Archive for the ‘Unjust enrichment’ Category

Purchaser pays owner who enters into a second contract to sell to a third party

December 14, 2019

Introduction

In Mui So Bing v Wan Chi Sing ([2019] HKCA 1341) D1 and D2 orally agreed to sell property to P. The parties later entered into signed written agreements; these were not registered at the Land Registry.

P paid the entire purchase price in stages to D1 and D2. D1 and D2 then entered into signed written agreements to sell the same property to D3 and D4. D3 and D4 registered their agreements at the Land Registry.

At first instance, P’s claim to be entitled to the property as against D3 and D4 based on a presumed resulting trust failed. The facts did not bring the case within any category of resulting trust. There was no voluntary transfer by P nor did P provide any part of the purchase price at the time of D1 and D2’s acquisition.

P’s claim against D1 and D2 in unjust enrichment succeeded.

P appealed against the first instance decision seeking to rely instead on the common intention constructive trust or the vendor and purchaser constructive trust.

The common intention constructive trust

While a common intention constructive trust can arise in the commercial context, there was no such trust here. There was no basis for finding that D1 and D2 had agreed to hold the property on trust for P. They had agreed to sell the property to P ([25] Yuen JA).

Vendor and purchaser trust

The vendor and purchaser resulting trust only arises if specific performance is available ([27.3]). Since P had not argued for the existence of such a trust at trial, a number of facts relevant to whether specific performance would be awarded were not explored ([27.4]). It was too late for P to raise this argument on appeal.

Priority

In any event, the contract with D3 and D4 had priority over the contract with P. P had not registered and so D3 and D4 could rely on section 3(2) of the Land Registration Ordinance. Notice was irrelevant because D3 1nd D4 had duly registered ([28.4]).

Any unwritten equity that P may have had (though the Court of Appeal was clearly sceptical as to whether there was any) was subsumed by the written agreement between P and D1 / D2 ([28.3])

Importance of pleading the relevant legal consequence

The Court of Appeal was severely critical of P’s attempt to plead legal consequences (common intention constructive trust and vendor and purchaser constructive trust) for the first time on appeal:

 ‘As the court’s primary aim in exercising its powers is to secure the just resolution of disputes in accordance with the substantive rights of the parties, and to further these objectives by actively managing cases 35 , it seems to me to be high time that consideration should be given to requiring legal representatives to plead not only material facts, but also all the legal consequences to which those facts validly lead 36 , with the effect that the parties would be barred from contending different legal consequences on appeal.’ ([23.3] per Yuen JA).

Michael Lower

Contracts and illegality: Patel v Mirza

August 25, 2016

In Patel v Mirza ([2016] UKSC 42) the UK Supreme Court considered the law concerning the recovery of money paid under a contract to carry out an illegal activity where the illegal act is not performed. If the activity were not illegal, the party who has paid the money would be entitled to recover the sum paid as a claim in unjust enrichment. The question is whether the illegality should prevent the claimant from recovering the money or other property transferred to the other party to the failed contract. In the context of Hong Kong’s property law, these principles are relevant, for example, where ding rights are sold to developers and false declarations are made to the Government as part of the overall performance of the contract. Can property transferred to developers in pursuance of the illegality-tainted contract be recovered?

Until now, English law in this area has been based on the House of Lords decision in Tinsley v Milligan and Hong Kong’s courts have applied this framework. Under the Tinsley approach, the question is dealt with as a procedural matter. The plaintiff is treated as having substantive legal rights and the question of illegality is dealt with as a procedural issue. The plaintiff can succeed if he has no need to plead his own illegality. If the plaintiff has to plead his own illegality (to rebut a presumption of advancement for example) then the claim will fail. This is subject to the possibility of a locus poenitentiae; the plaintiff who has to plead his own illegality might still be able to succeed if he can show that he withdrew from the transaction before implementation. This approach to the treatment of sums paid under illegal contracts that are not performed has come in for severe criticism. The  judgments of the nine members of the UK Supreme Court in this case are a collective attempt to create a new framework for dealing with cases of this sort. While there was unanimity as to the outcome on the facts of the case, there was disagreement within the Supreme Court on some of the fundamentals of the approach to be taken in this area.

In Patel, P paid GBP620,000 to M. M was to use the money to bet on shares in RBS relying on M’s insider information concerning an anticipated UK Government announcement. The announcement was never made. P sought to recover the GBP 620,000 on the basis that M would be unjustly enriched if he were permitted to keep it once the contract had failed. The question was whether the courts would help P given the illegality of the contract which amounted to a conspiracy to commit the offence of insider dealing. The UK Supreme Court were unanimous in deciding that P was entitled to recover the money despite the illegality of the contract and despite the fact that he would need to explain the nature of the agreement in order to establish his claim.

 

Lord Toulson and the majority: enforce the contract where to do so would be appropriate as a matter of policy (the ‘range of factors’ test)

The majority of the Supreme Court expressed agreement with the ‘range of factors’ approach articulated by Lord Toulson. Under this approach, the court would carry out a balancing act when deciding on whether or not to enforce a contract where there was unlawful conduct in its formation, purpose or performance. In broad terms, the court would:

a) consider the underlying purpose of the prohibition which has been transgressed, b) consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and c) keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.’ ([101] Lord Toulson).

Lord Toulson did not think any greater detail than that would help but suggested that relevant factors to be borne in mind when reaching a judgment would include: ‘the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties’ respective culpability.’ (107) The reliance approach in Tinsley should no longer be followed ([110] Lord Toulson).

 

Lord Neuberger’s Rule

Lord Neuberger takes a much simpler approach. He begins by saying that the appeal concerns, ‘a claim for the return of money paid by the claimant to the defendant pursuant to a contract to carry out an illegal activity, and the illegal activity is not in the event proceeded with owing to matters beyond the control of either party.’ ([145]). He contends for a very simple rule to the effect that the plaintiff is entitled to the money paid under such a contract (‘the Rule’) ([146]). This would apply ‘in appropriate cases’ even if the contract has been wholly or partly performed ([167]) though credit might have to be given for any benefit that the plaintiff has received ([168]). Lord Toulson’s balancing approach could be useful in deciding whether or not the case was an appropriate case for the application of the Rule ([174).

 

Do not enforce illegal contracts but order restitution of benefits conferred under contracts that fail on the grounds of illegality

The approach of the remaining judges is that the illegal contract is not enforced but is unravelled. Lord Mance disagreed with the majority’s suggestion that there needed to be a significant revision of the law in this area. His approach is that the unlawful contract could be rescinded and the parties put into the position that they would have been in had the contract never been entered into ([197]). Rescission would be available even if the contract had been partially performed, but the court would make adjustments to reflect any benefits that the plaintiff had received ([198]).

Lord Sumption spoke in favour of the illegality defence and the reliance principle as the appropriate guide as to when the defence was available (while accepting that its formulation in Tinsley was open to criticism). Where a contract fails then benefits conferred by one party on the other are recoverable ([247]). Equally, where the contract fails on the grounds of its illegality then the parties should be put into the position that they would have been had it never been entered into ([250]). The contract in this case was affected by the illegality principle ([267]) but restitution of the money that P paid to M in accordance with it should be ordered ([268]).

Michael Lower

 

Subrogation to the unpaid vendor’s lien

November 26, 2015

In Bank of Cyprus UK Ltd v Menelaou ([2015] UKSC 66) PM and DM sold property which was subject to a charge in favour of Bank of Cyprus UK Ltd (‘the Bank’). They contracted to purchase a new house using the proceeds of sale. The Bank agreed to this on condition that they obtained a first charge over the new house. The purchase of the new house was in the name of PM and DM’s daughter (‘the daughter’). She knew nothing of the arrangement with the Bank or of its involvement. The purchase was completed without the creation of a valid charge in favour of the Bank. The Bank claimed to be entitled to be subrogated to the unpaid vendor’s lien in respect of the new house. The obstacle that it faced was that it could be argued that it was not the source of the funds used to pay for the purchase (the proceeds of sale of the old house had been used).

The Supreme Court was unanimous in finding that the Bank was subrogated to the unpaid vendor’s lien. The majority did so on the basis of unjust enrichment with equitable subrogation as the remedy. Lord Carnwath reached the conclusion on the more straightforward basis that the Bank was beneficially entitled to the proceeds of sale of the old house under a Quistclose trust and so was entitled to step into the shoes of the unpaid vendor. Lord Neuberger relied on unjust enrichment but expressed agreement with Lord Carnwath’s views.

An unjust enrichment claim requires four questions to be answered:

  1. has the defendant been enriched?
  2. was the enrichment at the claimant’s expense?
  3. was the enrichment unjust?
  4. are there any defences available to the defendant?

(Benedetti v Sawiris [2013] UKSC 50).

The daughter had been unjustly enriched at the bank’s expense. This was because ‘the value of the property to [the daughter] was considerably greater than it would have been but for the avoidance of the charge and the Bank was left without the security which was central to the whole arrangement.’ ([24] Lord Clarke). There was a sufficient causal link between the benefit to the daughter and the loss to the Bank ([27] Lord Clarke). Lord Neuberger commented that the daughter’s enrichment was unjust because she had received the house as a gift from her parents and that if she had been a bona fide purchaser for value without notice of the Bank’s rights then it may not have been possible to say that her enrichment was unjust ([70]). Lord Clarke thought that the fact that the daughter was a donee was relevant when considering whether any defences were available to the daughter.

Subrogation to the unpaid vendor’s lien was available as a remedy to reverse the daughter’s unjust enrichment ([49] Lord Clarke). Lord Neuberger thought that it would be ‘hard to identify a more appropriate remedy’ since subrogation would give the Bank a right similar to that which it should have had under the anticipated charge ([79]). Lord Neuberger stressed that the conclusion that the Bank should be subrogated to the unpaid Vendor’s lien needed to be supported by principle ([94]). He thought that the facts that the house could only have been acquired using funds that the Bank could have demanded, that the failure to grant a Charge was the result of the solicitors acting for the Bank and the daughter and that the use of the funds with the Bank’s agreement discharged the unpaid vendor’s lien ([95]).

Lord Neuberger pointed out that the subrogation claim would have been uncontroversial had the Bank insisted on receiving the proceeds of sale of the original house and then making a fresh loan. The fact that they agreed to allow the proceeds of sale to be retained by the solicitors and re-used for the acquisition by the daughter was ‘a small and practical change’. It would be pure formalism if this change were to defeat the Bank’s claim ([99]).

Lord Carnwath thought that the Bank’s subrogation claim could succeed ‘by a strict application of the traditional rules of subrogation, without any need to extend them beyond their traditional limits.’ ([107]). He thought that this was a case where equitable subrogation was available without any need for recourse to the law of unjust enrichment and that there was a distinction to be made between a claim to a property right (subrogation to a vendor’s lien) and one based on unjust enrichment ([108]). He was prepared to accept that subrogation might be an available remedy in an unjust enrichment case but he did not decide the case on the basis of unjust enrichment ([109] – [110]).

In Lord Carnwath’s view, the Bank had to establish that its money had been used towards the purchase price to allow it to be subrogated to the unpaid vendor’s lien ([128]). It must be possible to trace money belonging to the Bank into the money used to pay the purchase price; ‘a sufficient link could not be found in a looser test based on economic reality or simple causation’ ([132]). The Bank did have a sufficient interest in the funds used to pay the purchase price. The Quistclose principle could be applied; the solicitors acting for the daughter and the Bank held the proceeds of sale of the original property for the Bank but had the power to apply it to the purchase of the property on behalf of the daughter ([134] – [139]).  There was no difficulty ‘in finding the necessary “tracing link” between the Bank and the money used to purchase the new property.’

Michael Lower

 

 

Can performance of contract with A amount to an unjust enrichment of B?

August 3, 2012

In Costello v MacDonald & Co ([2011] EWCA Civ. 930 CA (Eng)) M entered into a building contract with O Ltd (controlled by C) to develop a site owned by C. O Ltd was not C’s agent. C retained the property and was receiving the rents. When O Ltd defaulted on its obligations, M obtained a judgment against O Ltd.  In addition, C was held liable in unjust enrichment for the value of M’s services at the contract rate. O Ltd did not pay the amount due to M under the judgment. C appealed against the unjust enrichment award.

C’s appeal was successful; unjust enrichment could not be used to undermine the contract between M and O Ltd:

‘[The unjust enrichment claim must fail because it would undermine the contractual arrangements between the parties, that is to say the contract between the respondents and Oakwood and the absence of any contract between the respondents and Mr and Mrs Costello. The general rule should be to uphold contractual arrangements by which parties have defined and allocated and, to that extent, restricted their mutual obligations, and, in so doing, have similarly allocated and circumscribed the consequences of non-performance. That general rule reflects a sound legal policy which acknowledges the parties’ autonomy to configure the legal relations between them and provides certainty, and so, limits disputes and litigation.’ ([23) (Etherton LJ).

M should have obtained a guarantee from C.

A second possible defence to the unjust enrichment claim was that the benefit to C was indirect. This was not argued and so Etherton LJ alluded to the possible defence without deciding on it. There is a hint that this too might have succeeded ([22]).

Proprietary estoppel: unconscionability is all: a representation is not always necessary but encouragement is

January 12, 2012

Blue Haven Enterprises Ltd v Tully ([2006] UKPC 17) was an unjust enrichment claim but the Privy Council stated that the relevant principles were the same as for a claim in proprietary estoppel. In 1985, T entered into a contract to sell to R land in Jamaica that was suitable for development as a coffee plantation. There was a dispute and T purported to terminate the contract. In 1988, she agreed to sell the land to Blue Haven and allowed Blue Haven into possession. R knew of the sale. In January 1989, R obtained a judgment effectively requiring T to complete her contract with him and preventing her from selling to anyone else. In 1989, R visited the land and informed Blue Haven of his right to the land. Nevertheless, Blue Haven spent a lot of money to develop the land as a coffee plantation. Subsequently, R obtained an order requiring Blue Haven to give possession of the land to him and he became the registered owner of the land. Blue Haven brought an action for breach of contract against T and for unjust enrichment against R; Blue Haven had paid for development work that R would have had to pay for. This judgment is concerned with the unjust enrichment claim. The Privy Council stated that the relevant principles were the same as proprietary estoppel although no proprietary claim was being asserted.

The claim failed because R had done nothing to encourage any kind of expenditure or mistaken belief by Blue Haven. Quite the reverse was true since R had told Blue Haven of his interest before the expenditure had been incurred.

Lord Scott pointed out that the relevant representation came from T and not from R but that this was not the factor that was fatal to Blue Haven’s claim. There can be circumstances where there is no representation but there is unconscionability:

‘Enrichment of A brought about by improvement to A’s property otherwise than pursuant to some representation, express or implied, by acquiescence or encouragement for which A is responsible would not usually entitle B to an equitable remedy. But the reason would be that A’s behaviour in refusing to pay for improvement s that he had not asked for or encouraged could not, without more, be described as unconscionable.’ (para. 24).

Failed contractual negotiations and proprietary estoppel after Cobbe

November 7, 2011

In A v B ([2008] EWCH 2687) B owned the only two issued shares in a company intended to run a care home business. B owned a care home which she transferred to the company. She agreed in principle that she would transfer one share to A once they had agreed a buy-in price. Negotiations to agree the buy-in price were lengthy and slow. A helped B with the senior management responsibilities of the business. They both clearly anticipated that they would finalise a price and that the shareholders’ agreement and other documents would be concluded. The company acquired three more properties with the funding entirely coming from or reliant on B. A and B fell out. A claimed to be entitled to one half of the shares in the company on the basis of proprietary estoppel.

The proprietary estoppel claim failed. A had no expectation of a claim to any property; her expectation was that the terms of the agreement would be finalised and incorporated in a sale and purchase agreement for the shares and a shareholders’ agreement. A knew that there were negotiations to be concluded and documents to be finalised; her expectation was contingent on the successful completion of negotiations (para. 189). Lord Scott in Cobbe stated that proprietary estoppel arises when the owner of the asset is estopped from pleading some fact or mixed question of law and fact that would defeat the claim. Here, however, the relevant facts (that agreement had not been reached and that no shares had been transferred to A) were well-known to A and there was nothing to estop B from relying on them (para. 198). A’s attempt to argue that the claim was to an interest in the business run by the company also failed. A knew that her interest depended on acquisition of shares in the company (para. 199). Nor was there any unconscionability on B’s part. Once she had decided to terminate negotiations she promptly informed A of this fact (para. 187). In the commercial context it is more likely that claimants relying on proprietary estoppel will have expected to enter into a formal agreement and failure to reach such an agreement will be damaging to a proprietary estoppel claim (paras. 200 – 202).

The attempt to argue for a contructive trust based on a Pallant v Morgan equity also failed. There was no clear agreement that imposed any kind of trust on the shares in the company. There was no sign that A had suffered any detriment or conferred any benefit on B in reliance on any agreement.

B had, however, provided services to the company for which she was entitled to compensation on a quantum meruit basis. Otherwise, the company would be unjustly enriched.

Ramsden v Dyson

May 4, 2011

Where; (i) A allows B to build on A’s land, (ii) B does so because of a mistaken belief that B has an interest in the land;  and (iii) A knows of B’s mistaken belief then A has a duty to correct the mistaken belief.

In Ramsden v Dyson ((1866) L.R. 1 H.L. 129, HL) R granted T a yearly tenancy. T then spent a lot of money to erect buildings on the land. R then gave notice to quit. T sought equitable relief on the basis that he relied on R’s agent’s assurances that he would be entitled to possession for as long as he paid his rent and that he could call on R for the grant of a formal 60 year tenancy (with a right to renewal) after that. The majority of the House of Lords refused relief. To paraphrase Lord Cranworth (at 141) where; (i) A allows B to build on A’s land, (ii) B does so because of a mistaken belief that B has an interest in the land;  and (iii) A knows of B’s mistaken belief then A has a duty to correct the mistaken belief. But T knew what his rights were and R had not encouraged or known of any other belief.

Lord Kingsdown dissented. He would have given some relief (perhaps either an interest in the land or compensation for the expenditure). This is a fascinating judgment arising from an effort by R’s agent (R owned much of Huddersfield) to create a localised system of Land law / conveyancing.