right and wrong;75 this is part of the impetus in his call for logic. This does not imply a deductive non-moral methodology, merely one separate from the judge’s subjective preferences. A Dworkinian view achieves a compromise by reference to objective moral truth.76 It is compatible with Birks’ rejection of the judge’s subjective preferences, without being a purely deductive logical process. From our more pragmatic version of the Dworkinian perspective the grid can both be used to test cases for t and coherence, and be tested for t and coherence. It can only be an interpretive tool; as such the Birksian grid exemplies a methodology which with minor changes ts a Dworkinian framework quite well, retaining the implication of a ‘best’ answer. Disputes about taxonomy are disputes as to the (Dworkinian) best way to look at English law. A defence in terms of Dworkin seems to push us to view unjust enrichment as at least a weakly normative principle, as well as a category. This does not, however, mean that unjust enrichment must be homogenous. While we cannot pursue the question in detail, Barker has argued that a high level principle against unjust enrichment mediated through lower level principles is consistent with some diversity in those lower level norms. It allows us to compare and contrast those differing moral reasons for relief, thus providing a Dworkinian developmental function.77

b) Specic Criticisms Hedley has two further criticisms directed at whether the grid successfully captures English law as it stands. The rst relates to his question about the solidity

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Dworkin (n. 60) 13–14. Dworkin (n. 49) 31–39, 92–94; R. Dworkin, ‘Judicial Discretion’ (1963) 60 J Philosophy 624, 632. 75 Birks (n. 15) 23; Dworkin (n. 60) 259–260. 76 Dworkin (n. 60) 249–250; R. Dworkin, ‘Objectivity and Truth: You’d Better Believe it’ (1996) 25 Philosophy and Public Affairs 87. 77 K. Barker, ‘Understanding the Unjust Enrichment Principle in Private Law: A Study of the Concept and its Reasons’ in J. Neyers (ed.), Understanding Unjust Enrichment (Hart, Oxford 2004) 79, 91–94; E. Sherwin, ‘Restitution and Equity: An Analysis of the Principle of Unjust Enrichment’ (2001) 79 Texas L. Rev. 2083, 2104–2105. 74

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of the lines between the various components of the grid. Breach of contract for instance should appear twice.78 It should appear in the consent box, but also in the wrongs’ box. We see later that the need for a consent explanation for liability for breach of contract is less pressing than the need to explain the primary duty by consent. For now let us note that this objection misunderstands the difference between primary and secondary rights. Birks identies ve meanings of the word ‘remedy’. In Birks’ view there are two types of cause of action; there are wrongs and notwrongs. Not-wrongs do not respond to a breach of duty, but rather the cause of action enforces the primary right directly.79 All wrongs are breaches of duty. Consent generates a right, and a converse duty. Breach of contract can therefore stand in the wrongs category, because we ask the question what if this primary ‘consented-to’ duty is breached. The wrongs column does not therefore stand in a precise sequence with the other columns, as it depends on the existence of a duty generated elsewhere.80 Birks recognises this, but does not see it as a fatal objection to his scheme. It is not, although it does help to show he is wrong to insist categories interlock perfectly. Hedley argues that there is nothing obviously illogical about saying that the recipient of a mistaken payment commits a wrong by failing to return it.81 Birks suggests that there is no point in doing so because liability can be explained through unjust enrichment.82 To conclude that therefore the wrongs explanation is incorrect is, as Hedley says, suspect. The existence of liability X does not itself disprove that of liability Y; and indeed we might in some cases claim for conversion. Birks’ second reason for saying this is unjust enrichment is that if it were not unjust enrichment an action for damages would lie.83 Hedley points out that the obvious damages for failure to return £100 is £100 (plus interest).84 Indeed this is precisely what we nd the damages are in conversion actions.85 However, conversion is a notoriously difcult wrong. Hedley has argued that

78

Hedley (n. 16) 158. P. B. H. Birks, ‘Rights Wrongs and Remedies’ (2000) 20 OJLS 1, 14–15. Contrast K. Barker, ‘Rescuing Remedialism in Unjust Enrichment Law: Why Remedies are Right’ (1998) 57 CLJ 301. 80 P. B. H. Birks, ‘The Concept of a Civil Wrong’ in D. Owen (ed.), The Philosophical Foundations of Tort Law (OUP Oxford 1995) 31, 46; A. Burrows, ‘The New Birksian Approach to Unjust Enrichment’ [2004] RLR 260, 261–262. 81 Hedley (n. 16) 158. 82 Birks (n. 80) 48. 83 Ibid., 49. 84 Hedley (n. 16) 159. 85 A Tettenborn, ‘Conversion, Tort and Restitution’ in N. Palmer and E. McKendrick (eds.), Interests in Goods (2nd edn. Sweet and Maxwell, London 1998) 825, 825–826. 79

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simple receipt of the asset will ground liability.86 He comments that there is potential for injustice unless either a fault requirement is imposed or some sort of change of position defence allowed. In 2001, when Hedley was writing, it seemed clear that change of position would not be permitted in wrongs cases. At least in conversion that is no longer obvious.87 A wrong is a breach of duty. Being in receipt of property or money where one does not know one is not entitled is a funny type breach of duty. Breach cannot be totally passive in this way. Birks points out that a wrong can be an omission,88 but omits the important point that it must be conscious. Passively receiving a mistaken payment, or transfer cannot be any sensibly conceivable breach of duty.89 That being so there can only be a breach of duty where the party consciously refuses to return the asset, a subset of cases where he fails to do so.90 Merely being in possession is insufcient for conversion.91 The defendant must do a positive act, although detention may count as such an act, and intend to do the act itself;92 it does not matter whether he intended to interfere with another’s rights. Critically therefore there must be pre-existing rights with which he can interfere; that is why the claimant must retain legal title, or better legal title than the defendant. Only if all mistaken payments were given such proprietary consequences could an overlap be contemplated. Hedley’s second objection is that the grid does not mention legal interests. He argues that in order to answer any particular legal question you need to know what interest is protected. Indeed so. Simply saying you caused me loss gets me nowhere. He comments, ‘Either each square contains some pretty heterogeneous material or the grid must extend into a third dimension.’93 Hedley proceeds to argue that the grid implicitly claims the interest is unimportant. However, interests and rights feed off each other, and Birks’ theory is rightsbased. There is a long tradition in political theory that rights depend on interests and in particular the right-holder’s interests.94 It is difcult to say that you

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Hedley (n. 16) 156. Birks (n. 15) 98. 88 Birks (n. 80) 41. 89 J. Edelman, Gain-Based Damages (Hart, Oxford 2002) 34. 90 Caxton Publishing v. Sutherland Publishing [1939] AC 178; Alicia Hosiery v. Brown Shipley & Co. [1970] 1 QB 195. 91 Clerk and Lindsell on Tort (19th edn., Sweet and Maxwell London 2006) para. 17.09–17.10; Barclays Mercantile Credit v. Sibec [1992] 1 WLR 1253, 1257–1258; Lancashire & Yorkshire Railway Co. v. McNicoll (1919) 88 LJKB 601. 92 M. Bridge, Personal Property Law (3rd edn., Clarendon Press, Oxford 2002) 53–57; Tettenborn (n. 85) 826. 93 Hedley (n. 16) 160; Birks (n. 80) 51. 94 A. Harel, ‘What Demands are Rights? An Investigation into the Relation between 87

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have an interest in the performance of a contract, if there is no right to insist on a remedy if it is not forthcoming. Hedley explains this lack of consideration of interests in terms of unjust enrichment theorists’ claim that there is one form of enrichment, and that unjust enrichment is a fairly homogenous area.95 Hedley denies this homogeneity, and we examine his views on enrichment later. Whether this is so or not, different interests and doctrines are in play in mistake, undue inuence and failure of consideration. Unjust enrichment is heterogeneous, in the same way as Hedley claims tort and contract are. The pressure under our current Dworkinian view to see unjust enrichment as a principle does not, as we have seen, require homogeneity. The grid is cast at a very high level of generality. It does not contain everything in detail, but is not designed to do so.96

2) HEDLEY’S CRITIQUE OF RESTITUTION Hedley is a sceptic.97 He argues that contract can cover much of the restitution ground, and has suggested that unjust enrichment ideas crop up across the law.98 Hedley denies that contract can be explained in terms of consent. Hedley’s conception of contract straddles across the consent column in the Birksian grid. Indeed contract may straddle the event/response borderline. If Hedley is right about this, the grid ceases to be a useful means of looking at private law. At least one, and probably more, of the core concepts of English law cannot be tted into the Birksian theory. Hedley’s view of contract is expansive, with a wide penumbra. If this is a valid way of looking at legal concepts the Birksian grid is in jeopardy; it requires that sharp lines be drawn between concepts. If unjust enrichment is no more than a concept that crops up with others as being one, among several, methods of justifying a doctrine,99 it cannot be a unique event in the way Birks claims. This illustrates Hedley’s claim that the failure of unjust enrichment theory reects the failure of the ideological claim that a logical taxonomic view of law is necessarily better.100

Rights and Reasons’ (1997) 17 OJLS 101, 108–109; Dworkin (n. 49 above) provides such a theory. 95 Hedley (n. 16) 160–161. 96 Birks (n. 15) 279. 97 See S. Hedley, ‘Unjust Enrichment: A Middle Course?’ (2002) 2 OUCLJ 181. 98 Hedley (n. 11) 59, Hedley (n. 8) 141. 99 Hedley (n. 5). 100 S. Hedley, ‘Rival Taxonomies within Obligations: Is There a Problem?’ in S. Degeling and J. Edelman (eds.), Equity in Commercial Law (Law Book Co., Sydney 2005) 77.

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We divide this section into three. The rst section sets out Hedley’s view of contract, and tries to identify a core case. We see that his conception is very broad. The subsequent sections look at the critique of unjust enrichment. One criticism has been that contract is not concerned with consent; it is no answer therefore to the claim that unjust enrichment cases are not contractual to say they are not based on consent. According to Hedley, however, enrichment theory makes no sense outside contracts that could have been made.

a) Implied Contract This section rstly sets out Hedley’s view of implied contract. It then seeks to show that the category is too broadly drawn to be useful. This is not to say that there can never be cases where contracts can be implied. Of course there are. Contracts can be implied where the parties’ conduct suggests that they intended a contract, but did not expressly say so.101 It merely says that Hedley implies them too readily.

i) Hedley’s Argument Hedley’s argument is an analogical one. He suggests that there are cases that look like contract, and therefore ought to be treated as one. Essentially he denes contract as ‘the law of which benets are to be paid for’, and suggests that the courts will force completion of the exchange, or restore the status quo ante. He proposes four ways in which the concept of implied contract is underused in restitution.102 There are cases where the facts are almost but not quite a contract. His rst example is a 17 year old making a contract with a supermarket.103 The regime is almost indistinguishable from that relating to an 18 year old’s contracts. It is only when the law needs to treat the scenario differently to uphold the point of the incapacity rules that it does so. There is the case of paying off a debt, or in Hedley’s words ‘conferring a valuable benet in response to a legal claim.’104 Intriguingly Hedley argues that where there is no debt the money was paid for nothing and must be repaid.105 This is almost identical to Birks’ new argument in Unjust Enrichment. Birks there moves from an analysis that requires the claimant to show an unjust

101 Sir Guenter Treitel, The Law of Contract (11th edn., Sweet and Maxwell, London 2003) 9–10, 18–19; implied terms are covered at 201–206. 102 Hedley (n. 6) 439. 103 Ibid., 440–441. 104 Ibid., 448–449. 105 Ibid., 449.

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factor to one requiring only that he prove there was no legal basis for the payment.106 If money is paid for nothing (and is not a gift) there is no basis. Hedley, however, sees this as contractual. ‘An attempt to pay a debt is in essence a contractual arrangement – the payment is to secure the other’s abandonment of the claim.’107 The third category is the wrongful failure to contract. The facts ought to have ended up as a contract. There is a wrong here, perhaps conversion or trespass. Hedley argues that the remedy of the defendant’s paying market value to the claimant amounts to the law supplying the contract the parties ought to have made.108 The fourth and last category is that contractual remedies are contractual, not unjust enrichment. If the arrangement is regarded as contractual any remedy must also be.109 It does not matter that the contract may be rescinded or terminated, or frustrated. This fourth category is clearly at least contextually contractual. As such we will leave it to one side and concentrate our critique on Hedley’s rst three categories.

ii) Opposition to Implied Contract Most critiques of implied contract suggest that the contract is ctional. Hedley rejects this on the ground that the law has not stood still since 1875 and that contract has moved on with it. Hedley, as we have seen, describes contract as the law of which benets are to be paid for.110 Differently expressed, it is the law of the market. Much the same could be said about restitution. Barker has described unjust enrichment as the law of the ‘actionability of gain in private law.’111 Hedley makes a descriptive claim that the law deals with a wide range of problems by fashioning a contract between the parties, and we should investigate whether it should do so.112 The difculty is that Hedley’s conception of contract is even wider than the concept of unjust enrichment. It takes in the whole of direct restitution.113 It takes in some of restitution for wrongs,114 and cases that unjust enrichment lawyers themselves see as contractual. Hedley has criticised unjust enrichment theorists for the diversity of the scenarios

106

Birks (n. 15) ch. 5. Hedley (n. 6) 449. 108 Ibid., 450; Hedley (n. 13) 42. 109 Hedley (n. 6) 451. 110 Hedley (n. 6) 439. 111 Barker (n. 77) 92. 112 Hedley (n. 6) 455. 113 Ibid., 439; S. Hedley, ‘Unjust Enrichment: The Same Old Mistake’ in A. Robertson (ed.), The Law of Obligations: Connections and Boundaries (UCL Press, London 2004) 73, 78–79. 114 Hedley (n. 6) 449–451. 107

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they include in their subject.115 Hedley, however, claims that he does not seek to state his position with the same degree of logical rigour.116 That said, even accepting that Birks’ exposition of the grid and unjust enrichment aim at too great a degree of logical deductive precision, implied contract is too imprecise. If legal concepts are vague and have a wide penumbra, as they do here, they will not be exclusive; right answers will become impossible. Accepting a Dworkinian perspective, Hedley’s position becomes difcult to defend. There is very little that obviously connects a 17 year old’s contracts in Tesco with my stealing Hedley’s bicycle and riding it around the Irish countryside while he is at work before bringing it back. It is very hard therefore to identify a normative principle in Hedley’s work that can identify cases in which a contract ought to be implied. Perhaps there is no single normative principle. Hedley certainly does not seem to have offered one, although at one stage he proffered an explanation based on Jaffey’s reliance theory. Jaffey argues that each party accepts responsibility for the other’s reliance on any assumption that the agreement will be performed.117 Hedley argues that in pre-contractual cases each party takes responsibility for the other’s belief that their vague agreement would be carried out.118 Jaffey’s theory has too great a set of side effects; contract and duciary relationships become common law and equitable counterparts for example.119 However, despite proferring the reliance idea, Hedley has described the law of contract as ‘too vast and complicated for such generalisations’.120 He accepts therefore there is no single normative explanation. If we take the third category of implied contract, wrongful failure to contract, there are two ways of understanding the theory. We might say that the wrong is not optional. Without the wrong (the stealing in Hedley’s words) there can be no cause of action and recourse to market value; there is no reason to imply the contract. The contract is remedial; indeed on one level it is concerned merely with quantum of recovery. In the child’s contract case it has a different role. The ‘contract’ explains his primary liability, assuming that the goods purchased are necessaries. It explains the supermarket’s liability to the child. It is not

115

Hedley (n. 5). Hedley (n. 6) 436. 117 Jaffey (n. 10) 30. 118 Ibid., 116–120; S. Hedley, A Critical Introduction to Restitution (Butterworths, London 2001) 49; S. Hedley, ‘Work Done in Anticipation of a Contract which does not Materialise: A Response’ in W. R. Cornish et al. (ed.), Restitution: Past Present and Future (Hart, Oxford 1998) 195. 119 Jaffey (n. 10) 402–404; K. Barker, ‘Review Article: The Nature and Scope of Restitution’ [2001] RLR 232, 234. 120 Hedley (n. 113) 79; P. S. Atiyah, An Introduction to the Law of Contract (5th edn. Clarendon Press, Oxford 1995) 40, cf. S. Smith, Atiyah’s Introduction to the Law of Contract (6th edn. Clarendon Press, Oxford 2006) Ch. 2. 116

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wrong to describe there being a contract present. There is a limited and caveated right to avoid with restitutionary consequences.121 This is the only unjust enrichment right. The second means of understanding the implied contract is to completely ignore the wrong; there has been an asset transferred for nothing – the right to ride the bicycle. It needs to be paid for. There is a contract. In return for payment the claimant drops the claim. Hedley’s rst three categories can then be explained in the same way. In the stolen bicycle case, the 17 year old paying for his lunch in the supermarket, and the case of the payment to discharge a non-existent debt there has been an asset transferred that needs to be paid for. Birks would call all these cases unjust enrichment cases; there has been enrichment and no basis for its transfer.122 If we accept this, despite the accompanying sound and fury of the debate, Hedley’s contractual analysis has parallels with Birksian unjust enrichment analysis. This explanation is undermined, however, by Hedley’s references to stealing, and by the heading of the section as ‘wrongful failure to contract.’ Hedley refers to the contract in wrongs cases as being concerned with remedial not liability rules.123 He sees them as different cases. He is right to do so. The supermarket is liable to the teenager in the same way as to an adult. So too would the parties be liable to each other where Hedley nds a contract in on-going negotiations. Hedley accepts though that there might be a variety of possible bases for relief in these ‘pre-contractual’ cases.124 Yet if while I ride around the Irish countryside on Hedley’s stolen bicycle the chain snaps and I am hurt as a result, it would be very strange to say that the implied contract justied a claim against Hedley. Indeed Hedley suggests that to treat implied contract ‘as the basis for the doctrine would be to mistake form for substance.’125 This case seems to be on the very edge of the penumbra of contract, and the penumbra of other concepts too. This causes all sorts of analytical problems, and given the imprecision of the concepts, theoretical problems from a Dworkinian perspective. It becomes difcult to pin down what Hedley means, but this may simply be a function of the penumbral role of contract. Discussing the implied contract analogy Hedley

121

Minors’ Contracts Act 1987, s. 3, Steinberg v. Scala [1923] 2 Ch. 452, J. Beatson, Anson’s Law of Contract (28th edn., OUP, Oxford 2002) 225; Goff and Jones (n. 2) 631–633; D. Sheehan, ‘Natural Obligations in English Law’ [2004] LMCLQ 171, 191–192; Treitel points out that the contract might be ratiable rather than voidable (n. 101) 545–549. 122 Birks (n. 15) 84–86, ch. 5; see 261–262 on minority. 123 Hedley (n. 13) 93–96. 124 Hedley (n. 6) 445 n 21; K. Barker, ‘Coping with Failure: Reappraising PreContractual Remuneration’ (2003) 19 JCL 105. 125 Hedley (n. 13) 93; Hedley (n. 6) 451.

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says, ‘The whole point is that the claimant expected to be able to sell the asset . . .’126 On this basis, if the wrong is important his real point is not about implied contract, but lost opportunity to bargain. Liability comes about because there is no contract, but it is expressed in terms of an implied or notional contract. In similar terms the attempt to pay a non-existent debt generates a liability to repay precisely because no contract is formed; there is no quid pro quo.127 Yet Hedley seems to think these quite different cases. The point is the absence of a contract; yet in one case there is a wrong and in the other not. The doctrines have different roles, and implications, and answer different questions. There is little support in the case law for the proposition that Hedley’s second and third categories are contractual. Hedley, for instance, uses Inverugie v. Hackett 128 in his discussion of ‘wrongful failure to contract.’ The decision involved the defendant renting out the claimant’s ats as an adjunct to their hotel business. In fact they made no prot, but were required to pay the reasonable hire rate. Lord Lloyd, giving the main speech does not expressly use contractual language at all. There are though cases in Hedley’s support. In World Wide Fund for Nature v. World Wrestling Federation (WWF v. WWF) the two sides were in dispute over rights to the WWF logo. They reached a settlement, which the defendants broke. Peter Smith J. suggested that the remedy, based on a reasonable fee for being allowed to break the agreement, was a notional bargain neither party could refuse.129 Hedley also rejects mistake as a cause of action.130 In its place he puts a rule that recovery is available in cases where the claimant does not get what he paid for; he refers to this as a contractual analysis. Yet the cases do not use contractual language; they do use the language of mistake.131 The common feature is exchange. That exchange is sometimes factually obvious. Sometimes, however, it is a legal construct, as in WWF v. WWF, and we need to work out why we construct it. Implied contract does not give us that answer. Criminal law could be organised on the basis of punishment.

126

Hedley (n. 13) 95. Hedley (n. 6) 449. 128 [1995] 3 All ER 841; other cases Hedley cites do use contractual language – Wrotham Park Estates v. Parkside Homes [1974] 1 WLR 798, and Experience Hendrix v. PPX Enterprises [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 are breach of contract (or restrictive covenant) cases. Rumsey v. North Eastern Rly (1863) 14 CB (NS) 641, 143 ER 596 was decided at a time when implied contract language was a commonplace. 129 [2006] EWHC 184 [146]; Krehl v. Burrell (1877) 7 Ch. D 551. 130 Hedley (n. 13) ch. 1. 131 Kleinwort Benson v. Lincoln City Council [1999] 2 AC 349 (HL); David Securities v. Commonwealth Bank of Australia (1992) 175 CLR 353 (HCA); Nurdin and Peacock v. DB Ramsden & Co. [1999] 1 WLR 1249; Barclays Bank v. Simms [1980] QB 677. 127

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A book on imprisonment would have to cover the same sorts of thing as the book on nes, however.132 Similarly a book on exchange must ask the question why we impose the exchange. One would expect there to be common themes and policies running across the law. Dagan suggests these overlaps show the inappropriateness of over-precise classications.133 Hedley must agree that the common theme of exchange shows the inappropriateness of precise taxonomy. Hedley’s common theme of exchange does not tell us the normative basis of relief. The cause of action in mesne prots cases is different to that in undue inuence cases. One is a wrong. The other is not. Attempts to develop an ‘implied contract’ mould obscure the essential dissimilarity of the cause of action, and rights giving rise to it, even as they illustrate other similarities. As such it runs counter to the Dworkinian rights-based assumptions underlying this paper. Barker has suggested that family resemblances sufce to make a coherent category.134 These resemblances are, however, based on analogy. Analogy requires testing against higher order rationales as well as similar fact scenarios.135 Those rationales only make sense as answers to questions. Implied contract answers different questions. Indeed in the wrongs’ category it appears not to answer any question at all. It is not the doctrinal basis for the remedy, nor more than a facet of the issue. It is insufcient a reply to say contract is a ‘exible and permeable notion with the metaphorical implied contract being one tool for dealing with its outer edges.’136 Metaphor is not an analytical tool. The analogy with contract should not be drawn, at least not as widely as Hedley claims.

b) Unjust Enrichment and Contract Contract, according to Burrows, responds to expectations generated by promises, tort to compensation for wrongful harm, and restitution to unjust enrichment.137 Hedley argues that to give consent such prominence is absurd. Our task in the last section was to demonstrate that Hedley’s conception of contract is so wide as to be almost impossible to make sense of. It takes in too much, has no independent explanatory power, and cannot be said to be a coherent

132

Samuel (n. 3) 324; P. B. H. Birks, ‘Denition and Division: A Meditation on Institutes 3.13’ in P. B. H. Birks (ed.), Classication of Obligations (Clarendon Press, Oxford 1997) 1, 30. 133 H. Dagan, The Law and Ethics of Restitution (CUP, Cambridge 2004) 34. 134 Barker (n. 77) 100–101. 135 E. Sherwin, ‘In Defence of Analogical Reasoning in Law’ (1999) 66 U Chicago L. Rev. 1179, 1181–1183. 136 Hedley (n. 6) 436. 137 Burrows (n. 12) 1; see Hedley (n. 8) 143–145.

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category. Our task here is to demonstrate that there are consent theories which can respond to Hedley’s critique. That critique is that most contracts do not involve promises or intention, and the restitution lawyers’ view of contract as reecting party intention is extreme.138 Hedley describes the idea that contract law always represents the will of the parties as an ‘unwarranted descent into mysticism.’139 This is true of the core concept where there is an ‘agreement’, and is certainly true of some of the wider manifestations of contract seen above. A contract formed as a result of the party’s wrongful failure to contract is not based on consent. The parties would not have come to an agreement. Hedley seeks to show that the sharp distinction drawn between contract and unjust enrichment is false. There is a subjective element to contract formation. The Hannah Blumenthal140 sets out a test that a contract is formed where A makes an offer to B that objectively means X. B actually does believe the offer to mean X and accepts. The more important point is that subjective intention is not consent. Contract can be based on consent without being based on subjective intention. Hedley concedes a contract is sometimes a voluntary obligation,141 but does not accept that this explains its moral underpinnings. Nor can he given the wider manifestations of implied contract that he cites. Robertson comments that a party may be bound by something they never intended, as a consequence of the objective theory.142 Barnett, whom Hedley does not cite, has proposed a sophisticated theory of consent.143 It explains why some interpersonal obligations should be enforceable and others not. According to Barnett, contract law concerns the enforcement of obligations arising from the valid transfer of entitlements between parties.144 Freedom of action would be seriously impeded if legitimate rights holders could be deprived without their consent.145 Barnett proposes that it is always the objective meaning of a party’s acts that matters. In other words

138

S. Hedley,‘Unjust Enrichment’ (1995) 54 CLJ 578, 591; Hedley (n. 7) 253–255. Hedley (n. 118) 80; Hedley (n. 8) 141. 140 Paal Wilson & Co. v. Partenreederei Hannah Blumenthal [1983] 1 AC 854 (The Hannah Blumenthal). 141 Hedley, A Critical Introduction to Restitution (n. 118) 46. 142 A. Robertson, ‘On the Distinction between Contract and Tort’ in A Robertson (ed.), The Law of Obligations: Connections and Boundaries (UCL Press, London 2004) 87, 92. 143 R. Barnett, ‘A Consent Theory of Contract’ (1986) 86 Columbia L. Rev. 269; cf. C. Fried, Contract as Promise (HUP, Cambridge 1981) and D. Kimel, From Promise to Contract (Hart, Oxford 2005). 144 Barnett (n. 143) 297. 145 Ibid., 298–299. 139

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objectivity is not inconsistent with consent.146 The objective manifestation of consent is all the other party has to go on, or he cannot make decisions on any stable basis. An inquiry into subjective intent would undermine the security of transactions.147 The main thrust of Hedley’s argument, with which we deal in detail below, concerns state, or legal, interference with party intention. What we are not defending, and what both Hedley and Barnett are correct to criticise, is the extreme will theory of contract.148 Kimel has likewise concluded that a rigid conception of freedom of contract is unrealistic.149 He sees the decline in ‘extreme philosophical individualism and related political doctrines’150 where Hedley sees the dying off of will theorists. Hedley argues that the main part of contract law concerns the rules which apply in default of agreement.151 Implied default terms are contractual, but they are not based on consent. Barnett’s answer is that contracts are indeed incomplete. However, default terms can be explained in terms of consent.152 Interestingly Hedley concedes that some default terms might be justied as plausible guesses as to party intention.153 According to Barnett, parties who could have contracted around the default term but did not can still be said to have tacitly consented to it.154 Robertson suggests that this idea of tacit consent is of little help; it can be extended to cover tort liability; voluntary agreements and assumptions of liability shape tort liability.155 Barker has argued, however, that voluntary assumption of responsibility is irreconcilable with the cases and difcult in principle.156 I do not consent to the general law of tort applying when I drive to work. Silence in the face of a rule we cannot contract around is at best ambiguous.157 I cannot contract around the general law with the state. I may be able to contract around the general law with a particular person. However,

146

Ibid., 301. Ibid., 273. 148 Ibid., 272–274; Hedley (n. 13) 63–66. 149 Kimel (n. 143) 118–119. 150 Ibid., 135. 151 Hedley (n. 13) 58–63; Hedley (n. 7) 255. 152 R. Barnett, ‘The Sound of Silence: Default Rules and Contractual Consent’ (1992) 78 Virginia L. Rev. 821, 821–822. 153 Hedley (n. 13) 60, as can some statutory restrictions, S. Hedley, ‘Contracts as Promises’ (1993) 44 NILQ 12, 16–19. 154 Barnett (n. 152) 826. 155 Hedley Byrne v. Heller [1964] AC 465 (HL); Robertson (n. 142) 104–106. 156 K. Barker, ‘Unreliable Assumptions in the Modern Law of Negligence’ (1993) 109 LQR 461, 463–475. 157 Barnett (n. 152) 902. 147

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when I get into my car I do not know whom I might accidentally run down, or if I will run anyone down. Some parties may not realise what the default rule is, or may prefer a different default but do not contract around it. Barnett’s answer lies in whether the party is rationally ignorant or not.158 In those cases the default rule is chosen so as to reect ‘the expectations implicit in the parties’ silence in the absence of any bargaining.’159 Barnett would not deny the existence of imposed terms that cannot be displaced by agreement, yet he denies they are as prevalent as Hedley claims, and argues that in general implied terms bolster the importance of consent. He explicitly rejects the type of argument that Hedley deploys.160 That is the argument that all gap-lling rules are imposed for policy reasons and demonstrate the ctitious nature of contractual intention. Barnett acknowledges the point Hedley makes about gap lling being impossible to explain on the promise principle,161 and in fact he critiques the promise principle on this basis himself.162 The emphasis is different to an emphasis on bargaining power, as Barnett has recognised,163 but it serves as a proxy. One shot consumers are not knowledgeable, but their lack of market power may be one reason why they are rationally ignorant. They usually enter form contracts, and Hedley has argued that standard form contracts deny the importance of intention.164 Barnett argues that contracts of adhesion are consented to, on the basis that we make a rational decision to agree to unread terms, yet we do not consent to radically unexpected terms.165 Enforcing reasonable terms protects our freedom to contract. Enforcing unreasonable terms violates freedom from contract. This explains those rules of contract concerning the degree of notice that must be given of unexpected terms.166 According to Hedley we also do not consent to rules on, for example, damages and mitigation of loss.167 Barnett argues we can consent to the extent of liability as well to the extent of the obligation.168 We consent on the same basis

158

Ibid., 894–897. Ibid., 893. 160 Ibid., 826–828. 161 Ibid., 823; Hedley (n. 13) 65; Fried (n. 143) 69. 162 R. Barnett, ‘Some Problems with Contract as Promise’ (1992) 77 Cornell L. Rev. 1022, 1026–1027. 163 Barnett (n. 152) 892. 164 Hedley (n. 13) 57–58. 165 R. Barnett, ‘Consenting to Form Contracts’ (2002) 72 Fordham L. Rev. 627, 639. 166 Treitel (n. 101) 216–221, 244–245. 167 Hedley (n. 13) 59; Hedley (n. 7) 256–259. 168 Barnett (n. 143) 316–317; Hedley (n. 16) 158. 159

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as with default terms. To the extent they can be contracted around we may indirectly consent to them. However, there are rules we cannot contract around. Liquidated damages clauses must be genuine pre-estimates of loss or they will be struck down as penalties.169 That is a rule we do not consent to. There may be many such rules. That does not disturb the conclusion that contract is based on consent. Barnett draws a distinction between consent to the primary obligation, and consent to liability. He suggests that because parties can opt out of liability through limitation and exclusion clauses, the adoption of a consent theory of liability is less pressing. Most parties know they are entering a contract and can limit their liability, but if consent is not vital at the level of obligation parties cannot take steps to avoid it.170 Hedley has not shown that a consent theory fails as an explanation for contract. We have not shown that consent theory is the explanation for the moral force of contract merely that it has responses to Hedley’s critique. He has not therefore shown that dividing unjust enrichment from contract on the basis of consent is awed.

c) Enrichment Hedley’s critique of enrichment is partly based on a view that the denition of contract can be expanded to include these cases. The denial of his claim rests on the view that his analogy is inappropriate. He argues that we must value benet by reference to the market, and the denitions of enrichment reect that; ‘bargained for’, ‘free acceptance’ and ‘reprehensible seeking out’ all have overtones of the market to them.171 Few cases give any explicit thought to enrichment. Few need to. Yet there is increasing recognition and judicial discussion of enrichment as a probandum of unjust enrichment claims.172 Hedley does not per se object to talk of benets.173 However, Hedley asks, ‘What then are we to make of those theorists who insist that the remedies here are not contractual, but are meant to remove unjust enrichments gained at the claimant’s expense, something quite different?’174 The orthodox view is that the defendant should pay the objective value of the benet minus any subjective devaluation. This Hedley refers to as lacking

169

Treitel (n. 101) 999–1003. Barnett (n. 143) 317. 171 Burrows (n. 12) 16–25; Birks (n. 15) ch. 3. 172 Pacic National Investments Ltd. v. City of Victoria [2004] SCC 75; Proctor & Gamble Phillipine Manufacturing v. Peter Cremer GmbH [1988] 3 All ER 843; Van den Berg v. Giles [1979] 2 NZLR 111. 173 Hedley (n. 13) 71; Hedley (n. 8) 142–143; P. Watts, ‘Restitution- A Property Principle and a Services Principle’ [1995] RLR 49, 80. 174 Hedley (n. 13) 71–72. 170

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coherence and clarity and being ‘useless’.175 This is too harsh, and certainly overstates the case. A defendant should be allowed to say that he does not value the enrichment at the same level as the market.176 Barker sees the market as the only way prima facie to value a non-money benet.177 Burrows talks of how ‘no rational person would be prepared to pay for . . .’ – a reference to the market.178 Quantum meruit is based on the market in the sense that the quantum of recovery is calculated on the basis of a fair price for the services.179 Money only makes sense if there is a market. ‘Inevitable expense saved’ can only be determined on the basis of the market. There is a core recognition among unjust enrichment lawyers that the default position calculates enrichment by market value. Caveats must though be entered where parties show that they value the benet differently,180 or where defendants are disentitled from showing that they do so. This concentration on market value, which is then sometimes adjusted, does not mean that we need to resort to implied contract. Showing this is our rst problem. Comparative law helps demonstrate the point. German law has much the same problem. It needs to value enrichments from services, and tries to avoid liability for unwanted services and property improvements. This it calls aufgedrängte Bereicherung, or imposed enrichment. Alongside other doctrines, a small part of the law of unjustied enrichment deals with this, the Verwendungskondiktion. German law also looks at both the objective and subjective valuations of the services. It does not use implied contract language.181 Hedley argues restitution for services cannot be done.182 It is, as we will see, true to say that many restitution for services cases are not restitution cases. There are, he says, no uncontroversial examples of it.183 He identies approximately 13 cases that we might regard as restitution of services,184 all of which

175

Hedley (n. 138) 597. Burrows (n. 12) 18. 177 K. Barker, ‘Riddles Remedies and Restitution: Quantifying Gain in Unjust Enrichment Law’ [2001] CLP 255, 264. 178 Burrows (n. 12) 17; G. Virgo, The Principles of the Law of Restitution (2nd ed., OUP, Oxford 2006) 65; Birks (n. 15) 47–48. 179 Burrows (n. 12) 343–347; Hedley (n. 6) 449–450. 180 Barker (n. 177) 264–267. 181 T. Krebs, ‘Unrequested Benets in German Law’ in J Neyers et al. (ed.), Understanding Unjust Enrichment (Hart, Oxford 2004) 248, 257–261; MünchKomm § 812, no. 262, BGHZ 47, 370, 371–372. 182 Hedley (n. 5). 183 Hedley (n. 7) 267–271. 184 Greenwood v. Bennett [1973] QB 195; Lodder v. Slowey [1904] AC 442; Brewer Street Investments v. Barclays Woollen Co. [1954] 1 QB 428; Rover International v. Cannon Film Sales [1989] 1 WLR 912; BP v. Hunt (no. 2) [1979] 1 WLR 783; Way v. Latilla [1937] 3 All ER 759; Upton DC v. Powell [1942] 1 All ER 220; Craven Ellis v. Canons Ltd. [1936] 2 KB 403; Boardman v. Phipps [1967] 2 AC 46; William Lacey 176

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have come in for criticism from one quarter or another. Hedley acknowledges the mildness of much of the criticism, however.185 Hedley describes the action in cases of goods and services as akin to sale, but in money cases just an order for the return of a like sum.186 He argues that imposing liability as if the defendant had received the cash can be ‘monstrously unjust’.187 By contrast there is little injustice if the defendant received cash. This is our second problem. How do we deal with the potential injustice? An unrequested improvement to property, which is Hedley’s example, will often have no value due to subjective devaluation. Hedley believes this bears little resemblance to the cases, although this, as we will see, is not quite right. Samuel, in discussing the question, cites a suggestion by Birks that English law is wrong to say benets cannot be forced on people behind their backs.188 Sometimes relief should be available on the basis of negotiorum gestio, despite the caution urged on us.189 Watts suggests that relief be restricted to cases where the services are proffered and there is no, or appears to be no, intent they be gratuitous. Interestingly this mirrors prerequisites for negotiorum gestio.190 Services decisions are often not unjust enrichment decisions. In contract frustration cases, the problem is dealt with by statutory discretion. In BP v. Hunt (no. 2)191 the claim arose from the frustration of a contract by the Libyan Government’s nationalisation of the oil industry. BP had carried out exploration on Hunt’s behalf for oil in the Libyan desert. BP sought recovery. Robert Goff J. decided that under Law Reform (Frustrated Contracts) Act 1943 section 1(3) services were to be valued on the basis of their end product. In some cases where there is no end product the benet will be the services themselves.192 That benet is adjustable to reach the just sum. The Court of Appeal was right to emphasise this discretion. It may seem therefore that there is no room for unjust enrichment. It is not surprising that there are so few cases. In Greenwood v. Bennett,193 however, a person mistakenly carried out repairs on a car, and then found that it belonged

(Hounslow) Ltd. v. Davis [1957] 1 WLR 932. The other cases are not criticised for the enrichment aspect. 185 Hedley (n. 7) 271. 186 Hedley (n. 13) 80. 187 Hedley (n. 42) 775–776. 188 Samuel (n. 30) 354; Birks (n. 79) 28 citing Falcke v. Scottish Imperial Insurance (1884) 36 Ch. D 234. 189 D. Sheehan, ‘Negotiorum Gestio: A Civilian Concept in the Common Law?’ (2006) 55 ICLQ 253. 190 Ibid., 257–258; Watts (n. 173) 70–72. 191 [1979] 1 WLR 783. 192 Ibid., 801–802. 193 [1973] 1 QB 195 (CA); Sheehan (n. 189) 254.

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to another person. This cannot be negotiorum gestio, which relies on a deliberate decision to act, knowing that it is somebody else’s business. It is, as it would be in Germany, unjust enrichment, and valuation is possible, as we have seen without ever mentioning implied contract. Birks argues that the way enrichment was found was ‘mysterious’; the problem was the absence of any consideration of subjective devaluation.194 That relates to the question whether the defendant could say that he preferred an unrepaired car, or a car repaired elsewhere. Yet as Phillimore L. J. put it, ‘It was not seriously disputed . . . that the £226 had improved the value of the car.’195 The Court of Appeal cannot be seriously criticised for not answering a question nobody asked. Dagan supports subjective devaluation as part of the law’s commitment to autonomy.196 As we saw, the objective theory of contract has subjective elements to it.197 Subjective devaluation is not unusual in its emphasis on party autonomy. It is one way we can show the law is concerned with the enrichment of the defendant. In Ministry of Defence v. Ashman198 the defendants remained in property owned by the Ministry after being given notice to quit. Other cases, often Canadian,199 discuss subjective devaluation explicitly. To say that there is no basis in the cases is wrong. There is increasing judicial support. But there are only a handful of cases where the question arises. In MoD v. Ashman Hoffmann L. J. said, The open market value will ordinarily be appropriate . . . But such benets may in special circumstances be subject to . . . subjective devaluation. This means a benet may not be worth as much to the particular defendant as to someone else.200

CONCLUSION Logic, precision and rationality alone do not justify anything. That said, Birks’ description of the grid and the reasoning lawyers should employ has Dworkinian overtones, and the grid can be defended on this basis. It is a rights-based

194 P. B. H. Birks, An Introduction to the Law of Restitution (Revised edn., Clarendon Press, Oxford 1989) 125, 270. 195 [1973] 1 QB 195 (CA) 202. 196 Dagan (n. 133) 139–148; Barker (n. 177) 265–267. 197 Treitel (n. 101) 1–2. 198 (1993) 66 P&CR 195 (CA). 199 Gidney v. Shank [1995] 5 WWR 385; Olchowy v. McKay [1996] 1 WWR 36; Club 7 Ltd. v. EPK Enterprises (1993) 15 Nd & PEIR 271; McDonald v. Coys of Kensington [2004] EWCA Civ 47 [26]–[40]; Marston Construction v. Kigass (1990) 46 Building LR 109. Peel (Regional Muncipality) v. Canada [1992] 3 SCR 762, (1992) 98 DLR (4th) 140 places emphasis on ‘the right to choose how to spend one’s own money’. 200 (1993) 66 P&CR 195 (CA) 201.

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scheme, tting lawyers’ reasoning and the aims of claimants. It is an interpretive tool and an object for interpretation itself. As an interpretive tool, it shows that law is not purely deductive. The grid depended too much on logic and too little on interpretation and analogy. A rights-based model which accepts that differing rights can emerge from the same facts can ourish though. A disagreement about what should be in the grid is a disagreement about better and best ways of describing our legal system. Hedley attempts to show that the true understanding of much of unjust enrichment lies in expanding contract. However, his view of contract has too great a reach if used as an analytical tool; as a metaphor it has no analytical power. Hedley’s view can itself be critiqued from a Dworkinian perspective as being too imprecise and allowing vague penumbrae in legal concepts. The reach of contract needs restricting. Understanding the reach of the explanatory force of consent helps to shape the proper form of those rules depending upon it. A consent theory can meet Hedley’s criticisms of the insistence that contract concerns party intention, as unjust enrichment does not. With contract conned unjust enrichment has room to breathe.

Chapter 11 Contract, Unjust Enrichment and Restitution: The Signicance of Classication Peter Jaffey INTRODUCTION Typically a contractual claim arises because the defendant failed to perform as he agreed, and the claimant is entitled to expectation damages to put him in the position he would have been in if the defendant had performed as agreed. There are certain other types of claim arising on the termination of a contract that are often said not to be contractual but restitutionary or unjust enrichment claims: these are the claim to recover a prepayment, and the claim to recover reasonable payment for work done under the contract.1 How should they be described, and does it matter how they are described? This has been a persistent problem in the literature on restitution and unjust enrichment, and it lurks in the background even when it is ignored.

1

See e.g., P. Birks, An Introduction to the Law of Restitution (rev. edn., Clarendon Press, Oxford 1989); A. Burrows, The Law of Restitution (2nd edn., Butterworths, London 2002), ch. 10; A. Skelton, Restitution and Contract (Manseld Press, Oxford 1998).

213 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 213–228. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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A claim can be described in any number of ways, and different descriptions may be apt for different purposes. The question is, what does a particular description say about a claim? What feature of a claim does it highlight, and what signicance does this feature have? What is needed here with respect to concepts such as contract, unjust enrichment and restitution is not a comprehensive study of the detail of doctrine and case law, but an understanding of what kind of concept each is, what its relationship to other concepts is, and what role (if any) that kind of concept has in legal reasoning. In other words, what is needed is to characterise each concept as a category in a scheme of classication, and to determine the signicance of that classication in law and legal reasoning. The most important and the most commonly used types of classication in private law seem to me to be classication by justication, by remedy, by modality or normative type, and by convention. Distinguishing between these types of classication reveals what the real issues are in the controversy over how to describe the claims mentioned above, and other controversial claims in private law.2

1) CLASSIFICATION BY JUSTIFICATORY PRINCIPLE A claim can be classied by reference to the general moral principle that justies it. I will refer to this as classication by justicatory category. For example, it seems to me that contract is best understood as a category based on the general principle that agreements are binding. Contract law is the body of rules that give effect to this principle in a particular way. Thus contract law has a framework and a characteristic set of issues that arise from the nature of this underlying principle – issues such as what counts as an agreement, what conditions need to be satised for an agreement to be binding, what implied terms there should be, etc. In my view, tort and property are also best understood as justicatory categories, though this may be a more tendentious claim. Some might accept the idea of a justicatory category and also the characterisation of contract law as such a category, but argue nevertheless that characterising a claim as contractual or as falling into some other justicatory category is not of any practical relevance, because in practice determining whether there is a valid claim is just a matter of determining whether on the facts the rules generate a claim, and for this purpose the nature of the underlying principle is irrelevant. Where the law is settled – where the case can be resolved by the application to the facts of a body of clear and authoritative rules – this is indeed the case, and one should not underestimate the extent to which the law

2

The approach set out here is explained more fully in P. Jaffey, Private Law and Property Claims (Hart, Oxford 2007).

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is settled.3 Even here, however, the characterisation of the law by reference to a justicatory category serves the important function of indicating in broad terms the moral basis of the claim. But, furthermore, insofar as the law is unsettled, the classication of a putative claim in a certain justicatory category can be part of the process of legal reasoning by which the law is determined. Often the rst stage of trying to resolve a new or troublesome case is to allocate it to a certain justicatory category such as contract or tort, which means that it is given common treatment with other claims in that category, under an established framework that determines in general terms how the case is dealt with. The effect is that the court makes an analogy between the case in hand and a standard case in the category, which amounts to asserting that the fundamental principle underlying the justicatory category is applicable. In this way, justicatory categories are relevant to legal reasoning, and at the same time to the development of the law. Sometimes the objection is made to this understanding of legal categories that it depends on a consensus on what the underlying principle is, whereas in fact there is often fundamental disagreement on this.4 But for a justicatory category to function in the way described it is not necessary that there should be a consensus on this issue. Generally the underlying principle will not be explicitly considered or interpreted; it will be taken for granted and not addressed at all. For the category to function as a justicatory category, it is necessary only that there be an assumption that the category is based on some such principle. One might say, in fact, that a justicatory category is a category that purports to be based on a general moral principle and operates on the basis that it is. Thus it is no objection to this approach to categories such as contract and tort that there is persistent controversy over the principles underlying them. This general approach to justicatory categories is consistent with the development of the law by the recognition of a new justicatory category or the disappearance of an old one. The theory of unjust enrichment holds, broadly speaking, that claims that arise from the receipt of a benet, which in the traditional common law were found dispersed over different areas of the law and treated as unrelated claims, should be brought together and given common treatment under a standard framework. Many people take the view that the law has now developed to recognise a category of unjust enrichment, and there is plenty of support for this in recent judgements of the English courts.5 The

3 It is not necessary for present purposes to establish a strict distinction between settled and unsettled law. 4 E.g., S. M. Waddams, Dimensions of Private Law (CUP, Cambridge 2003), chs. 1, 11. 5 E.g., Banque Financière de la Cité v. Parc (Battersea) Ltd. [1998] 2 WLR 475; Portman BS v. Hamlyn Taylor Neck [1998] 4 All ER 202; Cressman v. Coys of Kensington [2004] 1 WLR 2775.

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approach above explains the development of the law of unjust enrichment in terms of analogical reasoning. It implies that the theory of unjust enrichment is sound if unjust enrichment is correctly understood as a justicatory category, based on a general moral principle of unjust enrichment. But from the fact that this process has occurred one cannot infer that it is justied and that there is truly a principle of unjust enrichment that can support the recognition of such a category. The principle might be illusory, and the category, though purporting to be a justicatory category and operating as such, might be spurious. In fact almost no attention has been directed at identifying and formulating the supposed principle of unjust enrichment, in either the literature or the case law. In my view there is no such principle, and it is a mistake to recognise unjust enrichment as a justicatory category. I will come back to this point below.

2) CONVENTIONAL CLASSIFICATION Some people reject the approach above entirely, on the ground that the common law does not consist of a limited number of discrete bodies of law supported by distinct moral principles. Instead the law is more like a homogenous mass, and claims can differ from each other in many different ways, to a greater or lesser degree. Claims are collected into categories purely for convenience in teaching and administration. The law could have been divided up in quite a different way, and it is just an historical accident that it has ended up with the categories that we nd. I will refer to categories understood in this way as ‘conventional categories’. A conventional category works in the way that a name or address works, purely as a means of referring to the contents of the category, that is to say, locating legal rules in the relevant case law and commentary.6 It can have no role in legal reasoning. There is no reason to place a new or controversial claim in a particular conventional category and decide it in the same way as other claims in the category. In legal reasoning over unsettled law, one might want to make an analogy with cases from quite different conventional categories. This approach to classication is reected in a prominent line of argument in the opposition to the theory of unjust enrichment: that the recognition of a category of unjust enrichment is a futile exercise because no practical signicance with respect to legal reasoning can be attached to classication of the law into categories. The principal value of categories such as contract and tort is convenience in teaching and administration, and so there was no point in the turmoil involved in the creation of a new category of unjust enrichment; and, furthermore, it is articial and dogmatic to try and force a controversial case

6

Cf. M. Moore, Placing Blame (Clarendon Press, Oxford 1997), ch. 1.

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into a single category because the case may have elements of a number of different categories.7 In my view, this line of opposition to the theory of unjust enrichment is misconceived. It is surely implausible to think of categories such as contract and tort as conventional. It seems to me clear that there are bodies of inter-related rules forming discrete bodies of law and that there are a limited number of fundamental principles that provide the foundations for them. In any case, the development of a category of unjust enrichment in accordance with the theory of unjust enrichment is explicable only on the basis that unjust enrichment is a justicatory category based on a principle of unjust enrichment. Thus, with respect to the theory of unjust enrichment, the real question is not whether there are justicatory categories in general, but whether there is a principle of unjust enrichment that could support the particular justicatory category of unjust enrichment, and, as I have already pointed out, this crucial question seems to have gone almost completely without mention, let alone attracted the careful attention that it requires.

3) CLASSIFICATION BY REMEDY A claim can be classied in terms of what the claim is for – the type of remedy – for example, compensation. It hardly needs to be pointed out that a remedial category is not the same thing as a justicatory category. There is no general connection between the type of remedy that is appropriate for a claim and the nature of the justication for the claim. In a particular justicatory category, different remedies may be available, and a certain type of remedy, such as compensation, may be available for claims in different justicatory categories. Remedial categories are not in my view of great signicance. Generally the crucial issue is whether there is a valid claim, and insofar as classication is relevant in deciding this issue, the appropriate classication is by justicatory category, as discussed above. Where a putative claim is in doubt, there is no reason to rely on an analogy with a claim for the same remedy, which may have a quite different justicatory basis. However, it appears that sometimes a body of law has indeed been formulated and developed around the availability of a certain type of remedy: in other words, a remedial category is treated as if it were a justicatory category for the purposes of deciding when a claim should arise and developing the law. I will refer to this as the ‘remedy-asjustication’ fallacy.

7 There seem to be elements of this sort of understanding of legal categories in Waddams, (n. 4); P. Atiyah, Essays on Contract (Clarendon Press, Oxford 1986), 48; P. Cane, The Anatomy of Tort Law (Hart, Oxford 1997), 198; S. Hedley, ‘Unjust Enrichment as the Basis of Restitution: an Overworked Concept’ (1985) 5 LS 56.

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Consider, for example, the old implied contract ction.8 The ction developed as a device for bringing a claim within one of the old forms of action. The form of action in question – indebitatus assumpsit – provided the remedy of payment of a specied sum. This was originally used for claims for debt in contract, and the form of action specied the requirement to plead a contract. The claim to recover a mistaken payment, though having a quite different justication from the contractual claim for debt, was also a claim for payment of a specied sum, so the same form of action was apt in the sense that it provided the appropriate remedy. The ctional implied contract allowed the claim to be brought under the form of action. Even after the abandonment of the forms of action the claim to recover a mistaken payment was treated as a matter of implied contract or quasi-contract, and it appears that in some cases the misconception that the claim was in some sense contractual affected the reasoning of the courts. Where this occurred, the immediate error was the ction of implied contract, but behind this was the remedy-as-justication fallacy.

4) RESTITUTION AND UNJUST ENRICHMENT Restitution is ostensibly a type of remedy – the remedy of restoring to the claimant money or property transferred from him to the defendant, or, as some prefer, more broadly, the remedy of removing a benet, or some part of a benet, received by the defendant from the claimant or from elsewhere, and giving it to the claimant. But the restitution books are not concerned with remedial issues: they are not like books on damages or specic performance. They deal with the question when claims arise, like the books on contract and tort, and present a standard framework and common treatment for claims falling within the category. This makes sense only if the category is a justicatory category, based on a general underlying principle, and indeed this is generally said to be the principle of unjust enrichment. Thus although restitution is ostensibly a remedial category, it has always operated as the justicatory category of unjust enrichment. The implication is that it would be better to describe the category as unjust enrichment rather than restitution, and this seems to be the current tendency, though the argument for this change has not been expressed in quite this way. Although there has been some debate about the relationship between restitution and unjust enrichment,9 this controversy entirely misses the real issue,

8

On the implied contract ction, see Birks, (n. 1), 35. In connection with Birks’s ‘quadration thesis’, which holds that all restitution claims are based on unjust enrichment and all unjust enrichment claims lead to a remedy of restitution: Birks, ibid., 17–18. 9

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which, as pointed out above, is whether there is a genuine justicatory category of unjust enrichment at all. Is there, in other words, a principle of unjust enrichment, and if so what is it? In the literature on restitution and unjust enrichment, although it is quite common to see references to the principle of unjust enrichment, as I have already said it is rare to nd any attempt to formulate and explain it. There are a number of possibilities that might be considered.

A remedial principle of unjust enrichment It is sometimes said that the principle of unjust enrichment is the principle that ‘unjust enrichments should be reversed’.10 The principle appears to be that, given that a benet has been received that the law deems to be unjust, the law should remove the benet (or some appropriate part of it) by awarding a claim for restitution. But this is trivial. If a benet is deemed unjust by the law then there should indeed be a claim. The question is when the law should deem a benet to be unjust. What is required is a principle that shows in broad terms why a benet should be regarded as unjust, and therefore provides a basis for determining when a claim arises. The suggested principle is not capable of supporting a justicatory category; it is a purely remedial principle, purporting to prescribe a certain remedy given that a claim arises. To treat this remedial principle as the principle supporting a justicatory category is to commit the remedy-as-justication fallacy. Similarly it is sometimes said that the principle of unjust enrichment is the principle that ‘invalid transfers should be reversed’. But, again, this is a purely remedial principle. Once a transfer is deemed to be invalid it is hardly controversial that it should be in some way reversed. Some would equate the reversal of invalid transfers with the reversal of unjust enrichment. It is a common error amongst unjust enrichment lawyers to suppose that whenever a defendant has received a benet there has been a transfer to him, from the claimant or someone else; in reality, a benet may be received other through a transfer, for example by the provision of services. To say there has been a transfer from the claimant to the defendant is to say that property (including money) has been transferred from the claimant to the defendant, and if the claimant has a claim to reverse it on the ground of its invalidity, this can mean only that there was no valid exercise of the owner’s power of transfer. The primary right from which the claim arises is the claimant’s right of ownership and the claim is propertybased, in the sense that it arises in the justicatory category of property.11

10

E.g., Burrows, (n. 1), 1. This is not the same thing as saying the claim is proprietary rather than personal. The idea of a justicatory category of property calls for further discussion though it is 11

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The ‘wrongdoer’s prots’ or disgorgement principle The principle that a wrongdoer should not be allowed to benet through his wrong is surely sound and should be generally recognised in the law. But it cannot provide the basis for a justicatory category of unjust enrichment. Most of the claims that are said to be unjust enrichment claims do not arise from a wrong at all: this is true of the claim to recover a mistaken payment, for example. The rationale for this claim is clearly not to prevent a wrongdoer proting from his wrong. More generally, the principle cannot be the basis for a justicatory category because it does not provide the basis for a claim to arise; it justies a certain type of response to a wrong, and a wrong can arise in different justicatory categories – for example, in contract or tort.12

An ‘organising principle’ Some commentators regard the principle of unjust enrichment as an ‘organising principle’.13 This seems to mean that claims arising from the receipt of a benet are brought together for common treatment, but without any assumption that they have a common type of justication. It is just useful or convenient to consider them together. Commentators who take this view claim that the principle is neutral on questions of justication – on how cases should be decided, and on how the law should develop. An ‘organising principle’ is not a principle in the relevant sense at all. It does not provide a basis for a claim. It does not purport to account for a justicatory category of unjust enrichment, or for the theory of unjust enrichment. The issue left open is why it is thought convenient to address claims arising from the receipt of a benet together in this way. What sort of criterion of classication does the organising principle supply? Is the category simply a conventional

not appropriate to pursue the issue here. It is discussed at more length in Jaffey, (n. 2), ch. 3. 12 See further P. Jaffey, ‘Two Theories of Unjust Enrichment’ in J. W. Neyers, M. McInnes & S. G. A. Pitel (eds.), Understanding Unjust Enrichment (Hart, Portland 2004), 160. 13 See e.g., G. Virgo, The Principles of the Law of Restitution (2nd edn., OUP, Oxford 2006), 57, discussing the ‘formulaic function’; D. Johnston & R. Zimmermann, ‘Unjustied Enrichment: Surveying the Landscape’ in Johnston & Zimmermann (eds.), Unjustied Enrichment: Key Issues in Comparative Perspective (CUP, Cambridge 2002), 3; E. McKendrick, ‘Taxonomy: Does it Matter’ in Johnston & Zimmermann, ibid., 628, 654. This approach amounts to the ‘weak theory’ as opposed to the ‘strong theory’ of unjust enrichment, distinguished in Jaffey, (n. 12).

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category in the sense above? In practice, the organising principle is taken to justify adopting a framework of standard issues and developing uniform rules for claims in the category. In other words, the category functions as a justicatory category though no argument for this is supplied.

‘Failure of basis’ It is sometimes said that unjust enrichment claims arise from ‘failure of basis’.14 Sometimes the implication seems to be that the claim arises from an invalid transfer, which as pointed out above can only mean that the claim is propertybased. On other occasions ‘failure of basis’ seems to be used to mean that the benet was provided for a purpose that was not fullled. The traditional orthodoxy would be that the claimant should have a claim arising from the failure of the purpose behind a transfer to the defendant only if there was an agreement to that effect between the parties, so the claim should in principle be contractual. Otherwise it would be unfair to the defendant to impose the condition on him. Indeed generally failure of basis is invoked in a contractual context, and it is generally said that agreement is a necessary element of the claim,15 though it is nevertheless denied that the claim is contractual, for reasons considered below. There is of course a considerable literature on the idea of failure of basis, but it is not apparently designed to elucidate an underlying principle of unjust enrichment, and certainly no formulation of the principle appears to have emerged from it.

Is there a principle of unjust enrichment? The literature makes repeated reference to a principle of unjust enrichment, but to invoke a principle is not to formulate it or defend it. It is not sufcient simply to postulate a principle, or to develop a framework supposedly based on a principle – such as the three-stage test for an unjust enrichment claim – without showing how it is based on the supposed principle. Furthermore, setting out in greater and greater detail the supposed consequences of the application of the principle in different circumstances does not amount to explaining what the principle is. What is required is an explanation of the nature of the principle. At the conference it was suggested that, in asking what the principle of unjust enrichment is, I was missing the ‘elephant in the room’. It may be that

14 15

See e.g., Burrows, (n. 1), ch. 10. See e.g., Burrows, ibid.

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this suggestion was based on the misconception that in denying that there is a principle of unjust enrichment I am arguing that certain longstanding and entirely uncontroversial claims that are nowadays widely described as restitutionary or unjust enrichment claims should not be available at all. This is not so of course. The issue is about how such claims should be classied – whether it is apt to describe them as unjust enrichment claims. This depends on the basis of the claim, and it has implications for other possible claims that may be controversial. Although it is obvious that there are and should be claims that arise from the receipt of a benet, it is far from obvious that they fall within a genuine justicatory category based on a general principle of unjust enrichment. It seems to me obvious that it is not the case. I do not believe that there is a general principle of unjust enrichment that can account for the considerable body of law that is now said to form the law of unjust enrichment. In my view, enrichment is a type of event or a state of affairs that can be relevant to a claim for different reasons in different circumstances by virtue of different general principles, in different justicatory categories, in particular contract and property. There are other types of event or states of affairs that are analogous in the sense that they can be relevant to different types of claim for different reasons, and not because of a principle that governs all claims to which that event or state of affairs is relevant. For example, this could be said of the events of reliance, loss, communication and disclosure. The theory of unjust enrichment and the modern tendency to recognise a justicatory category of unjust enrichment is an example of the remedy-as-justication fallacy. It has simply been assumed that all claims to recover a transfer, or more broadly all claims arising from a benet received by the defendant, should be treated in the same way, and then in a process of rationalisation the idea of a principle of unjust enrichment has emerged to provide a spurious common justication for them.

5) THE CONTROVERSIAL CLAIMS ARISING OUT OF UNCOMPLETED CONTRACTS As mentioned at the start of the paper, there are certain claims arising on contract termination that are controversial. These are the claims to recover a contractual prepayment and the claim to recover reasonable payment for work done under the contract. As I mentioned earlier, where the law governing these claims is clear and certain and not brought into question it will make no practical difference how they are classied. But where the law is unsettled, for the reasons outlined above it is a crucial matter to determine which justicatory category the claims are in, since this will determine in general terms how the issues are resolved and how the law develops.

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A contractual analysis Although these claims arise out of a contract, generally on its termination, it seems that they have historically been excluded from contract law for two reasons. First, they are not claims for expectation damages. The assumption may be that contract is necessarily concerned with expectation damages, and therefore that these claims cannot be contractual. But of course one cannot infer from the type of remedy what the justication for the claim is. This is an example of the remedy-as-justication fallacy.16 Secondly, the claims are not based on a breach of duty or wrong. They can arise on frustration, and possibly also where the contract is terminated as a result of the claimant’s own failure to perform, not the defendant’s.17 It is generally assumed that a contract claim must be based on a breach of a contractual duty to perform, and so these claims cannot be contractual. But it is not clear that a claim in contract must necessarily arise from a wrong. In my view this is mistaken. I have argued elsewhere that these claims should be understood as contractual reliance claims.18 On this approach, the principle behind contract – the principle that agreements are binding – can justify holding a contracting party responsible for reliance incurred by the other party on the contract. Where the claimant has made a payment under a contract or has done work under a contract, and the contract terminates before the claimant has received any reciprocal performance under the contract, the claim to recover the prepayment, or the claim for reasonable payment for work done, is explicable on the basis that it protects the claimant’s reliance loss under the contract. Such a claim is not based on the commission of a wrong by the defendant. On this understanding, the benet received by the defendant can also be relevant to the claim; this is so because, since both parties have accepted responsibility for the other’s reliance, in principle there should be an overall accounting or balancing of reliance loss that also takes account of benet received.19 This approach can also explain why a claim can arise where there has not been any benet to the defendant, whereas to deal with this type of case some proponents of the unjust enrichment approach have been forced to take up the idea of a deemed or

16

For example, recently in Taylor v. Motability [2004] EWHC 2619 (Comm), [20– 27], the judge rightly rejected a claim for a “restitutionary remedy”, but also implied that a contractual claim was necessarily a claim for expectation damages. 17 Ibid. 18 P. Jaffey, The Nature and Scope of Restitution (Hart, Oxford 2000), ch. 2. 19 This approach has been adopted in particular circumstances though not generally: see e.g. Cargill International v. Bangladesh Sugar & Food Industries [1996] 4 All ER 563, 568; Tradigrain v. State Trading Corp. of India [2005] EWHC 2206 (Comm), [2006] 1 Lloyd’s Rep 216, [26].

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ctional benet.20 This is a brief summary of the approach, which is discussed more fully elsewhere,21 but I hope it is enough to show its plausibility.

Objections to the unjust enrichment analysis The usual view nowadays seems to be that these claims are not contractual claims and must be unjust enrichment claims. The fundamental problem with this approach is that, although one might want to say that the remedy is restitutionary, or that the claim arises from the receipt of a benet, the important issue is the justicatory category of the claim; and to make out a convincing argument that the claim is an unjust enrichment claim in this sense it is necessary to be able to explain what the principle of unjust enrichment is, and yet as discussed above no such principle has been identied. Another problem is that the claim clearly depends in certain crucial respects on the existence and the terms of the contract. Although it is said to be based on unjust enrichment, it is also said that the reason why the benet is unjust is that the contract was not performed as agreed, or, as it is sometimes put, the termination of the contract means that the basis on which the payment was made has failed.22 But by virtue of what basic principle can the terms of the contract and the fact that it has terminated be relevant, if this is not the basic principle behind contract as a justicatory category? The answer is surely that the claim is indeed contractual, though it is not a claim for expectation damages and it does not arise from a wrong.23 Furthermore, when it comes to the measure of recovery, some commentators, though regarding the claim as a non-contractual unjust enrichment claim, nevertheless hold that the terms of the contract are relevant in determining the measure of recovery. Say the contract provides that the claimant will provide services to the defendant at a specied price, and the claimant provides some of the services before the contract is terminated, and assume that the claimant has a claim for reasonable payment for the services provided. On the contractual reliance approach, there is good reason to say that the measure of reasonable payment should reect the value placed on the services by the contract, and this would mean that the measure of recovery should not generally be affected by changes, after the contract was made, in the market value of the services, or

20

Birks, (n. 1), 126–7, 232–7. Jaffey, (n. 18). 22 Burrows, (n. 1), ch. 10; see also Roxborough & Ors v. Rothmans of Pall Mall Australia Ltd. [2001] HCA 68. 23 The same criticism can be made of Cressman v. Coys of Kensington [2004] 1 WLR 2775. 21

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their value to the defendant, or the cost to the claimant of providing them. If the claimant recovers more or less than the current market rate, or the current value to the defendant of the services, this is simply a reection of the contractual function of allocating the risk of events occurring after the time when the contract was made. But if the claim is a non-contractual unjust enrichment claim, one would think that it must be the current, actual circumstances that are relevant to determining the measure of recovery according to the supposed principle of unjust enrichment, not the terms of the contract. It has been suggested that the contract provides the best evidence of the value of the services to the defendant for the purposes of determining the measure of an unjust enrichment claim.24 In principle, this presumably depends on what the principle of unjust enrichment is and what measure of recovery it prescribes. But, in any case, if the contract is relied on purely in this evidential way, there is no justication for enforcing the contractual risk allocation by disregarding changes in circumstances after the contract was made. Other commentators bite the bullet and accept that the contractual terms should not be relevant to the measure of recovery, on the ground that the contractual allocation of risk should not be enforced by way of the unjust enrichment claim (though of course it remains the case that the claim arises from non-performance of the contract). On this approach, the objection arises that the unjust enrichment claim is liable to subvert the contract and contract law by disturbing the contractual allocation of risk. The response to this objection might be that unjust enrichment is a separate justicatory category and has equal standing with contract, and disturbance to contract law is simply the price that has to be paid for properly recognising the operation of the principle of unjust enrichment. But, once again, determining whether there is a justicatory category of unjust enrichment, and if so what should happen in the event of a clash between this category and contract, depends on identifying and understanding the supposed principle of unjust enrichment. It is sometimes said, instead, that the objection based on subversion of contract is misconceived because the unjust enrichment claim arises only once the contract has terminated, and once the contract has terminated the issue of inconsistency with it cannot arise.25 This response is sensitive to the subversion argument, but it is hopeless. Most (though not all) ordinary contractual claims arise on contractual termination, and they are subject to and give effect to any terms of the contract that are relevant to remedial matters, including the contractual allocation of risk.

24 25

Burrows, (n. 1), 23. Ibid., 331.

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6) BIRKS’S SCHEME OF CLASSIFICATION The main categories of Birks’s well-known scheme of classication are ‘Consents’, ‘Wrongs’ and ‘Unjust Enrichments’.26 He described these as types of ‘causative event’. But causative events are the elements of a classication, not a criterion for a classication. The equivalent in the discussion above is ‘claims’. It does not seem to me to be of great importance, at least for most purposes, whether one chooses claims or causative events as the elements of a legal classication. The crucial issue is what type of classication it is – that is to say, what criterion distinguishes categories of causative event from each other. Birks’s categories seem generally to be regarded by other writers as being in the nature of what I have called justicatory categories, equivalent to contract, tort and unjust enrichment (understood as a justicatory category), but this is difcult to reconcile with what Birks actually said about his classication. First, it appears that Birks was sceptical whether there was a ‘principle of unjust enrichment’, and more broadly whether abstract principles had any practical role in legal reasoning. He thought one should look ‘down at the cases’ not up at abstract principles.27 But these are not alternatives. Insofar as the law is unsettled and there is room for it to be developed, abstract principles that provide the justication for concrete rules must be relevant in developing the rules, as most other proponents of the theory of unjust enrichment accept. Secondly, it seems clear that Birks did not equate his category of ‘Wrongs’ with tort or his category of ‘Consents’ with contract. For example, a breach of contract, which is an event that falls in the justicatory category of contract, was for Birks in the category of ‘Wrongs’ not the category of ‘Consents’; and the transfer of property and the making of a will were for Birks examples of ‘Consents’, though they are not a matter of contract. Birks’s categories, as I have argued elsewhere,28 are best understood not as justicatory categories but as modalities or normative types, like Hohfeld’s legal relations.29 Hohfeld’s classication referred to, amongst others, ‘right-duty’ relations and ‘powerliability’ relations. Birks’s category of ‘Wrongs’ can easily be understood as equivalent to the category of right-duty relations, since the event of a wrong is a breach of duty, and one can dene the same category in terms of either right-

26

Birks, (n. 1), 40; P. Birks, Unjust Enrichment (2nd edn., OUP, Oxford 2005), ch. 2. Birks, (n. 1), 22. A general principle is not relied on in the last work by Birks, (n. 26). 28 P. Jaffey, ‘Classication and unjust enrichment’ (2004) 67 MLR 1012; see also Jaffey, (n. 2). 29 W. N. Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning (D. Campbell and P. Thomas (eds.), Ashgate, Aldershot 2001, originally published 1913–17). 27

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duty relations or wrongs. Similarly, from the examples of ‘Consents’ mentioned above, it seems that they are examples of the exercise of a power, so this category can be equated with the category of Hohfeldian power-liability relations. But the role of modalities or normative types in the law is quite different from that of justicatory categories. They are part of the language necessary for expressing legal rules clearly and precisely, but they are not themselves associated with particular principles or types of justication for a claim, such as contract or tort. On this interpretation of Birks’s scheme, one objection is that, although ‘Wrongs’ and ‘Consents’ can be understood as modalities or normative types, unjust enrichment cannot. As suggested above, enrichment is simply a type of event or state of affairs that can be relevant for different reasons in different circumstances, in the same way as reliance or loss. It is not associated with a particular modality or normative type any more than it is associated with a particular principle or justicatory category. More importantly, classication by normative type or modality cannot in any case provide support for the type of project that Birks was pursuing. The theory of unjust enrichment requires a justicatory category of unjust enrichment based on a principle of unjust enrichment. This is because it involves the development of the law by analogy, as discussed above. This reveals a problem in Birks’s general approach. On the one hand, he was committed to the development of the common law through analogical reasoning to recognise a category of unjust enrichment, and this development makes sense only on the basis that the category is a justicatory category supported by a principle of unjust enrichment. On the other hand, he deprecated the importance of underlying principles and thought that legal analysis and the development of the law could be done without them. This is the classic formalist misconception that unsettled law and controversial cases can be resolved purely by conceptual analysis, including Hohfeldian analysis, meaning the formulation of the law using the correct normative types or modalities. These two lines of thought in Birks’s work are totally at odds with each other.

CONCLUSION There are many ways to classify legal claims. The most important in my view is classication by justicatory category. Classication by justicatory category is relevant to legal reasoning where the law is unsettled, and it contributes to the development of the law by way of analogical reasoning. The theory of unjust enrichment, which holds that claims arising from the receipt of a benet should be brought together for common treatment, amounts to the assertion that there is a justicatory category of unjust enrichment, based on a general principle of unjust enrichment. But no satisfactory formulation of the principle

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has emerged from the literature or the case law. The theory of unjust enrichment and the recognition of a justicatory category of unjust enrichment seem to be based on the remedy-as-justication fallacy – the fallacy that claims for a certain remedy must fall in the same justicatory category. The claim to recover a contractual prepayment and the claim for reasonable payment for work done under a contract, which sometimes arise on contractual termination, are widely said to be restitutionary or unjust enrichment, rather than contractual, claims. Most commentators who take this view support the theory of unjust enrichment as I have described it, and implicitly recognise unjust enrichment as a justicatory category comparable to contract or tort. This characterisation of the claims is not just a matter of labelling; it is liable to affect the content of the law and its development. But until such time as a plausible version of the principle of unjust enrichment appears, this approach is built on sand. In my view, commentators who take this approach should be prepared to explain what they have in mind when they invoke a principle of unjust enrichment or treat unjust enrichment as a category implicitly based on such a principle; alternatively, if they think this is not relevant to the characterisation of claims as restitutionary or unjust enrichment claims, they should be prepared to explain what sort of category they have in mind and what its signicance is. Furthermore, it seems to me, they should be prepared to give serious attention to alternative explanations of these claims, including the contractual reliance explanation briey outlined above. Nothing less than this should satisfy anyone who is genuinely interested in the coherence and sound theoretical development of the common law.

PART 3 CLARIFYING THE LAW OF CONTRACT

Chapter 12 The Purpose of the Doctrine of Presumed Undue Inuence Jesse Elvin* INTRODUCTION This paper examines the doctrine of presumed undue inuence in the light of a number of recent English appellate court decisions. It argues that these decisions have failed to clarify the law, and that they suggest that there is no predominant English judicial view about the purpose of the doctrine. As ChenWishart states,1 there are three main competing interpretations of the rationale of the doctrine. The rst two views focus on procedural unfairness. These views are, rstly, one that focuses on whether the stronger party was guilty of a form of wrongdoing in relation to a position of inuence or trust, and, secondly, one that focuses on whether the ‘weaker’ party’s will was ‘overborne’ and which regards any misconduct on the ‘stronger’ or ascendant party’s part as irrelevant. In contrast, the third view of the doctrine of presumed undue

* I would like to thank Arlie Loughnan and Paula Giliker for their comments on earlier drafts of this paper. 1 Contract Law (OUP, Oxford 2005) 347.

231 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 231–253. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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inuence emphasises substantive unfairness, characterising the purpose of the doctrine as the protection of vulnerable parties from improvident transactions.2 My argument is that none of these interpretations may be viewed as constituting the predominant concept of presumed undue inuence among the English judiciary, notwithstanding Birks’ statement that the courts currently favour the idea of presumed undue inuence as a form of wrongdoing,3 and Bigwood’s parallel observation that judicial and academic statements generally ‘locate the rationale of undue inuence in “victimization” or “exploitation” avoidance’.4 At this stage, it is important to clarify exactly what this paper adds to the existing literature on the subject. Uniquely, it is a detailed analysis of the recent senior English appellate cases on presumed undue inuence framed by the terms of the three main competing views about the purpose of the doctrine. It challenges the assumption, held by commentators such as Birks5 and Bigwood,6 that the English judiciary favour a particular view about the true nature and rationale of presumed undue inuence. At the outset, it must be recognised that these commentators do not claim that it is possible to devise an explanation of the law that accounts for all of the approaches and outcomes that are observable in the case law in this area.7 However, they do imply that, although the case law is contradictory, it is possible ‘to capture the true nature of relational [i.e., presumed] undue inuence, howsoever that phenomenon manifests in a particular case’.8 This paper argues that recent English cases indicate that this is misleading; that is, that it is not possible to discern overwhelming support in the recent case law for a particular understanding of the nature of presumed undue inuence. In this respect, the English position regarding the doctrine of presumed undue inuence appears to be the same as the position regarding the doctrine in Canada. As Richards J. A. put it in Van de Geer Estate v. Penner, ‘the relevant law with respect to the doctrine of undue inuence has not been fully resolved

2

Ibid. See too J. Cooke and D. Oughton, The Common Law of Obligations (3rd edn., Butterworths, London 2000) 478, stating, ‘[w]here the court . . . [intervenes], it would appear to do so on grounds of substantive fairness of the result in a particular case’. 3 P. Birks, ‘Undue Inuence as Wrongful Exploitation’ (2004) 120 LQR 34, 35–6. See too M. Chen-Wishart (n. 1) 349. 4 R. Bigwood, Exploitative Contracts (OUP, Oxford 2003) 383. 5 See e.g., P. Birks and N.-Y. Chin, ‘On the Nature of Undue Inuence’ in J. Beatson and D. Friedman (eds.), Good Faith and Fault in Contract Law (OUP, Oxford 1995). 6 See e.g., R. Bigwood, ‘Undue Inuence: “Impaired Consent” or “Wicked Exploitation”?’ (1996) 16 OJLS 503. 7 See e.g., R. Bigwood (n. 4) 473, observing that ‘the true nature of the subject jurisdiction must be found more in abstract considerations of principle, policy and doctrinal unity than in the irreconcilable expository strands and approaches observable in the case law in this area’. See too P. Birks (n. 3). 8 R. Bigwood (n. 4) 470.

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by the Supreme Court of Canada’.9 In Geffen v. Goodman Estate, the leading Canadian case on the doctrine of presumed undue inuence, the Supreme Court of Canada was unable to agree on the purpose of the doctrine.10 La Forest J, for example, acknowledged that there are ‘differing views on what the doctrine of undue inuence is designed to protect’,11 but stated that ‘it is unnecessary for us to choose between these . . . opposing positions in the context of this case . . . and I think it is unwise to do so’.12 Why does it matter which rationale the courts prefer? As Bigwood has pointed out, this issue is important because one’s view about the correct application of the doctrine ‘will be coloured largely by what one considers to be the true nature and rationale of relational [i.e., presumed] undue inuence’.13 For example, a judge who believes that the doctrine is concerned with wrongdoing will require a party seeking relief for presumed undue inuence to establish that the other party’s conduct was reprehensible. In contrast, a judge who believes that the doctrine is concerned with defective consent will focus on the complainant’s capacity to make decisions at the time of the transaction. Finally, a judge who believes that the rationale of the doctrine is to protect parties from improvidence will focus on the issue of substantive unfairness; that is, on whether the transaction is ‘seriously unfair’ or inappropriate, given the nature of the relationship between the parties. The rest of this paper consists of four parts. Firstly, I provide a standard denition of undue inuence, found in many cases, which serves as a general introduction to the subject. Secondly, I outline the distinction between the three main competing views of presumed undue inuence. Thirdly, I analyse the recent case law in terms of these three perspectives. Finally, I conclude that the analysis of the recent case law indicates that there is no predominant concept of presumed undue inuence among the English judiciary.

1) A GENERAL OUTLINE OF THE DOCTRINE OF UNDUE INFLUENCE The doctrine of undue inuence applies to transactions such as contracts and gifts. It can be used to set aside these transactions in certain circumstances. Unfortunately, judges are reluctant to clarify its exact nature. As Birks and

9

2006 SKCA 12 (Court of Appeal for Saskatchewan, Canada) [68]. [1991] 2 SCR 353. 11 Ibid., [85]. 12 Ibid., [86]. 13 R. Bigwood, ‘Undue Inuence in the House of Lords: Principles and Proof’ (2002) 65 MLR 435, 445. 10

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Chin have pointed out, the courts often favour circular denitions: ‘the requirements of relief for undue inuence are that there must be inuence and that it must be undue’.14 In Royal Bank of Scotland v. Etridge (No. 2), for instance, Lord Nicholls said: If the intention [to enter into a transaction] was produced by unacceptable means, the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or ‘undue inuence’, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as an expression of a person’s free will. It is impossible to be more precise or denitive.15

This comment does not indicate what is legally ‘unacceptable’, although, as I will discuss later, his Lordship considered the concept of undue inuence in more detail, notwithstanding his conclusion that it is impossible to dene it with precision because ‘[t]he circumstances in which one person acquires inuence over another, and the manner in which inuence may be exercised, vary too widely to permit of any more specic criterion’.16 Lord Clyde agreed with Lord Nicholls in Etridge, pointing out that ‘there is a considerable variety in the particular methods by which undue inuence may be brought to bear . . . They include cases of coercion, domination, victimisation, and all the insidious techniques of persuasion’.17 However, he also added a few observations of his own. In particular, he questioned the wisdom of attempting to make classications of cases of undue inuence, stating that undue inuence is ‘something which can be more easily recognised when found than exhaustively analysed in the abstract’.18 In this respect, he was challenging the practice, which can be seen in a number of cases, of dividing undue inuence into two classes: ‘actual’, or class one, undue inuence, on the one hand, and presumed, or class two, undue inuence, on the other.19 With actual undue inuence, the claimant must provide evidence of overt acts of improper pressure or coercion by the party alleged to have exercised the undue inuence.20 Once the claimant has proved that such pressure or coercion was actually applied, there is no need for him or her to also prove that the transaction was ‘manifestly disadvantageous’21 or, as Lord Nicholls put it in Etridge,

14

P. Birks and N.-Y. Chin (n. 5) 86. [2001] UKHL 44, [2002] 2 AC 773, [7]. 16 Ibid. 17 Ibid., [93]. 18 Ibid. 19 This classicatory scheme was adopted by the Court of Appeal in Bank of Credit and Commerce International SA v. Aboody [1990] 1 QB 923, 953. It was approved by Lord Browne-Wilkinson in Barclays Bank plc v. O’Brien [1994] 1 AC 180 (HL) 189. 20 Etridge (n. 15) [8] (Lord Nicholls). 21 CIBC Mortgages plc v. Pitt [1994] 1 AC 200 (HL) 209 (Lord Browne-Wilkinson). 15

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that it ‘calls for explanation’.22 In contrast, in cases of presumed undue inuence, evidence of overt acts of improper pressure or coercion is not relevant, but proof of a relationship of trust and condence, coupled with a transaction that calls for explanation, is essential; as Lord Nicholls put it in Etridge, in this kind of case, ‘proof that the complainant placed trust and condence in the other party in relation to the management of the complainant’s nancial affairs, coupled with a transaction which calls for explanation, will normally be sufcient, failing satisfactory evidence to the contrary, to discharge the burden of proof’.23 According to conventional understanding, once the presumption of undue inuence has arisen, it can be rebutted with proof that the weaker party acted independently of any inuence of the other party and with full appreciation of what he or she was doing, or, to put it another way, that the transaction was made by the weaker party ‘only after full, free, and informed thought about it’.24 The usual way of rebutting this presumption is to show that the weaker party had full, competent and independent advice about the nature and effect of the transaction before acting.

2) THE THREE VIEWS REGARDING THE BASIS OF RELIEF FOR PRESUMED UNDUE INFLUENCE It is generally accepted that actual undue inuence cases are concerned with improper pressure. Birks and Chin have accordingly argued that all cases of illegitimate pressure, or actual undue inuence, ‘should be treated as duress’.25 I will not engage with this argument in this article. What matters here is the justication for the doctrine of presumed undue inuence. Bigwood’s view is that, in cases of alleged presumed undue inuence, the court must look to see whether there has been misplaced trust or reliance, since the purpose of the doctrine of presumed undue inuence is, and should be, ‘to police the conduct or “conscience” of the recipient of a benecial nancial transaction, whether it be a contract or a gift’.26 An alternative view, proposed by Birks and Chin in an article published in 1995, is that the basis of relief for presumed undue inuence is, and should be, the impairment of autonomy, and that a party who seeks help on this basis does not need to prove fault or wrongdoing on the part of the defendant.27 In making this claim, Birks and Chin argue that the focus is

22

Etridge (n. 15) [14]. Ibid. 24 Zamet v. Hyman [1961] 1 WLR 1442 (CA) (Evershed MR). 25 P. Birks and N.-Y. Chin (n. 5) 63. 26 R. Bigwood (n. 6) 512. 27 P. Birks and N.-Y. Chin (n. 5). As I will discuss in more detail below, Birks later stated that the courts currently favour the notion of undue inuence as a wrong. 23

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on the claimant; that is, ‘that the doctrine . . . is about [the claimant’s] impaired consent’.28 A third view, advocated by Chen-Wishart, is that the emphasis is on whether the transaction is substantively unfair.29 I will examine these three alternative views in order. According to Bigwood, presumed undue inuence is a type of passive wrongdoing. The claimant’s vulnerability is relevant, since all wrongful conduct in this context begins with the claimant’s ‘peculiar vulnerability’.30 However, Bigwood argues that the focus is, and should be, on a principle of what he calls ‘transactional neglect’. According to this principle, the defendant has ‘a responsibility . . . to take reasonable precautions in the circumstances (e.g., by way of disclosure, explanation, ensuring that P [the plaintiff] is independently advised, and the like) to prevent P being used merely instrumentally in D’s own economic project’.31 As Bigwood puts it, ‘what is characteristically “vulnerable” about victims of [presumed] undue inuence is that they are all parties who have in some way “let down their guard”; they have “renounced playing for advantage themselves”. They are, accordingly, justied in believing that the other party is acting, or will act, exclusively in their interests’.32 In contrast to Birks and Chin, Bigwood claims that ‘the rationale of the doctrine lies not merely in the actions, circumstances or condition of the subservient party herself’.33 Bigwood argues the will of the victim of presumed undue inuence is not ‘overborne’: ‘[t]here may have been misplaced trust or reliance, but the victim still acts “intentionally”, perhaps even acceding to the transaction euphorically’.34 By failing to take reasonable precautions, ‘what the ascendant party does in the [presumed] undue inuence context . . . is wrongfully make the option put to the subservient party (i.e. of entering into the transaction in

28

P. Birks and N.-Y. Chin (n. 5) 58. It might be objected that Birks and Chin’s account wrongly implies that the party who alleges undue inuence is necessarily the claimant. However, as they put it, ‘it is convenient to refer to the party against whom relief for undue inuence is sought as the defendant, even though in some congurations it is in fact the plaintiff who is obliged to resist a defence based on undue inuence’. 29 See e.g., M. Chen-Wishart, ‘The O’Brien Principle and Substantive Unfairness’ (1997) 56 CLJ 60. Chen-Wishart’s 2006 analysis of this area of the law was published too late for comment here: ‘Undue Inuence: Beyond Impaired Consent and Wrongdoing Towards a Relational Analysis’ in A. Burrows and A. Rodger (eds.), Mapping the Law: Essays in Honour of Peter Birks (OUP, Oxford 2006). 30 (n. 6) 509. 31 R. Bigwood, ‘Contracts by Unfair Advantage: From Exploitation to Transactional Neglect’ (2005) 25 OJLS 65, 68. 32 (n. 6) 510, quoting R. Goodin, ‘Exploiting a Situation and Exploiting a Person’ in A. Reeve (ed.), Modern Theories of Exploitation (Sage, London 1987) 185. 33 Ibid., 512. 34 Ibid., 511.

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question) appear to be a reasonable thing to do in the circumstances’.35 In short, Bigwood’s claim is that presumed, or what he calls ‘relational’, undue inuence is a form of wrongdoing. However, it is important to note that he has rened his analysis in recent years to make it clear that, in his opinion, presumed undue inuence does not necessarily involve ‘exploitation’. By this, Bigwood means that ‘the obligations . . . of “transactional care” . . . generated by legal neighbourhood in this context . . . [contemplate] the proscription of careless, as well as exploitative, conduct on D’s part’.36 What does he mean by ‘exploitation’ in this context? According to him, ‘a judgment of “exploitation” requires that D must either intend to take advantage of P’s . . . weakness or vulnerability, or else act in reckless disregard of P’s probable weakness or vulnerability’.37 To put it another way, ‘exploitation’ occurs where ‘D has deliberately (intentionally, recklessly) chosen not to respond . . . to an unreasonable risk of a foreseeable outcome, namely, that P will be used merely instrumentally if D does not act to avoid the outcome of his known power over P’.38 In contrast to Bigwood, Birks and Chin argue that undue inuence is a claimant-sided doctrine: ‘the relief follows from the impairment of the plaintiff’s capacity to make decisions’.39 According to them, it follows from this that the claimant need not prove wrongdoing by the defendant. However, this does not necessarily mean that the defendant did not behave unconscionably; it means only that ‘it is not necessary for the party claiming relief to point to fraud or unconscionable behaviour on the part of the other’.40 Birks and Chin argue that presumed undue inuence can ‘embrace cases in which the unconscientiousness consists only in attempting to enforce or to retain the benet of a transaction which was not unconscientiously entered’.41 They call this ‘unconscientiousness ex post’.42 What exactly is the underlying rationale of the doctrine of presumed undue inuence, according to Birks and Chin’s analysis? They claim that such cases involve a claimant who has lost his or her autonomy within the context of a relationship with the defendant; ‘the relevant weakness of the plaintiff is that, within the relationship, by reason of excessive dependence on the other person, he or she lacks the capacity for self-management which the law attributes to the generality of adults’.43 By ‘excessive’, they mean that ‘the abdication of the one

35 36 37 38 39 40 41 42 43

Ibid. R. Bigwood (n. 31) 87. Ibid., 78–9. Ibid., 79. P. Birks and N.-Y. Chin (n. 5) 60. Ibid., 61. Ibid., 60. Ibid., 62. P. Birks and N.-Y. Chin (n. 5) 67.

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judgment to the other must be out of the ordinary’;44 it need not be absolute. Birks and Chin use Allcard v. Skinner 45 to illustrate their argument. In this case, the claimant was a former member of a religious ‘sisterhood’ who sought to recover some of the wealth she had given to the Mother Superior of the sisterhood while she had been one of its members. She had made the gifts in accordance with a rule that required all members to give up their property, preferably in favour of the sisterhood, where it would be held in trust by the Mother Superior for the purposes of the sisterhood. As Birks and Chin point out,46 the claimant failed to recover the gifts, but only because she had waited too long after leaving the religious order. She would have otherwise been entitled to recover such part of her property as was still in the hands of the Mother Superior. However, what would have been the basis for this entitlement? In a passage worth quoting at length because of its revealing nature, Birks and Chin claim, In presuming the undue inuence, the Court of Appeal was not presuming recourse to threats, express or implied, either by the Mother Superior or by the clergyman who had been the co-founder of the convent. The plaintiff had been under a spell compounded of her enthusiasm for the sisterhood and devotion to its rules, which included an obligation to seek advice only within the order. Her weakness consisted in her impaired capacity vis-à-vis the head of the order to judge her own best interests. She was excessively dependent or, if ‘dependent’ is a shade wrong, she was excessively spell-bound. Either way, her autonomy was impaired to an exceptional degree.47

In Birks and Chin’s opinion, Allcard shows that presumed undue inuence requires an element of excessive dependency, but that it does not require, though may involve, an element of wrongdoing by the defendant. What is the third view regarding the rationale of the doctrine? Chen-Wishart argues that the basis of the doctrine lies in substantive, as opposed to procedural, unfairness.48 In her opinion, the role of the doctrine is to provide relief from seriously harmful transactions in the context of relationships involving trust and condence. She argues that the other interpretations of the jurisdiction cannot explain the outcomes of certain leading cases. For instance, she claims that Allcard is ‘inconsistent with an unconscientious conduct rationale’,49 since ‘the court found presumed undue inuence, although it acquitted the Mother

44

Ibid. (1887) LR 36 Ch. D 145 (CA). 46 P. Birks and N.-Y. Chin (n. 5) 68. 47 Ibid. 48 She has made this view explicit in a number of conference presentations, public lectures, etc.: e.g., ‘Undue Inuence: Vindicating Relationships of Inuence’ (public lecture given at University College London, 2006). She has also implicitly advanced it in her contract law textbook (n. 1). See too M. Chen-Wishart (n. 29). 49 M. Chen-Wishart (n. 1) 349. 45

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Superior of any . . . [wrongdoing]’.50 However, she also argues that ‘it is unrealistic to say that the novice nun . . . lacked autonomy or that her consent was “impaired”,51 since, for example, Lindley L. J. made it clear that there was no evidence that the novice nun ‘was unable to take care of herself or to manage her own affairs’.52 According to Chen-Wishart, the best view is that the court found presumed undue inuence in Allcard because the transaction was objectively inappropriate, given its ‘improvidence . . . to the novice nun’.53 Her claim is that, although the courts often use words like ‘consent’ and ‘wrongdoing’, the only logical view, given the outcomes of cases such as Allcard, is that they are concerned with providing ‘relief from improvident transactions in protected circumstances’.54 In emphasising the role of substantive unfairness, she asserts that there can be presumed undue inuence in the absence of procedural unfairness. As she acknowledges, her interpretation of the doctrine of presumed undue inuence raises the issue of ‘whether English should adopt a general principle of [substantive] unfairness’.55

3) AN ANALYSIS OF THE MODERN CASE LAW The differences, and similarities, between the three main competing analyses of the rationale of the doctrine of presumed undue inuence can be seen in an analysis of the modern English case law.56 Looking at the senior appellate cases dating back to, and including, Etridge, it is clear that there is support for the view that the rationale of presumed undue inuence lies in whether the stronger or ascendant was at fault. The most recent of these cases is Leeder v. Stevens.57 The question for the Court of Appeal in Leeder was whether it should set aside the exchange of a half share of a house for £5,000 by application of the principles of undue inuence. The Court stated

50

Ibid. Ibid., 350. 52 (1887) 36 Ch. D 145 (CA), 178. 53 M. Chen-Wishart (n. 1) 350. 54 M. Chen-Wishart ibid. 347. 55 Ibid., 347. 56 Since it is not possible to provide a detailed empirical analysis of lower court decisions in a paper of this length, I will focus on Etridge and the subsequent Court of Appeal decisions up to May 2006. Etridge is signicant because it is the most recent House of Lords decision in this area of the law. While the approach of the Court of Appeal and the House of Lords is not necessarily indicative of the general approach of the English courts to presumed undue inuence, it is the best evidence that we have in this respect in the absence of a comprehensive study of lower court decisions. 57 [2005] EWCA Civ 50. 51

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that these principles had been laid down in Etridge, and quoted from the speech of Lord Nicholls in this case. In the relevant part of his speech, his Lordship stated that undue inuence is a form of unacceptable conduct, adding that one form of such conduct ‘arises out of a relationship between two persons where one has acquired over another a measure of inuence, or ascendancy, of which the ascendant person then takes unfair advantage’.58 According to Lord Nicholls, In cases of this latter nature the inuence one person has over another provides scope for misuse without any specic overt acts of persuasion. The relationship between two individuals may be such that, without more, one of them is disposed to agree a course of action proposed by the other. Typically this occurs when one person places trust in another to look after his affairs and interests, and the latter betrays this trust by preferring his own interests. He abuses the inuence he has acquired.59

Applying Lord Nicholls’ principles to the facts of the case at hand in Leeder, the Court concluded that the defendant had raised the presumption of undue inuence, and that the claimant had failed to rebut it. The parties had been in a close and loving relationship, and the defendant had placed trust and condence in the claimant. In relation to the requirement, identied by Lord Nicholls in Etridge, that the party alleging presumed undue inuence show that the transaction is not readily explicable by the relationship of the parties, the Court of Appeal noted that that the disputed agreement was ‘a transaction which cried out for explanation other than going beyond merely a loving relationship. It is manifest . . . that the claimant must have known that the transaction was to his advantage’.60 The emphasized text suggests that it was signicant that the claimant’s conduct was morally blameworthy. He had claimed that he had not considered the value of the house. However, the Court described this as a ‘remarkable piece of evidence’,61 and noted that he had ‘accepted rather grudgingly in the evidence’ that he had realised that the transaction had been imbalanced in his favour.62 Importantly, he had realised that, under the terms of the transaction, he could force the defendant to sell the house immediately unless she bought his share of it;63 that is, that ‘the draft deed . . . contained potentially disastrous terms from the defendant’s point of view’.64 It seems that the Court therefore concluded that he had taken unfair advantage of his relationship with

58 59 60 61 62 63 64

Etridge (n. 15) [8]. Ibid., [ 9]. Leeder (n. 57) [17] (Jacob L. J.) (emphasis added). Ibid. Ibid. Ibid., [7]. Ibid., [9].

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the defendant; that is, betrayed the defendant’s trust by preferring his own interests. He had realised that the transaction had been imbalanced in his favour and potentially disastrous from the defendant’s point of view, and, as Bigwood might put it, he had failed to take reasonable precautions (for example, by ensuring that the defendant received independent legal advice) to prevent her ‘being used merely instrumentally in . . . [his] own economic project’.65 The decision of the Court of Appeal in Macklin v. Dowsett66 similarly supports the view that the emphasis in cases of alleged presumed undue inuence is on whether the party seeking to enforce the agreement behaved unreasonably. The facts of this dispute are complex. A local authority condemned the defendant’s bungalow, but, in 1994, granted him permission to rebuild it, provided he commenced construction within ve years. He began to demolish the bungalow, and moved into a caravan on the site, but made no signicant move to start the construction, and, in 1996, he sold his property to the claimants on the condition that he could live there rent free for the rest of his life. There was nothing in this agreement to prevent him from constructing the new bungalow for which he had obtained planning permission, or to require him to do so. However, it prohibited him from assigning his life tenancy to a third party. In January 1999, one month before the lapse in the planning permission unless the construction commenced, the claimants arranged for a local builder to start the necessary work. ‘At about the same time’,67 they entered into another agreement with the defendant in which he promised to surrender the life tenancy in return for £5,000 if he did not nish building the new bungalow within three years. After he failed to build the new house within this time, the claimants attempted to enforce the 1999 option agreement. In response, he alleged that was not bound by it, arguing that it should be set aside on the grounds of presumed undue inuence. The Court of Appeal agreed with this argument. Referring to the ruling of the House of Lords in Etridge, the Court held that the defendant had to show two things to raise the presumption of undue inuence: ‘(1) that, in entering into the option agreement, he had reposed trust and condence in the . . . [claimants] or that they had acquired some ascendancy over him; and (2) that the transaction was not otherwise readily explicable by the relationship between them’.68 In looking at the relationship between the parties, the Court focused on the nancial disparity between them shortly before the formation of the 1999 agreement. Unlike the claimants, the defendant had not had the nancial means to save the planning permission by making a start on the construction. According to the Court, this nancial disparity meant that there had been a relationship of ascendancy and dependency between the

65 66 67 68

R. Bigwood (n. 31). [2004] EWCA Civ 904. Ibid., [8] (Auld L. J.). Ibid., [10].

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parties.69 Furthermore, the Court held that the transaction ‘required explanation’.70 As Auld L. J. put it, this was because it effectively gave the claimants ‘the right to force . . . [the defendant] to surrender his right to live at the property rent free for the rest of his life for a mere payment of £5,000’.71 What is the rationale of the doctrine of presumed undue inuence, according to the decision in Macklin? Auld L. J. stated in the course of his judgment that ‘recent authorities of this Court have underlined the rationale of the doctrine of undue inuence as the protection of the vulnerable in dealings with their property and also the lack of any need to show misconduct on the part of the transferee’.72 However, this passage is difcult to understand. The reference to the lack of any need to show misconduct arguably implies that there is no need to show morally reprehensible conduct on the part of the transferee. Nonetheless, it appears that the claimants lost the case precisely because they had intentionally taken advantage of the defendant’s nancial weakness to dictate inequitable terms. According to Auld L. J., they had known, before they proposed the option agreement to the defendant, that he did not have the nancial resources to preserve the planning permission himself by beginning the construction,73 and that he would face the possibility of living in a caravan for the rest of his life unless the necessary construction commenced in time. In the words of Auld L. J., they started this construction themselves ‘to preserve and enhance the commercial value of their own future interest in the property and, notionally at any rate, to preserve for him the somewhat theoretical opportunity to support that aim by building the bungalow himself. The terms that they proposed . . .in the 1999 agreement . . . clearly signalled their doubt that he would make it and their wish to drive a hard bargain in the likely event that he would not’.74 In focusing on the issue of the claimants’ state of knowledge and their intention, Auld L. J. was considering whether they had unfairly exploited the situation. He concluded that they had, since they had realised that the defendant did not have the nancial resources to build the bungalow within the time, and that the 1999 agreement would therefore effectively grant them the option of purchasing his life tenancy for only £5,000 in three years time. Karen Walden-Smith, who appeared on behalf of the defendant in Macklin, has rightly characterised the case ‘as an example of the court intervening to protect the vulnerable from

69

Ibid., [28]. Ibid., [30]. 71 Ibid. 72 Ibid., [10], citing Jennings v. Cairns [2003] EWCA 1935 [34], [35] and [40] (Arden L. J.) and Niersmans v. Pesticcio [2004] EWCA Civ 372 [1], [2] and [4] (Mummery L. J.). 73 Ibid., [28]. 74 Ibid. 70

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exploitation’.75 In her opinion, it is a re-assertion of the ‘power of the court of equity to protect the vulnerable and to prevent unconscionable conduct’.76 What, then, did Auld L. J. mean when he referred to ‘the lack of any need to show misconduct on the part of the transferee’? The way that he decided the case suggests that, by ‘misconduct’, he meant improper pressure or threats,77 and that improper pressure or threats are irrelevant in relation to presumed undue inuence. Chater v. Mortgage Agency Services,78 a 2003 Court of Appeal decision, is also authority for the view that presumed undue inuence concerns wrongdoing. In this case, a mother transferred her property into the joint names of herself and her son. At the same time, they jointly obtained a mortgage secured against the house so that he could invest in a business. The business failed. When the mortgage fell into arrears, the bank sought to possess the property. In her defence, the mother argued that her son had unduly inuenced her to enter into the mortgage, and that the bank was xed with constructive notice of this undue inuence.79 Scott Baker L. J. gave the judgment of the Court. He said that ‘the burden of proving an allegation of undue inuence rests upon the person who claims to have been wronged’.80 In considering whether there was sufcient evidence about the transaction to raise the inference that it was procured by undue inuence, he asked, ‘was there prima facie evidence that the son abused the inuence that he had in his relationship with his mother?’81 He decided that, given the evidence, the mother had raised the inference that she had been victimised by her son, and that there was no satisfactory explanation to rebut the presumption that the son had ‘[taken] his mother for a ride’.82 Importantly, the transaction had been extremely unwise from her point of view: for instance, ‘she had gone from having a modest mortgage with a local authority on a property in her sole name to having a commercial mortgage many times larger and only owning half the property’.83 In characterising undue inuence as an

75

‘Protecting the Vulnerable – The Court of Appeal’s Decision in Macklin v. Dowsett’ accessed 10 October 2006. 76 Ibid. 77 Whether this is what the Court of Appeal meant by ‘misconduct’ in the cases to which Auld L. J. referred is a different issue. 78 [2003] EWCA Civ 490, [2004] 1 P & CR 4. 79 She also argued that she had been induced to enter the mortgage by a misrepresentation. However, this argument is irrelevant for the purposes of this paper, as is the issue of constructive notice. 80 Chater (n. 78) [22]. 81 Ibid., [27] (Scott Baker L. J.). 82 Ibid., [38]. 83 Ibid., [34].

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‘equitable wrong’,84 Scott Baker L. J. suggested that the conduct of the alleged user of the undue inuence is the important issue. The best way of explaining the nding of undue inuence in Chater is therefore by reference to the son’s behaviour: that is to say, the best interpretation of Chater is that the court found undue inuence because the evidence suggested that the son had behaved unreasonably. He must have realised that the transaction had been extremely improvident from the perspective of his mother, yet, as Bigwood might put it, the evidence suggested that he failed ‘to take reasonable precautions in the circumstances . . . to prevent . . . [his mother] being used merely instrumentally in . . . [his] own economic project’.85 It is signicant that one can also interpret Etridge as supporting the concept of presumed undue inuence as wrongdoing. This case concerned the doctrine of constructive notice, which relates to three-party situations where A may be unable to enforce a transaction against B because of the undue inuence or misrepresentation of C. However, the House of Lords took the opportunity to consider the general principles regarding undue inuence. I have already stated that, in Etridge, Lord Nicholls talked about undue inuence as an unacceptable form of conduct, emphasising that presumed undue inuence concerns a ‘relationship between two persons where one has acquired over another a measure of inuence . . . of which the ascendant person then takes unfair advantage’.86 After having observed that ‘undue inuence has a connotation of impropriety’,87 his Lordship discussed the concept of unacceptable conduct in more detail. In talking about whether a wife’s guarantee of her husband’s bank overdraft was procured by her husband’s undue inuence, he said, ‘statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue inuence’.88 In the same case, Lord Clyde similarly suggested that undue inuence is a form of unfair or ‘sinister’ exploitation, noting, ‘in the case of certain relationships it will be relatively easier to establish that undue inuence has been at work than in other cases where that sinister conclusion is not necessarily to be drawn with such ease’.89 Furthermore, Lord Hobhouse also suggested in Etridge that presumed undue inuence consists of a reprehensible failure to protect the weaker party’s interests. According to him, ‘presumed undue inuence . . . necessarily involves some legally recognised relationship between the two parties. As a result of that relationship one party is treated as

84 85 86 87 88 89

Ibid., [20], [22]. R. Bigwood (n. 31). Etridge (n. 15) [8]. Ibid., [32]. Ibid. Ibid., [93].

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owing a special duty to deal fairly with the other’.90 These comments by Lords Nicholls, Clyde and Hobhouse support Bigwood’s argument ‘that undue inuence is at its logical core concerned to discipline unfair advantage-taking . . . in interpersonal transactional encounters’.91 Having examined the evidence that supports Bigwood’s argument, I will now turn to the contradictory evidence that supports the second and third views on the rationale of the doctrine of presumed undue inuence. These views are similar to each other in the sense that they both see fault or wrongdoing as irrelevant in this context, but the former account focuses on the issue of impaired or defective consent, whereas the latter analysis emphasises the role of substantive unfairness. Looking again at the senior appellate cases dating back to, and including, Etridge, it is clear that there is support for Birks and Chin’s argument that the basis of relief for presumed undue inuence is the impairment of autonomy. However, it is equally clear that some aspects of the decisions provide support for, or at least are consistent with, Chen-Wishart’s claim that the purpose of the doctrine of presumed undue inuence is to provide relief from seriously improvident transactions in protected circumstances. Taking the cases in reverse chronological order, the most recent is Turkey v. Awadh.92 In this case, the claimant entered an agreement with the defendants, his daughter and son-in-law, which provided that they would transfer their house to him once he had paid them £93,000 and discharged their mortgage and other debts and obligations in relation to the house. When the claimant sought to enforce the agreement, the defendants alleged presumed undue inuence. The Court of Appeal made three main general observations. First, it stated that, in cases of presumed undue inuence, ‘there was no need to show either misconduct by the claimant or that the deal was disadvantageous to the defendant’.93 Second, it emphasized that ‘it is important to keep in mind that what is described in the cases as presumed undue inuence is, on a true analysis, no more than a label given to an evidential presumption which has the effect of shifting the burden of proof’.94 Third, it asserted that two conditions ‘must be established in order to raise the evidential presumption’:95 rst, there must be facts that ‘persuade the court that the party seeking to uphold the transaction (say, party A) was in a position to inuence the will of the other party (party B) in relation to a transaction of the relevant nature’;96 second, there must be facts that ‘persuade the court that the transaction in question is of such a nature that a person in the position of party B,

90 91 92 93 94 95 96

Ibid., [104]. R. Bigwood (n. 4) 382. [2005] EWCA Civ 382. Ibid., [ 11] (Buxton L. J.). Ibid., [36] (Chadwick L. J.). Ibid., [38]. Ibid.

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acting in the way that such a person might ordinarily be expected to act, would not have entered into the transaction unless his or her will was overborne’.97 Taken as a whole, these three observations suggest that the doctrine of presumed undue inuence concerns an evidential presumption regarding a person’s will; that is, that his or her will has been overborne if there is both proof of a relationship of trust and condence and a transaction that he or she probably would not have entered into had his or her autonomy not been impaired. Turning to the case at hand, the Court of Appeal held that, on the facts, no presumption of undue inuence arose. The relationship between the claimant and the defendants ‘had been, in relevant terms, one of trust and condence’.98 However, the transaction ‘was explicable by the ordinary motives in people in the position of the [parties]’.99 According to the Court of Appeal, the fact that the parties had not considered the value of the property did not raise a presumption of undue inuence. It was not appropriate to assume that the defendants’ will had been overborne, since the transaction could be explained by the fact that it was intended to help the daughter and son-in-law ‘out of the hole into which they had dug themselves’.100 The references to consent in the statements of principle in Turkey imply that the Court was concerned with the issue of autonomy. However, it is important to note that Chen-Wishart’s account of the doctrine of presumed undue inuence can easily explain the outcome of the case.101 Chen-Wishart might argue that, although the Court used the language of consent, the real reason why it declined to nd undue inuence is that there was no evidence that the contract was substantively unfair. She might point out that it was signicant, for instance, that there was no evidence regarding the actual value of the house. Without such evidence, the Court could not know whether the transaction was grossly improvident from the perspective of the defendants. The trial judge, and the Court of Appeal, made it clear that the defendants might have raised the presumption had they established ‘that the price paid was a serious undervalue’.102 Niersmans v. Pesticcio103 arguably provides clearer support for Birks and Chin’s interpretation of the law on presumed inuence. Here, the Court of Appeal sought to erase ‘fundamental misconceptions’ that it said had persisted

97

Ibid., [39]. Ibid., [16] (Buxton L. J.). 99 Ibid., [41] (Chadwick L. J.). 100 Ibid., [28] (Buxton L. J., quoting the trial judge). 101 Of course, an account that focuses on the role of substantive fairness has more difculty explaining why the Court stated that, in cases of presumed undue inuence, there is no need to show that the transaction was disadvantageous to the weaker party. 102 Ibid., [28], [28]–[32] (Buxton L. J.). 103 (n. 72). 98

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in relation to the doctrine of presumed undue inuence.104 The case concerned the gift of a house made by a brother, Bernard Pesticcio (‘Bernard’) to a sister, Maureen Niersmans (‘Maureen’), which the donor later claimed had been procured by undue inuence. The appeal focused on the signicance of the advice of a solicitor who had been instructed to act for Bernard in relation to the gift. The trial judge found that a presumption of undue inuence arose on the facts: Bernard, a party ‘of signicantly lower than average intelligence and understanding’,105 had placed trust and condence in Maureen, and the gift called for an explanation. Furthermore, the judge found that the independent legal advice did not rebut the presumption, since it had not been ‘such as a competent adviser would give’.106 Before the Court of Appeal, Maureen claimed that, if the advice had been lacking, ‘the proper remedy was for Bernard to bring an action for professional negligence against . . . [the solicitor], rather than pursue the present action against . . . [her] to set aside a gift, which he understood he was making and which he wanted to make in her favour’.107 Her argument was that she had done nothing wrong, and that the law should not hold her responsible for any mistakes that Bernard’s solicitor might have made. The Court of Appeal emphatically rejected this argument, stating that the issue was not whether ‘Maureen could have done anything more’.108 The Court held that, on the facts, she had not rebutted the presumption of undue inuence, since she had not showed that the nature and effect of the transaction had been fully explained to Bernard. In a particularly important passage, the Court of Appeal observed, The insistence . . . that Maureen had ‘done nothing wrong’ is an instance of the ‘continuing misconceptions’ . . . about the circumstances in which gifts will be set aside on the ground of presumed undue inuence. Although undue inuence is sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention is not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed inuence arising from the relationship of trust and condence should not operate to the disadvantage of the victim, if the transaction is not satisfactorily explained by ordinary motives . . . The court scrutinises the circumstances in which the transaction, under which benets were conferred on the recipient, took place and the nature of the continuing relationship between the parties, rather than any specic act or conduct on the part of the recipient. A transaction may be set aside by the court, even though the actions and conduct of the person who benets from it could not be criticised as wrongful.109

104 105 106 107 108 109

Ibid., [2] (Mummery L. J.). Ibid., [10]. Ibid., [23]. Ibid., [8]. Ibid., [22]. Ibid., [20].

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The Court of Appeal added that, whether or not Maureen’s conduct could be described as ‘wrongful’, the doctrine of presumed undue inuence requires that, once the presumption has been raised, it must be ‘afrmatively established that the donor’s trust and condence in the donee has not been betrayed or abused’.110 Stating that the presumption may be rebutted by showing that the transaction was entered into after its nature and effect had been fully explained to the donor by some independent qualied person,111 the Court nonetheless noted that the participation of a solicitor will not necessarily work in every case. According to the Court of Appeal in Niersmans, ‘it is necessary for the court to be satised that the advice and explanation by, for example, a solicitor, was relevant and effective to free the donor from the impairment of the inuence on his free will and to give him the necessary independence of judgment and freedom to make choices with a full appreciation of what he was doing’.112 This suggests that the issue in Niersmans was whether there was proper consent, and that the advice that Bernard received was irrelevant, since it did not give him the capacity to make an informed decision. Thus, Niersmans is apparently consistent with Birks and Chin’s proposition that ‘the doctrine of undue inuence is about impaired consent’.113 However, it is possible that the Court was interested in the issue of substantive, rather than procedural, fairness, and that Bernard’s appreciation of the transaction was relevant in relation to this matter. A transaction is not necessarily substantively unfair simply because the weaker party did not fully understand it;114 conversely, it might be seriously harmful to the weaker party, and therefore inappropriate, despite his or her full understanding of its implications. Nonetheless, I would argue that whether a gift is substantively unfair or inappropriate depends on all the circumstances, including the degree or extent of understanding of the donor. In other words, I would argue that the donor’s level of comprehension is relevant in relation to the assessment of what is ‘too much’, and that a gift is more likely to be inappropriate, or ‘too much’, where the donor did not fully appreciate what he or she was doing. The basis for the decision of the Court of Appeal in Jennings v. Cairns115 is similarly hard to pinpoint. This case concerned a gift made by Kathleen Enid Grace Davidge (‘Enid’) that her niece, Penelope Cairns (‘Penelope’), had alleg-

110

Ibid., quoting Hammond v. Osborn [2002] EWCA Civ 885, [32] (Sir Martin Nourse). 111 Ibid., [23]. 112 Ibid. 113 P. Birks and N.-Y. Chin (n. 5) 58. 114 For instance, it might benet the weaker party, despite his or her lack of understanding. 115 (n. 72).

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edly procured by undue inuence. Enid had made the gift primarily in the form of payments totalling £149,116 to an educational trust fund for Penelope’s children. The trial judge held that the relationship between the parties had been one of trust and condence, and that the size of the gift called for an explanation. This meant that a presumption of undue inuence arose, shifting the burden to Penelope. According to the judge, she had not discharged this burden. Enid had received advice about the transaction from a third party, but this advice had been wrong, meaning that she did not understand the effect of the trust and its scal consequences. As a result of the faulty advice, she did not understand, for example, the inheritance tax consequences of the gift being made. Reviewing the decision of the trial judge, the Court decided that ‘there was ample material in the judgment upon which the judge could make the ndings that the evidential burden shifted to Penelope and it was not rebutted by her. He was rightly not satised that Enid acted from her own full, free and informed will’.116 In response to the argument that there had been no undue inuence because there had been no wrongdoing by Penelope, the Court emphasized that ‘the fact that the conduct of the person exercising inuence is unimpeachable is not by itself an answer to a claim in undue inuence, though the presumption of undue inuence can be rebutted in many ways’.117 That Enid’s mistake was caused by a third party, and that Penelope had shared Enid’s mistaken beliefs, was irrelevant. As Arden L. J. put it, ‘even though the mistake was innocent, in my judgment it does not free Enid from the undue inuence’.118 It might seem that the basis for the nding of undue inuence in Jennings was Enid’s apparent lack of capacity, or what Birks and Chin might call her ‘judgmental disability’:119 while she ‘may have been able to look after her affairs in a broad sense’,120 she had trusted Penelope, and there was evidence that, at the time of the disputed gift, she ‘was no longer capable of giving matters extended thought’.121 Nonetheless, it is unclear whether the Court treated the improvidence of the transaction as evidence of Enid’s lack of capacity, or whether the improvidence was important in itself. The Court may have been concerned with the issue of substantive, rather than procedural, unfairness in the context of Enid’s lack of understanding of the consequences of what she was doing: after all, the gift was substantial, and ‘no independent consideration was given to . . . [her] need for the money, given her advancing years and failing health’.122

116 117 118 119 120 121 122

Ibid., [42] (Arden L. J.). Ibid., [40]. Ibid., [39]. P. Birks and N.-Y. Chin (n. 5) 72. Jennings (n. 72) [27] (Arden L. J.). Ibid. Ibid., [34].

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Hammond v. Osborn,123 which was decided the year before Jennings v. Cairns, is another case that lends itself to alternative analyses. Birks has claimed that it provides support for his view regarding the rationale for the doctrine of presumed undue inuence.124 However, Chen-Wisthart has suggested that it illustrates that the purpose of the doctrine is the protection of vulnerable parties from improvidence.125 Hammond concerned a frail, retired bachelor, who had become physically dependent on the help of others. He had met the respondent, a neighbour, when he had required her assistance in walking home from the local supermarket. Their relationship had grown from that time. He had become dependent on her. She had done his shopping, given him his meals, and helped manage his nancial affairs. In return, he had eventually given her a gift worth approximately £300,000. He had received no advice about the gift at all. The issue was whether he had made the gift because of undue inuence. It was not in dispute that there had been both a relationship of a trust and condence between donor and donee and a gift so large as together to give rise to the presumption of undue inuence.126 The only question was whether the presumption had been rebutted by proof that the gift had been made ‘only after full, free, and informed thought about it’.127 Although the donor had known that he was making a substantial gift to the donee, he had not known its size, the proportion of his liquid assets that it had represented, the relatively small amount that was left to him, nor that realising his investments in order to make the gift would have had disastrous implications for him in terms of his liability to tax. According to the Court of Appeal, this meant that the presumption had not been rebutted, and that the donor had not exercised an independent will. Seeking to rely on Lord Nicholls’ speech in Etridge, the donee had argued that the presumption is rebutted ‘if it shown that the conduct of the donee has been unimpeachable, or at any rate that there has been nothing sinister in it’.128 However, the Court of Appeal rejected this argument, holding that Lord Nicholls did not say that the presumption can be rebutted by evidence that the donee had behaved in an unimpeachable manner. Sir Martin Nourse, for instance, concluded that ‘even if it is correct to say that Mrs. Osborn’s conduct was unimpeachable and that there was nothing sinister in it, that would be no answer to an application of the presumption. As Cotton L. J. said in Allcard v.

123

(n. 110). P. Birks (n. 3) 36–7. 125 M. Chen-Wishart (n. 1) 362, considering Hammond in the context of a general discussion about the role of substantive unfairness in which she concludes that ‘substantive unfairness trumps procedural unfairness where the two conict’ (ibid., 363). 126 Hammond (n. 110) [1] (Sir Martin Nourse). 127 Ibid., [25]. 128 Ibid., [30]. 124

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Skinner . . . the court does not interfere on the ground that any wrongful act has in fact been committed by the donee but on the ground of public policy’.129 What was the basis for the Court’s decision in Hammond? The decision clearly had nothing to do with the behaviour of the donee. Commenting on Hammond, Birks has stated that ‘the reason why the money had to be given back was that the gift was invalidated for want of sufcient animus donandi on the part of the donor’.130 According to Birks, the problem was that the donee’s ‘excessive inuence’131 over the donor had impaired the latter’s autonomy: ‘[h]is gratitude and affection for her could not alter the fact that his dependence on her shut him out from other advice. Nothing had been done to bring in an independent adviser to ensure that he could “exercise an independent will about it” ’.132 An alternative interpretation is that the real problem with the transaction in Hammond is that it was extremely improvident from the perspective of the donor: the donee could not keep the gift because it was ‘too much’, especially considering the fact that the donor had not understood ‘the effect of what he was doing’.133 It is unclear which explanation gives a more accurate description of the basis of the decision. For instance, although Ward L. J. said that ‘the problem is lack of independence’,134 he nonetheless arguably also implied that the donor had been able to think for himself when he noted that, although the donor had been in ‘a state of some mental confusion’,135 he had nevertheless possessed ‘sufcient ability to comprehend fully what he was doing’.136

CONCLUSIONS In a 2004 publication, Birks argued that the courts are losing sight of the purpose of the doctrine of presumed undue inuence. He stated that two recent Privy Council cases, Attorney-General v. R137 and National Commercial Bank (Jamaica) Ltd. v. Hew,138 had ‘reinforced the impression of undue inuence as

129

Ibid., [32]. P. Birks (n. 3) 37. 131 Ibid. 132 Ibid. 133 Hammond (n. 110) [55] (Ward L. J.). 134 Ibid., [59], quoting Snell’s Equity (30th edn. Sweet and Maxwell, London 2000) [38–20]. 135 Ibid. 136 Ibid., quoting the trial judge. 137 [2003] UKPC 22, [2003] EMLR 24 (PC (NZ)). 138 [2003] UKPC 51. 130

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a wrong’,139 and concluded that the courts are paying insufcient attention ‘to the importance of preserving innocent undue inuence in line with innocent misrepresentation’.140 However, Birks also stated that ‘that door has not nally banged shut’,141 citing Lord Scott’s dissenting speech in Attorney-General v. R, as well as the decision in Hammond, as welcome and correct approaches to the law, since he believed that they focused on the issue of whether the weaker party’s will had been overborne. In declaring that the courts currently favour the idea of presumed undue inuence as a form of wrongdoing, Birks was oversimplifying the situation. There is no predominant concept of presumed undue inuence among the English judiciary. There is clearly much evidence for the view that the rationale for presumed undue inuence lies in whether the stronger or ascendant was at fault; for instance, the House of Lords used the language of wrongdoing several times in Etridge. However, Turkey, Niersmans, Jennings, and Hammond are inconsistent with this view: they suggest that wrongdoing is irrelevant, and that the doctrine is concerned with either impaired consent or substantive unfairness. Why is there no predominant judicial view about the purpose of the doctrine of presumed undue inuence? As Ewan McKendrick points out, ‘the courts have generally been reluctant to attempt a comprehensive denition of undue inuence’.142 In Etridge, for example, the House of Lords was ‘careful not to dene precisely the sort of inuence which will be regarded as “undue” ’.143 Perhaps the House was reluctant to fetter its discretion by providing such a denition. Is this lack of a clear denition problematic? In Portman Building Society v. Dusangh,144 a 2000 Court of Appeal decision, Ward L. J. referred to the debate concerning the nature of undue inuence, but did not nd it necessary to resolve it. It may not matter which approach is preferred in a particular case, since they may all lead to the same outcome. For instance, as Birks has put it in relation to Hammond, ‘it might not have been impossible to construct a wrong committed by the defendant, but it was not necessary to do so’.145 However, the characterisation of the doctrine of presumed undue inuence may have practical implications in individual cases; for example, the outcome of Niersmans might have been different, if the issue had been whether Maureen’s conduct had been wrongful. This means that Parliament, or the House of Lords, must conclusively settle the matter. Since Parliament has shown no interest in introducing relevant

139 140 141 142 143 144 145

P. Birks (n. 3) 34. Ibid., 36. Ibid. Contract Law: Text, Cases, and Materials (2nd edn. OUP, Oxford 2005) 753. J. Beatson, Anson’s Law of Contract (28th edn. OUP, Oxford 2002) 285. [2000] Lloyd’s Rep Bank 197. P. Birks (n. 3) 37.

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legislation, it seems that the House of Lords must resolve this issue. This is not to say that the courts should follow one of the competing interpretations of the rationale of the doctrine, regardless of the merits of the interpretation; I believe that the courts should identify the interpretation that has the most merit, and that they should follow this interpretation consistently.146 The debate regarding the purpose and nature of the doctrine is complex. However, as Bigwood puts it, the courts have ‘the responsibility of settling and describing, in meaningful and consistent language, the nature and conceptual boundaries of the jurisdiction in the abstract’.147 The lack of a predominant judicial view about the nature of the doctrine of presumed undue inuence leaves the law in an undesirable state of uncertainty.

146

I have not stated here which approach the courts should take; it is not possible to provide such an argument in a paper of this length. My aim in this article has been only to show that there is no predominant English judicial view about the purpose of the doctrine of presumed undue inuence. 147 R. Bigwood (n. 13) 435.

Chapter 13 Awarding Damages for Distress and Loss of Reputation in England and Canada Jill Poole INTRODUCTION As a general principle, the English and Canadian courts have traditionally denied recovery of damages for ‘distress’ and lost reputation in contractual claims. This position is considered to stem from the authority of the House of Lords in Addis v. Gramophone Co. Ltd.,1 although it is far from clear that this authority can be used to support the application of such a sweeping prohibition on recovery,2 and from the perception that contract is exclusively concerned with prot and therefore with providing compensation for nancial losses. The term ‘distress’ is used in practice to cover a great multitude of reactions, e.g., loss that is capable of being translated into nancial loss,3 inconvenience,

1

[1909] AC 488. See also Kolan v. Solicitor (1970) 7 DLR (3d) 481 (Ont HCJ), afrmed on appeal at (1970) 11 DLR (3d) 672. 2 See e.g., N. Enonchong, ‘Breach of Contract and Damages for Mental Distress’ (1996) 16 OJLS 617. 3 Most frequently reputational loss, although the difculty here is establishing the necessary causal link between the breach and the loss.

255 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 255–278. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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hurt feelings, upset, anxiety and annoyance. Such losses are generally referred to as ‘non-pecuniary loss’ in England but more usually as ‘intangible loss’ in Canada.4 Both terms evidence the difculties faced by the courts in recognising such losses in the contractual context and the deep suspicion of such claims that has traditionally applied in both jurisdictions. There are further complications in making any comparison of treatment since distress may be suffered as a result of the manner of the breach, e.g. callous or malicious conduct, or simply the fact that the breach has occurred. These distress events appear to be subjected to quite different treatment, largely in approach, but sometimes in terms of result, in England and Canada. These differences appear to be the product of a greater willingness on the part of the Canadian courts to ‘achieve the desired objective’, together with the ability to award aggravated damages (as compensatory loss), and even punitive damages, where the manner in which the breach is effected is regarded as sufciently reprehensible. However, the ability to recover aggravated damages in Canada, or at least the description of the damages as aggravated compensation, extends beyond the loss associated with the manner of the breach to the fact of breach itself. This greater armoury allows the Canadian courts to be far more exible (or, some might argue, more complicated) in their response to a perceived need to recognise ‘distress’ loss, albeit that an independent actionable wrong is a precursor to the recovery of aggravated and punitive damages.5 In addition, any analysis of recovery in this area is affected by the fact that on occasions the distress suffered may be a direct consequence of the breach, whereas in other instances it will be indirect or consequential loss following from a direct consequence. Nevertheless, there is no consistent judicial response in either jurisdiction which is based on this distinction. The decision of the House of Lords in Farley v. Skinner (No. 2)6 evidences some relaxation in the traditional approach to the ‘objects’ exception in English law,7 but the actual decision on the facts indicates that there is unlikely to be a radical change in the application of the objects exception so that suggestions in

4 For example, S. M. Waddams, The Law of Contracts, (5th edn. Canada Law Book Inc., Toronto 2005) [742] ff. ‘intangible injuries’ and M. G. Bridge ‘Contractual Damages for Intangible Loss: A Comparative Analysis’ (1984) 62 Can Bar Rev. 323. 5 Vorvis v. Insurance Corp. of British Columbia (1989) 58 DLR (4th) 193 and Whiten v. Pilot Insurance Company (2002) 209 DLR (4th) 257. 6 [2001] UKHL 49, [2002] 2 AC 732. See E. McKendrick and M. Graham, ‘The Sky’s the Limit: Contractual Damages for Non-Pecuniary Loss’ [2002] LMCLQ 161. 7 In Watts v. Morrow [1991] 1 WLR 1421, 1445, Bingham L. J. explained that the prohibition on recovery is not absolute and that ‘[w]here the [very] object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation’, it is possible to recover distress damages ‘if the fruit of the contract is not provided or if the contrary result is procured instead’.

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the Canadian courts that this represents a move towards more general recovery, would appear misconceived.8 Furthermore, although the approach of Lord Scott may be considered more radical, subsequent case law, preferring the majority approach,9 indicates that Lord Scott’s approach is not the analysis of choice. The purposes of this paper are to analyse the rationale underpinning the general prohibition on recovery, given that a signicant, and growing, number of academic commentators on both sides of the Atlantic have called for its abolition,10 and to question the suggested recovery criteria envisaged as replacing it. Whether there should be abolition or the continuation of the prohibition as the default position matters less than an ability to clearly identify the criteria on which recovery is to be permitted (whether as criteria in their own right or exceptions to the general prohibition). The role of remoteness as the potential governing test of recovery is vital in this debate, particularly as some Canadian courts have demonstrated a clear willingness to adopt it as the sole criterion whenever the courts believe this head of loss should be the subject of an award.11 However, its application must be judged in the light of the rationale for the general rule and the potential consequences of wholesale adoption of the remoteness test to determine recovery. Finally, it is necessary to consider the nature of these awards and the relatively modest sums awarded as distress loss. The English courts, in particular, claim that such damages are always compensatory but the indications are that there is sometimes no real attempt to evaluate on this basis so that, in practice, such awards may amount to punitive damages. In Canada, some awards of aggravated damages appear to constitute a punishment rather than true compensation despite, in many cases, an additional claim for punitive damages arising from the same loss.

8 For example, the interpretation and application of the ‘important object’ exception in Farley by the British Columbia Court of Appeal in Wharton v. Tom Harris Chevrolet Oldsmobile Cadillac Ltd. [2003] 3 WWR 629. 9 Hamilton-Jones v. David & Snape (a rm) [2003] EWHC 3147 (Ch.), [2004] 1 WLR 924. 10 See, for recent examples, D. J. Whaley, ‘Paying for the Agony: The Recovery of Emotional Distress Damages in Contract Actions’ (1992) 26 Suffolk U L. Rev. 935, A Phang ‘The Crumbling Edice? – The Award of Contractual Damages for Mental Distress’ [2003] JBL 341, R. Cohen and S. O’Byrne, ‘Cry Me a River: Recovery of Mental Distress Damages in a Breach of Contract Action – A North American Perspective’ (2005) 42 Am Bus LJ 97 and J. Hartshorne, ‘Damages for Contractual Mental Distress after Farley v. Skinner’ (2006) 22 JCL 118. 11 See the case law discussed at 2(d) below. Unsurprisingly, this approach has led to a greater ability to recover in Canada, although the adoption of this criterion as the sole determinant of recovery is inherently inconsistent between different Canadian Provinces and courts so that it is impossible to predict the criteria that a court will choose to apply.

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1) RATIONALE FOR THE GENERAL PROHIBITION AND ITS CONTINUED RELEVANCE? The traditional denial of recognition of recovery for distress in contract claims can be attributed to the characteristics of classical contract law, particularly in relation to commercial contracts, and the traditional view that the parties’ expectations are nancial and impersonal.12 It follows that distress on breach is not regarded as a risk accepted by the other party as it is outside the scope of what is voluntarily assumed,13 or at least it must be outside that scope unless there is an express assumption of responsibility for such a consequence, i.e., instances where non-nancial loss can be regarded as having been expressly ‘bargained for’. There is a clear nexus in this context between the nature of contract and the traditional rationale that such loss is too remote to be recoverable, i.e., such a loss cannot have been within the reasonable contemplations of the parties since the parties will only envisage nancial risks14 – unless, again, there is the express assumption of responsibility for such a risk, falling within the so-called ‘second limb’ of Hadley v. Baxendale.15 These rationales, in turn, mask a more obvious, and seemingly contradictory, fear of the courts, namely the policy argument that, since all contractual breaches are likely to be a source of distress (if only mild annoyance at the fact of breach and its consequences), it would open the oodgates if such damages were generally recoverable in contract. This is clearly the accepted rationale for the decision of the Court of Appeal in Watts v. Morrow,16 where Bingham L. J. stated that the denial of recovery ‘is not . . . founded on the assumption that such reactions are not foreseeable, which they surely are or may be, but on considerations of policy’.17 The dangers underpinning the policy were expressed

12 For example, J. Cassels, Remedies: The Law of Damages, (Irwin Law Inc, Toronto 2000) 205, states that the position stemmed from the view that ‘contracts are impersonal relationships, concerned primarily with economic exchange, and do not typically involve other elements of the parties’ personalities’. On the other hand, it was recognised in Ruxley Electronics and Construction Ltd. v. Forsyth [1996] 1 AC 344, per Lord Bridge, 353, that the assumption that contractual loss can be measured in purely nancial terms ‘may not always be appropriate’. 13 Lord Cooke in Johnson v. Gore Wood & Co. [2002] 2 AC 1, 49; [2001] 2 WLR 72, 108, ‘[c]ontract-breaking is treated as an incident of commercial life which players in the game are expected to meet with mental fortitude’. 14 Warrington v. Great-West Life Assurance Co. (1996) 139 DLR (4th) 18 (BCCA) at [19]. 15 (1854) 9 Ex 341, 354. 16 [1991] 1 WLR 1421. 17 Ibid., at 1445. This statement was approved by the British Columbia Court of Appeal in Wharton v. Tom Harris Chevrolet Oldsmobile Cadillac Ltd. [2003] 3 WWR 629, para. 48.

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by Staughton L. J. in his well known statement in Hayes v. James & Charles Dodd (a rm):18 ‘I would not view with enthusiasm the prospect that every shipowner in the Commercial Court, having successfully claimed for unpaid freight or demurrage, would be able to add a claim for mental distress suffered while he was waiting for his money’.19 Thus, at the core of the general denial of recovery is the nature of commercial contracting and the fact, which underpins the theory of efcient breach, that if only the nancial consequences of breach need to be considered, then breach may be an advantageous option where performance of the contract is otherwise uneconomic. However, this rationale may not extend to consumer contracting, which raises the question of whether a distinction exists, or should exist, between recovery for non-nancial benets in commercial or consumer contexts. Given the general prohibition, the only way in which there can be recovery is by avoidance of the general prohibition, e.g. through formulating the loss as nancial, or by means of exceptions to this general prohibition. In Addis v. Gramophone,20 Lord Atkinson had counselled against exceptions on the basis that recovery ‘would lead to confusion and uncertainty in commercial affairs’ and ‘would create anomalies, lead occasionally to injustice, and make the law a still more ‘lawless science’ than it is said to be’.21 The lack of a coherent rationale is recognised by a number of academic commentators, including Andrew Phang 22 who described the general principle as a ‘crumbling edice’ and the development of the exceptions as displaying a ‘lack of coherent justication’.23 Ronnie Cohen and Shannon O’Byrne, in the North American context, have argued that ‘the current patchwork of exceptions is unworkable’24 and as having been formulated ‘[i]n order to reach a just result’.25 They conclude that the general rule preventing recovery and, in particular, its focus on the commercial aspect of contracting, must be seriously questioned in view of the number of exceptions.26 Both articles therefore argue for the removal of the prohibition and exceptions27 and their replacement with recovery based on ‘ordinary principles

18

[1990] 2 All ER 815. Ibid., 823. 20 [1909] AC 488. 21 Ibid., 495. 22 A. Phang (n. 10). 23 [2003] JBL 341, 341 and 373. 24 R. Cohen & S. O’Byrne (n. 10), 100. 25 (2005) 42 Am Bus LJ 97, 127. 26 Ibid., 101. 27 E. Veitch, ‘Sentimental Damages in Contract’ (1977) 16 UWOLR 227, 236, commented that ‘once intangible harm has been accepted as an independent compensatable harm there can be no logical restriction on the kind of situations in which it will be recognized’. 19

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of contract law’,28 which Phang takes to mean the principles limiting the ability to recover in particular circumstances, i.e., remoteness and mitigation. However, this paper argues that such a dramatic reversal of principle is probably unlikely given the entrenched policy considerations at play and it is therefore preferable to seek a more coherent rationale(s) for permitting recovery in certain circumstances. This rationale explains the exceptions themselves as following ordinary principles governing recovery once the fallacy inherent in the objects exception is exposed. The result should be greater transparency of principle and a realisation that dramatic changes in applicable principles may be unnecessary. In addition, it is questionable whether the policy objective of denying recovery for distress following breaches of commercial contracts would necessarily be achievable if remoteness was the sole criterion for recovery.

2) THE BASIS FOR PERMITTING RECOVERY OF DAMAGES FOR DISTRESS a) Distress attributed to the manner of the breach The difculty with this rst category of distress attributed to the manner of the breach in English law is that the decision of the House of Lords in Addis v. Gramophone Co. Ltd. was interpreted as denying recovery for distress due to the harsh manner of a dismissal.29 In any event, if the breach in question is part of the dismissal process, it will be covered by the unfair dismissal legislation. Damages in this context will only be available in English law if the case falls within the principle in Mahmud v. Bank of Credit and Commerce International SA (in liquidation),30 involving a breach of the implied term not to conduct the business in a dishonest or corrupt manner where this breach can be shown to prejudice the employment prospects of former employees.31 Such a claim

28

Cohen & O’Byrne (n. 10) 101. Johnson v. Unisys Ltd. [2001] UKHL 13, [2001] 2 WLR 1076. In part it appears that this is because it was considered that this was the province of a defamation claim. In addition, as was recognised by their Lordships in Johnson v. Unisys, even if a claim for stigma damages does arise on the facts, there are likely to be insurmountable difculties in establishing causation in such situations, Bank of Credit and Commerce International SA (in Liquidation) v. Ali (No. 3) [2002] EWCA Civ 82, [2002] 3 All ER 750. 30 [1998] AC 20. 31 It is quite clear that damages cannot be available for the distress of losing one’s job, although this might well be considered as foreseeable, since such a perceived loss does not follow from any breach. 29

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is clearly distinct from a claim related to the manner of the dismissal since it relates to pre-existing conduct by the employer.32 In addition, such a claim is not a true distress claim but one formulated in terms of nancial loss resulting from damage to reputation. The position in Canada should hold out more hope for recovery of damages for the distress and upset associated with the manner and circumstances of the breach due to the willingness to award aggravated damages. However, the Canadian courts have devised a further hurdle before permitting such recovery in a claim for wrongful dismissal since they require that there be an independent actionable wrong. Prior to the decision in Vorvis v. Insurance Corporation of British Columbia,33 there had been a number of decisions awarding aggravated damages purely on the basis that distress at a sudden and unexpected dismissal without good cause in circumstances where the claimant considered, and had been led to believe, the job was secure, clearly fell within the remoteness principle.34 However, in Vorvis, and again in Wallace v. United Grain Growers Ltd.,35 the Canadian courts rmly rejected recovery for distress based on foreseeability alone in a claim for wrongful dismissal.36 The Supreme Court in Wallace placed particular emphasis on the dangers of opening the oodgates to distress claims in employment disputes. Given the need to establish an independent actionable wrong, the debate in Canada has centred on whether this requirement means that the conduct must be capable of also constituting a tort by, for example, wrongfully imprisoning and questioning the employee or making allegations which are defamatory. However, it seems clear that the independent wrong requirement can be satised by relying on a breach of another contractual term, e.g. failure to provide termination counselling as required by the contract terms,37 and although the decision in Wallace indicates that bad faith allegations of just cause for a dismissal do not constitute the independent actionable wrong required,38 this

32

The breach in Eastwood v. Magnox Electric plc [2004] UKHL 35, [2005] 1 AC 503 had occurred prior to the dismissal process and the claim was for nancial loss due to a psychiatric illness alleged to have been caused by that breach. 33 (1989) 58 DLR (4th) 193. 34 Pilon v. Peugeot Canada Ltd. (1980) 114 DLR (3d) 378, 29 OR (2d) 711 (HC), Pilato v. Hamilton Place Convention Center Inc. (1984) 45 OR (2d) 652 (HC), Cringle v. Northern Union Insurance Co. Ltd. (1981) 124 DLR (3d) 22 (BCSC) and Ribeiro v. Canadian Imperial Bank of Commerce (1992) 13 OR (3d) 278 (CA), although such a position challenged the freedom of employers to summarily dismiss employees. 35 [1997] 3 SCR 701, (1997) 152 DLR (4th) 1. 36 [1997] 3 SCR 701, 734. 37 Ditchburn v. Landis & Gyr Powers Ltd. (1997) 34 OR (3d) 578 (CA). 38 However, the Supreme Court considered that such conduct by an employer may be relevant to the period of notice, or damages in lieu of notice, which might be payable.

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position may require some revision in the light of the decision in Whiten v. Pilot Insurance Company 39 where the Supreme Court of Canada, admittedly in the context of an insurance claim, identied the independent actionable wrong as the breach of the insurer’s good faith obligation which was independent of the contractual duty to pay out to cover the loss. Thus, the Canadian position may hold greater possibilities for recovery in relation to the manner of the breach. In addition to making it clear that an independent actionable wrong would be required before such damages could be recovered, the Supreme Court in Vorvis v. Insurance Corporation of British Columbia rejected the claim for aggravated damages on the facts because the claim, which included a claim for punitive damages, was based not on the manner of the dismissal but on alleged treatment in the period prior to a dismissal.40 It was therefore not possible to establish the necessary causal link between the wrongful dismissal (failure to give the required notice) and the distress suffered. Nevertheless, as Waddams makes clear,41 if the breach had been pleaded as a breach of the implied term in Mahmud, damages might have been recoverable, at least for the nancial consequences of the employer’s conduct. It would seem arguable that it is more natural to associate distress damages with compensation for aggravation of losses due to the manner of the breach rather than distress due to the fact of the breach. However, whereas that possibility seems to be ruled out as a result of a number of complex factors operating in English law, the Canadian approach is to require a rigorous standard of poor conduct before awarding aggravated or punitive damages. Damages for such abstract suffering (i.e. unrelated to nancial loss) are still seen as the province of other areas of law, such as defamation or as available only in relation to breaches of duciary relationships or breaches of other contractual obligations of good faith, rather than as existing as a loss in its own right.

Such damages seem to be linked to the pecuniary consequences of the distress in making it more difcult to secure alternative employment. Whether it is possible to secure such damages for bad faith conduct in the abstract is clearly vitally important. However, the only basis for separate recovery would be recognition of a separate contract term to act in good faith when dismissing an employee, which could hardly be described as an independent actionable wrong. 39 [2002] 209 DLR (4th) 257. 40 In other words, there was a similar factual context to that prevailing in Eastwood v. Magnox Electric plc [2004] UKHL 35, [2005] 1 AC 503. 41 S. M. Waddams (n. 4), [750].

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b) Distress attributed to the fact of breach alone – the objects exception or recovery based on an assumption of responsibility for this loss? Non-pecuniary loss may ow from the fact of the breach; the best known examples of this are the so-called ‘holiday cases’,42 although this category (known as ‘the objects exception’)43 includes contracts relating to weddings44 and contracts where the purpose of the contract is to achieve peace of mind. Recovery in this category has nothing to do with the manner of the breach since it rests on the direct consequences of the fact that the breach has occurred and was justied as an exception to the principle in Addis v. Gramophone Co. Ltd. on the basis that if the very (or now the major or important) object of the contract is the provision of pleasure and peace of mind, then this is part of the contractual expectation and non-fullment or defective performance of the object should be compensated in the normal way as direct loss. Although the Canadian courts have a tendency to refer to recovery under this category as ‘aggravated damages’,45 these are true damages for distress and it would be preferable to recognise the loss as direct expectation loss, recovery for which is subject only to remoteness and mitigation. As a result of the predominant view that contracting has only commercial purposes, the basis for awarding distress damages within this ‘exception’ is said to be the recognition of the existence of ‘the consumer surplus’,46 i.e. that the purposes of contracts may not be limited to commercial exchanges but may have ‘a value’ to the claimant contractor over and above the market value of the performance secured. Once fullment of this consumer surplus is classied as part of the contractual

42 In English law, Jarvis v. Swans Tours Ltd. [1973] QB 233 and Jackson v. Horizon Holidays Ltd. [1975] 1 WLR 1468. Canadian case law includes Pitzel v. Saskatchewan Motor Club Travel Agency Ltd. (1983) 149 DLR (3d) 122 (Sask. QB) and Fenton v. Sand and Sea Travel Ltd. (1992) 4 Alta LR (3d) 86 (Prov Ct). In Canada the availability of distress damages has also extended to a breach involving a failure to deliver a holiday motor home, Elder v. Koppe (1974) 53 DLR (3d) 705, 15 NSR (2d) 688 (TD), although the purpose of the contract is simply the supply of a motor vehicle, generally regarded as a commercial purpose. 43 Ibid., n. 7. 44 See the Scottish decision of Diesen v. Samsen [1971] SLT 49 (wedding photos) and, in Canada, Wilson v. Sooter Studios Ltd. (1989) 55 DLR (4th) 303, [1989] 3 WWR 166 (BCCA) and Dunn v. Disc Jockey Unlimited Co. (1978) 20 OR (2d) 309 (Prov Ct). 45 See, for example, Newell v. Canadian Pacic Airlines Ltd. (1976) 74 DLR (3d) 574 and Warrington v. Great-West Life Assurance Co. (1996) 139 DLR (4th) 18 (BCCA). 46 An expression rst employed by D. Harris, A. Ogus & J. Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) 95 LQR 581.

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expectation, its non-fullment as a result of breach will sound in damages, albeit that the measure of damages needed to compensate for loss of this ‘value’ is necessarily difcult to quantify in compensatory terms.47

i) The nature of the subject matter of the contract or the scope of the individual obligation? The nature of this exception dictates that recovery is dependent on the nature of the subject matter of the contract, i.e. a judgement is taken on the basis of the contract as a whole. However, in reality the purpose of such an assessment is to justify the implication of a promise of pleasure, relaxation or peace of mind in the absence of anything explicit, and it has particular application in the context of contracts whose purpose is the provision of pleasure. Such implication is unnecessary, and irrelevant, where there has been an explicit promise or undertaking, e.g. in relation to aircraft noise in Farley v. Skinner and to specic services of solicitors which have the purpose of securing peace of mind such as securing a non-molestation order 48 or an order prohibiting an ex-husband from removing the children from the jurisdiction.49 Where there is such an express promise it is clear that responsibility has been accepted,50 and the loss that follows from breach will encompass non-pecuniary loss in the form of distress and anxiety since this loss falls within remoteness. In fact, the difculty with the objects exception as it is currently applied stems from the classication of ‘object’ in terms of the contract as a whole. This has led to the restrictive approach inherent in the adoption of a test which required ‘the very purpose of the contract’ to be the provision of pleasure or peace of mind and, despite the relaxation of the formulation of the applicable test by the majority of their Lordships in Farley v. Skinner, and the subsequent application of that test in Hamilton-Jones v. David & Snape,51 the entire exercise would seem unnecessary since, rather than focusing on the nature of the contract as a whole, it is preferable to focus on the individual obligations and promises it contains. Cohen and O’Byrne express a preference for focusing on

47

See, the principles in Ruxley Electronics and Construction Ltd. v. Forsyth [1996] AC 344, and the availability of awards for loss of amenity in contractual claims. 48 Heywood v. Wellers [1976] QB 446. 49 Hamilton-Jones v. David & Snape (a rm) [2003] EWHC 3147 (Ch.), [2004] 1 WLR 924. 50 In Canada breach of condence provisions have been held to fall within the peace of mind exception so that distress damages are recoverable, e.g., Peters-Brown v. Regina District Health Board (1995) 136 Sask R 126 (QB). The condence provision was itself implied into this contract for hospital treatment. 51 See (n. 49).

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the question: What has been promised?52 and the very fact that Farley v. Skinner marks a move away from recognition of a contract as having a single ‘very object’ to a test of recovery based on ‘the major or important’ purpose reinforces the fact that a contract comprises a range of differing obligations and that a singular classication of purpose is difcult to achieve. Furthermore, whilst the main purpose of a contract may indeed be commercial and although case law recognises the existence of ‘the consumer surplus’ in a non-commercial context, there would seem to be no reason why a commercial contract should not have similar non-economic benets, for which the other explicitly assumes responsibility in full knowledge of the likely nature of any loss as nonnancial.53 Thus, it is preferable to regard recovery as turning on the scope of the contractual obligation (within the principle in South Australia Asset Management Corporation v. York Montague Ltd.,54 i.e., what has the defendant undertaken to do or to be responsible for?) rather than ‘the objects exception’ (i.e., the very object of the contract needs to be the provision of pleasure or peace of mind). The scope of the obligation, and whether there has been an assumption of responsibility, should be the determinant of recovery rather than the nature of the contract and the contractual context. The differing approaches are patently obvious in the conicting approaches and outcomes evident from an examination of the Canadian decisions. For example in Baid v. Aliments Rinag Foods Inc.55 the court considered that no damages for distress were payable when the caterer was late in turning up for a wedding, on the basis that the contract was to cater rather than to cater specically for a wedding whereas the obligation of a disc jockey to turn up and provide the entertainment for a wedding party was treated as a contract involving non-tangible benets56 due to the way the obligation is expressed. By comparison, distress damages were awarded in the Canadian decision of Elder v. Koppe 57 in relation to the nondelivery of a holiday motor home although this should be seen as an obligation to supply a vehicle so that there should be no obligation to secure peace of mind unless it arises expressly (or on the basis of actual knowledge of likely loss through special circumstances within Hadley v. Baxendale). Thus recovery in the case law has been unpredictable due to the interpretation of the scope of the contract. An approach which focused on the scope of

52

Cohen & O’Byrne (n. 10), 103. Such recognition appears to have motivated the dissenting speech of Lord Cooke in Johnson v. Gore-Wood & Co. [2002] 2 AC 1. On the facts, considerable nancial embarrassment and personal upset was suffered due to the actions of the solicitors employed by the claimant’s company in relation to a commercial transaction. 54 [1997] AC 191. 55 [2003] OJ No. 2153 (Sup Ct). 56 Dunn v. Disc Jockey Unlimited Co. (1978) 20 OR (2d) 309 (Prov Ct). 57 (1974) 53 DLR (3d) 705, 15 NSR (2d) 688 (TD). 53

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obligations would place greater emphasis on any express assumption of responsibility for distress caused by any failure in performance, e.g. to turn up on time to cater. By analogy, whereas a surveying contract is regarded as a contract having purely nancial benets, as recognised in Farley v. Skinner, it is possible to contract to alter the position on responsibility for non-pecuniary loss as a consequence of non-performance of specic obligations. This is precisely what occurred on the facts in Farley. However, the oddity is the fact that it was felt necessary to achieve liability in the context of the contract as a whole, rather than the individual obligation relating to the assurances on aircraft noise, i.e. by relaxing the requirement that the ‘very object of the contract’ be peace of mind to a requirement that peace of mind be ‘the major or important object of the contract’. Such an approach requires the obligation on aircraft noise to jump an additional hurdle not usually required of breaches of express contractual obligations. This is, perhaps quite naturally, a reection of the preoccupation of the courts with getting within the scope of the objects exception, but should not be required for explicit individual obligations involving non-nancial benets.

ii) Implication of responsibility for distress loss In what circumstances, if any, should there be an implication of responsibility for distress loss? It is at least arguable that the key issue is whether it is possible to mitigate by securing substitute performance for the obligation broken or whether this would be too late. The essence of the holiday contract cases is that the holiday is regarded as a ‘one-off’ which cannot easily be repeated; hence the frequent use of the condition requiring holiday makers to report any deciencies to their holiday representative so that remedial action can take place early on in the holiday and further distress avoided. Equally, if the contract is cancelled at a very early stage, substitution or mitigation is regarded as appropriate. On that basis distress at the breach is avoided since expectations are regarded as fullled by the alternative performance. Similarly, a wedding or other special event cannot be re-run as the same event so that there can be an implicit responsibility for distress loss, dependent on the particular obligation broken in a wedding related contract. The nature of the loss in these cases is such that nancial substitution is not available and this is the reason why the distress occurs. It follows that more than responsibility for nancial loss is being assumed in such cases. The same may, of course, be true of the solicitor cases of Heywood v. Wellers and Hamilton-Jones,58 which were both time sensitive; once the event in question had occurred it would be too late to put it right so that distress can be anticipated as within the scope of the loss, and will be recoverable if it falls within remoteness. Further, in the Canadian breach of

58

See (n. 48 and n. 49).

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condence case law 59 since no substitution or alternative remedy could ever rectify a breach of condence relating to a medical treatment or condition, it is possible to imply responsibility for any distress loss. However, commercial obligations would necessarily rarely satisfy the ‘no substitution’ test and even if they did, recovery for non-nancial loss would be unlikely on the basis of the application of remoteness. It might therefore be thought advisable – and simpler – to exclude distress recovery in the case of all breaches of commercial obligations, but this would necessarily exclude express assumption of responsibility for non-nancial losses and would be unsatisfactory due to the difculties of making a clear distinction between commercial and non-commercial obligations,60 as Cohen & O’Byrne noted: ‘when the subject matter of the contract could full either a personal or a commercial need, the distinction breaks down’.61 Further, in Farley v. Skinner Lord Scott noted that such a distinction based on the nature of the contract ‘is too imprecise to be satisfactory’.62 The ‘objects exception’ test based on the very nature of the contract is, of course, similarly aficted. Thus, if the claimant in Farley v. Skinner had been a company purchasing a distribution centre and the company’s surveyors/property advisors had been expressly asked to check on access and road links to that centre but negligently reported that the centre was well-served by access routes, although there was only one route and that was frequently congested, the principle in Farley v. Skinner would suggest that, in addition to recovery of any provable nancial loss resulting from this breach, the claimant company should also be able to recover damages for distress or inconvenience. Such a position would assume that Lord Scott was incorrect when he suggested in Farley v. Skinner that it was not possible to recover for direct loss caused by the breach on a difference in value basis and compensation for distress since that would amount to double recovery. However, is the truth of the matter that it is difcult to see how a company can be said to suffer ‘distress’ in a personal sense which has not previously been compensated in nancial terms? In such a context, therefore, any damages for ‘distress’ are more likely to be seen as punitive in nature rather than compensatory when the key mantra of English contract law has been to award damages to compensate and not to punish. However, that should not preclude recovery for distress loss in the context of express assumptions of responsibility for it.

59 Peters-Brown v. Regina District Health Board (1995) 136 Sask R 126 (QB), discussed (n. 50). 60 This distinction was rejected in Canada in Taylor v. Gill [1991] 3 WWR 727 (Ata QB), the court insisting that the ‘objects test’ still needed to be applied on the facts. 61 Cohen and O’Byrne (n. 10), 126. A chattel may be purchased for a number of reasons, e.g., investment, personal or business use. 62 [2001] UKHL 49, [98]; [2002] 2 AC 732, 770.

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iii) Can loss of amenity damages be analysed as falling within a test for recovery based on assumption of responsibility for a loss? Responsibility for the loss of enjoyment of a particular physical possession or land may be explicitly assumed by means of an express contractual obligation. However, the question arises of whether the substitution test would permit the implication of such responsibility? In Farley v. Skinner, Lord Scott treated loss of amenity as a distinct category of loss, falling outside the objects exception, which could be distinguished from true distress damages on the basis that loss of amenity was a direct loss resulting from the breach,63 whereas distress loss is indirect loss. This was because he was prepared to take a broad view of ‘benet’ and the nature of the obligation to secure a benet. Such a position enables the award in Ruxley Electronics & Forsyth64 to be justied as direct loss on the basis of no substitution, i.e. there was no difference in value and cost of repair (i.e. achieving the performance and so avoiding substitution) had to be rejected as disproportionate. As nancial substitution was not possible, a damages award of loss of amenity reected the implied responsibility for distress suffered through the non-fullment of the contractual obligation to build the pool to a depth of 7” 6’. However, an argument for a loss of amenity award was rejected in Birse Construction Ltd. v. Eastern Telegraph Co. Ltd.65 and described as ‘hollow’ in circumstances where the defendant had contracted for the claimant to build a residential college but the defendant did not suffer any loss of amenity since it had sold the property in question. On these facts, ‘substitution’ for the defendant was possible so that the distress, associated with exposure to a defective appearance and lower levels of comfort following from the defective performance of the contract, had been avoided by the defendant. There was therefore no implied assumption of responsibility for this loss by the claimant. Interestingly, the signicant distinguishing factor is not that the party seeking loss of amenity damages in Ruxley was a ‘consumer’ whereas it was a company which had contracted in a commercial context in the Birse case, but the fact that the alleged loss had been avoided by the sale in Birse whereas Mr. Forsyth continued to own and use the swimming pool. Loss of amenity damages should therefore be available in all cases where there is an implication of an obligation assuming responsibility irrespective of the nature of the contract in question. For example, there would also be a loss of amenity if a leisure company had

63

Cassels, Remedies: The Law of Damages (n. 12), 207–8, considers that loss of amenity cases are also capable of being analysed in economic terms, i.e. the loss can be identied as the amount the claimant would have been prepared to secure the amenity or to avoid its loss. 64 [1996] AC 344. 65 [2004] EWHC 2512 (TCC), [2004] 47 EG 164 (CS).

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contracted for the construction of the same swimming pool. Whether it is the company’s customer, or Mr Forsyth’s friends or house guests who would actually suffer as a result of the lost amenity, seems irrelevant.

c) Distress consequent on direct physical loss The distress in question here is an indirect (or consequential) loss following from a direct loss caused by the breach. The courts have long accepted that since it follows from a physical deterioration in a previously existing position as a result of the breach, this distress is recoverable in a contractual claim. Loss consequent upon physical inconvenience may be more acceptable as a loss in contract because the loss is capable of expression in pecuniary terms, by analogy with the expenses that might otherwise have been incurred to avoid the physical inconvenience. However, this position cannot be sustained unless the measure actually awarded equates with the expenses rather than with an abstract assessment of the value of the ‘inconvenience’; in the case law there is no such link and the distress is valued in the abstract. Secondly, it is often not appreciated that the actual loss being sustained and compensated for in this case law is distress consequent upon physical inconvenience rather than damages for distress as a physical consequence of the breach. The courts appear to employ the mitigation doctrine as justifying recovery for distress in this context,66 assuming that the loss in question is caused by the breach.67 In addition, it is clear from decisions which can be traced back to the nineteenth century,68 that if there is to be recovery for any loss owing from physical inconvenience caused by the breach, then such a loss must have been within the reasonable contemplations of the parties since it is consequential loss. In Hobbs v. London and South Western Railway Company,69 the plaintiff had been forced to walk four – ve miles home late at night when, in breach of contract, the train on which the plaintiff was travelling failed to travel to the advertised destination. The Divisional Court allowed the claim for inconvenience damages,70 although only Mellor and Archibald JJ. claried the precise

66

For example, the claimant took all reasonable steps to avoid the consequences of the breach but was unable to do so and therefore suffered distress consequent on physical inconvenience. 67 See, e.g., Wiseman v. Virgin Atlantic Airways Ltd. [2006] EWHC 1566 (QB): claimant prevented from boarding a ight but no recovery for non-pecuniary loss such as that following from a robbery when the claimant had remained in Nigeria. A claim based on an alleged breakdown in health was also rejected as falling outside remoteness. 68 Burton v. Pinkerton (1866–67) LR 2 Ex 340, per Bramwell B, 349–350. 69 (1874–75) LR 10 QB 111. 70 The court rejected a further claim for the consequences of an illness contracted by

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basis for this decision, namely that the award related to distress consequent on physical inconvenience suffered as an immediate consequence of the breach. Mellor J. justied recovery in terms of mitigation since the defendant train operator might well have contemplated that alternative transport costs would probably be incurred as a result of the breach and clearly, it is easier to justify an award on these facts when it is a matter of chance that the plaintiff was unable to secure alternative transport which might have been charged to the defendant.71 However, although the operator might not have contemplated the loss which actually occurred, namely distress following from physical inconvenience, the case law appears to require only that the physical consequences of the breach fall within remoteness.72 This seems a highly questionable treatment of what is, after all, consequential (indirect) loss. Although the losses are different in nature, it is at least arguable that the measure of damages for distress consequent upon physical inconvenience ought to equate to the objectively determinable cost of alternative transport rather than to some arbitrary gure as subjectively determined by the judge (or jury at the time of this decision) and based on the open concept of ‘inconvenience’. In other words, evidence of the cost of substitute performance is evidence of its value to the claimant. Interestingly, and by comparison with recovery for ‘true distress’ (in (b) above), in this category of consequential distress, it is the very fact that recovery based on a nancial substitute could have been achieved which is used to justify recovery for physical inconvenience. Damages for physical inconvenience have also been awarded in the context of negligence claims against surveyors who, it is alleged, failed to detect defects in properties, and the purchaser either (i) instigated repairs and suffered distress consequent on physical inconvenience whilst these repairs were carried out,73 or (ii) suffered distress in consequence of living in the property in the unrepaired condition, where this was a reasonable course of action to take in the circumstances.74 In contrast, no damages for distress associated with physical inconvenience can be recovered if the purchaser’s aim in acquiring the

the wife as a result of the walk on the basis that this loss was too remote a consequence of the breach. 71 Ibid., 120, Blackburn J. recognised that the cost of alternative transport would clearly fall within the parties’ contemplations. 72 See Perry v. Sidney Phillips & Son [1982] 1 WLR 1297. 73 Perry v. Sidney Phillips and Son [1982] 1 WLR 1297 and Watts v. Morrow [1991] 1 WLR 1421. 74 Perry v. Sidney Phillips & Son [1982] 1 WLR 1297, Cross v. David Martin and Mortimer [1989] 1 EGLR 154, Bigg v. Howard Son & Gooch [1990] 1 EGLR 173, Watts v. Morrow [1991] 1 WLR 1421. Farley v. Skinner [2001] UKHL 49, [2002] 2 AC 732, concerns the different situation where the inconvenience cannot be remedied, other than by selling the property and moving away; as such, any inconvenience is ongoing.

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property affected was to resell it at a prot, rather than to live in it.75 In these circumstances, akin to the loss of amenity case law,76 there is no physical discomfort and so no distress for which to compensate. The issue of damages for (physical) inconvenience was considered by the House of Lords in Farley v. Skinner.77 The Court of Appeal, by a majority, had concluded that the aircraft noise did not amount to physical inconvenience but, in obiter comments the House of Lords disagreed and considered that aircraft noise was capable of having physical consequences such as to give rise to an award of damages for distress consequent on this physical inconvenience.78 However, any distress must be consequent on a physical consequence of the breach; the distress itself need not be physical. Lord Clyde, in particular, does not always make this clear. He considered that there was nothing magical about the use of the word ‘physical’ but focused on the nature of the physical discomfort or inconvenience and whether that amounted to distress for these purposes. However, it is clear that this is unnecessary and, as explained by Lord Scott, the appropriate criteria for determining recovery should be ‘the cause of the inconvenience or discomfort’. Lord Scott explained: If the cause is no more than disappointment that the contractual obligation has been broken, damages are not recoverable even if the disappointment has led to a complete mental breakdown. But if the cause of the inconvenience or discomfort is a sensory (sight, touch, hearing, smell etc) experience, damages can, subject to the remoteness rules, be recovered.79

If we examine the examples given by Lord Scott, it is possible to make a clear distinction between the two situations. If the aircraft noise causes the claimant to wake up, any distress and inconvenience follows from a physical cause and should be recoverable, whereas waking up because of worry and stress without physical cause, is, in the rst instance, mental suffering in the abstract, albeit that the reaction to it is a physical one. In general terms, there is no recovery for mental stress which leads onto a physical reaction, only for distress which follows from a physical cause. The cause and effect is vital to a correct reading of the legal position. Thus, if aircraft noise is recognised as having physical consequences, which it surely must have, damages for distress must be recoverable. The noise is a ‘confounded nuisance’, to borrow the description used by the judge at rst instance, precisely because it gives rise to physical effects which are considered to be unpleasant. Lord Hutton explained this by reference

75

Hutchinson v. Harris (1978) 10 BLR 19. See Birse Construction v. Eastern Telegraph Co. Ltd. (n. 65). 77 [2001] UKHL 49; [2002] 2 AC 732. 78 [2002] 2 AC 732, per Lord Steyn [30], per Lord Clyde [35]–[38], per Lord Hutton [57]–[61], and per Lord Scott [83]–[85]. 79 Ibid., [85]. 76

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to Hobbs v. London and South Western Railway Co.:80 ‘No doubt as Mr. Hobbs walked home after midnight with his wife and children the four or ve miles from Esher station through the drizzling rain he thought that the walk was a confounded nuisance, but that did not disentitle him from recovering damages for physical inconvenience and discomfort’.81 In this instance the cause of the distress is the physical inconvenience of the walk. It follows that the existence of the ‘physical inconvenience’ factor is helpful82 since it enables a distinction to be made in terms of recovery and ensures that distress damages are not generally available where there has been no more than a failure to full a contractual expectation.83 It also enables direct and indirect distress loss to be identied and subjected to the correct principles determining recovery; in the case of indirect distress loss (consequent on physical loss or inconvenience) recovery is subject only to remoteness and mitigation. By comparison, loss of amenity is direct loss through the non-fullment of a promised contractual benet.

d) A remoteness test as the sole criteria determining recovery? Remoteness, usually in the form of the application of the second limb of the test in Hadley v. Baxendale,84 has been applied as the sole requirement for recovery in some Canadian decisions. This ‘exception’ is not directly concerned with the subject matter of the contract, or for that matter with the particular contractual promises apart from the link with the concept of assumption of responsibility for distress loss. For example, in Newell v. Canadian Pacic Airlines Ltd.,85 aggravated damages were awarded because, although the defendant airline had given assurances that the plaintiffs’ dogs would be shipped safely, they neglected to ensure the safe carriage in the cargo hold; one of the dogs died and the other was injured. The court considered that distress was recoverable because it was a foreseeable consequence of the breach. However, the important aspect of the case was that the plaintiffs had made their particular concerns crystal clear and had nevertheless been assured that the dogs would be safe. It might therefore be said that the defendant airline had explicitly accepted the risk of the inevitable distress that would result from any failure to carry the dogs safely in much the

80

(1875) LR 10 QB 111. [2002] 2 AC 732, per Lord Hutton [59]. 82 Contrary to Lord Scott’s statement that a distinction between the physical and the non-physical was unhelpful. 83 Wapshott v. Davis Donovan & Co. [1996] PNLR 361, 378, per Beldam L. J. 84 (1854) 9 Exch 341. 85 (1976) 74 DLR (3d) 574, 14 OR (2d) 752 (Co Ct). 81

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same way as the surveyor in Farley v. Skinner had responded to the request to make a specic report on aircraft noise. By comparison, other Canadian decisions are not as readily explicable as falling within an explicit assumption of responsibility for any distress as a result of breach. In Kempling v. Hearthstone Manor Corp.86 the judge explicitly stated that the applicable test determining recovery for distress was the remoteness principle in Hadley v. Baxendale, and in Turczinski v. Dupont Heating & Air Conditioning Ltd.87 the Ontario Court of Appeal held that, although a contract for home improvements did not fall within ‘the very object’ test, the distress was recoverable as it fell within the specic contemplations of the parties.88 It is far from clear that distress damages should be recoverable in such circumstances although, in relation to a home improvement contract, certain breaches might give rise to a claim for distress damages consequent on physical consequences of the breach. On the other hand, it must be clear that the remoteness test cannot be the sole criterion in the context of claims for distress where the alleged breach is wrongful dismissal because of the requirement to establish an independent actionable wrong.89 Nevertheless, there is strong academic support for recovery based solely on remoteness. It is the solution supported by the American academic, Douglas J. Whaley 90 and also by Andrew Phang in his inuential Journal of Business Law article of 2003.91 Phang concluded: ‘there ought to be a general rule that damages for mental distress in situations of breach of contract ought to be awarded, subject to the existing limitations of, inter alia, remoteness and mitigation’.92 However, it must be clear that a test based on reasonable contemplations alone cannot work in this context to achieve the desired objective of non-recognition of distress in the commercial context. If remoteness were the sole criterion, the danger would be that it would fail to offer sufcient control, particularly as regards the operation of the rst limb in Hadley v. Baxendale, so that the oodgates would open, particularly in the commercial context, and uncertainty would result. Even the American Restatement of Contracts requires more than foreseeability for recovery of distress damages since § 353 rst requires

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(1996) 41 Alta LR (3d) 169 (CA). (2004) 246 DLR (4th) 96 (CA), paras. 26 and 27. 88 Ibid., para. 30. 89 Vorvis v. Insurance Corp. of British Columbia (1989) 58 DLR (4th) 193 and Wallace v. United Grain Growers Ltd. (1997) 152 DLR (4th) 1, [1997] 3 SCR 701, see earlier discussion, (2) (a) above. 90 Douglas J. Whaley, ‘Paying for the Agony: The Recovery of Emotional Distress Damages in Contract Actions’ (1992) 26 Suffolk U L. Rev. 935, 947. 91 A. Phang, ‘The Crumbling Edice? – The Award of Contractual Damages for Mental Distress’ [2003] JBL 341. 92 Ibid., 346 (emphasis added). 87

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the possibility of distress loss to be raised by reason of the nature of the contract or the nature of the obligation. In addition, whilst the application of the remoteness principle would permit recovery for distress following from explicit contractual obligations to assume responsibility for distress loss,93 such loss should be identiable as a loss in its own right on the basis of breach of the relevant obligation rather than using remoteness to achieve this identication. Thus, as already argued elsewhere,94 remoteness is a limitation on the ability on particular facts to be fully compensated for a loss following from a breach where both the breach and the loss have already been identied and linked by causation. It should not therefore be used to establish the existence of a loss or the general ability to recover for its breach.95 Interestingly, whilst rejecting remoteness as the sole criterion, Cohen and O’Byrne, consider that a single test based on remoteness is unlikely to permit more generous recovery whilst the basic commercial purpose of contracting is to the fore, since it will follow that non-nancial (or intangible) loss will not generally be within the parties’ reasonable contemplations.96 Even if this argument can be maintained as a realistic reaction by courts suddenly released from the restrictions of past constraints, it is unlikely to temper counsels’ inclusion of such a pleading for distress damages in all cases. That said, it must be the case that the remoteness test will only be effective to achieve the objective desired for it by Phang and Whaley if a broader view is taken of contractual benets. As evidenced by earlier remarks, the suspicion must be that the courts would relax any previous constraints if given the green light to do so and the danger must be the opposite of that feared by Cohen and O’Byrne, namely that counsel, and possibly the courts, will argue that distress is a natural consequence of the breach of a commercial obligation. Thus, it is submitted that it is the identication of the scope of the contractual obligations which should determine recovery. The distress loss must clearly fall within remoteness in relation to the breach but this cannot be the general test for recoverability. It is a ‘level two test’ on the ability to recover rather than

93 Although, as was recognised in the Ontario Court of Appeal in Brown v. Waterloo Regional Board of Commissioners of Police (1983) 150 DLR (3d) 729, 733–4, per Weatherston J. A., a remoteness test is likely to embrace the existing exceptions, there is considerable potential for it to operate outside that scope. 94 J. Poole, ‘Loss of Chance and the Evaluation of Hypotheticals in Contractual Claims’ [2007] LMCLQ 60 and J. Poole and J. Devenney, ‘Reforming Damages for Misrepresentation: The case for coherent aims and principles’ [2007] JBL (forthcoming). 95 Much the same point is made by Cohen & O’Byrne (n. 10) 138–139, when they state that Hadley v. Baxendale ‘does not seek to identify the terms of the contract nor determine whether there has been a breach’. 96 Ibid., 102–3. They criticise Whaley’s argument, 139, on this basis and conclude that the courts will fall back on the objects exception because of the difculties associated with foreseeability based on the ‘reasonable businessman’ model.

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a ‘level one test’ of whether recovery is possible in principle for such a head of loss. Lord Scott’s approach in Farley v. Skinner 97 amounts to applying the remoteness test (and also mitigation) as the sole criteria determining recovery for all direct loss involved in ‘deprivation of a contractual benet’ cases. He classied Farley v. Skinner as such a case based on the specic request to report on the aircraft noise and the subsequent assurance (i.e. explicit assumption of responsibility) and it must be the case that the only limitation on recovery in such instances should be remoteness since the breach and identication of recoverable loss (the benet) have already occurred. Remoteness in such instances will also be easily satised given the existence of that assumption of responsibility based on specic knowledge of the importance of the reassurance. Ruxley Electronics 98 provides a further example because loss of amenity claims were also classied by Lord Scott as involving a ‘deprivation of a contractual benet’, i.e., the swimming pool was not built to the specied depth and Mr. Forsyth therefore lost ‘the benet’ of such a depth. These cases were distinguishable from the type of distress claims prohibited under the general rule, which amount essentially to claims for a consequential loss that is one step removed from the direct impact of the breach. However, it is difcult to see on the basis of Lord Scott’s analysis why such distress should not, without more, also be recoverable if it falls within remoteness. That is precisely the position with respect to indirect distress consequent on physical inconvenience resulting from the breach. Despite this criticism, there is much to be said in favour of Lord Scott’s basic analysis in its simplest sense, although it must be questioned whether it really amounts to anything other than a test of identication of contractual undertakings to assume responsibility for distress loss. Where there is an explicit undertaking to provide a particular non-nancial benet, other than simple performance of the contract, or this is implicit in the nature of the obligation (as in the breach of condence obligation in Canada99 and certain breaches of holiday contracts),100 that breach can only be fully compensated by awarding damages for direct loss which includes the distress associated with the fact of breach. However, where responsibility cannot be implied, as in the obligation to deliver a holiday motor home,101 it should not be possible to recover for any distress, despite the fact that distress might well be regarded as foreseeable on the facts.

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[2002] 2 AC 732. [1996] AC 344. 99 Peters-Brown v. Regina District Health Board (1995) 136 Sask R 126 (QB), discussed n. 50. 100 This case law is discussed at n. 42. 101 Elder v. Koppe (1974) 53 DLR (3d) 705, 15 NSR (2d) 688 (TD), discussed n. 42 and n. 57. 98

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3) THE AMOUNT OF THE AWARD – TRUE COMPENSATION OR PUNISHMENT? Distress damages are awarded as compensation and that is equally the position where aggravated damages are awarded in Canada. However, it is necessarily difcult to quantify the appropriate compensation for non-nancial loss because of the very nature of this loss. What is clear is that distress damages, or loss of amenity damages, are unlikely to be compensation based on the actual cost of securing the end-product.102 The nature of the loss requires that damages should be assessed on the basis of the lost value to the claimant over and above the market value. This measure also supports the position that difference in value and distress damages may be available as compensation without posing a risk of double recovery.103 The best example of the approach to measure is the Canadian decision of Wilson v. Sooter Studios Ltd.104 where the distress damages for a breach by a wedding photographer could not include the cost of re-running the wedding party, including the cost of ying the guests back (at a cost of $7000 when the contract price was $399). The judge quantied the damages on the basis of the extra amount that the plaintiffs would have paid to secure substitute photos on the day, which was assessed at $600. Similarly in Dunn v. Disc Jockey Unlimited Co.,105 the damages awarded for the distress when a disc jockey failed to turn up to provide the entertainment at a wedding were assessed as the amount the plaintiff might have paid to secure a last minute substitute. Nevertheless, the fact that measure is calculated by reference to a nancial substitute does not mean that the basic loss is nancial. Despite the professed aim of such awards, there is always a danger that the quantication of distress damages may be less concerned with compensation than punishment which is liable to make such awards difcult to estimate in advance.

CONCLUSION Thus, distress damages in relation to the fact of the breach should only be recoverable where there has been an explicit or implied contractual assumption

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Ruxley Electronics v. Forsyth [1996] AC 344: such a measure would be considered excessive and disproportionate. 103 Although the contrary position is expressed by Lord Scott in Farley v. Skinner [2001] UKHL 49, [109]; [2002] AC 732, 772. 104 (n. 44). 105 (1978) 20 OR (2d) 309 (Prov Ct).

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of responsibility for such a loss. An assumption will only be implied where the obligation broken is a ‘one-off’ loss such that substitute performance or avoidance of loss cannot be secured. Therefore, it is not the nature of the contract (or whether a particular purpose is the very object or a major object of that contract) which matters, but whether there is an obligation (and so agreement) to accept liability for non-pecuniary losses as part of the expectation loss needing to be compensated in the event of breach of the performance obligation in question. Compensation will then follow, subject only to the application of remoteness and mitigation. Such an approach amounts to no more than following traditional principles since, as Cohen and O’Byrne have explained: Courts should give weight to the promises a contract contains, both economic and emotional, including promises of important intangible benets such as peace of mind, relaxation, and enjoyment.106

Equally, any test which rests on remoteness as the sole criterion is liable to open the oodgates to claims for distress loss in circumstances, such as the commercial context, where policy should dictate that pleadings should not include catch-all claims for mental anguish and distress owing simply from the fact that the breach has occurred; at least not in circumstances where this is not envisaged by a contractual obligation to this effect. Recovery of distress damages based on the allegation that the manner of the breach has aggravated the loss remains unlikely, although it may be a more likely prospect in Canada than in England. The English courts, largely as a result of the existence and scope of the statutory scheme for unfair dismissal, but also as a result of some residual hang-ups with the decision in Addis v. Gramophone Co. Ltd., have found it extremely difcult to identify any circumstances where they can award true distress damages for the manner of the breach. The interesting aspect of the Canadian willingness to recognise bad conduct as increasing the loss suffered in a non-pecuniary sense is that it can extend to the commercial context, particularly where there is a duciary relationship or separate contractual undertaking which has also been broken as part of the circumstances. The overwhelming sense is that whilst the ‘exceptions’ may have lacked some justication, it is possible to explain and rationalise the existing law in a way which meets the fundamental policy objective of avoiding oodgates in relation to recovery for distress in circumstances which do not merit an assumption of responsibility for the non-fullment of non-nancial contractual benets. Such an assumption of responsibility for non-nancial losses must either be consequent on physical loss or the result of either explicit promises, as in Farley v. Skinner, or some limited recognition of implied promises of

106

Cohen & O’Brien (n. 10), 126.

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responsibility. What is important to this analysis, however, is that the crucial focus should be on the individual obligation broken and promises made, rather than on the broader question of the type of contract – be that commercial or consumer, holiday or wedding. As O’Leary J. stated in Barbour v. GH Heating & Air Conditioning Ltd.,107 damages for mental distress in breach of contract claims are awarded only: where the defendant had agreed specically or by implication to provide the plaintiff with certain mental, social or emotional benets or satisfaction and the defendant failed to full its promise in that regard.

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(1981) 15 CCLT 168 (Ont HC), 178.

PART 4 CONTRACT AND UNJUST ENRICHMENT – RECONCILING DIFFERENT JURISDICTIONAL APPROACHES

Chapter 14 Specic Performance in the Common and Civil Law: Some Lessons for Harmonisation Lucinda Miller* INTRODUCTION A European contract law is no longer of purely theoretical interest. Work is currently underway on the drafting of what has been denominated the ‘Common Frame of Reference’ (hereafter CFR). This CFR, although still somewhat shrouded with ambiguity as to its true nature and purpose, is nevertheless an important indicator as to how the European Commission envisages the future of contract law in Europe and it has been given political approval in the Hague Programme of the European Council.1 Such a signicant development has a

* I would like to thank colleagues Michael Bridge, John Lowry and Fiona Smith for insightful comments on an earlier draft. 1 The Hague Programme on Strengthening Freedom, Security and Justice in the EU was agreed by Heads of State at the European Council on 5 November 2004. Contract law was embraced within its programme for strengthening justice, a programme that forms the third plank in the triptych of freedom, security and justice. Within this programme of justice, and under a rubric of ‘condence building and mutual trust’, specic action for improving the quality and coherence of EU legislation is timetabled. It is

281 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 281–310. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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number of important implications for the contract law of the EU Member States and is therefore deserving of the closest scrutiny. All the more so when the reductionist nature of the project is revealed. The CFR rst featured on the European stage in the Commission’s Communication Action Plan of 2003, entitled ‘A More Coherent European Contract Law’.2 This was the second document in a consultative process launched by the EC Commission in 2001,3 a process which continues to generate much interest and which has been responsible for an ever-increasing amount of scholarly commentary.4 At the heart of the debate on European contract law is the need, or desirability, to harmonise the contract laws of the EU Member States in order to improve the functioning of the European internal market. In brief, the legitimacy of the EC’s involvement in contract law, despite the lack of explicit treaty competence,5 has been pinned to the somewhat thinly evidenced contention that the divergence in contract laws across the EU causes disparities in competition and creates obstacles for cross-border trade.6 The Commission conceives the CFR as instrumental in the reduction of such obstacles. It is envisaged as a non-binding document7 that will establish common terminology and rules of European contract law. It will provide a point

here that the instrumental role of European contract law for improving civil justice is articulated. 2 COM (2003) 68. 3 COM (2001) 398. The 2001 and 2003 Communications have been followed by a 2004 paper entitled European Contract Law and the revision of the acquis: the way forward (COM (2004) 651) and a 2005 First Annual Progress Report from the Commission: COM (2005) 456. 4 The protean nature of the debate is encapsulated in the collection of essays in A. S. Hartkamp and M. W. Hesselink, Towards a European Civil Code (3rd ed. Kluwer, The Hague 2004). 5 See below (n. 6). 6 For a persuasive criticism of systematic harmonisation as an appropriate project to pursue at an EU level see T. Wilhelmsson, ‘Private Law in the EU: Harmonised or Fragmented Europeanisation?’ (2002) 10 ERPL 77. It should also be noted that in the light of the Tobacco Advertising decision, measures taken under Art. 95 TEC – currently the only possible legal basis for Community contract law instruments – will need to withstand scrutiny by the ECJ as to their real potential for improving the functioning of the internal market: Case C-376/98 Federal Republic of Germany v. European Parliament and Council of the European Union. A mere nding of disparities between Member States’ contract rules and a theoretical or abstract risk of obstacles to the fundamental freedoms or distortions of competition does not sufce to justify the use of Art. 95: see S. Weatherill, ‘The Commission’s Options for Developing EC Consumer Protection and Contract Law: Assessing the Constitutional Basis’ (2002) EBLR 506. 7 Although, in the future, the CFR could be given binding status; see 2004 Communication para. 2.1.3.

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of reference for the Community institutions when drafting legislation in the area of EC contract law and thus improve the coherence and quality of the EC contract law acquis,8 this, in turn, enhancing the functioning of the internal market.9 The Commission also hopes that Member States’ legislators will refer to this document when enacting contract law legislation (in areas both regulated and unregulated at Community level), as will arbitrators when resolving conicts between contractual parties, and that it will also constitute a source of inspiration for the ECJ when interpreting the contract law acquis.10 Most controversially, it is to act as a testing ground for a possible optional horizontal instrument which parties could choose to use as applicable law.11 The objectives that the CFR must meet are clearly ambitious ones. The CFR is depicted in beguiling terms. It is a necessary response to already-identied problems of inconsistency and lack of coherence. And the Commission, by taking an initial backseat position, minimises the potential for controversy. Elaboration of the document is to be undertaken by expert researchers, combined with regular stakeholder and Member State expert input.12 This hands-off guise, together with the document’s non-binding nature,

8

Several inconsistencies were highlighted in the 2003 Action Plan such as inconsistencies between, as well as within, Directives; lack of denitions (such as ‘damage’) in some Directives, whilst in others it has been dened; different methods of implementation amongst Member States; lack of uniformity resulting from the minimum harmonisation approach. See Action Plan paras. 16–24. 9 Para. 2.1.1 of the 2004 Communication. See also the remarks by Mr. Robert Madelin, Director General of the DG Health and Consumer Protection at the Commission at the rst workshop of the network of MS experts in contract law on 3 December 2004: . 10 See para. 2.1.2 of the 2004 Communication. 11 It is interesting to note that the 2004 Communication emphatically denies that the Commission is intending to propose a European Civil Code in an attempt to harmonise contract laws of Member States (para. 2.3). Indeed, surprisingly, even reection on a possible future optional instrument seems to have recently fallen off the Commission’s current agenda: workshop of the network of MS experts on European Contract Law 31 May 2005: . This, however, is viewed as a smokescreen by some; see below (n. 21) and accompanying text. 12 Following a call for proposals, the Commission selected a research network consisting of researchers from a broad spectrum of European legal traditions. Their research is not bound by any terms of reference from the Commission but must take into account the views of the network of stakeholder experts (the ‘CFR-Net’), also funded by the Commission. The CFR-Net creates a forum of consumer organisations, lawyers, business groups and other stakeholders with an interest in the European contract law initiative to provide practical input into the preliminary CFR research undertaken by

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is presumably intended to alleviate the political tension that further top-down legislative incursion into national contract law rules is likely to trigger.13 If we turn to the structure of the CFR, Annex I of the 2004 Communication14 envisages it as a three-part document, beginning with common fundamental principles of contract law15 supported, in the second part, by denitions of key concepts,16 with the bulk of the document consisting of the third part – model rules,17 with specic sections on sales and insurance contracts.18 This structure reveals much about the nal form and use for the CFR. It is clear that it extends beyond a lexicographical document that simply establishes common contractual terms or ‘best solutions’19 that legislators can draw on in much the same way as one might use a dictionary. It is more therefore than a ‘toolbox’20 for improving the coherence of existing and future legal instruments. It is instead served up by the Commission as a model for a coherent system of contract law in an almost identical structure to the Principles of European Contract Law (PECL). And the PECL have been elaborated with a clear objective in mind – the rst step towards use as ‘a basis for a European Code of Contracts’.21 Bearing in mind

academics. In this way, the Commission states that account will be taken of the practical context and needs of the users of the CFR. The Commission will act as the coordinator of this process. There is also a network of Member States’ experts whereby at regularly arranged workshops Member States are informed of progress of the CFR work and are able to give their input. The rst round of workshops took place in Dec 2004; . 13 Not least arising from questions regarding the competence of the Community to enact more horizontal measures in private law. Alongside this, issues concerning subsidiarity would also need to be addressed. 14 COM (2004) 651 pp. 14 ss. 15 Examples given are freedom of contract and the binding force of the contract. 16 Such as the denition of a contract. 17 It is to cover such areas as the conclusion, validity and interpretation of contracts; pre-contractual obligations; rules on performance and non-performance; plurality of parties; assignment of claims; transfer of contact and prescription periods (Annex I). 18 Para. 3.1.3 and Annex I. 19 Action Plan para. 63. 20 2004 Communication para. 2.1.1. 21 O. Lando, ‘Principles of European Contract Law: An Alternative to or a Precursor of European Legislation’ (1992) 40 Am J Comp L 573, 577. Although, admittedly, this is the view of Ole Lando (the President of the Commission on European Contract Law) and not necessarily the view of all members. Another author has recently stated that ‘a European contract code is on the agenda now, even though the EC Commission still prefers to speak vaguely of a Common Frame of Reference’: S. Grundmann (2005) 2 European Review Contract Law 184, 204. Collins also views the CFR as a ‘radical step’ towards a European contract law: H. Collins, ‘Harmonisation of European Contract Law: Citizenship, Diversity and Effectiveness’ in J. Bell and C. Kilpatrick (eds.),

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the ambitious time-scale that the Commission has established,22 it is not likely that the CFR will stray too far from the PECL model. But the approach of the Commission towards the harmonisation of contract law must be examined with care. The methodology of the EC is constructed on the basis that ‘best solutions’ can be found through the drafting of rules that will be common to all Member States.23 This rule-based logic24 is predicated on the notion that common rules equate with common solutions to legal problems, thus fullling harmonisation objectives. But this is simplistic in the way that it suppresses the value-laden nature of rules and the context in which they operate. Rules are ‘value-rational’25 and reect political choices in the way of socioeconomic and philosophical goals as well as the historical context of the system within which they lie. The introduction of new rules that reect the ‘foreign’ values of EC market integration26 will sit uncomfortably within their new legal environments. The resulting ‘irritation’ that this disjuncture of legal values unleashes on the internal structures of each Member State’s legal tradition27 has been admirably documented in relation to the ‘piecemeal’ method of EC harmonisation.28 In this article, Teubner has highlighted the diminished potential for harmonisation of EU legal systems since each system responds differently to the new legal arrival. But his thesis can be extended beyond the EU context and is

The Cambridge Yearbook of European Legal Studies: Volume Seven 2004–2005 (Hart, Oxford 2006) Chapter 5. 22 The Commission intends that the CFR will be adopted by 2009, two years after the Draft Common Frame of Reference is to be completed by researchers; 2004 Communication para. 3.2.4. 23 The strategy of the EC is two-pronged in that commonalities – or ‘common denominators’ – between legal systems are considered to already exist, they just need to be discovered and, secondly, it is recognised that new rules will also need to be drafted to establish commonalities for the future. See 2003 Action Plan para. 63. 24 Legrand believes that the rule-based approach is a typical feature of the civilians who have been ‘unrepentant rationalists’ since the second century, and for whom law still consists primarily of rules: P. Legrand, ‘On the Unbearable Localness of the Law: Academic Fallacies and Unseasonable Observations’ (2002) 10 ERPL 61, 65. 25 C. Joerges, ‘The Europeanisation of Private Law as a Rationalisation Process and as a Contest of Disciplines – an Analysis of the Directive on Unfair Terms in Consumer Contracts’ (1995) 3 ERPL Law 175, 179. 26 As one commentator remarks, reading the EC Communication leads one to believe that contract law is singular in its purpose – that of facilitating the proper functioning of the Internal Market. M. Hesselink, The New European Private Law: Essays on the Future of Private Law in Europe (Kluwer, The Hague 2002) 169. 27 This ‘spasmodic’ EC intervention causes disintegration not just in law but also between law and other discourses. See P. Legrand (n. 24) 69. 28 G. Teubner, ‘Good Faith in British Law or How Unifying Law Ends Up in New Divergences’ (1998) 61 MLR 11.

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a salient reminder for those working on any project that seeks to harmonise law between different legal traditions. Thus, in line with the tenor of this collection of essays, this paper also serves to highlight potential pitfalls for work being conducted by the Uniform Law Conference on commercial law harmonisation in bi-jurisdictional29 Canada.30 One response to such disharmony might be to consider more extensive harmonisation that penetrates further into the private law realms of the Member States, thus reducing the potential for locally produced divergence. It seems that this is the logic on which the CFR is hung, since the non-sector specic instrument represents a horizontal and more extensive form of harmonisation than the previous approach based on ‘pointillist’ Directives.31 But, this approach ignores the limited capacity of surface-level rule harmonisation, since rules form only one part of a complex set of legal ‘formants’,32 the range of formants extending beyond the formal rules and including judicial interpretation and academic commentary and which can only nd meaning from their individual cultural33 context. Thus, the statutory rule is only one piece of the legal jigsaw, reducing the potential for surface-level harmonisation to achieve the goals it purports to offer. The nal introductory point to make concerning the limitations of a rulebased approach to harmonisation is that the drafting of common rules, or best solutions, will inevitably lead to the creation of new law and thus generate legal change. Legal change is, of course, the goal of the EC project; the underlying philosophy is that the differences in Member States’ legal systems create obstacles in cross-border trade that must be reduced through new rules. This,

29

Namely Canadian common law and Québécois civilian. The Commercial Law Strategy was adopted by the Uniform Law Conference of Canada in 1998 with the purpose of harmonising commercial law across Canada. In a similar vein to the EC, harmonisation of (commercial) law is considered to facilitate trade within Canada. Attention should be drawn to comments made at the 2000 Annual Meeting regarding the obstacles to harmonisation of Canadian common and civilian law. Here it was considered ‘premature to be concerned about differences with Quebec law’ since, whilst theoretically there seemed to be a divide between the two jurisdictions, ‘in practice this was not happening’. See . This opinion might be reviewed in the light of the case studies below. 31 Although, one must remember that harmonisation of substantive law must be complemented by harmonisation of the institutions and procedures by which these rules are given effect if it is to be effective: S. Whittaker, Liability for Products: English Law, French Law and European Harmonisation (OUP, Oxford 2005). 32 R. Sacco, ‘Legal Formants: A Dynamic Approach to Comparative Law’ Instalments I and II (1991) 39 Am J Comp L 1 and 343. 33 By ‘cultural’ is meant the particular political, socio-economic, philosophical and historical context of a legal tradition. 30

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therefore, necessitates choosing one conception of contract over another. As for any normative project, it is imperative that this be defended and justied.34 It cannot be relegated to sterile, technical debates over rules. As such, the Commission needs to approach the CFR and harmonisation generally beyond the best solutions approach, and steer the discussion into more theoretical waters. There is the need to be aware of what is at stake when rules are harmonised35 and to acknowledge the ideological nature of the strategy in which the Commission is engaged.36 Although preferring to hide behind a veil of neutrality for the political advantages this secures in terms of its acceptability to Member States, contract law is not a politically neutral area of law.37 Justication, that goes beyond the goals of market integration, needs to be found if change is to be legitimate and politically acceptable to Member States. The extent to which the challenge of harmonisation goes beyond the technical exigencies of drafting common rules renders it crucial for the level of debate to reect such complexity, and for the opportunity for reexivity and understanding to be grasped.

1) UNDERSTANDING ‘REMEDIES’ In accordance, therefore, with the demands for knowledge and understanding of the value-laden nature of rules and their contrasting theoretical underpinnings, this paper examines the civilian and common law approach to the response to non-performance of a contractual obligation – more specically, the role of specic performance in each. Before a more extensive survey of the practices of each tradition is undertaken, it should rst be noted that both systems approach remedies law in distinctly divergent ways. In brief, in the common law38 the primary remedy for breach is damages, and specic performance is awarded only very exceptionally. In contrast, in civilian jurisdictions,39 specic performance receives a far more favourable reception and, where the victim of

34 M. Bussani, ‘Integrative’ Comparative Law Enterprises and the Inner Stratication of Legal Systems’ (2000) 8 ERPL 85, 90. See also S. Whittaker (n. 31) chapter 20. 35 M. Bussani (n. 34) 99. 36 P. Legrand (n. 24) 67. 37 See, for example, D. Kennedy, ‘The Political Stakes in “Merely Technical” Issues of Contract Law’ (2001) 9 ERPL 7; D. Caruso, ‘The Missing View of the Cathedral: The Private Law Paradigm of European Legal Integration’ (1997) 3 ELJ 3. And the urgency of the theoretical and political nature of the debate is something that likewise needs to be addressed by harmonisation projects at the Canadian level. 38 The focus of this paper is on English and Canadian common law jurisdictions. 39 For the purposes of this paper, French and the French-derived legal system of Québec.

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the breach opts to pursue this remedy,40 the court will rarely choose to substitute it with damages. An examination of the legal response to non-performance of a contractual obligation provides the ideal lens through which to discuss the value-laden nature of contract law and serves as a clarion call for a more fundamental debate to be undertaken at a European level.41 ‘Remedies law’, in common law parlance,42 reveals the axiological nature of contract law, sharply reecting fundamental socio-economic choices of a legal system, as well as revealing its theoretical, philosophical and historical backdrop. Furthermore, since the European Commission has singled out rules for non-performance as an area of particular attention43 the discussion takes on practical importance. For the civilian lawyer, this remedial perspective might not appear such an obvious candidate for analysis, and even perhaps seem counterintuitive. If one aims to reveal the values that underscore contract law it might be considered more appropriate to study the rules that regulate the content of contractual obligations and the rights that such rules generate – rather than the separate, or secondary, rules concerning remedies. Such a remedy-orientated outlook is indeed a common law characteristic,44 the civilian mindset preferring to approach contractual issues from the perspective of rights, as opposed to remedies. This in itself encapsulates an important divergence between traditions. The civilian maxim ubi jus ibi remedium stands in contrast to the oft-cited maxim ubi remedium, ibi ius, the latter reecting the traditional English attitude towards rights. Since the law is articulated through the remedy as opposed to the right 45 the precise content of the latter can only be evidenced through knowledge of the nature of the former. So, instead of asking whether there is a duty, one asks whether the court will give a remedy,46 an

40 In many situations, an award of damages will be preferable to the obligee than that of performance; below (n. 69). 41 But, as mentioned, it is reminded that this paper serves to highlight harmonisation projects in Canada. 42 Admittedly, the term ‘remedies’ has little meaning for the civilian. The literal translation remèdes does not serve to enhance understanding of the particular common law institution. It will be seen how the terminological difculty denotes more fundamental differences between each system. Whilst recognising the limitations of the term, for practical purposes ‘remedies’ will nevertheless be used throughout the paper. 43 See below (n. 56) and accompanying text. 44 The centrality in English law of the notion of remedies has been seen to account for the lack of general theory of obligations; see R. Sefton-Green, La notion d’obligation fondamentale: Comparaison franco-anglaise (LDGJ, Paris 2000) 11. 45 ‘It is impossible sensibly to discuss how binding a contract is until one knows what form of damages are likely to be awarded for its breach’: P. S. Atiyah, Essays on contract (Clarendon, Oxford 1990) Essay 3 ‘Holmes and the Theory of Contract’ 57, 61. 46 B. Nicholas, The French Law of Contract (2nd ed., OUP, Oxford 1996) 212.

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approach which focuses on rules established over time in response to individual decisions of the court, rather than any coherent articulation of principle. The common law’s remedial bias has meant that not only is this area of law a well trodden area of analysis but also that it is far more coherent than the civilian. Whilst there may be differing opinions amongst common lawyers as to the substantive content of the law of ‘remedies’,47 the term is nevertheless universally understood as the bundle of legal (or self-help) actions48 available to the obligee, who wishes to take measures in response to the obligor’s nonperformance of his contractual obligation.49 The ‘law of remedies’ is perceived as a coherent, systematic set of principles, suitable for self-standing scholarly attention, that are presented in a more or less uniform manner by the main textbook writers.50 In France however,50a there is no neat doctrinal category that facilitates a study of the consequences of a ‘breach’,51 and the lack of doctrinal systematisation seems to have stymied theoretical interest in this area of law. Instead, the area covered by remedies law in England is sprinkled amongst various parts of the Code civil. One needs to be relatively familiar with the Code to be able to navigate one’s way through various sections and chapters before the full panoply of legal rights can be discerned. Chapter III of the Third Title of the Code, under the rubric of ‘The Effects of Obligations’, contains the principal provisions.52 But they are found amongst other provisions that are unconcerned with

47

For example, actions such as termination for breach, or restitution, are considered by some, but not others, as falling within the ambit or remedies. See, on this, D. Harris and D. Tallon, Contract Law Today: Anglo French Comparisons (Clarendon Press, Oxford 1989) 264. 48 In the ordinary, non-legal, sense of the word. 49 See D. Harris et al., Remedies in Contract & Tort (Butterworths, London 2002) 3. 50 Most writers include remedies as the nal chapter(s) in their works, at the end of a ‘formation-performance-breach-remedies’ continuum e.g., G. H. Treitel, The Law of Contract (11th ed., Sweet & Maxwell, 2003); M. P. Furmston, Cheshire, Fifoot & Furmston’s Law of Contract (14th ed., Butterworths, London 2001); H. Collins, The Law of Contract (4th ed., CUP, Cambridge 2003). This routine format has tended to divorce the rights that arise from the contract, and which are allocated by the parties, from the remedies that are granted on breach. The perception of remedies law as belonging in procedural rules, rather than substantive law, has added to this separation. 50a The position in Québec is briey examined below, n. 52 51 Or, in civil law terms, non-performance. The terms, however, are not synonymous. The common law term, breach, signies that there is a remedy for the obligee, since non-performance is not excused. In other words it does not cover the circumstances where non-performance is the result of frustration since there is a lawful excuse for nonperformance. There is no breach unless the obligee would be entitled to claim damages. Non-performance – or inexécution – in France includes the situation where no ‘remedy’ is possible. 52 Articles 1134 ss., Code civil. The new Civil Code of Québec, enacted in 1994

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non-performance, and the problem of ascertaining what rights are available for non-performance is compounded.53 Coherence is further thwarted by the separate treatment given to the non-performance of special contracts (contrats nommés), and in particular the contract of sale, which is regulated in a later Title of Chapter III (Title Six54) and to which modied rules apply.55 The French text book writers replicate the incoherence of the Code civil, there being no systematic exposition on the recourses available to the obligee, faced with a nonperforming contractual party. With this perspective in mind, the European Commission’s proposals might appear puzzling to the civilian. Both 2003 and 2004 Communications explicitly single out remedies for the drafting of common rules and the suggested structure of the CFR demarcates ‘remedies in general’55a in section III of Chapter III ‘model rules’.56 Some explanation for the focus can be ascribed to the similar structural approach taken in the international sales document, the CISG,57 and the PECL. But, where intervention is to encroach on domestic law, justication must be found if the EC approach is to appear rational and acceptable to systems, such as the French whose structures do not turn on the remedial axis. The remedial perspective of the common law nds historical explanation. The common law elevation of remedies law to such a pivotal position, at the expense, it seems, of any clear systematisation of contractual rights (such as found in civilian systems), nds its source in the development of the common law as a system based on actions. Law was essentially knowledge (and manipulation) of procedural rules and it was only where an action could be identied,

(see n. 79 below), has brought more coherence to the area of non-performance. Most provisions have been brought together under Division II of Chapter VI under the rubric of ‘Right to Enforce Performance’ articles 1590 ss. 53 Nicholas (n. 46) 150 comments that the confusing assortment of provisions can be attributed to the way that the effects of an obligation are not separated from the effects of a contract. He explains that the logically prior issue as to the effects of a contract (they principally create, modify, and extinguish obligations, as well as transfer real and personal rights) is, of course, a different matter to that of the effects of an obligation. The effect of the later is that where the obligation is not performed (voluntarily or under compulsion) then an award of damages acts as a substitute. The question of inexécution naturally deals with the effect of an obligation. Another explanation for the disparate arrangement in both treatises and Code is that they are concerned not just with the contractual obligation, but obligations in general (i.e. including delictual) as well as remedies for enforcing real rights (e.g., article 1143 – see below). 54 Articles 1582 ss., Code civil. 55 Of course, the sale of goods in England is also dealt with in a separate statutory regime – the Sale of Goods Act 1979. 55a Translated in the ofcial French language document as ‘Non-exécution et recours en général’. 56 See for example Action Plan p. 2 & para. 63 and 2004 Communication, 15. 57 UN Convention on Contracts for the International Sale of Goods 1980.

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and its particular form ascertained, that one could talk about the precise nature of the right which the particular action engendered. This is a salutary reminder of how legal rules cannot be extricated from the historical, an assertion that goes beyond mere intellectual interest and proves helpful when addressing harmonisation. Meaningful dialogue is better assured when the rationale behind the rule is uncovered. If such rationale is found to be closely connected to historical happenstance two consequences may ow from this; rst, the self-evident nature of the rule may be thrown into question as it begins to appear anachronistic in a modern contractual world. In this way, legal change becomes an easier task to defend for those embarking on harmonisation. Secondly however, ‘historical contingency’58 may highlight real and important differences between legal systems that cannot be suppressed by a limiting, rulebased approach to harmonisation. If we briey turn to the common law and examine the historical roots of the modern articulation of remedies law, we see that the historical factors which account for the domination of damages over specic performance do not, in themselves, necessarily present insuperable obstacles to legal change. The separation in England between the equitable jurisdiction of Chancery and the common law courts helps account for the subordinate position of specic performance in relation to damages. The subsidiary position of the Chancery’s jurisdiction, restricted to instances where the common law could not provide an adequate pecuniary remedy, in turn hindered the development of equitable principles, which advocated respect for the promise made and the enforcement of contractual obligations – the inuence of specic performance thus being undermined by the common law preference for market principles and the concomitant award of damages. Despite the fusion of the courts in the late nineteenth century,59 the historical legacy has heavily inuenced the articulation of modern legal principles and the bifurcation of jurisdictions, no longer of an institutional nature, has nevertheless left an indelible mark on the common law mentality. In addition, the formulation of contractual principles took shape within the strictures of a particular type of contractual dispute, since English law was developed in accordance with the particular case that was adjudicated. Because litigation remained the privilege of those with nancial means, the courts primarily found themselves deciding issues pertinent to commercial parties. The commercial context of the nineteenth century embryonic contract law was instrumental in placing damages at the helm of the remedial structure. If one accepts the assumption that damages are the more adequate remedy for commercial parties (an assumption questioned below) then the same assumption

58

P. Legrand (n. 24) 67. Supreme Court of Judicature Act 1873 (36 & 37 Vict. c. 66) and the Supreme Court of Judicature Act 1875 (38 & 9 Vict. c. 77). 59

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cannot be so readily implied in the context of more modern backdrops to a contract, such as in dealings with consumers.60

2) THE PREVALENCE OF SPECIFIC PERFORMANCE It is now appropriate to turn in more detail to the rules regarding remedies, a preliminary step before examining the values that lie behind each different approach. It was seen above that the stance of each legal tradition can be boiled down to two simple postulates; in the common law it is damages that is the preferred remedy, specic performance only being awarded as an exceptional remedy. In contrast, in France, and French-derived systems, where the obligee pursues specic performance then the law will rarely choose to substitute it with damages. Of course, for the comparative enquiry to be authentic, it is crucial to delineate the subject matter of comparison. If we want to understand the preference for specic performance it needs to be clear what is meant when one refers to the term ‘specic performance’ or its near equivalent in French, and Frenchderived law – exécution en nature. An ‘umbrella’ denition that embraces both jurisdictions can be posited, but only if one looks at the resultant situation from the ‘innocent’ party’s position; it is the order granted to the obligee by the court, that secures for him the very thing for which he contracted. But a denition that encompasses both jurisdictions is somewhat contrived since it does not give full expression to the remedy that is available in either France or England. There are important differences. The common law conceives of this remedy in fairly narrow terms, a perspective that emphasises the very personal nature of the remedy. The court decree is only addressed against the obligor himself, whom is ordered to personally perform his contractual obligation. After all, it should be remembered that equity acts in personam61 and specic performance is an equitable remedy. From the civilian perspective, the precise contours of specic performance, or exécution en nature, embraces far more than the common law counterpart.62 Two examples demonstrate this. First, the term embraces the situation where the court orders the obligation to be performed by someone other than the

60 The deciencies that the commercially-founded common law has in recognising the interests of consumers has been highlighted by many, but see, notably; D. Harris, A. Ogus and J. Phillips ‘Contract Remedies and the Consumer Surplus’ (1979) 95 LQR 581. 61 T. Weir, ‘The Common Law System’ (1974) IECL Vol. II 83. 62 Although in France too, one can glimpse evidence of the difculty some authors have in conceiving of the remedy as outside of the purely personal action between obligee and obligor. E.g., Starck prefers to denominate the following two examples under the heading of ‘L’exécution indirecte en nature’, rather than as a true example of exécution en nature; B. Starck, Droit Civil: Les Obligations (Litec, Paris 1998) 1641.

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obligor, but cost of performance is met by the obligor of the original obligation.63 Here, the obligee receives the same performance, it is only the performing party that is different. This expands the notion of exécution en nature much further than English and Canadian common law. For the common law tradition, such a situation would be conceptualised as termination of the contract and an award of damages for the cost of having the work done by someone else.64 The second example where the remedy in France can be seen as more expansive than in England is where the obligor does something in contravention of an existing contractual obligation and the obligee can apply to the court for the construction to be destroyed.65 Since the end result for the obligee is the same as if the breach had not occurred, then this too is conceptualised as a form of exécution en nature. English law would consider the same action as a mandatory injunction, and not an instance of specic performance. The antithetical positions of France (and Québec law) and the common law in relation to remedies law are clearly articulated in the orthodox rules

63 See article 1144, Code civil. A similar provision can be found in the 1994 civil code of Québec; article 1602. 64 This is interesting, since it emphasises the jurisdictions’ attitude towards the contractual bond. French law strives to maintain the life of the original obligation, whilst English law prefers to relieve the parties from further dealings, more readily allowing termination of the contract. This point goes to the core of the different contractual traditions and will be further explored in the case studies below. Harris et al. supra n. 49 at p. 210 comment that the damages awarded (cost of cure, or reinstatement, damages) should be regarded as a form of ‘substitute specic performance’. This description is misleading however, and any such synthesis of the remedies of damages and specic performance should be avoided since each remedy protects a distinct interest; different both in nature and different in the goals that it fulls. Specic performance can be viewed as the most suitable remedy to protect the performance interest – in other words it grants the obligee the very thing that was promised. In contrast, an action for damages is concerned with protecting the interest in not being made worse off as a result of the breach. This is known as the compensatory interest; see C. Webb ‘Performance and Compensation: An Analysis of Contract Damages and Contractual Obligation’ (2006) OJLS 41, at 58. Webb however, whilst viewing the compensatory and performance interests as indeed distinct, views the cost of cure damages as a monetary award suitable for protection of the performance interest. Whilst recognising the difculty with this in the way that it does not protect the performance contained within the contract itself, he attempts to argue that the contract can be interpreted as providing for a cost of cure award in the event of breach, and, in the event that the court does not order specic performance; at 68 ss. In this way, Webb views the cost of cure monetary award in English law as performance thus aligning the English position with the French. Webb’s position however, is not an orthodox one within common law academic commentary, and leads to a rather tortuous interpretation of performance. 65 See article 1143, Code civil. An almost identical provision can be found in article 1603 of the 1994 Québec civil code.

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that govern the relationship between an award of damages and that of specic performance. In the common law, subject to a limited class of contract,66 it is only where damages are considered inadequate compensation for the obligee that the court will consider the equitable remedy of specic performance. This means that it is only subsequent to a prior enquiry into the sufciency of damages that the possibility of specic performance is addressed at all. Even where parties themselves stipulate that specic performance is their chosen remedy for breach, the court’s discretion cannot be fettered and, should the courts consider it appropriate, damages may be awarded instead.67 Importantly, even where damages are not adequate, the discretionary nature of specic performance means that recourse to the remedy may still be precluded. Unsurprisingly therefore, the award is therefore not a regular feature in the common law jurisdictions of England or Canada. In marked contrast, French and Québécois law offer far more opportunities for performance to be enforced through the courts. Exécution en nature is not a secondary remedy, resting almost entirely on the (non)availability of damages. Importantly, the obligee will not have to show that damages are an inadequate remedy before he can pursue an action for performance.67a Instead it could be said that the ‘adequacy’ of damages is determined by the obligee,

66 Notably, contracts for unique goods and, as an illustration of this, the contract for the sale of land. Contracts for the sale of land have traditionally been viewed as contracts for unique goods. However, it is interesting to note the position in Canada where the courts seem more prepared to consider the advantages and disadvantages of specic performance rather than granting it automatically. Whilst a survey of case law seems to suggest that specic performance is nevertheless usually granted (see R. J. Sharpe, Injunctions and Specic Performance (3rd ed., Canada Law Book Limited, Aurora Ontario 2000)) one recent example that refused the award is the decision of the Ontario Court of Appeal in Semelhago v. Paramadevan [1996] 2 SCR 415. Here, the assumption that every piece of real estate was unique was explicitly rejected by the court. Modern day housing can commonly comprise of identical lots, often purchased purely for their investment potential. With this in mind, the court held that evidence would need to be provided in order to show that the piece of land could not be substituted by any other, and therefore that damages was inadequate. It will be interesting to see if this approach takes root in England. See comments encouraging this approach in Harris et al. (n. 49) 176. 67 Quadrant Visual Communications Ltd. v. Hutchison Telephone (UK) [1993] BCLC 442. Although in this case, the plaintiff was found to have acted in an underhand way by failing to disclose an agreement to the defendant. This might go some way in explaining the court’s refusal to award the plaintiff specic performance, despite the stipulation for this remedy in the contract. 67a The Québec Court of Appeal decision of Varnet Software Corporation v. Varnet U.K. Ltd (1994) Canadian Patent Reporter 3d 29, neatly summarises the civilian position, albeit from a Québécois perspective; ‘under the Civil Law of Quebec, specic performance of contracts is the general rule, unlike the Common Law approach which favours compensation for breach by damages awards’ (at para 14).

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rather than the court, for if he prefers performance of the obligation, then this will (subject to certain qualications) be granted. The French obligee has the right to demand performance from the obligor – or rather, has the right to seek an authorisation from the court, compelling the obligor to perform. The availability of specic performance will be contingent on whether performance remains possible. Where performance has not become impossible, or where it is not of a decidedly personal nature (which can be broadly viewed as a further instance of impossibility) then the obligee is entitled to seek the remedy before the courts. He does not have to consider how his particular choice affects the party in breach.68 It is the continuance of the obligation and its eventual fullment that is crucial. Of course, in many situations, an award of damages will be preferable to the obligee than that of performance, and thus, in practice, the two jurisdictions often approach each other in result.69 But, the common law hierarchy of remedies, which elevates damages to primary position, is not replicated in the civil law. The extensive availability of specic performance in France and Québec, in practice, works to establish an equivalence of remedies which is largely predicated on the circumstances of the particular case and the particular preferences of the obligee. When the obligee opts to enforce performance, as opposed to pursuing a claim for damages, the discretion of the court to refuse such request is largely theoretical. It is only in order to protect the obligor’s right to performance (when the obligee acts under article 1144 or under article 1602 civil code of Québec) that the choice of the obligee seems to be circumscribed.70 The normative force that is found behind the preference for damages in the common law remedial system is thus absent in French law.

68

See for example the decision of the Court of Appeal of Paris (22 June 1987) D (1987) IR 178. And for Quebéc, see the decision of Golden Griddle, discussed in detail in the following section of this essay. 69 Since damages are statistically the most sought remedy, in practice, the two jurisdictions often approach each other in result: P. Juilhard and B. Rudden ‘La théorie de la violation efcace’ (1986) 4 RIDC 1015 para. 72. 70 According to an arrêt de principe (Civ., 19 March 1855 D 1855, 297) the judge has discretion to grant or withhold a request for specic performance under article 1144, Code civil. The discretionary powers of the judge under this article stand in contrast to those under article 1143 and has been criticized for depriving the obligee of his right to demand specic performance for what he has contracted: see B. Starck et al. (n. 62) 1651. One explanation might be located in the court’s concern to protect the original contractual bond between the obligor and obligee – a concern that does not arise in the context of article 1143 where judicial discretion is more stringently circumscribed. When the courts order a third party to perform, then they are in fact ousting the obligor from his own obligation and so the judicial discretion under article 1144 allows the court to give the obligor one last chance to perform, in this way protecting the obligor’s ‘right’ to performance. See on this, S. Whittaker, ‘Performance of Another’s Obligation: French and English Law Contrasted’ (2000) Oxford U Comparative L Forum 7 at .

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Adequacy of damages and impossibility of performance are thus the broad standards that determine the (un)availability of specic performance in the common law and civilian jurisdictions respectively. From the outset, the amorphous nature of the English notion of ‘adequacy’ jars with the more objectively ascertainable criterion of ‘impossibility’, the latter seeming to proffer a far more robust framework from which substantive rules can hang, as well as greater possibility for performance to be fullled. This is not to say that English rules are not predictable, since damages are almost always seen as adequate, except as concerns contracts for the sale of unique goods.71 And, even where damages are not adequate specic performance may still be refused. This limitation of the remedy does therefore lead to a certain predictability, all the more true when it is understood that the English concept of ‘adequacy’ more often than not rests either simply on whether an accurate assessment of damages is possible, and thus on a pragmatic concern to avoid over, or under compensation, or in order to avoid the difculties inherent in ordering direct enforcement – (time, expense, etc.). There is a marked absence of philosophical concerns about performing obligations.72 In this respect, the English rules on specic performance are often justied73 ex post facto under the pretext of being an economically efcient way of resolving the problem of the impossibility of calculating the expectation loss of the obligee. The problem is rarely investigated from the perspective of the right that the contract has conferred on the obligee.74

3) CASE STUDIES Co-operative Insurance Society v. Argyll Stores (Holdings) Ltd.75 Construction Belcourt Ltée v. Golden Griddle Pancake House Limited 76 The examination of the Golden Griddle and Argyll cases provide an instructive platform from which to study some of the deeper theoretical underpinnings and value-standards of the remedial rules examined above. And it will be seen how the case studies exemplify the limitations of a rule-based approach to harmonisation. The two cases deal with the legal response to the breach of a

71

See (n. 66). Although note works such as C. Fried, Contract as Promise: A Theory of Contractual Obligations (Harvard UP, Cambridge, Mass. 1981). 73 Although, not judicially. 74 See on this Harris & Tallon (n. 47) 388. 75 [1998] AC 1 (hereafter Argyll). 76 [1988] RJQ 716 (CS Que) (hereafter Golden Griddle). 72

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positive covenant to keep a business premises open and operating. Both businesses, in Golden Griddle, a restaurant and, in Argyll, a supermarket, had taken leases on commercial promises situated within shopping centres but had run into nancial difculties before the leases reached their term. They both found it commercially more expedient to close the premises and cease trading, thus breaching their obligation under the covenant. In both instances the landlord applied to the court to enforce the covenant by way of specic performance. The similitude of facts provides rich pickings for the comparative lawyer. Since the difference in legal response is obviously attributable to more than mere factual disparity, a rationale for divergence must therefore be located ‘elsewhere’. It is this investigation which illustrates the core thesis of this paper since it reveals the values that lie behind the rules on specic performance and the way that judicial interpretation is contingent on the cultural context within which the process is conducted. Importantly, it demonstrates how difference is not fortuitous but full of meaning, and therefore should only be suppressed when compelling reasons present themselves. The eld of study is further enriched through the study of a Canadian civilian case. Proximity to common law inuence has not been insignicant for the development of legal procedure and the Québec decision, whilst resting on French law for its substantive rules, follows the style of legal reasoning more familiar to a common law jurisdiction. In this way, the judgment is far more discursive than that seen in France, where the strictly syllogistic form of legal reasoning obfuscates the rationale for the outcome behind the formal legal rule. The insight into the civilian mindset that the Québec decision provides is instructive. Despite Lord Hoffmann opining that the theoretical divergence between civilian and common law jurisdictions diminished in practice,77 his brief comparative foray is misleading since the solutions reached could not be more starkly divergent. The House of Lords denied an award of specic performance and responded to the breach of covenant with an award of damages. In contrast, the Cour supérieur du Québec issued a permanent injunction, ordering the defendant to re-open the restaurant and to operate it for the remaining duration of the lease.78

77

Argyll (n. 75) 11. It is interesting to note that Scottish case law takes the same approach as Golden Griddle e.g., Highland and Universal Properties Ltd. v. Safeway Properties Ltd. (No. 2) [2000] EGLR 110 where it was held that a keep-open covenant was specically enforceable as a matter of Scots law. On the other hand, there is Canadian common law precedents which follow the English reasoning e.g., A. L. Sott Financial (Newton) Inc. v. Vancouver City Savings Credit Unit [2000] BCJ 499. See also a US factual equivalent Lorch Inc. v. Bessemer Mall Shopping Centre 310 So. 2d 872 where, owing to the perceived problem of supervising an award of specic performance, the court found damages more appropriate, thus following English and Canadian common law lines of authority. 78

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These contrasting conclusions serve to highlight the very important practical differences that result even where, as will be later seen, formal rules might suggest a similarity in response. Instead, differences of an axiological and theoretical nature are bound tightly to the formal articulation of the rule and the legal response to non-performance can only be understood with knowledge of both. The rule reects such things as the divergent theoretical underpinnings to the notion of contract, the way that an obligation is conceived, the role that the market plays in contract law and/or the importance of morality in contract law – all being inseparable from, and being inuenced by, the historical period during which contract law developed. The case studies exemplify the earlier criticism aimed at the technical approach taken to harmonisation which is divorced from theoretical concern and which simply equates convergence of rules with harmonisation. The fragility of this technique has obvious signicance for the work on the CFR and is, instructive for initiatives in commercial law harmonisation in Canada.

A rule-based analysis If we examine from the assumption on which the CFR is founded – that convergence in formal rules will assist harmonisation – the logical inverse assumption suggests that it is a divergence in formal rules that explains the divergence in legal solution. With this in mind, one might be forgiven in assuming that it was the formal rules of the Québec legal system upon which the decision of the court was predicated, rules which departed from those which inuenced the decision of the House of Lords. However, the contrasting solutions to these cases cannot be attributed to a divergence in rule since the positive norm in Québec seemed to suggest an approach that was harmonious with the common law. The opening sentence of article 1065 of the Civil Code of Lower Canada provides:79 Every obligation renders the debtor liable in damages in case of a breach of it on his part.

The provision goes on to provide that the creditor may ask for specic performance but this facility is restricted to cases which admit of it. The inevitability

79 This case was decided before the Civil Code of Lower Canada of 1866 was replaced by the 1994 Civil Code of Québec. Article 1065 has since been repealed and article 1590 of the 1994 code gives a far more lapidary rendering of the creditor’s right to specic performance in Québec. The new Code was part of a conscious process to return the law to its pure civilian roots and, as such, the new drafting of this article articulates the civilian position more faithfully. In France, a recent proposal for a reform of the law of obligations and prescription will, if enacted, bring certain codal provisions, including in the area of non-performance, in line with legal practice and doctrine: see (n. 88).

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of specic performance is thus not transparent from the rule. The Québec provision has close resonances with article 1142 of the French Code civil for, despite having asserted above that the obligee has the right to exécution en nature, the French position does need to be approached with care. Nowhere in the Code civil are such rights of the obligee made explicit. There is, instead, a misleading array of disconnected provisions that, on a literal reading, rather than point to the availability of specic performance, suggest that it is the award of damages which is the principal remedy. Article 1142, Code civil regulates obligations de faire and de ne pas faire: Toute obligation de faire ou de ne pas faire se résout en dommages et intérêts, en cas d’inexécution de la part du débiteur.80

This provision is at rst sight the formulation of a simple and denitive principle; that obligations de faire and de ne pas faire are not capable of being the subject of exécution forcée 81 – breach of such obligations is to be remedied by an award of damages. The provision articulates the adage formulated in the sixteenth century: nemo praecise cogi potest ad factum.82 The idea of physically compelling someone to perform his obligation, or even preventing him from acting in contravention of his obligation, was intolerable to the drafters of the Code civil. At the time the sanctication of individual liberty and dignity, principles that, as we shall see, ironically later became tools to justify the primacy of specic performance, meant that coercion against an individual, forcing him to perform his private law obligations could not be accommodated in the new order.83 The chief proponent of this view had been Pothier, but its general, unquestioning acceptance by the commissions responsible for promulgation of the Code owes much to post-Revolutionary fears of state violence, the

80 Article 1101, Code civil denes a contract as an agreement consisting of any, or all, of three types of obligations; obligations de donner, de faire and de ne pas faire. Obligations de donner are dealt with under a different rubric from those of faire and de ne pas faire. The omission of the obligation de donner from article 1142 suggests by implication that such obligations are indeed subject to specic performance. However this category of obligation has been subject to much academic scrutiny and, fuelled by signals from the Cour de cassation, the very existence of such an obligation has been questioned. It is not the place here to deal with this debate, but see for example, M. Fabre-Magnan, ‘Le mythe de l’obligation de donner’ RTD civ 1996.85; D. Tallon, ‘Le surprenant réveil de l’obligation de donner’ D. 1992, chr. 67. 81 A literal reading of article 1142 reminds one of the Holmesian statement regarding common law damages discussed below. 82 No-one can be compelled to perform a specic act. 83 As one author asks, what meaning can one give to freedom where performance can only be achieved through coercion? – W. Jeandidier, ‘L’exécution forcée des obligations contractuelles de faire’ RTD civ 1976.700 para. 7.

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subsequent ramications for public order84 and, more particularly, as a means to diminish judicial authority.85 In this way, damages, as a sanction for nonperformance of an obligation de faire or de ne pas faire, suited the political and philosophical climate of the time. It was in the second half of the nineteenth century that article 1142 became subject to a ‘renversement de principe’86 rendering the award of damages ‘illogical’. Article 1142 became subject to far-reaching ‘juristic interpretation’87 which has stretched its meaning so far from its clear wording, as to render it almost meaningless.88 Taken together with the two exceptions articulated in articles 1143 and 1144 (see above) one can go as far to describe it as an exception to the general principle of specic performance.89 French doctrine90 considers that, despite the wording, the provision is limited to the case where performance is materially or morally impossible,91 and even confronted with such impossibility, this will not prevent the judge from ordering an injunction backed up, if necessary, by an astreinte,92 thus constituting what might be called indirect compulsion. This disjuncture between, on the one hand judicial practice and academic opinion and, on the other, the formal legal provision, emphasises the point that understanding of a legal system can only be reached through full examination of the entire complex relationship between the legal ‘formants’ of the sys-

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Starck et al. (n. 62) 1631. J. Dawson, ‘Specic Performance in France and Germany’ (1959) 57 Mich L. Rev. 495, 510. 86 Y.-M. Laithier, Etude comparative des sanctions de l’inexécution du contrat (LGDJ, Paris 2004) 46. 87 S. Whittaker (n. 70). 88 It has been the subject of much criticism by a number of scholars e.g., ‘on voit qu’en dénitive, le législateur eût mieux fait de ne pas écrire la disposition de l’art. 1142’: G. Boudry-Lacantinerie et L. Barde, Traité Théorique Et Pratique De Droit Civil: Des Obligations (3e éd., Sirey, Paris 1906) t. 1, no 433. A Tunc states that ‘la vérité est que l’art. 1142 est une disposition fâcheuse, contraire même à l’idée d’obligation . . . et donc il faut limiter l’application aux cas où l’exécution en nature est matériellement ou moralement impossible’ note sous Lyon, 30 July 1946, D. 1947, 377. Also see comments in RTD civ 2003.709 – ‘la voie de l’exécution forcée est bien aujourd’hui largement ouverte en jurisprudence, en dépit des termes restrictifs de l’article 1142 du code civil’. The proposals for a reform of the law of obligations and prescription proposes a considerable rewording of this provision in proposed article 1154; See http://www.justice.gouv.fr/publicat/rapport/RAPPORTCATALASEPTEMBRE2005.pdf, 91. 89 It has been stated that ‘le juge a progressivement mis entre parenthèses les termes de l’article 1142 pour faire du droit à l’exécution forcée le principe’: J. Mestre, ‘Le juge face aux difcultés d’exécution du contrat’ in Le juge et l’exécution du contrat (PUAM, Aix-Marseille 1993) 91. 90 B. Starck (n. 62) 1633. 91 A. Tunc (n. 88). 92 See below. 85

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tem.93 It is a complexity that should be heeded by those drafting common rules based on the assumption that such rules are capable of engendering a common approach to legal problems. As seen, interpretation of the rule is deeply embedded in the cultural context in which it sits and linked to the values that it is seen to advance. Thus, if one is to fully comprehend the role of specic performance in each legal tradition, one also needs to reveal the values that the remedy is seen to advance.

A value-driven analysis Turning rst to the House of Lords decision, much of the interest in this judgment, as has been noted by Phang,94 is the meticulous way that Lord Hoffmann examined the rationale underlying the infrequency of the award of specic performance. It is explicit from his leading speech that his principal concern was to put an end to the contractual bond between the parties and to release them from the ‘yoke’ of a ‘hostile relationship’.95 Despite the absence of ambiguity in the continuous operating covenant and the deliberate nature of the breach, the court was little troubled by enforcing this contractual promise between the two business parties. In other words, there was little concern with keeping the contractual obligation alive. Whilst the theory of pacta sunt servanda does still remain a cornerstone of the common law, the primary obligation to perform what has been agreed does not become subsumed within the notion that, on breach, the only legal response is enforcement through the secondary obligation of specic performance. Instead the common law position can still be cited, albeit somewhat supercially, as per Holmes: ‘The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it – and nothing else’.96 From a common law perspective, the House of Lords’ decision is unsurprising. As seen, it is established practice that specic performance is an exceptional remedy, awarded only if damages are considered inadequate and, even where adequate, may still be refused at the discretion of the court. What is of interest is the rationale behind this rule. The theoretical root to the common law preference for damages is what can be termed the utilitarianbased theory of contract law. The most developed of utilitarian theories97 is the efciency theory which advocates damages as being the most efcient contractual remedy and the one that promotes the greatest welfare in society. Such a theory propounds an economic analysis of contract law whose normative

93

See R. Sacco (n. 32). A. Phang, ‘Specic Performance – Exploring the Roots of “Settled Practice” ’ (1998) 61 MLR 421. 95 Argyll (n. 75) 16. 96 O. W. Holmes, ‘The path of the law’ (1897) 10 Harv L. Rev. 457, 462. 97 See S. A. Smith, Contract Theory (Clarendon Press, Oxford 2004) 108. 94

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basis is that legal rules should promote economically efcient results and thus maximise wealth. Whilst there is often heated debate as to the remedy that best advances economic goals,98 the common law preference of damages over specic performance is most often advocated as best according with economic goals. This economic analysis of contract law is explicit in the House of Lord’s decision – Lord Hoffmann expressing concern at the ‘waste of resources’ that would result from enforced compliance with the contract99 both for the parties themselves as well as the legal system in general.100 The concern was that specic performance of the running of a business101 would present practical difculties for both courts and parties since it would be problematic to assess when, and if, the party was in compliance. Repeated visits to the court for such an assessment would raise costs for the parties as well as being a nancial burden on the courts. Expense would be compounded owing to the difculties inherent in framing the award in terms precise enough for enforcement. Concerns regarding economic efciency are also discernible in the court’s aversion to a plaintiff using specic performance as a bargaining chip. Faced with a defendant wishing to be released from performance, if specic performance were routinely available the plaintiff would have the possibility of exacting a higher amount of money from the defendant for his release. This would result

98 Those that support specic performance as being most efcient include: A. Schwartz, ‘The Case for Specic Performance’ (1979) 89 Yale L. J. 271; T. S. Ulen, ‘The Efciency of Specic Performance: Toward a Unied Theory of Contract Remedies’ (1984) 83 Mich L. Rev. 341. Those that support damages include: A. T. Kronman, ‘Specic Performance’ (1978) 45 U Chi L. Rev. 351; E. Yorio, ‘In Defence of Money Damages for Breach of Contract’ (1982) 82 Colum L. Rev. 1365; T. Muris, ‘The Costs of Freely Granting Specic Performance’ [1982] Duke L. J. 1053, 1061–68; R. Posner, Economic Analysis of Law (6th ed., Aspen Law & Business, New York 2003). 99 Argyll (n. 75) 16. 100 It is useful to compare this approach with the House of Lords in White and Carter (Councils) Ltd. v. McGregor [1962] AC 413 where the claim was classied as involving one of debt, rather than one of damages. This was crucial, since it meant the debtor was forced to pay all sums due under the contract – thus giving the creditor an award of specic performance (albeit indirectly). Importantly, the claimant was not under a ‘duty’ to mitigate his loss and, being entitled to refuse to terminate the contract, was able to perform to the point where the debt arose under the contract – even if this might be considered unreasonable. Thus, goals of economic efciency had to give way to legal certainty, the latter being facilitated by allowing the creditor to enforce his strict contractual rights in electing to afrm or repudiate the contract. The decision has proved controversial; e.g., P. M. Nienaber, ‘The Effect of Anticipatory Repudiation: Principle and Policy’ [1962] CLJ 213. 101 At the root of the case is a distinction between orders to carry on a business and those that require a specic result.

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in over-compensating the plaintiff with an award of damages that went above the value to him of performance. Damages are therefore preferred since they best accord with economically efcient goals. It is interesting to contrast this with the civilian perspective. Civilian jurists have not embraced an economic analysis of law with anything like the vigour of common law scholars. Until relatively recently economic tools have played only a minor, if not inexistent, role in French (and French-derived) legal doctrine.102 As such, in the Québec court Mr. Justice Steinberg refused to be inuenced by the economic hardship to the defendant or by the wider consequences for societal welfare. In having to continue to operate a failing business ‘hardship and personal consequences [were] irrelevant’ to the award of specic performance.103 He believed it ‘specious to suggest that courts should refrain from enforcing contracts if the defendant will lose money as a consequence’.104 Specic performance could only be refused in cases where performance had become ‘virtually impossible’. Although one can nd utilitarian theories of economic efciency that support specic performance,105 it is traditionally ‘rights-based’ justications that propound this remedy over damages. And, the Québec court propitiously offers us such an account for the justication for enforcing contractual obligations. The rights-based approach locates primary justication for enforcement in the source of the contractual obligation, a conception derived from French law. This obligational source is, as Mr. Justice Steinberg pedagogically reminds us,106 the autonomy of the will theory, or autonomie de la volonté as it is known in French. This is an Enlightenment philosophy based on the concepts of freedom and individualism. It posits that although each man is free, through his own will he can choose to bind himself to others and, in so doing, restrict this very freedom. His subjection by his own free will is the highest expression of that free will. He thus becomes no longer free to be free. Such restriction is in accordance with individualist philosophy since the constraint emanates from the individual’s own will – thus individual liberty is respected. This theory could, of course, act as a constraint on specic performance, since man should not be forced to act. As we have seen, this was the initial stance taken by the drafters of the Code. But nevertheless, the very same principles of individualism, liberty and dignity have later been robustly embraced as a defence for

102 For notable exceptions see Juilhard and Rudden (n. 69); Y.-M. Laithier (n. 86); M. Fabre-Magnan Essai d’une théorie de l’obligation d’information dans les contrats (LGDJ, Paris 1992); G. Canivet et al. Mesurer l’efcacité économique du droit (LGDJ, Paris 2005). 103 Golden Griddle (n. 76) para. 50. 104 Golden Griddle (n. 76) para. 78. 105 See (n. 98). 106 Golden Griddle (n. 76) para. 46.

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performance, culminating in the belief that it is the very ‘essence’107 of the obligation that it be performed. Where performance is not voluntary then the only logical108 response is to enforce it through the court. In this way the sanction for non-performance becomes subsumed within the notion that contracts are binding – the concept of force obligatoire contained within article 1134. Since the contract creates binding obligations then specic performance becomes not one of many sanctions, but the only sanction capable of both vindicating the rights of the obligee as well as satisfying the normative aims of rights-based legal theory. Damages, in contrast, are criticised as authorising the obligor to unilaterally modify the obligation, from one of performing into one of paying money, thus making the contractual obligation facultative.109 For traditional civilian doctrine it is ‘inconceivable’ that damages can be a substitute for performance.110 The persistent and somewhat sloppy incantation of autonomie de la volonté and la force obligatoire to justify the prevalence of specic performance is somewhat lacking in intellectual vigour since any dogmatic adherence to the autonomy of the will theory is difcult to sustain in modern contract theory.111 Admittedly, the theoretical retreat has been most visible in matters concerning the formation of the contract and the determination of its content, but its persistence in matters of non-performance does nevertheless suggest an adherence to specic performance which the will theory can only partially explain. Particularly when one remembers that the same principles were used to justify the refusal of specic performance in the nineteenth century drafting of the Code civil. The Roman conception of obligation as a vinculum juris, the term embodying bonds, or ties, between the parties, has been inuential and gives further insight into the civilian preference for specic performance. The term reects the etymological root of the Latin word obligatio which denotes a tying together (ligare) of bonds between the obligor and the obligee. This symbolises an essentially bilateral relationship, signicant when viewed from either side of the contractual relationship.112 For the obligor, the obligation represents the

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Y.-M. Laithier, (n. 86) 44. C. Demelombe, Traité des contrats ou des obligations conventionnelles en général (2e éd., Durand et Hachette, Paris 1870) vol. 24 n. 488, 486. 109 Y.-M. Laithier (n. 86) 45. 110 P. Jourdain, ‘Réexion sur la notion de responsabilité contractuelle’ in Les métamorphoses de la responsabilité, Sixièmes Journées René Savatier (PUF, Paris 1998) 65. 111 See also the more strident criticism by Laithier (n. 86) chapter 1 on the assimilation of force obligatoire with exécution forcée. 112 R. Sefton-Green (n. 44) 4; ‘l’obligation signie le lien entre le droit (créance) et le devoir, l’expression englobant les deux’. See also P. Ancel, ‘Force obligatoire et contenu obligationnel du contrat’ RTD civ. 1999.771 para. 2, where the technical sense 108

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duty to perform and, for the obligee, it denotes the right to receive performance. This ‘double-sided’ nature of obligation links the parties in the contractual relationship and, in practice, manifests itself in the ways that performance of the contract is, at all times, a goal to be furthered. For French law, where the obligor does not perform, the response of the law is not to encourage the rupture of the relationship but, instead, to provide a legal framework within which performance is encouraged. There are a number of institutions in French law, in addition to the sanction of specic performance, that encourage the preservation of the contractual obligation. For example, the judicial nature of termination which does not allow the obligee to break off contractual relations unilaterally but, according to the terms of article 1184,113 forces him to pursue it through the court. The discretionary nature of the award is designed to maximise the chances of performance by giving the obligor one last chance to perform should the court judge this appropriate, something that might appear anomalous to the common lawyer accustomed to such concepts as efcient breach. A further example, is the favourable attitude towards the penalty clause, it being viewed as an additional means to coerce a recalcitrant obligor to full his obligation114 with similar effect to the astreinte procedure, whereby a nancial sum is attached to an order of specic performance for every day that the obligor is in default. These maximise the potential for performance of the contractual obligation and provide for a robust and coherent framework within which the preference for specic performance nests. It is only where these fail or where such means are not available, that the question of substitutionary relief in the form of damages arises. This clearly stands in contrast to the common law. Here, the conception of obligation is not ‘double-sided’ but instead is perceived solely from the viewpoint of the obligor. This emphasises the duty to perform and not the accompanying right of the obligee to receive performance. Without such a right to performance, on breach of contract there is little incentive for the law to prolong the contractual relationship and it is hard to nd adequate justication for the enforcement of contracts against the will of the individual in the absence of clear economic harm. Although contract cannot be reduced to solely economic signicance, the common law has a notion of contract that is less concerned

of the term ‘obligation’ is viewed as ‘un rapport entre un créancier et un débiteur’. Also Nicholas (n. 46) 29ss, where obligation is described as a two-sided concept that can be seen in the actif as a créance (or credit) and in the passif as a dette (or debt). 113 Article 1184 al.2 provides ‘. . . le contrat n’est point résolu de plein droit. La partie envers laquelle l’engagement n’a point été exécuté, a le choix ou de forcer l’autre à l’exécution de la convention lorsqu’elle est possible, ou d’en demander la résolution avec dommages et intérêts’. 114 L. Miller, ‘Penalty Clauses in England and France: A Comparative Study’ (2004) 53 ICLQ 79.

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with the obligational relationship between the parties to the contract than with the contract itself. The contract is more ‘objectivised’ and viewed as something of economic value – a bargain – that has been concluded by an exchange of promises. Once the bargain has been broken (breach of contract) then there seems little justication to keep the parties ‘yoked’ together and damages are seen as the more logical remedy, and as one more betting economic theory. Absent a right to performance,115 the damages award aims to protect the economic position that the obligee would have occupied had the obligor fullled his promise. The difference in approach can also be attributed to the more moral stance that France takes to contract law. In French, and French-derived, law the contract operates against a backdrop that views cooperation between the parties as essential. Interests of both obligor and obligee merge to form an ‘obligation de coopération ou de collaboration entre les parties’116 and what has been termed a ‘solidarité contractuelle’ or ‘fraternité’117 that restrains the obligee from acting solely in his own interests. And specic performance gives voice to French concerns with morality in contracting for there is a ‘conception hautement morale’118 to the enforcement of a contractual obligation in the way that it is seen to encourage virtuous behaviour; there is respect for the parole donnée. One can also attribute this more moral avour of civil law, that has difculty with the depersonalisation of law, as a way to explain the absence of economic analysis of contract law – an approach far more suited to the common law with its raisonnement froid de l’economiste119 and utilitarian tradition. If we return to the decision of the Québec court, it is not suggested that the court would have been blind to some of the concerns of the common law courts, for example the unease with the plaintiff using specic performance to extract a greater amount of compensation. But, as suggested by Jukier,120 it will not be economic-based reasoning that frames the criticism but rather the court would respond to such a concern through the notion of good faith and the doctrine of abus de droit – abuse of rights. In the light of this analysis of the different civilian and common law approaches, it is interesting to study the way each court dealt with one of the supposed obstacles (from the common law perspective) to specic perfor-

115

Rather than a right to performance, it seems that in England it is the obligor who appropriates the right to terminate the contract subject to paying compensation. 116 Y. Picod, ‘L’Obligation de coopération dans l’exécution du contrat’ JCP 1988 I 3318. 117 C. Thibierge-Guelfucci, ‘Libres propos sur la transformation du droit des contrats’ RTD.civ 1997. 357 para. 2. 118 Picod (n. 116). 119 P. Juilhard and B. Rudden (n. 69) 1015. 120 R. Jukier, ‘Where law and pedagogy meet in the transsystemic contracts classroom’ (2005) 50 McGill Law Journal 789.

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mance – namely the problem of supervision. In the common law the practical difculties that are associated with supervising the award of specic performance are traditionally viewed as a reason for refusing specic performance and, indeed, formed a major part in the House of Lords refusal in Argyll. The question of whether there is compliance with the award might necessitate repeated visits to the court and this was deemed unacceptable, not just for the economic disadvantages discussed above, but also since the court felt it would exacerbate the oppression on the defendant; he would have to comply with the order knowing that default results in contempt of court proceedings.121 It should be remembered that the nal stop for a recalcitrant obligor is imprisonment.122 What is interesting is that in Québec, unlike in France, contempt of court is a feature of the legal system. One cannot point therefore to the draconian consequences of this award as an explanatory tool for the conicting common law approach. Instead, our analysis of the values that the award of specic performance reects in this civilian jurisdiction enables us to understand why the court would not allow the issue of supervision to be an obstacle. As far as the purported problems associated with the assessment of compliance and the framing of the injunction so that its terms are precise, the Québec court did acknowledge that, if one was not to reduce the remedy to a ‘mockery’, compliance would indeed need to be measured. The court also recognised that contempt of court could produce draconian consequences for the obligor. However, unleashed from the common law’s (theoretical) constraints of awarding this remedy, the court grasped the issue as a pragmatic, problem-solving exercise. There was a genuine attempt to arrive at a practical solution to the supposedly insurmountable problems cited by the House of Lords. In short, the court found that a benchmark could be used from which to measure the future business practice of Griddle – using the previous recent practice of the restaurant. One need only to turn to records of the restaurant as evidence of the standard to which the restaurant should perform once business was resumed. And, responding pragmatically to the fears raised over the defendant frustrating the order and increasing litigation costs, the court held that it would be unlikely, enjoined, as Griddle Pancakes were, to display their corporate name, that they would risk sullying their name through shoddy service. The court seemed more in tune with the modern complexities of commercial relationships whereby compulsion transcends the will of one person and instead is linked to the corporate structure of a business. Imprisonment for contempt therefore becomes a far more abstract concept.

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Argyll (n. 75), 13 ss. Although, with little concept of the right of specic performance the court was not enticed into considering that the ‘sword of Damocles’ (so metaphorically described by Lord Hoffmann at 13) would be hovering above the head of the defendant simply for performing those contractual duties that he had already agreed to perform. 122

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CONCLUSION This paper has rather modest objectives. It is, in essence, a criticism of the inadequate perspective that has been adopted in relation to contract law harmonisation in the EC, with lessons to be taken for any project (such as that in Canada) which attempts to bridge the gulf between civil and common law jurisdictions. As seen, the CFR is based on a nineteenth century, axiomatic stage of legal science which takes a ‘rule-model’ view of legal science, attempting to reduce highly complex facts into simplistic rules for easy consumption.123 Through the comparative analysis of the position of specic performance in common and civil law traditions, it has been seen that, if harmonisation is to go beyond the purely semantic, one needs to take into account more that simply the surface rule and expose the deeper ideological values that lie behind it. We have seen how the operation of the rules on specic performance are highly contingent on the context in which they operate, and on the objectives that they are seen to pursue. Since the values of each tradition rest on distinctive socio-economic, philosophical and historical factors, then European harmonisation at the level of rules, reecting the values according with market integration, will do little more than create a framework that (in the case of a non-binding document) will either be ignored, or (in the event of a future binding document) will simply be interpreted in a way that achieves the objectives and values that each jurisdiction pursues. Moreover, such a method of harmonisation does not provide the necessary legitimacy for legal change. If, in the pursuit of harmonised rules, ‘best solutions’ come to replace national rules, it is crucial that justication for change be found. The analysis of specic performance has revealed the fundamental value-differences in legal traditions, thus revealing the inevitable legal adaptation that harmonisation threatens. Although the EC Commission has tended to obfuscate the theoretical differences between jurisdictions with its enthusiastic search for commonalities,124 in fact, such differences have been implicitly acknowledged in previous attempts to frame common rules on nonperformance. At an international level, the CISG represents a rather awkward attempt to house both civilian and common law approaches to specic performance under the same legislative roof. The presence of article 28125 means,

123 On this, see G. Samuel, Law of Obligations and Legal Remedies (2nd ed., Cavendish, London 2001) chapter 14. 124 A practice for which comparatists are often criticised; see P. Legrand (n. 24). Importantly, the practice followed by certain comparatists of looking at similitude of result has been viewed as neglecting ‘les raisons d’être de la règle et les motifs qui conduisent à privilégier telle issue sur telle autre’: Y.-M. Laithier (n. 86) para. 369. 125 ‘If in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a

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in effect, that it is left to domestic law to determine the entitlement to specic performance – with no attempt to bridge the gap between either jurisdiction’s approach. At a European level, the drafting of the PECL provision on nonperformance also reects a uncomfortable compromise between the two legal traditions, albeit a more synthesised solution than the CISG. In brief, the relevant provision, article 9.102, establishes specic performance as an entitlement for the obligee (article 9.102(1)) – clearly reecting the civilian inuence – but then paragraphs (2) and (3) provide that the remedy is not to be ordered under certain circumstances. These latter paragraphs articulate concerns within the common law about the availability of the award. And the open-textured language, which denies specic performance where, for example, it would cause ‘unreasonable effort or expense’ for the obligor126 is an unambiguous reection of the difculties in regulating the two traditions in a uniform manner. Despite the attempt at balancing the competing common and civilian approaches, article 9.102 allows both to co-exist, and it is unlikely (given the different interpretation that each jurisdiction will have of concepts of (un)reasonableness) that the provision will produce harmonised solutions for non-performance. The task for those drafting the CFR will be no less of a challenge.126a The difculties outlined do not intend to suggest that all attempts at harmonisation should be dismissed as impossible.127 But, what is needed (and what is absent from the Commission Communications) is recognition, and on-going debate of the real issues at stake.128 These issues include open discussion of the type of contract law that a European contract law is to be and the values that it is to reect. Such dialogue is political in its reach and should include discussion on the philosoph(y)ies on which contract is to be based, its functions, and the values that inform it; the role it occupies in society (as an economic framework

judgement for specic performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention’. 126 PECL 9.102(2)(c). 126a One could also point to the EC Sales Directive (1999/44/EC) as illustrative of an EC attempt to combine civilian and common law rules for non-performance under the same legislative roof; where consumer goods are non-conforming, article 3 sets out a hierarchical system of ‘remedies’ of which the consumer may dispose. An account of the resulting complexities that arise after transposition of the Directive into French and English law is given in S. Whittaker, above n. 31. The experience with the Sales Directive also bodes badly for more general initiatives such as the CFR. See further L. Miller ‘The Common Frame of Reference and the Feasibility of a Common Contract law in Europe’ (2007) 4 JBL forthcoming. 127 For this view see, amongst others, P. Legrand, ‘European Legal Systems are not Converging’ (1996) 45 ICLQ 52. 128 Extensive European legal discussion in itself facilitates the harmonisation of views – See M. van Hoecke, ‘Deep Level Comparative Law’ EUI Working Paper no. 2002/13.

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for the market and/or as a way of adjusting imbalance and inequity between parties) and how far social and economic rights should be protected within contract law.129 It is these real questions that lie dormant within the technical project of rule-based harmonisation and the elaboration of common rules. And it is only in addressing these questions that any future European contract law will nd the legitimacy on which it can rest.

129 For support for the protection of more extensive social and economic rights in a European contract law, that draws their content from the Charter of Fundamental Rights and the Draft Constitution, see H. Collins (n. 21).

Chapter 15 ‘Compensation’ and ‘Indemnity’ under the Agency Regulations: How the Common Law System Copes with the Invasion of Civilian Concepts Robert Bradgate and Séverine Saintier INTRODUCTION In February 2003 the European Commission published its Action plan for a more coherent European contract law.1 The following year the European Commission, jointly with the EU Parliament and Council of Ministers, published the communication, European contract law and the revision of the acquis: the way forward.2 This document proposed the preparation of a ‘common frame of reference’ to be used in the preparation of European legislation in the eld of contract law. The EU has, of course, been legislating in the eld of contract law for many years now. The publication of the Action Plan and, especially, the proposal for a common frame of reference recognise the weaknesses of the existing body of legislation and the difculties of producing legislation to be

1 2

Com (2003) 68 nal, OJ 063 of 15-03-2003, 1–44. Com (2004) 654 nal, see Eurlex, document No. 52004DC0651.

311 Paula Giliker (Ed.), Re-examining Contract and Unjust Enrichment, pp. 311–337. © 2007 Koninklijke Brill NV. Printed in the Netherlands.

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applied across the European Union in Member States with different legal traditions in the absence of shared concepts or a common legal vocabulary. Much of the existing legislation has been concerned with consumer protection rather than with contract law more generally or commercial contracts. In 1986, however, the Council of Ministers enacted Directive 86/653 on the coordination of the laws of the member states relating to self-employed commercial agents.3 Although the Directive shares some features with those concerned with consumer, or, perhaps, more accurately employment, protection, being based on the premise that commercial agents are in need of protection against their principals, it is essentially a piece of commercial legislation, in that its impact is on a purely commercial contract, made between two businesses.4 The Directive was implemented in the UK by the Commercial Agents (Council Directive) Regulations 19935 (to which we hereinafter refer as ‘the Regulations’), which came into force on 1st January, 1994. The experience of the Directive and its implementation in the UK illustrate rather nicely the forces that led to the publication of the Action Plan and proposal for a common frame reference. Not only the vocabulary of the Directive but its very rationale and philosophy are alien to the common law. The assumption that commercial agents need protection against their principals is an essentially civilian one. It stands in marked contrast to the traditional common law attitude, which assumes that the principal must be protected against the risk of the agent’s abuse of power, and affords such protection via the stringent duciary duties imposed on the agent. Indeed, the absence of a common vocabulary is vividly illustrated by the view expressed by the English Law Commission in 1977, a year after the Directive was rst proposed, that ‘commercial agents’ were not known as a separate category to English law.6 Consistent with the policy of protecting commercial agents, the Directive gives the commercial agent the right, on termination of the agency relationship, to receive payment of either ‘compensation’ or ‘indemnity’, the two concepts drawing on French7 and German8 law respectively.

3

OJ L 382/17 of 31 December 1986. Although both parties are businesses, commercial agents are, usually, smaller businesses than principals and therefore in similar need of protection as consumers. 5 For England, Wales and Scotland, SI 1993/3053 as amended by SI 1993/3173 and SI 1998/2868. For Northern Ireland, see the Commercial Agents (Council Directive) Regulations (Northern Ireland) 1993 No. 483 amended by 1999, No. 201. 6 Law Commission Report No. 84, ‘Law of Contract, Report on the proposed EEC Directive on the law relating to Commercial Agents’ (Cmnd 6948). For this reason, the UK and Ireland were granted additional time to implement the Directive (article 22 of the Directive). 7 See article L 134-12 French Commercial Code. For an English translation, see <www.legifrance.gouv.fr>. 8 See §89b German Commercial Code. 4

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These provisions, always likely to be amongst the Directive’s most important for the commercial agent’s reinforced protection, have proved to be the most difcult aspect of the Directive from a common law perspective.9 The difculties experienced by the common law in implementing and applying them illustrate the difculty of transplanting concepts from their native legal soil, without any explanation as to what they are,10 whilst at the same time raising questions about the traditional taxonomy of legal remedies and the place of such concepts in that taxonomy of statutory remedies. The Directive itself creates difculties by opting for not one scheme of payment, but two, allowing Member States to choose between compensation and indemnity.11 However, the Directive offered little guidance on the meaning of these terms or how ‘compensation’ or ‘indemnity’ should be calculated. Faced with this, the UK Government abdicated responsibility for choosing between the two and, in its implementing Regulations, reproducing the Directive almost word for word, provided for both compensation and indemnity to be available (Regulation 17(1)) and the choice between them to be made by the parties, albeit with the default in favour of compensation in the absence of party election (Regulation 17(2)). The Department of Trade and Industry did in fact publish some guidance notes,12 but as will be seen, those notes give parties and their advisers little real assistance. In the absence of any meaningful guidance from the Government or decided case law it was, of course, impossible for contracting parties to make any sort of informed choice. Fundamentally, what contracting parties want to know, is which of the two termination payments is likely to give the commercial agent more. On the face of it, this would appear to be simply a question of quantication, but it is submitted that there is an a priori question which must be answered, namely to conceptualise, in broad terms, the Directive’s concepts of compensation and indemnity. Proper conceptualisation can offer guidance as to quantication.13 Conceptualisation must, in turn, be purposive, so as to be guided by and implement the

9 The Directive also introduces a duty of good faith, which might be thought to be controversial to a common lawyer. However, as yet, it appears, to date, to have given rise to very little judicial difculty. 10 There is an extensive literature on the problems of legal transplants. In recent years much of it has focused on the problems of good faith: see G. Teubner ‘Legal irritants: good faith in British law or how unifying law ends up in new divergences’ (1998) 61 MLR 16. 11 Article 17(1). 12 DTI Guidance Notes on the Commercial Agents (Council Directive) Regulations 1993, published in September 1994. 13 The process is not all one way. The calculation of an award can help identify the basis upon which it is made and the interest it protects. So, for instance, an award of damages calculated on the contractual, expectation basis, tells us that the function of contract law is the protection of expectations.

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underlying policy objectives of the law. Our starting point must therefore be to identify the purpose of the award. The labels, ‘compensation’ and ‘indemnity’, are suggestive of compensatory remedies. A common lawyer might expect the distinction to be that an indemnity would cover all the claimant’s losses whilst compensation might be limited – for instance by rules such as the requirement to mitigate loss or remoteness of damage – so as to provide compensation for some of the claimant’s losses, but not a complete indemnity. But these are not common law provisions. Closer examination of the relevant provisions of the Directive suggests that compensation looks to the loss suffered by the commercial agent, and is therefore genuinely compensatory nature, whilst indemnity looks to the benet conferred on the principal by the commercial agents’ activities, and therefore is more restitutionary in nature. As will be seen, however, the reality is rather more complicated. Our aim, in this piece, is to consider the proper conceptualisation of the Directive’s remedial scheme in order to understand how it maps onto the traditional common law taxonomy of remedies. It is, however, necessary to summarise rst the circumstances in which termination of the commercial agency contract takes place and compensation or indemnity becomes payable.

1) TERMINATION: ITS MEANING At common law, an agency contract can be terminated by expiry, if expressed to be for a xed term; by notice in accordance with its terms; by the consent of both parties; unilaterally, by either party in response to serious breach, or breach of condition, by the other party; or by frustration. A commercial agency contract regulated by the Regulations and the Directive may be terminated in any of these ways. Regulations 14–16, adopting almost verbatim the language of articles 14 to 16 of the Directive, deal with termination by notice and expiry of a xed term. Regulation 14 provides that: An agency contract for a xed period which continues to be performed by both parties after that period has expired shall be deemed to be converted into an agency contract for an indenite period.

It therefore implicitly recognises that a commercial agency contract expressed to be for a xed term may be brought to an end when not renewed. The assumption, however, seems to be that a xed-term contract will normally continue to be performed after expiry of the term, so that, although neither the Regulations nor the Directive expressly so states, expiry of a xed term contract without renewal must amount to a termination of the contract. This proposition has been accepted, expressly or implicitly,14 in a series of

14

Moore v. Piretta Ltd. [1999] 1 All ER 174 indirectly dealt with the issue when

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decisions15 so that it must be taken as settled that expiry of a xed-term contract without renewal amounts to a termination on which compensation or indemnity becomes payable. Regulation 15 provides that: (1) Where an agency contract is concluded for an indenite period either party may terminate it by notice.16

Regulation 16 then provides that nothing in the Regulations affects the application of any enactment or rule of law which provides for the immediate termination of the agency contract: (a) because of the failure of one party to carry out all part of his obligations under that contract; or (b) where exceptional circumstances arise.

In effect therefore Regulation 16 preserves the common law rules as to termination for breach and frustration. Regulation 18 deals with the situations in which no termination payment is payable and provides that no payment is due where: (a) the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract under Regulation 16 above; or (b) the commercial agent has himself terminated, unless such termination is justied either (i) by circumstances attributable to the principal or (ii) on grounds of the age, inrmity or illness of the agent in consequence of which he cannot reasonably be required to continue his activities; or (c) the commercial agent, with the agreement of the principal, assigns his rights and duties under the agency contract to another person.17

So no termination payment is payable where the agent is dismissed on grounds of serious breach or breach of condition, where the agent resigns other than

the Court of Appeal held that ‘it is to be noted that the grounds upon which the right to indemnity or compensation can be excluded do not include the expiry of the term of the agency contract or the expiry or non renewal of the agency contract’, per John Mitting QC, 179b. 15 Whitehead v. Jenks and Cattell [1999] Eu LR 827. See also Tigana Ltd. v. Decoro Ltd. [2003] EWHC, 23 Eu LR 189 where Davis J. referring to the submission of a counsel that the entitlement to termination rights does not apply to agency contracts which have expired by efuxion of time as ‘plainly wrong’ at [74]. 16 The notice required depends on the contract, but Regulation 15 stipulates minimum periods of notice to be given. 17 Note that assignment of duties would not be permissible at common law. Presumably what the Directive intends here is what the common law would normally refer to as novation.

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on grounds of ‘circumstances attributable to the principal’ or ill health etc., or where the agent transfers the agency. For our purposes the signicance of these provisions, when read together, is that termination payments are payable not only where termination of the commercial agency contract amounts to a breach by the principal18 (although there is no doubt that payments are due in such circumstances)19 but also in a range of circumstances where there is no breach,20 including where the contract is frustrated, e.g. by reason of the agent’s illness. Tellingly, Regulation 17(8) expressly provides that the commercial agent’s estate shall be entitled to compensation or indemnity where the agency contract is terminated by the death of the commercial agent. It seems to us that this gives us a signicant clue as to the nature of the payments as does the provision in Regulation 18(c) excluding the right to termination payments where the commercial agency is assigned: they are clearly very different in their nature from traditional common law remedies for breach of contract. Where the contract is terminated as a result of a breach of contract by the principal, the agent would of course be entitled to damages at common law. Compensation and indemnity under the Regulations offer something more. We turn now to the text of the Regulations in order to highlight the problems that the near-verbatim implementation of the Directive have caused.

18 Strictly speaking it is submitted that in such a case the contract is terminated by the commercial agent, not by the principal. The analysis is familiar from employment law and its concept of ‘constructive dismissal’. Where the principal commits a serious breach of contract without dismissing the commercial agent, the commercial agent is entitled to accept the breach as repudiatory and terminate the contract without notice. Where the principal dismisses the commercial agent in breach of contract – i.e. without the notice required by the contract or before expiry of the contract’s term – the correct analysis, it is suggested, is that the principal thereby commits a repudiatory breach in response to which the commercial agent is entitled to terminate the contract without notice, so that is the commercial agent’s acceptance of the principal’s breach, rather than the act of dismissal, which brings the contract to an end. 19 See, for instance, Page v. CST Ltd. [1997] 3 All ER 656; see S. Saintier, ‘New developments in agency law’ [1997] JBL 77. 20 As is the case for instance when the principal decides to close down the part of the business that the commercial agent is in charge of as was the case in King v. Tunnock [2000] Eu LR 531 or when the principal decides to close down a failing business as in Lonsdale v. Howard and Hallam Ltd. [2006] EWCA Civ 63, [2006] 1 WLR 1281: see S. Saintier, ‘Guidelines for compensation of commercial agents’ (2006) 122 LQR 379.

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2) INDEMNITY AND COMPENSATION IN THE AGENCY REGULATIONS AND THEIR CIVIL LAW RATIONALE a) The text Regulation 17 contains the main provisions concerned with termination payments. Compensation is the default option, yet, following the sequence of the Directive, the provisions dealing with indemnity are set out rst. Both sets of provisions are worth quoting verbatim.

i) Indemnity Regulation 17 provides that: (3) subject to paragraph (9) and to Regulation 18 below, the commercial agent shall be entitled to an indemnity if and to the extent that – (a) he has brought the principal new customers or has signicantly increased the volume of business with existing customers and the principal continues to derive substantial benets from the business with such customers; and (b) the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers. (4) The amount of the indemnity shall not exceed a gure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding ve years and if the contract goes back less than ve years the indemnity shall be calculated on the average for the period in question. (5) The grant of an indemnity as mentioned above shall not prevent the commercial agent from seeking damages.

It seems then that, paradoxically, indemnity can be both more and less than damages for breach of contract. More, because, as Regulation 17(3)(b) makes clear, commission lost by the commercial agent is only one of the factors to be considered by the courts in assessing what is an equitable amount to award as indemnity. Less, because, as Regulation 17(5) also makes clear, the grant of an indemnity does not prevent the commercial agent seeking damages. Implicitly therefore, it seems clear that indemnity is something different from damages for breach of contract. The key provision, however, is Regulation 17(3) since the conditions there set out dene not only the amount of indemnity (‘to the extent that’), but also the conditions under which (‘if’) it is payable at all. However, although Regulation 17 tells us when indemnity is payable and xes a ceiling to the amount payable, it does not tell us how the payment is calculated. The primary measure

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looks to the benet received by the principal as a result of the agent’s activities, but assessment also takes account of the agent’s loss and the Regulation 17(3(b) introduces a measure of unpredictability with the requirement that the agent is entitled to an indemnity, ‘to the extent that . . . the payment of this indemnity is equitable, having regard to all the circumstances.’ All that we can say for certain is that, in view of the cap, it is not an indemnity in the common law sense.

ii) Compensation Turning now to compensation, Regulation 17(6) provides that ‘the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal’. Surprisingly given its importance, ‘damage’ is not dened, but Regulation 17(7) provides that: for the purpose of these Regulations such damage shall be deemed to occur particularly when the termination takes place in either or both of the following circumstances, namely circumstances which – (a) deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benets linked to the activities of the commercial agent; or (b) have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.

Regulation 17(7) raises a series of questions. First of all, its drafting is confusing to a common lawyer, with contradictory indications. The reference to termination ‘[depriving] the commercial agent of the commission which proper performance of the agency contract would have procured for him’ is redolent of the language of expectation and suggests a parallel with damages for breach of contract. But, as we have noted earlier, compensation is payable even where there is no breach of contract. Moreover it has been held that the reference to ‘proper performance’ of the contract is not limited to performance strictly in accordance with the terms of the contract but, especially in view of the mutual duties of good faith imposed on the parties means something like ‘performance in accordance with the reasonable expectations of the parties.’21 The following part of paragraph (a), with its reference to ‘providing his principal with substantial benets’ introduces a restitutionary element and looks not to the commercial agent’s loss but the benet to the principal. Both elements of paragraph (a) must be satised in order for the agent to claim compensation:

21

Page v. CST Ltd. [1997] 3 All ER 656.

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termination must take place in circumstances which (1) deprive the commercial agent of the commission which proper performance of the contract would have procured for him and (2) provide the principal with substantial benets.22 Paragraph (b) then introduces an alternative basis for payment of compensation: – where termination takes place in circumstances which prevent the commercial agent from amortising the costs and expenses incurred in the performance of the agency on the advice of the principal. Adopting the language of damages, this appears to look to the commercial agent’s reliance interest. A second question is whether Regulation 17(7) has the same signicance as Regulation 17(3) has in relation to indemnity: is damage a necessary or merely a sufcient condition for compensation to be payable? On the face of it, damage is a necessary condition for compensation to be payable (although the point is not beyond doubt), raising another question: can damage occur other than in the circumstances outlined in paragraphs (a) and (b) of Regulation 17(7)? Again the language is not crystal clear but the language – ‘damage shall be deemed to occur particularly when . . .’ strongly suggests that the situations outlined in the text are not exhaustive of those when damage occurs for the purposes of Regulation 17. In the Scottish case of King v. Tunnock,23 counsel for the principal tried to argue that no compensation was due to the commercial agent because the principal did not and would not receive ‘substantial benets’ from the commercial agent’s efforts as per Regulation 17(7)(a), since he had closed down that part of the business. Lord Caplan, in the Court of Session, rejected this argument, stating that Regulation 17(7) did not ‘set out the exclusive circumstances giving rise to compensation’ and therefore is not meant to be an exclusive list of events where the damage occurs nor does it mean that the commercial agent has to demonstrate that he has suffered a damage in such specic situations.24 The commercial agent was therefore entitled to receive substantial compensation for the loss he suffered.25 The nal question in this regard is whether the amount of compensation payable is in any way limited to the ‘damage’ suffered by the agent? In other words, does ‘damage’ dene the amount of the commercial agent’s entitlement as well as the conditions for such an entitlement?

22

It should be noted that on the face of it, it is not the commercial agent’s activities which provide the principal with the relevant benet, but termination of the agency contract. The principal must gain, and the commercial agent loses from termination. 23 [2000] Eu LR 531. 24 Ibid., [42]. 25 A different interpretation seems to have been reached by the English Court of Appeal in the recent case of Lonsdale v. Howard and Hallam Ltd. [2006] EWCA Civ 63, [2006] 1 WLR 1281 where Moore-Bick L. J. took into consideration the fact that the business was failing in order to reduce the amount of compensation of the commercial agent. The case is discussed in more detail below.

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b) External guidance Since the language of the Agency Regulations – and Directive – is confusing about the nature of indemnity and compensation, perhaps we can draw on guidance from either the DTI or the European Commission.

i) DTI Guidance In 1993, recognising that the Regulations introduced a number of novel concepts, the DTI published a set of guidance notes.26 In the light of subsequent court decisions, many aspects of those notes have proved to be inaccurate. However, they did note that ‘the word “indemnity” has a rather more limited meaning than that which it normally bears in English law in that it: (i) appears to fall short of a complete making good of the loss suffered by the [commercial agent];27 and (ii) does not necessarily arise in relation to loss caused by the principal.

Other than this, the DTI Guidance Notes throw little light on the proper conceptualisation of termination payments under the Regulations, observing that calculation of the two termination payments ‘is a matter for the courts to decide’!

ii) The European Commission’s Report In 1996, the European Commission published a report on the application of the termination payment provisions.28 That report throws rather more light on the question of the proper classication of ‘indemnity’ and ‘compensation’. As it conrms: Indemnity represents the continuing benets to the principal due to the efforts of the commercial agent. The commercial agent, however, will only have received commission during the duration of the contract which will not typically reect the value of the goodwill generated for the principal. It is for this reason that the payment of a goodwill indemnity is commercially justied.

As the report goes on to indicate, the indemnity system was modelled on article 89b of the German Commercial Code which provides for a similar goodwill indemnity. Confusingly, article 89b is headed ‘claim for compensation’ and

26

See (n. 12). The notes refer to the loss suffered by ‘the principal’ but this must be a mistake. 28 European Commission 1996 report on the application of Council Directive on the coordination of the laws of the member states relating to self-employed commercial agents (Com (1996) 364 nal). 27

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continues ‘after termination of the contractual relationship the commercial agent may demand from the principal reasonable compensation’ if and in so far as three conditions are satised. They are that: (1) the principal continues to enjoy substantial advantages after termination of the agency from relations with new customers recruited by the commercial agent and (2) by reason of termination the commercial agent loses rights to commission which, had the agency continued, he would have had from business transactions already concluded or to be concluded in the future with customers recruited by him; and (3) compensation is equitable in all the circumstances of the case.

Leaving aside the linguistic difculties, this makes clear that the rationale for indemnity payment is not the loss suffered by the commercial agent as such, but the inequitable distribution of gains from the commercial agents’ activities, from which the principal disproportionately benets as result of termination of the commercial agency, because he continues to benet from the agent’s activities, whilst the agent does not. Turning now to compensation, the European Commission’s report observes that: The compensation system was based on French law... whose aim was to compensate the agent for the loss he suffered as a result of the termination of the agency contract . . .29

This strongly suggests a compensatory rationale for the compensation payment, but, confusingly, the report continues: Various judgments of the French courts justify the payment of compensation on the ground that it represents the cost of purchasing the agency to the agent’s successor or on the ground that he retains the time it takes the agent to reconstitute the client base which he has been forcefully deprived of.30

The French Commercial Code31 contains very little further guidance. The relevant provision is Article L 134-12 which provides that ‘if their relationship with the principal ceases, commercial agents shall be entitled to an indemnity (sic) for the loss suffered.’ The lack of detail in the French implementing text as to the type of loss that the commercial agent suffers on termination can be explained by the desire of

29

Ibid., 5. Ibid. 31 The text of the implementing legislation of 25 June 1991 has now been inserted verbatim in the new French Commercial Code in articles L 134-1 to L 134-17. 30

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the French legislator to ensure that the implementation of the Directive would be done in a manner which ensures legal continuity with pre-existing legislation.32 We are, therefore, little closer to identifying the rationale underlying the need for the compensation and indemnity provisions in the Directive. All that we can say with certainty is that the two payment systems share a similar rationale, indemnity seeking to compensate the agent for the loss of the chance to share in the continuing benets from the agency, and compensation representing a loss to the agent of a valuable asset in the form of the agency itself. Above all, it is clear that neither system represents damages for breach of contract.

iii) The underlying civil law rationale In both German and French law the underlying rationale of commercial agency is that the commercial agent has a quasi-patrimonial interest in the agency. To put it another way, principal and commercial agent are treated as engaged, in effect, in a joint venture. This is formally recognised in French law under the notion of common interest mandate.33 The commercial agent’s efforts are directed to building up goodwill for the principal’s business, from which both parties benet (the principal by selling more goods and the commercial agent by receiving commissions on such sales). But on termination of the commercial agency contract the principal may continue to benet from repeat orders from customers recruited by the commercial agent, whilst the commercial agent, no longer entitled to commission, receives no benet from those orders. It is, in effect, as if the commercial agent’s share of the business goodwill has been appropriated to the principal. The commercial agents directive is based on the French and German systems and seems to adopt this rationale. We may note in passing that the proprietary analysis of the agency is entirely consistent with the exclusion of the right to termination payment where the agent assigns the agency,34 because in that case the agent receives the value of the agency from the assignee, and with the preservation of the right to termination payment where termination occurs as a result of the death of the agent,35 in which case the ‘property’ should fall into the agent’s estate. This quasi proprietary nature of the agency is now clearly accepted by the English and Scottish courts alike. In Moore v. Piretta Ltd.,36 the only case which involves the calculation of indemnity, the Court of Appeal held that the

32 Where the Directive provides ‘deemed damage’, the French text remains silent. It was feared that to introduce details would restrict the commercial agent’s protection. 33 Article L 134-4 al 1 French commercial code denes the contract between commercial agents and their principals as entered into ‘in the common interest of the parties’. 34 Regulation 18(c). 35 Regulation 17(8). 36 [1999] 1 All ER 174.

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purpose of indemnity is ‘to award the commercial agent a share in the goodwill’ he helped to build, otherwise, ‘the whole benet of that goodwill would remain with the principal’.37 In Barrett McKenzie v. Escada Ltd.,38 the High Court held that the aim of the compensation option is to compensate the commercial agent ‘for the loss of a quasi-proprietary right: the loss of an asset to the agent (the agency)’.39 In the more recent and denitive case on compensation, Lonsdale v. Howard and Hallam Ltd.,40 Moore-Bick L. J. described the commercial agency contract as a ‘species of property’.41 If we accept that the agent’s interest in the agency is a quasi-proprietary interest in an asset, we might therefore rationalise the right to a termination payment as a right to compensation for expropriation of that asset, or its value. There remains the question, though of how that asset is to be valued.

3) AN UNJUST ENRICHMENT ANALYSIS?42 In Tigana Ltd. v. Decoro Ltd.43 Davis J. tentatively suggested an unjust enrichment analysis for the compensation alternative, observing that: one can discern from the Directive (. . .) a desire to prevent the principal from, as it were, unjustly enriching itself by appropriating to itself, without recompense, the goodwill and customer connection to which the efforts of the commercial agent have contributed.44

He later added: clearly one important element, as the recitals to the Directive show, is to avoid a principal being unjustly enriched by appropriating to itself, without recompense, the goodwill and customer connection to which the efforts of the commercial agent have contributed; and to compensate the loss to him of his agency.45

According to this analysis, on termination of the commercial agency relationship, the principal is unjustly enriched either because he keeps for himself the whole value of the agency, or because he continues to benet from the

37

Ibid., 177 g. [2001] Eu LR 567. 39 Ibid., [27]. 40 [2006] EWCA Civ 63, [2006] 1 WLR 1281. 41 Ibid., [30]. 42 An earlier version was rst published in S. Saintier and J. Scholes, Commercial agents and the Law (Informa, Richmond 2005) 199–200. 43 [2003] EWHC, 23 Eu LR 189. 44 Ibid., [77]. 45 Ibid., [90]. 38

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commercial agent’s efforts during the agency, without having to pay for it so that the benet is not shared with the commercial agent. In other words, the enrichment can be viewed either as negative – the avoidance of the need to pay commission to the agent – or positive – in effect, the appropriation to the principal of the commercial agent’s share of the joint venture. On either analysis, the principal is enriched at the agent’s expense. Admittedly the picture is not entirely clear, Davis J. introducing compensation for loss as a secondary objective of the compensation payment in the second passage quoted above, but the emphasis here is clearly on avoiding unjust enrichment. To quote Davis J. again ‘it seems clear that the Directive contemplates that the goodwill established by an agent for the benet of the principal can be treated, as it were, as a quasi-proprietary right in which the agent is taken to have a share and of which he is divested on termination’.46 However, whilst there is undoubtedly enrichment of the principal at the agent’s expense, can that enrichment be said to be unjust? It must be borne in mind that the right to a termination payment can arise where the termination is not wrongful, including where the contract is frustrated or a xed term expires. Although it may be morally or commercially unjust, it is doubtful ‘whether there is anything unjust about the principal acquiring benets under a lawfully terminated contract’.47 Can it be said that there is no legal basis for the principal to receive the enrichment? The problem is that arguably, looked at purely in terms of contract, the basis for the principal is that he is entitled to a portion of the prots that he received from the customers. Since he has no contractual obligation to pay commission to the commercial agent anymore, he is entitled to that money. It is therefore difcult to say that the principal’s enrichment is unjust. Even if we look at the matter in terms of the principal appropriating the agent’s share in an asset, that appropriation is sanctioned by contract. One possible response to this might be that the Directive and the Regulations see the agency as something more than simply contractual, giving rise to a relationship which transcends contract. Thus, when the agent receives compensation on termination, its calculation is based on the termination of the whole relationship and not merely on the termination of the individual contract.48 As we have noted earlier, there is a presumption in the Regulations that an agency expressed to be for a xed term will continue in existence after expiry of the xed term. In addition, the courts have recognized that ‘proper performance’ of the agency contract requires more than compliance with its terms,49 and the parties are subject to duties of mutual good faith, which clearly go beyond con-

46

Ibid., [90]. S. C. Smith, ‘Death of a salesman’ [2000] SLT (2000) 289, 294. 48 Moore v. Piretta Ltd. [1999] 1 All ER 174. 49 Page v. CST Ltd. [1997] 3 All ER 656; and see Lonsdale v. Howard and Hallam Ltd. [2006] EWCA Civ 63, [2006] 1 WLR 1281, [50] per Moore-Bick L. J. 47

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tract. On this basis, one could say that the law reects an expectation of both parties that the relationship will last long enough for both to recoup the investment that they have made in the relationship.50 If we consider the quasi-proprietary nature of the commercial agency relationship, as reected in French and German law, it becomes easier to rationalise the right to payment in terms of unjust enrichment. Principal and agent work together to build up an asset of value to both of them. On termination the whole of the value of that asset passes to the principal, to the exclusion of the agent. If the principal is permitted to keep the whole of the value of the agency business he is unjustly enriched by virtue of appropriating the agent’s share of that value.

4) CALCULATING INDEMNITY AND COMPENSATION Adoption of the proprietary analysis of the agency relationship allows us to rationalise the right to payment on termination as either compensation for expropriation of an asset or the legal response to the unjust enrichment of the principal, which results from that expropriation. However, conceptualisation of the right to payment is not an end in itself, but an aid to calculation of the amount of that payment. In most cases it will make little, if any, difference which analysis we adopt the two approaches producing the same result; but there will be cases where the results will differ.

a) Calculating indemnity As we have noted earlier, compensation is the default position and indemnity only applies under the Regulations when the parties expressly opt for it as per Regulation 17(2). For that reason, very few cases reaching the courts in this country have so far involved the indemnity option. The case of Tamarind International Ltd. and others v. Eastern Natural Gas Ltd.51 was settled out of court; the Scottish case of Hardie Polymers Ltd. v. Polymerland 52 involved indemnity payments but the main question was one of construction of the contract and not calculation of the indemnity. The earlier case of Moore v.

50 Please note that the commercial agent makes a continuous investment in the relationship: even when the relationship is mature, he still uses his marketing skills to try to nd new customers. This is important since it is therefore impossible to say that the longer the relationship is, the lesser amount the commercial agent should receive since he will have had a longer time to recoup his investment. 51 [2000] Eu LR 708. 52 (2000) SCLR 64.

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Piretta 53 is therefore the only decision to date to have considered in detail the calculation of the indemnity payment.54 In Moore, the claimant started to act as commercial agent for the defendant in January 1988 when the parties entered into a xed-term contract. The contract was renewed annually until February 1994, when a new contract was drawn up in order to comply with the Regulations. The new contract was for an indenite duration and contained a six-months termination clause. The contract expressly stipulated that the commercial agent was to be indemnied on termination. In October 1994, the principal gave the commercial agent the agreed six months notice terminating the contract. Subsequently, the commercial agent issued proceedings claiming indemnity under Regulation 17(3). The central contention was to know how much should be awarded by way of indemnity. Counsel for the principal advanced a number of arguments seeking to limit the amount of the indemnity payable. All were rejected by the judge, John Mitting QC, sitting as a deputy judge in the High Court. First he held that indemnity should be calculated with reference to the relationship as a whole and not simply in relation to the last contract to date.55 Second, he held that the requirement in Regulation 17(4) that ‘the amount of the indemnity shall not exceed a gure equivalent to an indemnity for one year . . .’ did not limit the court, talking only of the year following termination when assessing the amount of the indemnity due. He observed that: one of the things that has to be assessed is the extent to which the principal continues to derive substantial benets from the efforts of the agent. The value of the business which remains for the benet of the principal can (. . .) be assessed by reference to periods as short as a year. But there is nothing in the Regulations that requires them to be thus limited’.56 As a consequence, ‘if on the evidence the benets of the agent’s efforts are likely to endure for more than a year after the termination’ then, ‘the assessment need not be limited to looking at the period of one year after termination only.57

This is consistent with the practice of the German courts since the benets can last to ve years or more in case of durable goods.58 Finally, counsel for the principal argued that the requirement that the indemnity ‘must be equitable’, as per Regulation 17(3)(b), was not met in the pres-

53 54 55 56 57 58

[1999] 1 All ER 174. Some of the comments rst appeared in Saintier and Scholes (n. 42). See the point made above, (n. 48) and associated text. [1999] 1 All ER 174, 181 j. Ibid. For details, see Saintier and Scholes, (n. 42) 208.

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ent instance on the ground that it imposed a requirement, although different in nature, akin to the mitigation principles which apply under domestic law to wrongful dismissal cases. Mitting J. also rejected that argument on the ground that the requirement of equity is only relevant in relation to the evaluation of the indemnity itself, stating that ‘if evidence shows that the percentage is grossly disproportionate either way to the efforts of the agent so as to produce an inequitable result, then it might be necessary to enquire into such factors’.59 Mitting J. however said that ‘equitable principles might require there to be taken into account such part of the goodwill as the agent was able to exploit himself (. . .) for the benet of another principal’.60 This is, once again, a reasonably accurate representation of what happens when the German courts look at whether the calculation of indemnity is equitable when the commercial agent can work for competitors after termination of the agency relationship.61 On the basis of these ndings, and closely following the rst two German law requirements dened earlier, Mitting J. held that the indemnity payable to the commercial agent was £92,000. He arrived at that gure by looking at the ‘value of the business of the principal’, which he concluded refers to ‘the value of the business to the principal of new customers brought by the agent (. . .) and of existing customers whose business has been substantially increased’,62 which is consistent with the method used in Germany. However, beyond this, his Honour’s calculation is not clear. For instance, it is not clear on which basis he decided that the length of the benets of the principal was 2.75 years.63 Additionally, after applying the cap imposed by Regulation 17(4), he decided that the nal sum to be awarded was £64,526.33. He did not, however, give any detail as to how he calculated that particular sum. This is regrettable.

59

[1999] 1 All ER 174, 182 g. Ibid., 182 f. We might note that there is thus a trade-off between the right to indemnity and any post termination covenant imposed on the agent. Insofar as such a covenant is imposed and restricts the agent’s activities, it will tend to increase the amount of indemnity payable, whereas the absence of such a covenant, by permitting the agent to exploit for his own benet the goodwill he contributed to will tend to reduce the amount of any indemnity. 61 For details, see Saintier and Scholes, (n. 42) chapter 6, section 6.4.1.1, especially 209–212. 62 (n. 59), 181 f. 63 F. Randolph and J. Davey, Guide to the Commercial Agency Regulations (2nd edn., Hart, Oxford 2003) 97. 60

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b) Calculating compensation A brief overview of the case law to date shows that when the Regulations rst came into effect, there was a tendency for the domestic courts, to look at the practice of the French courts for guidance. This is especially true for Scotland with cases such as King v. Tunnock 64 where the Court of Session awarded two years worth of commission to the commercial agent whose agency had been terminated by the principal after over twenty years of service. The approach was, however, not consistently followed by the courts of England and Wales, mostly, it seems, because they perceived the French rule of thumb to award two years’ worth of gross commission as compensation to produce an ‘unwarranted windfall’65 for the commercial agent on the basis that such an award does not represent the true loss he suffers following termination. The rejection of the French system is also explained, in practical terms, by the need for the principles behind the calculation of compensation to be ‘sufciently UK-based and developed so as to be interpreted and enforceable by UK judges without requiring in any single case (. . .) an expert in French law to determine the case’.66 However, despite a clear desire and efforts67 to evaluate compensation in a more ‘UK-based manner’, the lack of clear alternative established method of calculation was, until recently, still noticeable.68 Moore-Bick L. J. who gave the leading judgment in Lonsdale v. Howard and Hallam Ltd., was even more sanguine when, after reviewing cases to date, he remarked that there was ‘no clear agreement on the principles governing the assessment of compensation under Regulation 17(6)’69 and that it was often very difcult ‘to discern the basis on which the court reached its decision’.70

i) Calculating compensation as if valuing a business One suggestion put forward was to calculate compensation as one would value a business. Such an idea was rst aired in the case of Barrett McKenzie v. Escada Ltd.,71 where Bowers J. held that when calculating the amount of compensation due,

64

[2000] Eu LR 531. Ingmar G. B. Ltd. v. Eaton Leonard Inc. [2002] ECC 5, per Morland J., [52]. 66 Barrett McKenzie v. Escada Ltd. [2001] Eu LR 567, per Bowers J., [21]. 67 See especially Tigana Ltd. v. Decoro Ltd. [2003] EWHC, 23 Eu LR 189 where Davis J. set out a list of 14 factors to be taken into consideration when assessing compensation. 68 Saintier and Scholes, (n. 42) 190. 69 (n. 40), [23]. 70 Ibid. 71 [2001] Eu LR 567. 65

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one is valuing the agency and its connections established by the agent and it is really a question of compensation for the notional value of that agency on the open market, somewhat similar to the value of the goodwill that one might have in a business.

This is consistent with the proprietary appropriation analysis, which we suggested above is the true rationale of the termination payment system. The idea was more recently applied by the Court of Appeal in Lonsdale v. Howard & Hallam Ltd.,72 the most denitive decision on the issue to date.73 In this instance, the claimant had acted as a commercial agent for the defendants since January 1990. In 2003, due to falling sales, the defendants decided to close their manufacturing business and sold the brand to competitors. They accepted that on termination of their relationship, the claimant had a right under the Regulations to compensation and accordingly, offered him, £7,500. The claimant refused that sum and began proceedings claiming £19, 670, a sum roughly equal to two years worth of commission. The trial judge accepted that, under Regulation 17(6), the claimant was entitled to compensation for the loss he had suffered on termination; that such a loss was the value of the agency, i.e. the goodwill, that he had been deprived of and that the value of the agency should be assessed at the date of termination. However, taking into consideration that the sales had been in decline and that the cause for termination was the closure of the principal’s business, the maximum that the claimant could receive was £5,000. The Court of Appeal upheld the decision of the trial judge on all points. Moore-Bick L. J., with whom the other two members of the court agreed,74 undertook a detailed review of the previous case law, concluding that ‘One thing that emerges from these decisions is that there is no clear agreement on the principles governing the assessment of compensation under Regulation 17(6)’.75 The correct approach, he decided, was to identify the loss in respect of which compensation is awarded; that, in turn, depended on an analysis of the legislative text.76 Acknowledging the civilian origin of the concept of compensation, Moore-Bick L. J., correctly recognized that the ‘damage’ – i.e., the loss that Regulation 17(6) refers to – is very different from any existing common law principles since the purpose of Regulations 17(6) and (7) was to compensate the commercial agent for the loss he suffered on termination, the loss of the goodwill attached to the agency’s business.77

72

(n. 40). This case was however recently given leave to appeal to the House of Lords. The Court of Appeal decision was shortly followed by the High Court in Vick v. VogleGapes Ltd. [2006] EWHC 1665, 150 SJLB 917. 74 Jacob and Hallett L. J. J. 75 (n. 40) [23]. 76 (n. 40) [25]. 77 (n. 40) [24]. 73

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Above all, despite being ‘redolent of the language of breach of duty’, he recognized that compensation under the Directive is not damages for breach of contract. However, the assessment of compensation required more than simply awarding the agents such sum as appears just and reasonable, in contrast to the position in relation to indemnity where the overriding principle is to award such sum as is equitable in all the circumstances. He rejected, too, counsel’s suggestion that he should be guided by the purpose of the legislation. We may see here a clear desire to establish clear principles, rather than rely on a vague discretion. On the other hand, he also rejected the invitation to adopt the French ‘two years commission’ rule of thumb, for which no one had offered a rational explanation.78 While recognizing the value of the European Commission’s 1996 report, he indicated that it had perhaps been given too much prominence in the course of argument. As he observed: – It is no doubt helpful and informative to know how the French courts have applied Article 17 of the Directive, but the knowledge that the compensation system was based on the law previously in force in France has tended to lead judges in this country to assume that the Directive must be understood and applied in the way that it is understood and applied in France, instead of approaching it as a piece of Community legislation in its own right. One consequence is that there has in my view been too great a readiness to assume that the common law approach must be rejected in all its manifestations in favour of a different approach which the Directive itself does not dene.79

Analysis of the legislation itself led to the conclusion that the damage in respect of which compensation is awarded as identied in Regulation 17(7) was the loss to the agent of his share of the goodwill in the agency. This was consistent with the analysis in the European Commission’s report, although the concept of the agent enjoying sharing the goodwill of the principal’s business might be a novel one for the common law. In reaching this conclusion, his Lordship seems to have rejected an unjust enrichment analysis: the agent is entitled to be compensated for loss of his quasi proprietary interest in the goodwill of the agency.80 That approach, he concluded, was consistent with all the previous decisions of the English courts with the exception of Duffen and P. J. Pipe.81

78

(n. 40) [39] (n. 40) [25]. 80 See (n. 40) [38] where his Lordship rejects a suggestion to base the calculation on the benet received by the principal prior to termination of the agency. 81 (n. 40) [38], namely Duffen v. Frabo SpA No. 2 [2000] Eu LR 167 and P. J. Pipe & Valve Co. Ltd. v. Audco India Ltd. [2005] EWHC 1904, [2006] EU LR 368. 79

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However, identifying the nature of the agent’s loss is only the rst step in the compensation enquiry. The next step is to quantify the compensation payable in respect of that loss. Having correctly identied the nature of the agent’s loss, that task was easier: the compensation which the agent is entitled to receive in such cases should reect the value of the business at the date of the termination. Once that is recognised the task of assessing the amount of compensation in any given case is made easier because the court can concentrate on the facts and matters that have a bearing on the value of the business to the exclusion of those that do not.82

Expert evidence might be desirable to assist the court in making a proper valuation of the business, but in the absence of such evidence or agreement between the parties ‘it may be sufcient to place all the material before the court and invite the judge to make whatever he considers to be the appropriate order, as the parties did in this case. In such a case the judge is entitled to apply his common sense and adopt a broad brush approach’.83 This seems surprising in view of his Lordship’s earlier rejection on broad rules of thumb, but it has the merit of avoiding excessive technicality, especially where the value of the business may be relatively low. However, as Moore-Bick L. J. recognized, there may be cases where an award based on the value of the goodwill of the lost share of the business will provide the agent with inadequate compensation. One such situation is that covered by Regulation 17(7)(b), where termination takes place in circumstances which ‘have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.’ In such a case the agent would not be limited to a claim for the value of his lost share in the goodwill of the business which might not provide him with adequate compensation, but will be entitled to claim compensation for whatever loss he can show he had suffered, including in an appropriate case, his unamortised expenses. It is a little difcult to see how it can be said that such ‘wasted expenditure’ is a loss caused by the termination of the agency; one might expect it at least to be required of the agent that he demonstrate that had the agency not been terminated he would have recouped that expenditure; it is not clear if the principal would have a defence to such a claim if he could show that prots from the agency would have been inadequate to cover that expenditure so that some, or all, of it would have been wasted in any case. Other items excluded from recovery in a claim for compensation include commission lost due to failure to give proper notice of termination and lost

82 83

Ibid. (n. 40), [57].

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future commission. Where termination of the agency amounts to, or results from, a breach of contract by the principal, the agent will be entitled to bring a separate claim for damages for breach of contract, which will include a sum by way of damages for failure to give proper notice. The goodwill value of the agency will reect the value of future sales; an award of compensation calculated by reference to the goodwill value of the agency will therefore have indirectly included an element in respect of lost future sales, so there will be no need to compensate those separately. Moore-Bick L. J.’s description of the commercial agency as a ‘species of property’,84 is, interestingly, very similar to the French notion of the ‘common interest mandate’, which is the rationale behind the French ‘indemnité compensatrice’.85 Moore-Bick L. J. therefore acknowledges that the right of the commercial agent to claim compensation for his loss, although ‘redolent of the language of breach of duty’86 is clearly wider as it gives him something he would not have at common law. This part of the decision is welcome.

ii) Post termination events Some other aspects of Moore-Bick L. J.’s analysis, are, however, more problematic. Recognising that the task of assessing the loss of the commercial agent is very different from assessing damages for breach of contract, Moore-Bick L. J. stated that common law principles of mitigation of damage would not apply.87 Given the proprietary analysis of the agent’s loss, this must be correct. Similarly, it is difcult to see any role for remoteness in the assessment of compensation. Moore-Bick L. J. added, however, that not all common law principles would be automatically disregarded and stated that even though the valuation had to take place at the stage of termination, it might, in some cases, be appropriate to take into account post termination events, especially in relation to the state of the business of the principal. As a consequence, if the principal closes down the business on, or shortly after termination of the agency, that fact might have to be taken into consideration since that closure will inevitably affect the value of the goodwill attaching to the agency.88 Taking into account post-termination events when valuing the agent’s lost share in the joint-venture for the purposes of assessing compensation at rst seems problematic. It is surely correct that the common law principles such as mitigation and remoteness of damage have no place in the assessment of compensation under the Regulations. Mitigation might require the agent to seek

84 85 86 87 88

(n. 40), [30]. For details, see Saintier and Scholes, (n. 42) 157. (n. 40), [28]. (n. 40), [30]. (n. 40), [58].

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a new agency, but whilst commission earned in the new position might compensate for commission lost as a result of termination of the old agency, and therefore mitigate that loss, it would in no way compensate for the accumulated goodwill attached to the old agency. Ex hypothesi the point of the compensation payment is that the agent has to rebuild his goodwill in the new position. He must, of course, mitigate if he wishes to claim damages over and above the compensation payment. Equally, it is established that when assessing damages for breach of contract, the court may, in an appropriate case, depart from the normal rule that damages are assessed as at the date of breach and substitute some later date as the date of assessment, allowing it to take into account supervening events such as falls in market value.89 This principle is not conned to damages for breach of contract, but is more generally applicable. At rst blush, there seems little scope for its application to compensation under the Regulations. Regulation 17 seems to suggest that, when assessing compensation, the crucial date is the date of termination of the agency. There is no requirement in Regulation 17(7), (unlike in Regulation 17(3) in relation to indemnity) that the agent’s activities provide the principal with a continuing benet after termination. We have suggested that the underlying rationale of the termination payment schemes seems to be (at least for indemnity) that the principal continues to benet from the agent’s activities after termination, whilst the agent does not share in that benet but, as we have seen, what the agent is compensated for according to the decision in Lonsdale, is the loss of his quasi proprietary interest in the agency’s goodwill, assessed by reference to the value of that goodwill. As Moore-Bick L. J. observed, post termination events, at least those which are foreseeable at the date of termination of the agency, are bound to affect its open market value. If it be objected that, in so far as this may tend to reduce the amount of the compensation payment, it runs counter to the Directive’s objective of protecting the commercial agent, the response is that it need not do so. It is not impossible that supervening events may increase, rather than decrease, the value of the goodwill of the agency.90 But we accept that in most cases supervening events are likely be relevant where they decrease that value. We would suggest that no hard and fast rule about the effect of supervening events can be laid down, but the court should be guided by the Directive’s general underlying principles. Examples may help to illustrate the point. Suppose, rst, that the agency is brought to an end by frustration. Termination resulting from frustration does not preclude entitlement to a termination

89

See, for recent example, Nimmo v. Habton Farms [2003] EWCA 68; [2003] 2 All ER Comm 109 (effect of events on damages for agent’s breach of warranty of authority). 90 See, for instance, in Tigana, the principal received a large number of orders from customers introduced by the agent after termination of the agency. The point is discussed later in more detail.

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payment. On the other hand, the frustrating event is likely to reduce, possibly to nil the continuing value of the agency to both principal and agent. If the underlying rationale of the payments system is that the agent has lost his share of the value of the goodwill of the agency (or that the principal is enriched by receiving for himself the whole of the value of that goodwill), the amount of the compensation payment must be reduced to reect the fact that that value is reduced by the frustrating event. Looking at it another way, if the agency is viewed as a joint venture, the risk of frustration is, by denition, one which should be shared by the parties, so that frustration must affect the amount of compensation payable to the agent. Now suppose that the frustrating event occurs after termination of the contract. In this case, it is not responsible for the termination, but it nevertheless affects the continuing value of the goodwill of the agency. The position here is rather less clear. It seems unreal to ignore the effect of the potentially frustrating event altogether, but strict application of the principle that valuation is taken at the date of termination would lead to that result. If we consider that what the agent has lost is the opportunity to sell the agency, then it seems to us that the effect of the frustrating event on the amount of compensation will vary according to its proximity in time to the date of termination. Once again, the risk of frustrating events ought, in principle, to be shared between the parties; on the other hand, the longer the time between the date of termination, and the occurrence of the frustrating event, the greater the scope for other eventualities to intervene. For instance, other externalities might increase the value of the agency, or the agent might sell before the frustrating event. Alternatively, one might argue that the agent being entitled to compensation, the principal ought to make payment, and if he delays in doing so, should bear the consequences of that delay. The position may be entirely different if the agency is terminated by the principal. In that case, it seems to us that there are strong arguments for taking into account post-termination events which increase the value of the agent’s interest and ignore those that decrease the value of the agent’s interest. In relation to the former, let us take a scenario similar to what happened in Tigana v. Decoro Ltd.91 where the contract was terminated before all the efforts of the agent gave rise to sales. After the contract was terminated, a high number of sales materialised and it was recognised that such sales were in fact the result of the agent’s efforts. In such a case, not taking into consideration what happens after termination would be detrimental to the agent’s interest. Moreover, taking such post termination events into consideration is entirely consistent with calculating the amount of compensation by reference to the value of the

91

[2003] EWHC 23, [2003] Eu LR 189.

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goodwill of the agency at the date of termination since that value would reect the prospect of future sales, at least where they are foreseeable. Where post termination events operate to the detriment of the agent, the position may be different. Suppose, for instance, that the agent is employed under a xed term contract subject to a three-month break clause, and the principal terminates the contract under the break clause. There is therefore no breach of contract. The principal then closes down the business. Again, the act of closure reduces (to nil) the value of the agency. Now, however, it seems to us that there are strong arguments that the post termination event – closure of the business – should be ignored when calculating compensation. Closure in these circumstances is an event entirely within the control of the principal; there is therefore no reason why the risk of that act should be shared between the parties. Moreover, there may be circumstances in which the principal’s actions are contrary to the overriding duty of good faith imposed on both parties by the Regulations. These examples are not meant to be exhaustive; circumstances are almost innitely variable. The point is that there are good grounds in principle for taking account of post termination events in calculating compensation, especially if not doing so would provide the commercial agent with an unmerited windfall, but that it is impossible to lay down hard and fast rules about the effect of such events on that calculation. If the calculation of damages for breach of contract is not a scientic exercise, the calculation of compensation under the Regulations is even less so.

iii) A purposive approach? We have suggested above that in deciding whether, and if so, we can take account of post termination events, the court should be guided by the underlying principles of the Directive. The Court of Appeal in Lonsdale was pressed with the argument that it should adopt a purposive approach to the assessment of compensation. On the whole, the Court of Appeal rejected that proposal in favour of a more predictable, principled approach, as outlined above. However, Moore-Bick L. J. conceded that in some circumstances, a more exible, purposive approach might be appropriate. He offered as an example the case where an agency for a xed term expires in accordance with its own terms. In such a case, rigid application of the ‘valuation at the date of termination’ approach adopted by the court in Lonsdale, would mean that the agent would receive no compensation, the agency, having expired, having no sale value. Since it is clear from the terms of the Directive that it is intended that the agent should receive compensation in such a case, the court conceded that it would be appropriate to depart from the ‘valuation at the date of termination’ approach. It seems to us that this is entirely consistent with our suggestions for the treatment of post-termination events, above.

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c) Compensation and indemnity: Are they that different? When the idea of assessing compensation as if valuing a business was rst aired, it was feared that, by encouraging the courts to place too much emphasis on the goodwill of the principal’s business, such an approach would too closely align compensation with indemnity,92 whereas the language suggests they are different, indemnity focusing primarily on the benets to the principal, compensation, looking more even-handedly to the benet to the principal and the agent’s loss, but prioritising the latter. Consistent with its emphasis on the legislative text, the Court of Appeal in Lonsdale rejected counsel’s argument that the court’s decision should more closely align the two termination payment schemes. But on reection, why should it be considered problematic that the two be aligned? As we have sought to demonstrate, the underlying rationale of both the compensation and indemnity payment provisions is the reversal of the unjust enrichment, which would occur as a result of termination were the principal allowed to keep for himself the whole value of the agency, which is seen as in the nature of a joint-venture between principal and agent and an item of quasi property. Whilst Regulation 17(7) may be said to place greater emphasis on the agent’s loss, and less on the principal’s benet, than does Regulation 17(3), it seems to us that both indemnity and compensation take some account, in their rationale, of both the loss to the agent and the gain of the principal resulting from the termination of the agency. Moreover, whilst accepting that in some cases the value lost by the agent may exceed the value of the principal’s gain and vice versa, in most cases the two sums will be the same. From a broader perspective, one of the principal weaknesses of the Directive was that its harmonising effect was limited, partly because of the failure to choose between the two different termination payments systems. An approach which, in the interpretation, more closely aligns the two systems would therefore have the merit of reducing, rather than increasing the gap between the two and would thus further the broader objective of harmonisation.

CONCLUSION In this paper, we have seen that it is now accepted by the domestic courts of the UK that the remedies of ‘compensation’ and ‘indemnity’ available to commercial agents under the Regulations are unique to the commercial agency relationship and are consequently very different, in their concept and in their application from any pre-existing remedies available at common law. We have also sought to argue that the underlying rationale of protection for the agent

92

Saintier and Scholes, (n. 42) 201.

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is that the agent and the principal in a commercial agency relationship are engaged in a quasi joint-venture, which results in the agent enjoying a quasi property interest in the agency. Termination of the agency deprives the agent of the benet of that interest, at the same time enriching the principal who retains the full benet of the agent’s efforts. The objective of compensation and indemnity payments under the Directive is then to reverse that unjust enrichment, or, to put it another way, compensate the agent for his loss. We have argued, too, that the court is right, in principle, to value the loss in the same way that the goodwill of a business is valued. We have also found that although, normally, that valuation should be made at the date of termination of the agency, it may be appropriate in some cases to take account of factors after the date of termination which reduce, or possibly increase, the value of the business. The courts have reached this conclusion in relation to compensation, only with some difculty, refusing to adopt the practice of the French court in relation to the assessment of compensation, and seemingly having some difculties shaking off the analogy with common law damages for breach. However, whilst the Court of Appeal in Lonsdale is to be applauded for adopting a principled approach to the assessment of compensation, and rightly sought to conceptualise the nature of the agent’s claim before moving on to the question of calculation, we would suggest that the court was perhaps too ready to reject the unjust enrichment analysis of the agent’s claim in favour of the ‘lost property’ analysis. As we observed above, in many cases, the two approaches will produce the same result, the value of the agent’s lost share of goodwill, being the value of the principal’s enrichment. However, important consequences may ow from the classication of the claim in an appropriate case, and it may therefore be necessary for the courts to return to this question again in a future case.93 It may be premature to reach conclusions in relation to indemnity, but the one decided case suggests the Court of Appeal has found it easier to adapt to the German-based system, possibly because the conceptual basis of the indemnity system as the reversal of unjust enrichment, as explained in the European Commission’s 1996 report, is more easily recognizable. We began by referring to the proposals for preparation of a Common Frame of Reference for European contract law. We would suggest that the experience of the English and Scottish courts in applying the termination provisions of the Regulations illustrates the forces that led to the publication of the Action Plan and the need for a common frame of reference. Proper understanding of the conceptual basis of the commercial agent’s rights, not to mention consistent usage of terminology, is vital to the understanding of those rights.

93

We intend to return to the question in a future piece.

Index Abus de droit 306 Agency contracts Termination 314–316 Astreinte 300, 305 Autonomy of the will theory, or autonomie de la volonté 303–304 Beatson, Mr Justice 18, 33 Birks, Peter 8, 18–19, 28, 47, 65, 73–74, 78, 81, 89, 107, 185–198, 202, 210–211, 226–227, 232–233, 235–238, 245–246, 248–252 Birksian grid 186–187, 194–195, 198, 201 British Association of Canadian Studies Legal Studies Group 1 Burrows, Andrew 204, 209 Change of position, defence of 30, 56–57, 75, 110, 117, 197 Choice of law Putative law of contract 155–181 Restitutionary aftermath of void contract 155, 170–181 Void contracts 155–156, 181 Classication of claims As an analytical tool 185, 187, 212 By analogy to zoology 186, 188 By convention 214, 216–217 By justicatory principle 214–217

By normative type 227 By remedy 214, 217–218 Common Frame of Reference 4, 5 n. 14, 281, 311, 337 Commercial Agents 312–337 Compensation 4, 11, 311–315, 317–325, 328–337 External guidance 320–323 Indemnity 4, 11, 311–327 Termination of agency relationship 314–316 By expiry 314 By frustration 314, 333 By notice 314–315 For breach 315 Commercial Agents (Council Directive) Regulations 1993 312–313 Conict of Laws Aftermath of void contracts 170–181 Forum non conveniens 166 Lex fori 162, 164–170, 177–181 Lex locus transactionis 162–164 Contract Anticipatory breach of 266 Breach of 18, 20–21, 25, 107, 120, 136, 145–146, 149, 152, 189, 191, 196, 226, 255–257, 269, 273, 278, 302, 305–306, 316, 317–318, 322, 330, 332–333, 335

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Index

Contingency 20, 291 Damages – see Damages Formation 16 Illegal 83, 178 Non performance or inexécution: see Breach of contract above Penalty clauses 305 Damages Aggravated 148, 256–257, 261–263, 272, 276 Cost of cure 189, 293 n. 64 Distress – see Distress Damages Intangible loss, for 256, 274 Loss of reputation, for 255 Punitive or exemplary 6, 11, 133, 139, 146–149, 151, 256–257, 262 Reinstatement 293 n. 64 Debt 36–37, 41, 101, 105, 135, 135 n. 8, 136–138, 178, 199–200, 202–203, 218, 245 Distress Damages 255–278 Attributable to manner of breach 260–262 Attributable to fact of breach alone 263–269 Consequent on direct physical loss 269 Employment disputes 260–262 ‘Objects’ exception 256, 260, 263–268 Quantication 276 Duress 16, 18, 172, 235 Dworkin, Ronald 192–195, 198 Efcient breach, doctrine of 97, 97 n. 42, 98, 98 n. 45, 107, 259, 305 Enrichment 24–25, 34–36, 38, 208–209, 211, 222, 227, 324, 337 Market value 209 Objective value 208 Subjective devaluation 208, 210–211 Equitable severance 46 Exécution en nature 292–294, 299, 300 n. 88 Failure of consideration 117, 198

19–20, 33–35,

Fiduciary duty, breach of 21, 25, 47, 87–108 Canadian law 87 Equity 90–92, 96, 98, 101, 103–104 Relationship with contract law 93–99, 103, 107–108 Relationship with unjust enrichment 89, 93, 99, 100–105, 107–108 Forfeiture 16, 20 Free acceptance 35, 208 Frustration 5–6, 16, 109–132, 210, 223, 314–315, 333–334 Contract for the sale of land 123 Money paid in advance 122–123 Report of the British Columbia Law Reform Commission 112–119, 132 Services 123–127 German law of restitution 209 Good faith Contractual 94, 116 Utmost good faith see Insurance Harmonisation proposals for European private law 5, 10 Legitimacy of the EC’s involvement in contract law 282 Hedley, Steve 186–192, 195–210 Illegality 18, 37, 42, 83 Implied Contract 172, 186, 199–211, 218 Implied Terms 20, 43, 119–120, 130–131, 139, 141, 207, 214, 260, 262 Injunction 293, 297, 300, 307 Mandatory 293 Insurance 6, 117–118, 133–153 Utmost good faith 143 Jaffey, Peter

150, 152, 187, 201

Knowing receipt

35

Manseld, Lord 8, 16, 19, 101, 135, 138 Misrepresentation 16, 243 n. 79, 244, 252 Money paid in advance 113 n. 22

Index Mistake 8, 16, 18, 32, 34–35, 44, 46, 51–59, 61–85, 162, 171–172, 191, 198, 202–203, 249 As to supposed liability 56, 66 As to terms of contract 63 In equity 54, 63–64, 79, 81 Of fact 52, 54, 56, 68–69, 72, 75–78, 80–82, 84–85 Of identity 52 n. 5 Of law 8, 37 n. 60, 61–62 Bar 68–69, 73–76, 76 n. 90, 79, 83–84 Exceptions to bar 68, 82–84 Negotiorum gestio

210–211

Pacta sunt servanda 102 n. 59, 301 Part performance 16, 113, 119, 126 Passing On, Defence of 33 Principles of European Contract Law (PECL) 284–285 Public Policy 21, 38, 44, 57, 70, 77–78, 149, 177–180, 247, 251 Quantum meruit 32, 47, 123–126, 128–129, 209 Québec 3, 10–11, 35 n. 47, 67 n. 37, 69, 69 n. 46, 286 n. 30, 293, 293 n. 63, n. 65, 295, 295 n. 68, 297, 298, 298 n. 79, 299, 303, 306–307 Rectication 16, 63 n. 10 Relationship of law and equity 47 Restitution see Unjust enrichment Roman Law 10, 11–19, 100–101 causa data causa non secuta 19–20 Samuel, Geoffrey 185–195, 210 Special contracts (contrats nommés) 290 Specic performance 63 n. 10, 287, 292 Civil law 281, 287, 291, 293–294 n. 67a, 295, 297, 299, 301, 303, 305–309, 317, 322

341 Common law 281, 287, 290–292, 292 nn. 60–61, 293, 293 n. 62, 294, 294 n. 67a, 295–297, 297 n. 78, 298, 299 n. 81, 301–303, 305–309, 309 n. 126a Problem of supervision 307

Taxonomy 2, 9, 103, 185–188, 190–195, 204 Trespass to Land 25 ubi jus ibi remedium 288 ubi remedium, ibi ius 288 Unconscionability 6, 16 Undue inuence 16, 18, 198, 204, 231–252 Actual 234–235 Presumed 231–233, 235–248, 250–253 United States 133, 140 Inuence of 5, 10 Uniform Law Conference on Commercial Law Harmonisation in Canada 286 Unjust enrichment 1–2, 5–11, 15–17, 21, 23–49, 51–53, 55–59, 61–62, 65, 68–72, 74–75, 79, 87, 89, 93, 99–108, 110, 112, 170–181, 185–228, 279, 323–325, 330, 336–337 Absence of basis 8–9, 11, 66–68, 71–72, 79, 191 Absence of juristic reason 8, 36, 38–39, 44, 48, 57, 67 Change of position 27 n. 15, 30, 56, 75, 110, 117, 197 History of 100 Unjust factor 24, 27–28, 34–37, 44, 48, 57–58, 62, 66–67, 71–72, 75, 79–80, 191 Unjustied enrichment: see Unjust enrichment Utilitarian-based theory of contract law 301