A party that carries out work for the benefit of another party will usually do so because they have entered into a contract that specifies the services required and the payments expected in exchange. However, a contractor that starts work prematurely, before concluding a contract for the work, may have a claim under the law of restitution. Is it possible to have separate claims for the same work – in contract and restitution?
The issue in Macdonald v Costello [2011] EWCA Civ 930; [2011] PLSCS 231 was whether a builder could pursue a claim for unjust enrichment – under the law of restitution – against landowners who had benefitted from work executed by the builder in accordance with a contract between the builder and a third party.
The builder claimed that the landowners had benefited from the construction of a valuable housing development on their land and wanted to avoid payment by sheltering behind the corporate identity of the party that had contracted for the construction of the housing, which they owned and controlled. The Court of Appeal rejected the builder’s claim because it could see no basis for holding the landowners liable for the breach of contract by the company.
The claim failed because to hold otherwise would have undermined the contractual autonomy of parties that had structured the transaction with their eyes wide open. Responsibility for payment rested with the company that entered into the construction contract and it would cause serious difficulties should the courts expand the law of restitution in the way the builder was suggesting. This would radically alter the bargain the parties had struck and the rights and obligations that they had assumed. It would also alter the usual consequences of the company’s insolvency, which was one of the risks that the builder had assumed. To allow the builder to pursue a direct claim against the landowners would improve the builder’s position as against all the other unsecured creditors of the company.
The court was also concerned that the existence of separate remedies in contract and restitution might produce anomalous results. Contractual damages are calculated by reference to the contract price and terms. Compensation for unjust enrichment in respect of services is calculated by reference to the value of the services (generally at the date of their receipt), which may or may not be the same as the contractual rate. Consequently, a risk arose that a court might have to award compensation in restitution at a higher rate than the contractual rate, which would enable a claimant to improve on a bad bargain.
The judgment confirms the courts’ preference for upholding contractual arrangements and explains the policy reasons for so doing; to provide certainty and to limit disputes and litigation. It also highlights the importance of investigating the financial status of counterparties before contracting with them – and, where necessary, of extracting suitable performance guarantees or some alternative form of security that can be called upon, if needed, in the event of any default by the counterparty or its insolvency.
Allyson Colby is a property law consultant
