MACDONALD entered into a contract with Oakwood Residential Limited (“Oakwood”) to carry out building work on land owned by Mr. and Mrs. Costello (“the Costellos”). The Costellos also owned Oakwood and were the directors of that company. MacDonald was not paid for his work so sued Oakwood for breach of contract, and the Costellos in unjust enrichment. Both claims succeeded in the Bournemouth County Court; Recorder Abbott held that the Costellos and Oakwood were jointly and severally liable to pay the money due to MacDonald. The Costellos successfully appealed: Costello v MacDonald [2011] EWCA Civ 930, [2011] 3 W.L.R. 1341. No claim in unjust enrichment could succeed on such facts.
Although the Costellos were enriched by the work done by MacDonald, and in a general sense it might be considered unjust that the Costellos not pay for their benefit, the Court of Appeal was absolutely right to overturn the decision of the lower court. Etherton L.J., giving the only reasoned speech, held that allowing a claim in unjust enrichment would undermine the contracts in place and “the way in which the parties chose to allocate the risks involved in the transaction” (at [21]). This is a fundamental point: unjust enrichment should not be allowed to undermine the primacy of contract. The parties allocated the risks involved in the transaction through voluntary agreements. Unjust enrichment should not interfere to distribute those risks differently, and allow MacDonald to “leapfrog” its contract with Oakwood. Moreover, Etherton L.J. thought that there was a “perfectly straightforward and standard way” for MacDonald to limit its exposure to non-payment from Oakwood, and that was to take guarantees from the Costellos (at [32]). MacDonald failed to obtain such contractual protection. By not obtaining guarantees, MacDonald might be considered to be taking the risk that it would be unable to bring a claim against the Costellos – either in contract, or in unjust enrichment.
The result in Costello is unsurprising. It clearly adopts the approach of the House of Lords in Pan Ocean Shipping Co. Ltd. v Creditcorp Ltd. (The Trident Beauty) [1994] 1 W.L.R. 161 and, more recently, the High Court of Australia in Lumbers v W Cook Builders Pty. Ltd. (in liquidation) [2008] HCA 27. Admittedly, in Costello the defendant and the third party who had entered into the contract were very closely linked; Oakwood was used by the Costellos purely for tax reasons. It is therefore, perhaps, understandable why the first instance judge looked “to the realities” in finding that the Costellos were unjustly enriched. But the Court of Appeal was correct to reject this approach. There was no good reason to pierce the corporate veil: the Costellos deliberately used Oakwood for the transaction, and MacDonald knew this, thereby assuming the risks that flowed from the transaction being structured as it was. Etherton L.J. usefully identified the “general policy of refusing restitutionary relief for unjust enrichment against a defendant who has benefited from the plaintiff's services rendered pursuant to a contract to which the defendant was not a party” (at [30]).
Furthermore, protecting the parties' allocation of risk is not the only justification for rejecting a claim in unjust enrichment in these three-party cases. Although the point was not argued before the Court of Appeal, Etherton L.J. was right to question whether the claim could succeed given that the Costellos were only indirectly enriched by MacDonald. The Costellos' benefit directly flowed from Oakwood's allowing them the benefit of the contract. For a claim in unjust enrichment to succeed, the enrichment should be received directly at the claimant's expense.
Although the primary reasoning in Costello is clear and satisfactory, the unjust enrichment claim is problematic for another reason: the relevant unjust factor is difficult to discern. The most likely candidate might be total failure of consideration. But a requirement of this unjust factor is that the defendant knew that the claimant would expect the defendant to pay for the benefit (see Virgo, The Principles of the Law of Restitution (2nd edn. 2006), p. 306). Yet the Costellos would not have expected anything of the sort. The very reason why Oakwood rather than the Costellos entered into the contract with MacDonald was that the Costellos personally would not have to pay anything to MacDonald.
Etherton L.J. used the language of unconscionability to explain why the claim in unjust enrichment had proceeded so far. His Lordship cited cases on proprietary estoppel, as well as the decision of the Privy Council in Blue Haven Enterprises Ltd. v Tully and Robinson [2006] UKPC 17, in which Lord Scott thought that the claim in unjust enrichment hinged upon whether the circumstances in which the defendant was enriched placed him under an equitable obligation to compensate the claimant. The Court of Appeal in Costello did not need to endorse this approach or decide upon this point, but it is suggested that such reasoning is unsatisfactory. Unjust enrichment is a common law cause of action. Its development has hinged upon the identification of various unjust factors, of which unconscionability is not one. It would be better to focus upon the established grounds of restitution, such as mistake and failure of consideration, rather than mire this area of the law in the uncertainty inherent in unconscionability.
One final quibble. Etherton L.J. referred to “compensation for unjust enrichment” (at [31]), but to describe the award pursuant to unjust enrichment as compensatory is unhelpful. Unjust enrichment is not concerned with the claimant's losses but the defendant's gain. As a gain-based remedy – calculated by assessing the value of the defendant's enrichment – it should be characterised as restitutionary, not compensatory. Terminological clarity is lost if the award made for unjust enrichment is described as compensatory. However, the claimant's losses might still be relevant in limiting the amount of a restitutionary award to reverse unjust enrichment if there should be correspondence between the defendant's gain and the claimant's loss (see McInnes (1998) 57 C.L.J. 472).
Regardless of the language used, the thrust of the reasoning in Costello is undoubtedly right. Claimants who enter into contracts to benefit third parties should not later be able to sue those third parties where they cannot do so under any contract. Claimants must instead accept that their remedy lies in contract against the contract-breaker. Unjust enrichment must not usurp the contractual allocation of risk.
