NOW that the law of unjust enrichment is firmly entrenched, judicial attention can focus on issues relating to the law's outer limits. One of these issues concerns whether a claimant can recover in unjust enrichment where he acted in his own interest rather than to benefit the defendant, such that any benefit actually obtained by the defendant can be characterised as ‘incidental’. This was considered for the first time by the Court of Appeal in TFL Management Ltd. v Lloyds Bank plc [2013] EWCA Civ 1415.
Explora Group Ltd. had spent £550,000 on legal fees in a claim to recover a debt. The claim failed in the Court of Appeal which, having construed an assignment agreement, held that the debt was actually owed to the defendant bank. Subsequently the defendant entered into a settlement with the debtor, relying on this judgment. Explora's rights having been assigned to the claimant, it sued the defendant in unjust enrichment on the ground that Explora had incurred legal costs which conferred a valuable benefit on the defendant as a result of Explora's mistaken belief that it had a right to be paid.
Beatson L.J. recognised that there were various reasons for scepticism about the validity of such a claim. But, since this was an appeal from a summary judgment that the case should not proceed to trial, the court was only concerned with whether the claim had any prospect of success on the assumption that the facts as pleaded could be proved. By a majority the appeal was allowed. In reaching this decision two distinct arguments were considered.
The first related to whether the defendant's enrichment was incidental such that it could not found a claim, as the trial judge had concluded. Although no previous English authority had recognised such a principle, he was influenced by Goff and Jones: The Law of Unjust Enrichment (8th edition, 2011), para. 4-52 which tentatively recognises the principle, citing Ruabon Steamship Company Ltd. v London Assurance Company Ltd. [1900] A.C. 6, 12 (Lord Halsbury LC) and Becarra and Page v Close Bros 25th June 1999 in support. But Floyd L.J. considered that neither decision compelled the recognition of such a limiting principle.
Counsel for the Bank had formulated the ‘incidental benefit’ principle as applying where the claimant had embarked on a course of action with an intended consequence in mind which was pursued in his self-interest and a benefit accrued to the defendant which was not identical to the consequence intended by the claimant. It was argued that this was satisfied on the facts because Explora had commenced proceedings to recover the debt for itself, but it was held that it was owed to the Bank. However, as Beatson L.J. recognised, such a formulation might exclude cases where restitution has been previously awarded, including the core case of a liability mistake. For where the claimant has paid money to the defendant in the mistaken belief that he owed the money, he would be acting in his own interest to discharge the debt, but the defendant's benefit will not be identical, since it will simply be the receipt of money without the liability being discharged.
Since the court was not compelled to recognise the ‘incidental benefit’ limitation as a matter of authority, and because it was difficult to formulate such a principle, particularly in summary proceedings, and there was no clear conceptual basis for denying restitution where the claimant had acted selfishly, the court refused to recognise the principle. But it did not follow that ‘incidental benefit’ was irrelevant to the unjust enrichment claim. Floyd L.J. considered that it was an “umbrella term” which was potentially applicable to different elements of the unjust enrichment formula.
The court consequently considered the second argument, namely whether there was any prospect of the claimant establishing that the unjust enrichment formula might be satisfied at trial. Whilst Sir Stanley Burnton was adamant that there was no justiciable cause of action, the majority recognised that the claim might succeed on the pleaded facts.
The first question was whether the Bank had been enriched. There was significant confusion in the pleadings as to what the relevant enrichment might have been. The Bank was not enriched by the judgment. All that Explora had procured was a declaration that the Bank had a right to the debt under the relevant agreement. This right was not conferred by the claimant's actions; it already existed under the agreement, with the Court simply construing what the parties had agreed. Neither could the relevant enrichment be the value of the debt paid to the Bank, because it had a right to receive this under the agreement, constituting a legal basis for the payment. The majority considered that the Bank had been enriched by the claimant commencing proceedings, in that the Bank had been saved legal expenses which it would otherwise have had to incur to recover payment. But, as Sir Stanley Burnton recognised, this did not enrich the Bank because, had it incurred this expense, it would presumably have been able to recover its costs from the debtor. Making the Bank liable for Explora's costs would have the effect of circumventing the court's costs jurisdiction. Explora, as the losing party, would not have been able to claim costs from the debtor but, through the application of the law of unjust enrichment, would be able to pass this loss on to the Bank, even though the Bank succeeded in recovering its debt. In such circumstances, the claimant's loss should lie where it falls. Despite this the majority concluded that it was arguable that the Bank might have been enriched because, even if it could have recovered its legal costs had it sued the debtor, it would still have borne other costs, particularly to receivers. This might be sufficient to establish the possibility of enrichment in summary proceedings, but the objective valuation of this enrichment would be much less than the legal costs borne by the claimant, significantly reducing the impact of the unjust enrichment claim.
The second question was whether the expense saved was obtained at Explora's expense. This was not obtained directly, because the direct recipients of the money expended by Explora were its legal advisers. Despite this, and relying on a broad interpretation of the principles recognised in Investment Trust Companies v HMRC [2012] EWHC 458 (Ch), Floyd L.J. considered that the claimant had a realistic prospect of establishing that the benefit was conferred indirectly at Explora's expense, because there was likely to be a sufficient causal connection between the expense incurred and the benefit received by the Bank.
The third question was whether the enrichment was unjust. The claimant relied on the ground of mistake since, but for Explora's mistaken belief that the debt was owed to it, litigation would not have been commenced. Whether mistake could be established depends on whether the risk-taking involved in litigation negates the mistake. This will turn on whether Explora considered that it was more probable than not that the money was owed to it by the debtor: Marine Trade SA v Pioneer Freight Futures Co Ltd. [2009] EWHC 2656 (Comm). Since Explora presumably only pursued the litigation because it believed that the debtor probably owed the money to it, mistake could be established at trial, so there was no reason to reject the claim on this ground in summary proceedings.
It follows, somewhat surprisingly, that the majority was correct to allow the appeal. Although it will be difficult to establish the claim at trial, with the Court of Appeal's refusal to recognise a limiting principle of ‘incidental benefit’ it is possible that the claimant will obtain restitution even though it had been acting selfishly and was acting in a way which was intended to be adverse to the interests of the Bank. Would such a result be acceptable?
In most cases where the claimant's primary intent was to improve his own position, unjust enrichment will not be established simply because such an intent will be inconsistent with the identification of a ground of restitution. For example, Floyd LJ referred to the hypothetical problem suggested by Birks in Unjust Enrichment (2nd ed., 2005), p. 158, where A spends money heating his ground floor flat and the heat rises benefiting B in the flat above, such that B does not need to put on her own heating. A will usually not be able to claim restitution from B, not because the enrichment is ‘incidental’ but because A will not have been mistaken. This problem caused Birks difficulty only because he sought to establish the injustice of enrichment with reference to the absence of a legal basis for the transfer of the benefit. Birks would have avoided restitutionary liability in such a case by treating the escaping heat as a gift. Such artifice can be avoided by focusing on the need to establish mistake.
But, as the pleaded facts of the TFL case indicate, there may be exceptional cases where a ground of restitution can be established despite the claimant acting selfishly. If the defendant cannot deny that any of the elements of the unjust enrichment formula have been established, should a defence be recognised to defeat the claim? Formulating an ‘incidental benefit’ defence lacks a clear conceptual basis for denying restitution; acting selfishly is insufficient. The real concern surely is that a claimant who has acted in a particular way, in circumstances where the very last thing that he wanted was for the defendant to be enriched, seeks restitution from the defendant who, as things turn out, is enriched. Recognising a defence in these limited circumstances would, at least, prevent the claimant from having both his cake and eating it. But that may not be an adequate reason to deny restitution, and is certainly not consistent with established defences. If so, restitution should be awarded despite the benefit being ‘incidental’.
