Unjust enrichment

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Unjust enrichment is a legal term in English law, and in several other jurisdictions that inherited the English common-law legal system, denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing.

Contents 1 Example 2 Determination of Liability 2.1 Was the defendant enriched? 2.2 Was the enrichment at the expense of the claimant? 2.3 Was the enrichment unjust? 2.4 Does the defendant have a defense? 2.5 What remedies are available to the claimant? 3 United States

[edit] Example

A typical example of a claim based on unjust enrichment is that of payment by mistake. Imagine that customer B is accidentally given $10 too much change by shopkeeper A. B does not notice the mistake. There is no way that B can be accused of any wrongdoing. Nonetheless, the law imposes an obligation on B to repay $10 to A. This is because B has been unjustly enriched by $10 by A’s payment. Unjust enrichment, if proved, always triggers an obligation to make restitution. It never triggers an obligation to pay compensation because such an obligation might leave the defendant, who is normally entirely innocent, bankrupt.

[edit] Determination of Liability

Liability under the principle of unjust enrichment is wholly independent of liability for wrongdoing. Claims in unjust enrichment do not depend upon proof of any wrong. Having said that, it is possible that on a single set of facts a claim based on unjust enrichment and a claim based on a wrong may both be available. A claim based on unjust enrichment always results in an obligation to make restitution. A claim based on a wrong always results in an obligation to make compensation, but may additionally result in an obligation to make restitution. For discussion of restitution for wrongs, see the page on restitution.

It is generally accepted that a claim based on unjust enrichment can be submitted to five stages of analysis. These can be summarised in the form of the following questions:

1. Was the defendant enriched?
2. Was the enrichment at the expense of the claimant?
3. Was the enrichment unjust?
4. Does the defendant have a defence?
5. What remedies are available to the claimant?

[edit] Was the defendant enriched?

Sometimes the answer to this question will be obvious. Normally, direct monetary enrichment poses no serious problems. In the example above, where shopkeeper A gave customer B $10 too much change by mistake, it is obvious that B has been enriched by $10.

However, the situation is much more difficult when the benefit the defendant received was something other than money. This is because it is often difficult to prove how much, if anything, a non-money benefit is worth to the defendant. Imagine a new case. B’s car is in need of repair. Believing the car to be his own, A carries out repairs on the car. The repairs would have cost $300 if B had gone into the market to employ a mechanic to perform them. A later discovers that the car belongs to B. Does A have a claim against B based on unjust enrichment? The answer seems to be that he does not. Even though B has had the benefit of $300 worth of services, we cannot be certain that B was willing to pay for repairs to the car at all. We cannot hold that B is liable to pay $300 to A because that would leave B in an important sense worse off than he was at the beginning. He would have been forced to pay for repairs he did not want and had no opportunity to reject. The position would be different if we had any proof that B would have been willing to pay for the repairs. Let us assume now that B had already booked a mechanic to do the repairs for a cut-price of $200. Now A is entitled to a claim against B, but for $200 only. Remember that the value of the claim is measured by B’s gain and not by A’s loss. We cannot value B’s gain any higher than $200 because we have no proof that he was willing to pay any more than that.

[edit] Was the enrichment at the expense of the claimant?

This requirement is usually not problematic, provided that the defendant’s enrichment is received directly from the claimant. In all the examples discussed so far in this section B’s enrichment has clearly been at A’s expense. In the shopkeeper example A is $10 worse off because of the overpayment. In the car repair example A has provided valuable services for no payment. In both cases it is fairly clear that there is some correlation between B’s gain and A’s loss. This is particularly clear in cases involving money but holds true in non-money cases as well.

The difficulty arises when a third party, C, is interposed between A and B. This new problem is a particularly difficult one. It will not be resolved here, but three examples of the problem itself will be given.

First, suppose that C owes A $100. C is on his way to pay A the money when it falls out of his pocket. It is picked up by B. C does not now have enough money to pay A. Does A have a claim based on unjust enrichment against B in respect of the $100?

Secondly, suppose that A has an account with bank C. C pays $100 to B, mistakenly believing that A has instructed it to do so, and debits A’s account accordingly. C goes into liquidation. Does A have a claim against B to recover the $100?

Thirdly, suppose that A sells a painting to C very cheaply, mistakenly believing C to be his brother. C knows that A has made a mistake and that he will soon be asked to return the painting. In an attempt to make a profit, he sells the painting on to B. The sale is at a low price because B knows that the painting does not really belong to C. Can A recover the painting or its value from B in an action based on unjust enrichment?

[edit] Was the enrichment unjust?

There are two established approaches to this issue. Traditionally, common law systems such as those of England, the US and Australia have proceeded on the basis of what may be termed the ‘unjust factor’ approach. Traditionally, civil law systems such as those of France and Germany have proceeded on the basis of what may be termed the ‘absence of basis’ approach. More recently, many common law systems have showed signs of a possible move towards the ‘absence of basis’ approach (see for example the law of North Dakota in the section on the United States below). Both approaches will be discussed.

The ‘unjust factors’ approach requires the claimant to point to one of a number of factors recognised by the law as rendering the defendant’s enrichment unjust. English law clearly recognises at least the following unjust factors:

1. Mistake of fact
2. Mistake of law
3. Duress
4. Undue influence
5. Total failure of consideration
6. Miscellaneous policy-based unjust factors such as ‘withdrawal within the locus poenitentiae’

It is at least arguable that English law also recognises the following unjust factors, but some controversy surrounds each:

1. Ignorance/powerlessness
2. Unconscionability
3. Partial failure of consideration
4. Absence of consideration

‘Absence of consideration’ is particularly controversial because the cases that support its existence as an unjust factor can also be used to support the view that English law has begun to favour the ‘absence of basis’ approach (see next paragraph).

The ‘absence of basis’ approach does not deal in individual unjust factors. Instead it seeks to identify enrichments with no legitimate explanatory basis. Imagine that A contracts with B that A will pay $150 up front for B to clean his house. A pays the money. B’s enrichment has a legitimate explanatory basis – he was paid under a valid contract. However, let us now change the example and assume that the contract was in fact void. This is discovered after A has paid the money but before B cleans the house. B’s enrichment no longer has a legitimate explanatory basis so B must repay the $150 to A.

Notice that in the example just given, exactly the same conclusion would be reached using the ‘unjust factors’ approach. Under that approach, A would not be able to point to an unjust factor provided that the contract was valid, but could point to the unjust factor of total failure of consideration once we assume that it was void. In the vast majority of cases, a properly developed ‘unjust factors’ approach and a properly developed ‘absence of basis’ approach will reach the same result.

[edit] Does the defendant have a defense?

There are a number of defences available to claims in unjust enrichment. Defences may be complete, in which case they defeat the whole claim, or partial, in which case they merely reduce the value of the claim. The most important defences to claims in unjust enrichment are:

1. Change of position
2. Agency/ministerial receipt
3. Bona fide purchase for value without notice (note that this is not available to defendants who were enriched directly from the claimant – see below)
4. Counter-restitution
5. Illegality

A small amount will be said on each of the above defences, and an example of each will be given.

(1) Change of position

Since the focus of unjust enrichment is on the defendant’s gain, he can reduce the value of the claim against him if he can show that he has changed his position in good faith in reliance on being entitled to keep the enrichment. Change of position is fundamentally a partial defence, although it can be a complete defence if the amount of the defendant’s disenrichment matches or exceeds the initial value of the claim against him.

Let us return to the shopkeeper example used above (in the section entitled ‘Introduction’). B is accidentally given $10 too much change by shopkeeper A. B does not notice the mistake. At this point we alter the example slightly, and imagine that B later discovers that he has $10 more than he thought he had. He does not realise where the additional $10 came from. Pleased at his apparent good fortune, B decides to buy a bottle of wine for $8 that he would not otherwise have bought. He drinks the wine. Now A brings his claim for restitution of the $10. B has a partial defence of change of position because he spent money he would not otherwise have spent in reliance on a genuine belief that he was entitled to the $10. The value of A’s claim is reduced to $2.

(2) Agency/ministerial receipt

This defence may be seen as a species of change of position. If the defendant can show that he received the enrichment as an agent for another and that he paid the enrichment over to that other without notice of the claimant’s claim then he will not be liable.

B is C’s secretary. A comes into C’s office, mistakenly believing that he owes C $200. He gives $200 to B to give to C, in payment of the debt. If B pays the $200 over to C before he learns of A’s mistake then he has a defence against A’s claim against him.

(3) Bona fide purchase for value without notice

This defence is available only to parties who receive the claimant’s property indirectly, via a third party. ‘Bona fide’ means ‘good faith’ (in latin). ‘For value’ indicates that the defence is only available if the defendant gave something to the third party in return for the property. ‘Without notice’ indicates that the defence is not available if the defendant knew or should have known of the claimant’s title to the property when he purchased the property from the third party.

Recall the example of the painting in the Section 2 above. In that example it is explicitly mentioned that B knows that the painting does not really belong to C. The reason for making that clear was that if B had been unaware of A’s title he would have been able to assert a defence of bona fide purchase for value without notice.

(4) Counter-restitution

If the claimant’s claim would leave the claimant unjustly enriched at the expense of the defendant, the defendant can reduce the value of the claim against him accordingly.

Imagine that A employs B to build an extension on his house. The contract provides for A to pay B $1000 up front. The contract is to be terminable by A if B fails to keep to a certain schedule. B does some work, worth $50, but quickly falls behind schedule. A terminates the contract and brings a claim for restitution of the $1000. However, if B repays $1000 to A, A will be left unjustly enriched at B’s expense. Specifically, he will have rendered $50 of services for nothing. B could bring a separate restitutionary claim against A seeking to recover the reasonable value of the work i.e. $50. However, in order to avoid this rigmarole, the law allows B to invoke the defence of counter-restitution in the original action. The defence will allow B to reduce the value of the claim against him to $950.

(5) Illegality

If the claimant needs to rely on evidence of his own illegal acts to show that he has a claim against the defendant, the court may refuse to help him. This area of law is complicated and controversial but the above proposition is generally accurate.

A is in financial trouble and wishes to protect his boat from his creditors. With this in mind, he agrees with B that A will transfer the boat to B to keep it from the creditors and B we will retransfer the boat to A when the financial difficulties are over. A transfers the boat to B. A is declared bankrupt and his creditors do not get their hands on the boat. A year or so later, A asks B to give him the boat back and B refuses. B is unjustly enriched at A’s expense but, nonetheless, the court will not listen to A’s claim, which would have to rely on evidence of the agreement’s fraudulent purpose.

[edit] What remedies are available to the claimant?

It is necessary to distinguish personal remedies from proprietary remedies. A personal remedy asserts that the defendant must pay the claimant a sum of money. By contrast, a proprietary remedy asserts that some property in the defendant’s possession belongs to the claimant, either at common law or in equity. There are several arguable examples in the English case law of the courts giving a proprietary remedy in an unjust enrichment claim. However, some commentators maintain that, in English law, unjust enrichment only ever triggers a personal remedy.

There are several reasons why it may be important for the claimant to seek a proprietary rather than a personal remedy. The most obvious is that showing that one is entitled to a proprietary interest in some property means that one need not compete with the defendant’s unsecured creditors in the event of his insolvency. It is also generally accepted, although with little justification, that a claimant who is entitled to a personal remedy only will be restricted to simple interest, while a claimant who is entitled to a proprietary remedy can get compound interest. The availability or non-availability of a proprietary remedy may also have consequences for limitation periods and for the conflict of laws.

English law gives effect to restitutionary proprietary interests (assuming that it does at all) through a number of devices. One of these devices will be discussed and another two will be mentioned briefly.

The most important battleground in this controversial area of law is that of resulting trusts. One view, whose most notable proponent is William Swadling, holds that resulting trusts arise either automatically or in response to a presumed intention (on the part of the transferor) to create them. Either way, they do not arise in response to unjust enrichment. The opposing view, whose principal proponents have been Peter Birks and Robert Chambers, argues the contrary, that resulting trusts arise in response to unjust enrichment. It is possible to cite English cases in support of both views. There is a good deal of discussion of presumptions in the cases, which might be thought to lend particular support to the Swadling view. However, Birks and Chambers explain that discussion by suggesting that the presumption in question is not a presumption of intention to create a trust but a presumption of lack of intention to benefit the recipient (or to make the recipient an express trustee for a third party).

Most of the cases that are discussed in this context do not provide clear support for one view or the other. Three notable exceptions are Chase Manhattan Bank v Israel-British Bank [1980] and Air Jamaica v Charlton [2001] (which lend clear support to the Birks/Chambers view) on the one hand, and Westdeutsche Landesbank Girozentrale v Islington LBC [1996] (which lends clear support to the Swadling view) on the other.

The second area of law to mention is that of rescission. There are several examples in the English case law of rescission of a contract revesting a proprietary interest in the claimant.

Finally, we have the law of tracing into substitutes. Huge controversy surrounds the question whether rights in substitute property arise in response to unjust enrichment. In the Fosckett v McKeown judgment the House of Lords decided that tracing was not simply a response to a cause of action of unjust enrichment, and that tracing into substitutes was merely the identification of trust property. The court referred to tracing into substitutes as a 'vindication of property rights' as distinct from a claim for unjust enrichment.

[edit] United States

The North Dakota Supreme Court has ruled that five elements must be established to prove unjust enrichment [1]:

1. An enrichment
2. An impoverishment
3. A connection between enrichment and the impoverishment
4. Absence of a justification for the enrichment and impoverishment
5. An absence of a remedy provided by the law

In Massachusetts, there are some decisions denying recovery in restitution by the breaching party although this is not generally the rule in the United States.

Here are some examples:

B contracts with T to provide a year's worth of labor at a specific price P. T is to pay B for his labor at the end of the year. After 9.5 months B decides to quit the job. B sues T and recovers the fair market value of the labor he performed for T during those 9.5 months. Note that in this instance, because B is in breach of his contract with T, B cannot recover more than the contract rate for his labor. The non-breaching party is protected from paying more than the contract rate for labor. The supporting reasoning is that it would be unfair to make the party who has lived up to his end of the agreement pay more than he agreed to in the first place. However, the breaching party is afforded no such protection.

Suppose B is a building contractor who has been awarded a contract to build a skyscraper. B hires A to handle all necessary steel erection. The contract calls for B to furnish the cranes A needs to lift the beams into position. B does not furnish these cranes to A. At first, A performs and hires cranes at his own expense but partway through the contract A stops and refuses to go further on account of B's breach. A sues B and recovers the fair market value of the services he has rendered to B thus far. As the non-breaching party, A is entitled to the fair market value of his services (what it would cost one in B's position to hire one in A's position to perform the services A has rendered to B at the time and place A rendered such services to B) even if it exceeds the contract price for such services.

Not all actions in restitution involve contracts. However, whenever one party confers a material benefit upon another with the reasonable expectation he will be compensated for doing so, the party conferring the benefit is entitled to restitution.