THE DEFENCE OF PASSING ON The identity and existence of a loss-based defence in the law of unjust enrichment is disputed. Widely known as ‘passing on’, but better identified as ‘disimpoverishment’, this defence has generated confusion and disagreement across and within England, Australia, Canada and the United States of America. This book seeks to address these problems in three ways. First, by providing a solution to the defence’s terminological problems and presenting a coherent picture of the current state of the law. Secondly, by examining whether a defendant’s unjust enrichment can be said to have come ‘at the expense of ’ a claimant when a third party has borne the cost of that enrichment. Put another way, whether awards of restitution are, or should be, restricted by the value of a claimant’s loss. And finally, by analyzing the reasons in favour of accepting or rejecting a loss-based defence in the law of unjust enrichment. Numerous scholarly textbooks and law journals have devoted space to these issues. This work, however, has tended to focus narrowly on either particular cases or sets of issues. This book seeks to address this deficiency by collating, and providing total coverage of, the controversies and questions pertaining to a loss-based defence in the law of unjust enrichment.This work will be essential reading for anyone interested in the law of restitution, and in its relationship with other areas of private law.
The Defence of Passing On
Michael Rush
OXFORD AND PORTLAND, OREGON 2006
Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail:
[email protected] Website: www.isbs.com
© Michael Rush 2006 Michael Rush has asserted his right under the Copyright, Designs and Patents Act 1988, to be identified as the author of this work. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any mean, without the prior permission of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation. Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing at the address below.
Hart Publishing, 16c Worcester Place, Oxford, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0) 1865 510710 E-mail:
[email protected] Website: http://www.hartpub.co.uk
British Library Cataloguing in Publication Data Data Available
ISBN-13: 978-1-84113-602-8 (hardback) ISBN-10: 1-84113-602-6 (hardback)
Typeset by Compuscript Ltd, Shannon Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall
Preface
In his preface to the first edition of The Law of Restitution, Professor Andrew Burrows described how the late Alfred Wainwright was happy, sorry and relieved after finishing his seven volume guide to hiking in the Lakes District. While such sentiments are apposite for anyone who completes a significant piece of writing, the hiking analogy is particularly befitting. This book is based on my doctoral thesis undertaken at the University of Oxford. My supervisor, Professor Burrows, was an invaluable guide. His incisive comments on innumerable and often incomprehensible drafts, masterful ability to reduce the complex to the comprehensible, and willingness to always give generously of his time, proved vital in the development and completion of the thesis. Moreover, his approach to legal scholarship did, and will continue to, exert a profound personal influence. Many others assisted on my journey. I owe them all a debt of gratitude. Dr James Edelman was of particular importance. Though little of what is contained in the book is formally attributed to him, his involvement critically affected its content and shape. Professor Mitchell McInnes and Mr Robert Stevens, my doctoral examiners, were also a source of encouragement and insight. The same is true of Professor Peter Birks and Mr Graham Virgo. This book contains, in one form or another, many ideas canvassed in, or arising from, our lengthy discussions. Neil Francey and Edward Archibald were also able to provide valuable information on Australian law. Professors Andrew Kull and Colleen Murphy were equally obliging in responding to various queries concerning American law. I am grateful to Albert Dinelli, Joseph Santamaria QC, Monica Chowdry and Professor Charles Mitchell for the time they spent reading and commenting on the manuscript. Professor Colin Tapper and Dr Katharine Grevling, my college supervisors, provided considerable support throughout my time at Magdalen. And I remain indebted to the Wingate Foundation, Freshfields Bruckhaus Deringer, and UK Government Overseas Research Studentship scheme, for the financial assistance they provided. Finally, I would like to acknowledge the vital role played by my family and, in particular, my wife, Penelope.
Contents
Preface .........................................................................................................................v Table of Cases ............................................................................................................xv Table of Statutes ......................................................................................................xxv 1 Introduction ........................................................................................................1 A. Thematic Outline ........................................................................................2 B. Chapter Summaries.....................................................................................2 Part I The Foundations............................................................................................7 2 Introduction to the Defence of Disimpoverishment .......................................9 A. Introduction.................................................................................................9 B. Questions in Unjust Enrichment ...............................................................9 C. Definition...................................................................................................10 D. Change of Name ........................................................................................11 1. History of ‘Passing on’......................................................................12 2. Errors of Exclusion...........................................................................12 3. Errors of Inclusion ...........................................................................14 (a) Source of the Errors ..................................................................14 (b) Problems with Errors................................................................15 (c) Example of the Errors...............................................................16 E. Another Problem with Pseudonyms........................................................17 F. Triggering the Defence of Disimpoverishment.......................................19 1. Not Restricted to Cases of Unlawful Taxation................................19 2. Anticipatory Disimpoverishment....................................................20 G. Assumptions ..............................................................................................20 1. The ‘Windfall’ Assumption ..............................................................20 (a) The Defendant will Also Receive an Undeserved Windfall....................................................................................20 (b) The Role of Third Parties .........................................................21 2. Causation ..........................................................................................21 H. Taxation Agents .........................................................................................23 I. Burden of Proof.........................................................................................25 1. Onus is on the Claimant ..................................................................25
viii
Contents 2. 3.
Onus is on the Defendant ................................................................25 Is Reversal of the Onus of Proof Apparent but Not Real? ...........................................................................................27 (a) A Presumption of Disimpoverishment .....................................28 (b) It is Sufficient to Raise, but not Prove, the Defence .................28 4. Where should the Burden Lie? .......................................................29 J. Judicial Responses to Disimpoverishment ..............................................30 1. Acceptance of the Defence at Law ...................................................31 (a) Accept at Law and on the Facts................................................31 (b) Accept at Law but Reject on the Facts ......................................31 2. Rejection of the Defence at Law ......................................................31 3. Qualified Rejection...........................................................................32 K. Conclusion .................................................................................................34 3 Common Law Cases on the Defence of Disimpoverishment ........................35 A. Introduction...............................................................................................35 B. England ......................................................................................................35 1. Linz v Electric Wire Company of Palestine Ltd .................................35 2. The Swaps Cases ...............................................................................36 (a) The Decisions ...........................................................................36 (b) Are the Decisions Binding? ......................................................39 3. Woolwich Equitable Building Society v Inland Revenue Commissioners...................................................................................40 4. Banque Belge Pour L’etranger v Hambrouck ....................................41 C. Australia .....................................................................................................43 1. Mason v New South Wales ................................................................43 2. Commissioner State Revenue (Victoria) v Royal Insurance Australia Ltd......................................................................................44 3. Roxborough v Rothmans Pall Mall....................................................46 D. Canada........................................................................................................47 1. Acceptance at Law and on the Facts................................................47 (a) Unlawful Demand by a Public Authority ................................47 (b) Mistake .....................................................................................48 2. Acceptance at Law but Rejection on the Facts................................49 (a) Unlawful Demand by a Public Authority ................................49 (b) Mistake .....................................................................................50 3. Rejection at Law ...............................................................................50 E. United States of America ..........................................................................52 1. Rejection at Law ...............................................................................52 2. Qualified Rejection...........................................................................57 3. Acceptance at Law ............................................................................59 F. Conclusion .................................................................................................62
Contents
ix
4 Statutory Defence of Disimpoverishment ......................................................63 A. Introduction...............................................................................................63 B. The Defence of Unjust Enrichment..........................................................63 1. Relevant Statutory Provisions..........................................................63 2. The Meaning of ‘Unjustly Enrich’ ...................................................64 (a) The Meaning of ‘Enrichment’ ..................................................65 (b) The Meaning of ‘Unjust’ ..........................................................65 3. Correlation with the Defence of Disimpoverishment....................65 C. Operation of the Unjust Enrichment Defence........................................66 1. Condition #1: The Claimant Must ‘Pass on’ the Cost of the Tax ..........................................................................................67 2. Condition #2: The Claimant Must Avoid Any Loss .......................69 (a) No Change in Price ..................................................................70 (b) The ‘Price Taker’ Argument .....................................................71 (c) Counter-factual Argument #1: Prices would have Increased Anyway .....................................................................75 (d) Counter-factual Argument #2: Revenue would have Increased ..........................................................................77 (e) Increase in Price Not Matched by an Increase in Revenue ....................................................................................78 (f) Potential Substitutability of Profitable Products......................79 3. Condition #3: Recovery Must ‘Unjustly Enrich’ the Claimant............................................................................................80 4. Conclusion ........................................................................................80 D. Recovery for Third Parties of Overpaid VAT ..........................................81 1. Direct Recovery by Third Parties.....................................................81 2. Claimant Recovering for Third Parties ...........................................81 3. Conclusion ........................................................................................84 E. Influence of European Jurisprudence ......................................................85 1. Three General Propositions from the ECJ ......................................85 2. Three Specific Propositions from the ECJ ......................................86 F. Conclusion .................................................................................................86 1. Some Specific Observations.............................................................86 2. Implications for this Book ...............................................................87 Part II ‘At The Expense Of ’ ..................................................................................89 5 What Might ‘At the Expense of ’ Mean? ...........................................................91 A. Introduction...............................................................................................91 B. Two Interpretations of ‘at the Expense of ’ ..............................................92 C. The Meaning of ‘Loss’ ...............................................................................93 1. ‘Loss’ Meaning ‘Detriment’ ..............................................................93 (a) Pecuniary Detriment................................................................93
x
Contents (b) Non-pecuniary Detriment .......................................................95 ‘Loss’ Meaning ‘Deprivation’ (of a Right) ....................................101 (a) Examples in the Case Law of ‘Loss’ Meaning ‘Deprivation of A Right’........................................................102 (b) Should a ‘Deprivation of a Right’ Constitute a ‘Loss’? ..........103 3. ‘Loss’ Meaning ‘Opportunity Forgone’ .........................................105 Loss and Restitution................................................................................107 1. Corresponding Loss........................................................................107 (a) Only ‘Some’ Loss is Necessary ................................................107 (b) A ‘Corresponding’ Loss is Required ........................................107 (c) The Preferred Interpretation of whether a Loss Must be Corresponding ..........................................................108 2. Initial or Ultimate Loss? ................................................................109 The Meaning of ‘From’............................................................................109 1. Things and Services: What Exactly Comes from the Claimant? .................................................................................110 (a) Things.....................................................................................110 (b) Services ...................................................................................111 Differences between ‘From’ and ‘Loss’ ...................................................112 Conclusion ...............................................................................................112 Addendum................................................................................................113 2.
D.
E.
F. G. H.
6 What do the Cases say ‘At the Expense of ’ Means?.......................................115 A. Introduction.............................................................................................115 1. Scope and Purpose .........................................................................115 2. Structure..........................................................................................116 3. Outcome..........................................................................................116 B. Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt................116 1. England ...........................................................................................117 (a) Re BHT (UK) Ltd ..................................................................117 (b) Greenwood v Bennett .............................................................118 (c) Hambly v Trott .......................................................................119 (d) Banque Financiere De La Cite v Parc (Battersea Ltd)...........121 (e) BP Exploration Co (Libya) v Hunt (No 2) ............................122 (f) Debt Discharged at Less Than Full Value ..............................125 (g) Necessitous Intervention.........................................................127 2. Australia ..........................................................................................129 (a) Interest Awards .......................................................................129 3. Canada ............................................................................................132 4. United States of America ..............................................................133 5. Conclusion ......................................................................................134 C. Situation 2: ‘Gain’ Increases After Receipt.............................................135 1. England ...........................................................................................135
Contents
xi
(a) (b) (c)
The Decisions .........................................................................135 Reasons for Judgment .............................................................136 The True State of Affairs in FC Jones and Foskett v Mckeown? ...............................................................137 (d) Implications for the ‘at the Expense of ’ Requirement ...........................................................................138 2. Australia ..........................................................................................138 3. United States of America ...............................................................140 D. Conclusion ...............................................................................................142 7 What should ‘at the Expense of ’ Mean? ........................................................143 A. Introduction.............................................................................................143 1. The Inquiry .....................................................................................143 2. Structure and Outcome..................................................................143 B. The Problem Restated: The Status Quo Ante cannot be Restored....................................................................................................144 1. Restitution when Loss and Gain Correspond...............................144 (a) Pre-exchange Equilibrium......................................................145 (b) Identification of the Parties ....................................................145 (c) The Appropriate Response is Restitution................................145 2. Conclusion ......................................................................................146 C. Four Conceptions of What ‘At the Expense of ’ Means.........................146 D. Whenever Loss and Gain Do Not Equate..............................................148 1. The Work is Done Elsewhere.........................................................148 2. The Meaning of ‘Restitution’ .........................................................149 3. Windfalls .........................................................................................150 4. Conservation of Judicial Resources ...............................................151 (a) Are the Parties Equally Undeserving? ...................................151 (b) What If the Claimant Incurs Some Loss?...............................152 (c) Difficulty in Proving Loss .......................................................152 5. Presumption of Self-reliance .........................................................153 E. ‘Gain’ Exceeds ‘Loss’at the Moment of Receipt.....................................154 1. Symmetry with Restitution for Wrongs ........................................154 (a) Restitution Versus Disgorgement for Wrongs .........................154 (b) Restitution for Wrongs and Unjust Enrichment ....................154 (c) The Implications of Symmetry...............................................155 (d) Wrongs and Unjust Enrichment: Different Events.................156 2. Corrective Justice and Kantian Rights...........................................157 (a) Corrective Justice on Aristotle’s Terms....................................157 (b) Corrective Justice Through a Kantian Lens............................158 (c) No Intent ................................................................................160 (d) Policy-based Restitution .........................................................161
xii
Contents (e) When Gain and Loss Do not Equate .....................................161 3. Conclusion ......................................................................................163 F. ‘Gain’ Increases After Receipt .................................................................163 1. Introduction....................................................................................163 (a) The Issue and the Perspectives................................................163 (b) Four Preliminary Matters ......................................................164 2. What Has Come ‘At the Expense of ’ the Claimant? ....................165 (a) The Normative Position .........................................................166 (b) Unjust Enrichment at the Expense of the Defendant.............167 (c) Directness ...............................................................................168 (d) The Transfer ...........................................................................169 (e) Symmetry (of Risk) with the Defence of Disenrichment ........................................................................169 3. Conclusion ......................................................................................171 G. Conclusion ...............................................................................................171
Part III Other Reasons to Reject or Accept the Defence of Disimpoverishment ................................................................................173 8 Other Arguments for Accepting the Defence of Disimpoverishment.........................................................................................175 A. Introduction.............................................................................................175 B. False Bases for Accepting the Defence ...................................................175 1. Inflation Reduction ........................................................................175 2. Third Parties Incur Two Losses .....................................................177 3. Symmetry with the Defence of Disenrichment............................179 4. Litigation Chains ............................................................................181 (a) Limited Application................................................................181 (b) In Support of the Defence of Disimpoverishment ..................182 (c) Unsupported Fears and Conclusions......................................182 5. Protection of Government Finances .............................................183 (a) Reasons for Refusing Restitution ............................................184 (b) A Nuanced Response ..............................................................185 (c) Reasons for Awarding Restitution ..........................................185 C. A Legitimate Basis for Rejecting the Defence .......................................187 1. The Claimant will Receive a Windfall ...........................................187 (a) Receipt via An Unimpeachable Contract or Gift ...................188 (b) Receipt via an Unjust Enrichment at the Expense of a Third Party......................................................................189 D. Conclusion ...............................................................................................190 9 Other Arguments for Rejecting the Defence of Disimpoverishment .........191 A. Introduction.............................................................................................191
Contents
xiii
B. False Bases for Rejecting the Defence ....................................................191 1. Symmetry with Tort Law ...............................................................191 2. Undertaking to Pass-back ..............................................................193 (a) Rejecting the Defence..............................................................193 (b) True Rejection? ......................................................................193 3. It is Only a Complete, Not Partial, Defence..................................194 C. Potential Bases for Rejecting the Defence .............................................194 1. Problems of Proof...........................................................................194 (a) The Problems..........................................................................195 (b) Examination of the Problems.................................................195 (c) Proof of Impoverishment........................................................198 (d) Conclusion ..............................................................................202 2. Recovery Based on Economic Assumptions should not be Permitted.........................................................................................202 3. Unlawful Demands for Tax............................................................204 D. Three Reasons for Rejecting the Defence ..............................................207 1. Res Inter Alios Acta Alteri Nocere Non Debet .................................207 2. The Claimant’s Defective Transfer.................................................208 3. The Ideal Corrective Justice Solution will not be Attained..........209 (a) Problems with Attaining Corrective Justice when the Defence is Upheld .............................................................209 (b) What are the Alternatives? ....................................................211 E. Conclusion ...............................................................................................218 Part IV Third Parties............................................................................................219 10 Third Parties....................................................................................................221 A. Introduction.............................................................................................221 B. When Can an Action be Brought Against a Claimant? ........................221 1. Third Party v Claimant ..................................................................221 2. Parens Patriae..................................................................................222 C. Class Actions ............................................................................................223 1. What is a Class Action? .................................................................224 2. What are Some of the Advantages of Class Actions? ..................224 3. Two Illustrations.............................................................................225 (a) Javor v State Board of Equalization ......................................225 (b) Cauvin v Phillip Morris .........................................................226 (c) Conclusion ..............................................................................228 D. Recovery of Overpaid Tax by a Third Party (from the Claimant) ................................................................................................228 1. The Issue .........................................................................................228 (a) An Illustration ........................................................................228 (b) The Purpose of this Inquiry....................................................229
xiv
Contents 2.
Is Restitution within a Valid Contract Permitted?........................230 (a) Composite Charge ..................................................................230 (b) Itemized Charge .....................................................................231 (c) Conclusion ..............................................................................234 3. Is Restitution within a Valid Contract Justified? .........................234 (a) The Item is Severable and Not Negotiated.............................234 (b) Analysis of the Beatson and Birks Perspective........................235 E. Conclusion ...............................................................................................242 11 Conclusion.......................................................................................................245 A. The Problems Restated ...........................................................................245 B. The Conclusions Reached.......................................................................245 1. A Change of Name .........................................................................245 2. Three Possible Responses, Not Two ..............................................246 3. The Meaning of ‘At the Expense of ’ ..............................................246 4. Other Arguments For and Against the Defence ...........................247 5. Implications for the Statutory Defence.........................................248 6. Third Party Claims .........................................................................248 C. Restatement..............................................................................................249 Bibliography ............................................................................................................251 Index .......................................................................................................................257
Table of Cases
123 East Fifty Fourth Street Inc v United States 157 F 2d 68 (USCA 1946)....................................................55, 58, 214, 230, 232 Acme-Evans Co v Smith 13 F Supp 356 (USDC IN 1936)....................209–10, 230, Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 ..........................................................42 Air Canada v British Columbia [1989] 1 SCR 1161 (1989) 59 DLR (4th) 161 (CSC)..............................................15, 26, 40, 47, 150, 184–6, 193, 204, 245 Air Canada v Ontario (Liquor Control Board) (1995) 126 DLR (4th) 301 (OCA) .................................................................................................50 Allen v Waters [1935] 1 KB 200 (CA)...................................................................214 Allied Air Conditioning Inc v The Queen (1994) 109 DLR (4th) 463 (BCCA) ........................................................................................................49 Amax Potash Ltd v Government of Saskatchewan [1977] 2 SCR 576, (1976) 71 DLR (3d) 1 ..............................................................................204, 206 American Chain Co v Hartford-Conneticut Trust Co 86 F 2d 105 (USCA 1936) ......................................................................................................22 Amministrazione delle Finanze dello Stato v Denkavit Italiana Srl [1980] ECR 1205................................................................................................85 Amministrazione delle Finanze dello Stato v SpA San Giorgio [1983] ECR 3595 ..............................................................29–30, 75, 85, 177, 197 Armory v Delamirie (1722) Stra 505.............................................................104, 152 Atlanta Americana Motor Hotel Corp v Undercofler 222 Ga 295 (1), 149 SE 2d 691 (GASC 1966) ...............................................................59 Attorney General v Blake [2001] 1 AC 268 (HL)..................................................133 Avon Products Pty Limited v Federal Comr Taxation [2004] FCA 475 ........................................................................................................68, 71 Bacchus Imports Ltd v Dias 468 US 263, 104 S Ct 3049 (USSC 1984) ...........55, 61 Banque Belge pour L’Etranger v Hambrouck [1921] 1 KB 321 (CA).................41–2 Banque Financiere de la Cite v Parc (Battersea Ltd) [1999] 1 AC 221 (HL)...............................................................................................10, 121 Barclays Bank Ltd v W J Simms & Son Ltd [1980] QB 677 ...................................42
xvi
Table of Cases
Bell Bros Pty Ltd v Shire of Serpentine-Jarrahdale (1969) 121 CLR 137 .............205 Benzoline Motor Fuel Co v Bollinger 353 Ill 600, 187 NE 657 (ILSC 1933) ............................................................................57–8, 193, 209, 213 BHT (UK) Ltd [2004] EWHC 201 ...................................................117–8, 142, 149 Birra Wuhrer SpA v Council and Commission of the European Communities [1984] ECR 3693 .........................................................................85 Blackmon v Georgia Independent Oilmen’s Association 129 Ga App 171(3), SE 2d 896 (GASC 1973)................................................................59 Blackmon v Premium Oil Stations Inc 129 Ga App 169(2), 198 SE 2d 900 (GASC 1973).....................................................................................59 Boardman v Phipps [1967] 2 AC 46 (HL) ............................................................167 BP Exploration Co (Libya) v Hunt (No 2) [1979] 1 WLR 783, aff ’d [1981] 1 WLR 232 (CA), [1983] 2 AC 352 (HL) ..............................122–3 British American Tobacco Australia Ltd v Western Australia [2003] HCA 47.................................................................................................186 Bronco Wine Company v Frank A Logoluso Farms 214 Cal App 3d 699, 262 Cal Rptr 899 (CACA 1989) .....................................................212–3 Builder’s Club of Chicago v United States 14 F Supp 1020 (USCC 1936) .............53 Butcher v Churchill (1808) 14 Ves Jun 567, 33 ER 638 ........................................126 C B Cones & Son Mfg Co v United States 123 F 2d 530 (USCA 1941) .................22 Canadian Pacific Airlines Ltd v British Columbia [1989] 1 SCR 1133, (1989) 59 DLR (4th) 218 (CSC) .............................................................47 Case Y46 91 ATC 431...............................................................................................16 Cauvin v British American Tobacco Aust Services Ltd [2002] NSWCA 253 .....................................................................................................227 Cauvin v Phillip Morris [2002] NSWSC 736............................209, 217, 226–7, 230 Cauvin v Phillip Morris [2004] HCATrans 93......................................................227 Cherubini Metal Works Ltd v Nova Scotia (AG) (1995) 137 NSR (2d) 197 (NSCA) ................................................................................50 Christopher v Hoger 160 Misc 21, 289 NYS 105 (NYMC 1936) .........................230 City of Prichard v Hawkins 255 Ala 676 (SCAL 1951)...........................................55 Coho Creek Estates Ltd v Maple Ridge (1995) 53 ACWS (3d) 890, 27 MPLR (2d) 129 (BCSC)......................................................26, 28, 49, 50 Commerzbank AG v Gareth Price-Jones [2003] EWCA Civ 1663..........................20 Commonwealth v Kaplan 311 Pa 539, 166 A 883 (RISC 1922) .............................23 Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA)44 ..............91, 101, 186, 198, 205, 209, 214, 232 Consolidated Distilled Products Inc v Mahin 56 Ill 2d 110, 306 NE 2d 465 (ILSC 1973).........................................................................26, 59 Cook v Sears Roebuck & Co 212 Ark 308, 206 SW 2d 20 (ARSC 1974)................23 Cth v McCormack (1984) 155 CLR 273 (HCA) ...........................................129, 132
Table of Cases
xvii
Cummings v Noyes (1813) 10 Mass R 433............................................................120 Customs & Excise Comrs v McMaster Stores (Scotland) Ltd (1996) SLT 935, [1995] STC 846, [1995] BTC 5390 ..........64–5, 82–3, 118, 193 Customs & Excise Comrs v National Westminster Bank plc [2003] EWHC 1822 (Ch), [2003] BVC 633 ..........................64–5, 67, 73, 86 David Securities Pty Ltd v Commonwealth of Australia (1992) 175 CLR 353 (HCA) ............................................................................179 Daynes & Anor v Customs & Excise Comrs [1994] BVC 664.................................66 Decorative Carpets Inc v State Board of Equalization 373 P 2d 637, 58 Cal 2d 252 (CASC 1962) ...................................................26, 59, 214 Dennis v London Passenger Transport Board [1948] 1 All ER 779...............................................................................................................214 Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER 193 (PC)........................................................................................................20 Dilexport Srl v Amministrazione delle Finanze dello Stato [1999] ECR I-579 ...............................................................................................85 Duke of Bedford v Ellis [1901] AC 1 (PC) 8 .........................................................224 Edwards v Lee’s Administrator 265 Ky 418, 96 SW 2d 1028 (KYCA, 1936) ..........................................................................................134 Eimco BSP Services Co v Chilivis 241 Ga 263, 244 SE 2d 829 (GASC 1978) ............59 Eisen v Carlisle & Jacquelin 391 F 2d 555, 572 (USCA 1973) .............................228 Elida Gibbs Ltd v Customs & Excise Comrs [1997] BVC 80...................................74 Empire Life Insurance Co v Neufield Estate (1998) 22 Estates and Trusts Reports (2d) 207 (BCSC) ........................................................................47 Everson v Rich (1988) 31 ETR 26, 16 RFL (3rd) 337 (SCA)...................................96 Express Dairy Foods Ltd v Intervention Board for Agricultural Produce [1980] ECR 1887..................................................................................85 Falcke v Scottish Imperial Insurance Co Ltd (1886) 34 Ch D 234 (CA) 248 ...........................................................................................................128 Fazzi v Peters 68 Cal 2d 590, 440 P 2d 242 (CASC 1968) ...................................212 FC Jones & Sons v Jones [1997] Ch 159 (CA) ..........................................135–8, 165 Fleer Corporation v Topps Chewing Gum Inc 539 A 2d 1060 (DWSC 1988) ...................................................................................140, 142, 165 Foskett v McKeown [2001] 1 AC 102 (HL) .......................................136–8, 149, 165 Furman University v Livingston 244 SC 200, 136 SE 2d 782 (SCSC 1993) ...................................................................................................23–4 Gainers Inc v Canadian Pacific Ltd (1995) 120 DLR (4th) 143 (ACA)..................51 Georgia v Pennsylvania Railroad Co 324 US 439 (USSC 1945) ..........................223
xviii
Table of Cases
Gidney v Feuerstein [1996] 2 WWR 383 (MCA) .................................96, 98, 132–3 GIO of NSW v Healy (No 2) (1991) 22 NSWLR 380 (NSWCA) ........................130 Glasgow Corporation v Lord Advocate (1959) SLT 230 ........................................184 Gnitrow Ltd v Cape plc [2000] 3 All ER 763 (CA)...............................................127 Goodman v Pocock (1850) 15 QB 576...................................................................231 Goring, The [1988] AC 831 (HL)..................................................................128, 129 Grantham Cricket Club v Customs & Excise Comrs [1998] BVC 2272 ..........................................................................65, 73–4, 80, 84 Great Atlantic & Pacific Tea Company v City of Lexington 256 Ky 595, 76 SW 2d 894 (KYCA 1934)...............................................................184 Great Northern Railway Co v Swaffield (1874) LR 9 Exch 132.....................................................................................................................128 Green v Portsmouth Stadium [1953] 2 QB 190 (CA)Greenwood v Bennett [1973] QB 195..................................................................................231 Greenwood v Bennett [1973] QB 195..............................................................118–19 Greta Holme, The [1897] AC 596 (HL) ................................................................102 Ha v New South Wales (1997) 189 CLR 465 (HCA)..............................................46 Hambly v Trott (1776) 1 Cowp 371; 98 ER 1136 ...........................................119–21 Hanover Shoe Inc v United Shoe Machinery Corp 392 US 481, 88 S Ct 2224 (USSC 1968)...................................................................12, 18, 198 Hans Just I/S v Danish Ministry for Fiscal Affairs [1980] ECR 501.......................85 Hazell v Hammersmith & Fulham London BC [1992] 2 AC 1 (HL).....................37 Heckman & Co Inc v I S Dawes & Son Co Inc 56 App D C 213, 12 F 2d 154 (DCCA 1926).......................................................................230, 234 Hobart v Minister of National Revenue (1985) 61 NR 233 (FCA) ........................47 Honorbilt Products Inc v Comr Internal Revenue 119 F 2d 797 (USCA, 1941) .....................................................................................................22 Howell Industries v Sharon Steel 754 F 2d 374 (USCA 1984)................................17 Hunt v Severs [1994] 2 AC 350 (HL)............................................................207, 214 Hutzler Bros Co v United States 33 F Supp 801 (USDC MD 1940) ......................22 Independent Linen Service Co v Stone 192 Miss 832, 6 So 2d 110 (SCMS 1942) .................................................................................24, 54, 230 Interwoven Stocking Co v United States 114 F 2d 768 (USCA, 1944)..............22, 23 Ireks-Arkady GmbH v Council and Commission of the European Communities [1979] ECR 2955 .........................................................................85 James B Beam Distilling Co v Georgia 263 Ga 609, 437 SE 2d 782 (GASC 1993)...............................................................................59, 61 James B Beam Distilling Co v Georgia 501 US 529, 111 S Ct 2439 (USSC 1991).......................................................................................................61
Table of Cases
xix
Javor v State Board of Equalization 527 P 2d 1153, 12 Cal 3d 790 (CASC 1974) .....................................................................................225, 228 Jenkins v Tucker (1788) 1 Hy Bl 90, 126 ER 55 ....................................................128 Johnson v Nova Scotia (AG) (1990) 96 NSR (2d) 140 (NSCA).......................26, 47 Jones v Department of Revenue 60 Ill App 3d 886, 377 NE 2d 202 (ILCA 1978)...............................................................................................236 Jones v Hoar (1827) 22 Mass 285; 5 Pick 285.......................................................120 Kastner v Duffy-Mott Co 213 NYS 128 (1925 NYSC)..........................................234 Kesbec Inc v McGoldrick 278 NY 293, 16 NE 2s 288 (NYCA 1938) ................23, 26 Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380 (CA) ...........................................................................1, 19, 22–3, 36–41, 115 Kleinwort Benson Ltd v South Tyneside Metropolitan BC [1994] 4 All ER 972 (Com Ct).................................................................1, 21, 23, 36–41 Lamdec Ltd v Customs & Excise Comrs [1991] VATTR 296, [1991] BVC 721 ..........................................................................................82–3, 118, 193 Lash’s Products Company v United States 278 US 175, 49 S Ct 100 (USSC 1929)..............................................................................................230 Law Society of Upper Canada v Ernst & Young (2002) 213 DLR (4th) 167, 59 OR (3d) 214 (OSC) ......................................................................52 Law Society of Upper Canada v Ernst & Young (2003) 227 DLR (4th) 577, 65 OR (3d) 577 (OCA) ..............................................................................17 Leonard v Socony-Vacuum Oil 42 F Supp 369 (USDC WIS 1942) .......................12 Les Fils De Jules Bianco SA v Directeur General Des Douanes et Droits Indirects [1988] ECR 1099 ......................................................................85 Linz v Electric Wire Company of Palestine Ltd [1948] AC 371 (PC) .................35–6 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL)........................................179 Ludwigshafener Walzmuhle Erling KG v Council and Commission of the European Communities [1981] ECR 3211...................................................85 Lytle v Payette-Oregon Slope Irr Dist 152 P 2d 934 ..............................................140 Maguire v Makaronis (1997) 188 CLR 449 (HCA)..............................................131 Mann v Thompson 118 So 2d 112 (USCA 1960) .........................................140, 142 Marks & Spencer plc v Customs & Excise Comrs (No 1) [1997] V&DR 85, [1997] BVC 2243..................................................................77 Marks & Spencer plc v Customs & Excise Comrs (No 1) [1999] 1 CMLR 1152....................................................................64, 69, 76, 79, 194, 203 Marks & Spencer plc v Customs & Excise Comrs (No 1) [2003] EWCA Civ 1448 .....................................................................................76 Marks & Spencer plc v Customs & Excise Comrs (No 2) [1997] BVC 2255 ............................................................................................................75
xx
Table of Cases
Marks & Spencer plc v Customs & Excise Comrs [2002] ECR I-6325 .........................................................................................................85 Marks & Spencer plc v Customs & Excise Comrs [2005] UKHL 53 ............................................................................................................64 Martin Oil Service Inc v Dept of Revenue 49 Ill 2d 260, 273 NE 2d 823 (ILSC 1971) ............................................................................236 Mason v New South Wales (1959) 102 CLR 108 (HCA)..................................12, 43 Mass Transit Administration v Granite Construction Company 471 A 2d 1121 (MDCA 1984).........................................................133 Maynard v Thrasher 77 Ga App 316, 48 SE 2d 471 (GACA 1948) .......................23 McDonald v Coys of Kensignton [2004] EWCA Civ 47 ..........................................10 McKesson Corp v Division of Alcoholic Beverages and Tobacco, Department of Business Regulation 496 US 18, 110 S Ct 2238 (USSC 1990).............................18, 24, 55–7, 61, 186, 198, 205–6 Mediana, The [1900] AC 113 (HL)...............................................................102, 104 Michelin Tires (Canada) Ltd v Minister of National Revenue (Customs & Excise) [2001] FCA 145 (CCA).....................................................47 Michelin Tires (Canada) Ltd v Minister of National Revenue (Customs & Excise) 158 FTR 101 (CFC).....................................................28, 47 Miles v Wakefield District Council [1987] AC 539 (HL) ......................................233 Milwaukee Safeguard Insurance Co v Selcke 324 Ill App 3d 344, 754 NE 2d 349 (ILCA 2001) ........................................................................28, 61 Mississauga Hydro-Electric Commission v Ontario Hydro (1979) 102 DLR (3d) 135 (OSC).............................................................................12, 51 Mississauga Hydro-Electric Commission v Ontario Hydro (1982) 133 DLR (3d) 256 (OCA)..................................................................................51 Mr and Mrs J King, T/A The Barbury Shooting School v Customs & Excise Comrs [2002] V&DTr No 17822 ........................................................72 Mutual Pools & Staff Pty Ltd v Cth (1994) 179 CLR 155 (HCA) 177.....................................................................................................................213 National & Provincial Building Society v Customs & Excise Comrs [1996] V&DR 153...................................................................71, 73, 75, 181, 216 Nattrass v Nattrass [1999] WASC 77 (WASC) .....................................................130 Neles Controls Ltd v Canada (2002) FCA 107 (FCA) ............................................47 Nelson v Nelson (1994) 184 CLR 545 ...................................................................215 Nicholson v Chapman (1793) 2 H Bl 254, 126 ER 536 ................................128, 129 Noll Baking & Ice Cream Co v Sparks Mill Co 304 Ill App 624, 26 NE 2d 425 (ILAC 1940) ...................................................................................230 Northern Arizona Gas Service Inc v Petrolane Transport Inc 145 Ariz 467, 702 P 2d (AZCA 1985) ......................................................................17
Table of Cases
xxi
Olanda, The [1919] QB 728 ..................................................................................231 Orphanos v Queen Mary College [1985] AC 761 (HL) ........................................231 PA Cowdy T/A Berriewood Farm VTD 18599 (unreported 26 May 2004)...........................................................................................................83 Pauls Agriculture Ltd v Council and Commission of the European Communities [1983] ECR 1707 .........................................................................85 Pettkus v Becker [1980] 2 SCR 834, (1980) 117 DLR (3d) 257 (CSC) .................26 Portman Building Society v Hamlyn Taylor Neck [1998] 4 All ER 202 (CA)........10 Pourier v South Dakota Dept Revenue 658 NW 2d 395 (SDSC 2003) .........................................................................................................209, 212 Queens of the River Steamship Co v Conservators of the River Thames (1899) 15 TLR 474 ............................................................................................................232 Reed v Norris (1837) 2 M&C 361, 40 ER 678.......................................................126 Repayment of Illegal Taxes: EC Commission v Italy [1988] ECR 1799 ............29, 85 RIBA Publications v Customs & Excise Comrs [1999] V&DR 230, [1999] BVC 2201 ..........................................................................................80, 83 Richardson Lubricating Co v Kinny 337 Ill 122, 168 NE 886 (ILSC 1929) ..........................................................................................57, 58, 230 Rowe v Vale of White Horse DC [2003] 1 Lloyd’s Rep 418 (Admin Ct) ...............10 Roxborough v Rothmans Pall Mall (1999) 161 ALR 253 (FCA) ..........................236 Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA)..................46, 101, 151, 199, 205, 214, 217, 222–3, 226, 229, 232–3, 235 Saleh v State Board of Equalization (unreported, July 29 2003, SCCA) .............209 Sargood Bros v Commonwealth .............................................................................184 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309......................................................................................138, 142, 165 Schneider v Eisovitch [1960] 2 QB 430 .............................................................213–4 SCI Operations Pty Ltd v Cth (1996) 69 FCR 346 (FCA)..............................17, 130 Scottish Equitable plc v Derby [2001] 3 All ER 818 (CA) ....................................179 Shannon v Hughes Co 109 SW 2d 1174, 270 Ky 530 (KYCA 1937) ............16, 26–7 Sloat v United States 260 F Supp 73 (USDC TX 1966) ...................................13, 26 Smith v Sparks Milling 219 Ind 576, 39 NE 2d 125 (INSC 1942) .......................241 Snyderman v Isaacs 31 Ill 2d 192, 201 NE 2d 106 (ILSC 1964) ....................209–10 Sobeys Inc v Nova Scotia AG (1992) 112 NSR (2d) 205 (NSSC)...........................50 Societe Comateb v Directeur general des douanes et droits indirects [1997] ECR I-165 .....................................................................................25, 85–6 Sorochan v Sorochan [1986] 2 SCR 38, 29 DLR (4th) 1 (CSC)..........................96–7
xxii
Table of Cases
South Tyneside Metropolitan Borough Council v Svenska International plc [1995] 1 All ER 545 ......................................................................................20 Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025 ..............................................................................................232 Standard Oil Co v Bollinger 337 Ill 353, 169 NE 236 (ILSC 1929) ...................................................................................................................57 State Bank NSW v Comr of Taxation (1995) 62 FCR 371 (FCA) ................................................................................................................130 State v Obexer & Son Inc 660 P 2d 981 (NVSC 1983).....................................23, 26 Storthoaks Rural Municipality v Mobil Oil Canada Ltd (1975) 55 DLR (3d) 1 (CSC)............................................................................................179 Strang v Inkpen (1989) 33 ETR 130, 20 RFL (3d) 393 (NSC).........................96, 98 Szabo Food Services Inc v Dickinson 286 So 2d 529 (FASC 1974).........................60 Tang Man Sit v Capacious Investment Ltd [1996] AC 514 (PC) .........................154 Tayside Numbers Ltd v Comrs of Customs & Excise EDN/92/149, unreported (8874)..............................................................................................70 Texas Co v Harold 228 Ala 350, 153 So 442 (SCAL 1934)...................................230 Thomas v Brown (1876) 1 QBD 714.....................................................................231 Thornton v Board of School Trustees of School District No 57 (Prince George) (1978) 83 DLR (3d) 480 (CSC) ............................................214 Tomlinson v Bentall (1826) 5 B&C 733, 108 ER 274 ...........................................128 Toussaint v Martinnant (1787) 2 TR 100 .............................................................231 Truro Carpet Factory Outlet v Nova Scotia (1991) 103 NSR (2d) 214 (NSCA) ..................................................................................................26, 48 Twentieth Century Sporting Club v United States 34 F Supp 1021, 92 Ct Cl 93 (USCC 1940) ..................................................................................23 United States v Jefferson Electric Manufacturing Co 291 US 386, 54 S Ct 443 (USSC 1934) ...........................................12, 26, 27, 53, 56, 206 United States v State of Colorado 666 F Supp 1479 (USDC CO 1987) ....................................................................................................60, 115 Vogel v Knox 147 F Supp 10 (USDC MN 1957).....................................................20 Waikato Regional Airport Ltd v AG (NZ) [2003] UKPC 50 ..................................12 Watson Laidlaw & Co Ltd v Pott Cassells & Williamson (1914) 31 RPC 104 (HL) ..................................................................................................103 Wayne County Produce Company v Duffy-Mott Company Inc 244 NY 351 (NYCA 1927)230 ........................................................233, 234, 237, 240 Weber’s Wine World v Abgabenberufungskommission Wien (opinion, March 20, 2003) (unreported)..........................................................86
Table of Cases
xxiii
Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL)...............................207 Weston v Downes (1778) 1 Doug 23 .....................................................................231 William C van Antwerp v State of New York 218 NY 422 (1916 NYCA) ..........52–3 Worthington Pump & Machinery Corp v United States 122 F Supp 843 (USCC 1954) .......................................................................................17, 197 Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (HL) ...........................................................................................12, 40, 204 Wren, In Re 48 Cal 2d 159, 308 P 2d 329 (CASC 1957)......................................213 Yakamina Dairy Pty Ltd v Wood [1976] WAR 57 (WASC) .............................155–7
Table of Statutes
United Kingdom Administration of Justice Act (Scotland) 1982 s 8 ..............................................215 Civil Liability (Contribution) Act (UK) 1978 .................................................126–7 Civil Procedure Rules (UK) 1998 r 19.6(1) ............................................................................................................224 r 19.6(4) ............................................................................................................224 Customs & Excise Management Act (UK) 1979 s 137A(3) ..................................64 Finance Act (UK) 1989 s 24................................................................................63–4 Finance Act (UK) 1994 sch 7 para 8(3) .................................................................64 Finance Act (UK) 1996 sch 5 para 14(3) ...............................................................64 Finance Act (UK) 1997 ch 16 sch 5 ........................................................................64 Finance Act (UK) 1997 s 47 ....................................................................................78 Finance Act (UK) 2000 ch 17 sch 6 ........................................................................64 Finance Act (UK) 2001 ch 9 sch 8 ..........................................................................64 Law Reform (Frustrated Contracts) Act (UK) 1943 ...........................................123 s 1(2) .............................................................................................................123–4 s 1(3) .............................................................................................................122–4 Taxes Management Act (UK) 1970 s 33 ...................................................................1 Value Added Tax Act (UK) 1983 s 2(1)..................................................................82 Value Added Tax Act (UK) 1994.................................................................64, 79–81 s 80 ......................................................................................................................78 s 80(1) .....................................................................................................63, 70, 81 s 80(3) .......................................................................................................1, 64, 70 s 80(7) .................................................................................................................81 Value Added Tax Regulations (UK) 1995...............................................................84 Value Added Tax (Amendment) Regulations (UK) 1998 .....................................84 rr 37A-H .....................................................................................................84, 216
Australia Sales Tax Assessment Act (Cth) 1930 s 26(1) ........................................................12 Sales Tax Assessment Act (No 1) (Cth) 1933 s 7(a) ..............................................12
xxvi
Table of Statutes
Stamp Duty Act (Vic) 1958.....................................................................................45 Trade Practices Act (Cth) 1974 s 75AU................................................................177
Canada Health Services Tax Act (RSNS) 1989 s 21.............................................................49
United States of America 15 USC (US) 1994 s 15c........................................................................................223 Federal Rules of Civil Procedure (US) 1966 r 23 ................................................224 Hart Scott Rodino Antitrust Improvements Act (US) 1976 ...............................223 Internal Revenue Code (US) 1954 s 6416(a)(1) ....................................................13 Revenue Act (US) 1928 s 424......................................................................12, 17, 27 Revenue Act (US) 1928 s 424(a) ...............................................................26, 53, 216
1 Introduction
The defence of ‘passing on’ (which, as shall be argued in chapter 2, is better described as the defence of ‘disimpoverishment’) is often talked about, but rarely seen. Numerous scholarly textbooks and law journals have devoted space to the issue. The courts, however, have been far less troubled by it. At common law, only two English cases have explicitly considered the defence.1 This state of affairs requires an explanation. In particular, two questions need answering: why does a loss-based defence to a claim for restitution continue to arouse academic interest, and how can another contribution to the existing body of literature be justified? The answer to both questions is that the law is unsettled. This instability manifests itself in five ways. First, the House of Lords has neither denied nor accepted the existence of a defence of disimpoverishment. Second, while the Court of Appeal rejected the defence in Kleinwort Benson Ltd v Birmingham City Council,2 it is arguable that this response was unnecessary. Consequently, their criticisms may be interpreted as persuasive, but non-binding. Third, there is divergence across the common law world. Loss-based defences have been rejected in some jurisdictions, yet accepted in others. Fourth, despite the Court of Appeal’s disapproval, it has been statutorily accepted in the United Kingdom. Even then, however, it has been adopted only sporadically.3 Finally, there is disagreement about how restitution for unjust enrichment should be calculated when the defendant’s gain does not correspond with the claimant’s loss. The defence of disimpoverishment exposes this discord and provides a lens through which the meaning of the ‘at the expense of ’ requirement can be analyzed.
1 Kleinwort Benson Ltd v South Tyneside Metropolitan BC [1994] 4 All ER 972 (Com Ct); Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380 (CA). 2 Ibid. 3 It has been incorporated into Value Added Tax Act (UK) 1994 §80(3), but does not impact on the recoupment of income or corporate tax under Taxes Management Act (UK) 1970 §33.
2
Introduction
Important and influential work has been published on the defence.4 This work, however, has tended to focus narrowly on either particular cases or sets of issues. As yet, there has been no attempt to collate and provide total coverage of the numerous controversies and questions pertaining to the defence. The aim of this book is not only to rectify this deficiency but also provide further insight into its rationale and explanations for why it might be either accepted or rejected.
A. Thematic Outline This book, while made up of eleven chapters, is best viewed as containing four parts. The first part, which lays the foundation of the book, is contained in chapters 2, 3 and 4. Here the defence of disimpoverishment is introduced and explained. The major reasons for undertaking this book, as described immediately above, are exemplified by a review of the relevant theory, cases and statutory provisions pertaining to the defence. The second part of the book comprises chapters 5, 6 and 7. The question as to what amounts to a sufficient connection between a would-be claimant and a defendant who has been unjustly enriched is here examined. The purpose of this inquiry is to determine whether the defence of disimpoverishment should be ruled-out on the basis that restitution is not, or should not be, predicated on the claimant having suffered a loss. The third part of this book comprises chapters 8 and 9. All remaining arguments for accepting or rejecting the defence of disimpoverishment are here considered. The fourth and final part of this book is contained in a single chapter. Here, the rights of third parties at whose ‘ultimate expense’ a defendant’s unjust enrichment may have come are explored.
B. Chapter Summaries The scope and structure of each chapter in this book is as follows. Chapter 2 is exclusively concerned with the nature and province of the defence of disimpoverishment. In this chapter the defence is clearly defined not only in
4 In addition to chapters or sections in texts, a selection includes B Rudden and W Bishop, ‘Gritz and Quellmehl: Pass it On’ [1981] 6 ELR 243; W Woodward, “‘Passing-on’ the Right to Restitution” (1985) 39 U Miami L Rev 873; P Michell, “Restitution ‘Passing-on’, and the Recovery of Unlawfully Demanded Taxes: Why Air Canada Doesn’t Fly” (1995) 53 U Toronto Faculty L Rev 130; F Rose, ‘Passing On’ in P Birks, (ed), Laundering and Tracing (Oxford, OUP, 1995) 261; M McInnes, “‘Passing on’ in the Law of Restitution: A Re-consideration” (1997) 19 Sydney L Rev 179.
Chapter Summaries
3
terms of its sphere of operation, but also in relation to the fundamental dilemma it seeks to address. Considerable time is spent explaining why the so-called ‘passing on’ defence gives rise to controversy and confusion, and justifying why the ‘defence of disimpoverishment’ is a more appropriate label to describe the issues under review. Once the purpose and parameters of the defence are made clear, attention turns to some of its particular aspects. These include the judicial responses the defence may generate and how the allocation of the burden of proof in unjust enrichment cases affects its operation. While chapter 2 is concerned with the theory of the defence of disimpoverishment, chapter 3 concentrates exclusively on its practical application. Here, cases from England, Australia, Canada and the United States are discussed in order to ascertain how the defence has been received and applied at common law. This chapter reveals that a uniform judicial response to the defence has not developed. In Canada and certain jurisdictions in the United States, the defence has been accepted as part of the law of unjust enrichment. By contrast, in England and Australia, and even some Canadian and American cases, the defence has been rejected. The view taken in this book is that only one of these approaches is correct. It falls to chapters 5 through to 9 to determine which it is. The legislative development of the defence of disimpoverishment is considered in chapter 4. It is revealed that legislators in the United Kingdom have chosen to refer to the loss-based defence as the ‘defence of unjust enrichment’. It is explained in this chapter, however, that the defence of unjust enrichment is synonymous with the defence of disimpoverishment. The different labels do not detract from the fact that the principle underlying both defences—the prevention of recovery when the claimant has suffered no loss—is the same. In addition to providing this clarification, chapter 4 focuses on the mechanics of the defence. The source of reference for this analysis is the numerous decisions in which claimants have attempted to shift the cost of value added tax to third party consumers via price increases. In conclusion, chapter 4 presents itself as another vital building block for this book. It appears anomalous that a defence should be rejected at common law and yet adopted in statutory form (and even then, in relation to some, not all, taxes). Whether this situation represents an unacceptable incongruity, and if so what should be done about it, is the province of the next two parts of the book. Having established the foundational aspects of this book in part one, part two considers whether the defence of disimpoverishment does and should form part of the law of unjust enrichment. The focus of chapter 5 is on what it may mean to say that the defendant’s unjust enrichment must have come ‘at the expense of ’ the claimant. The basis of this discussion (and of chapters 6 and 7) is that unless the claimant is required to prove that the defendant’s unjust enrichment caused a ‘loss’ (ie impoverishment) to him, the defence of disimpoverishment cannot form part of the law of unjust
4
Introduction
enrichment. If the claimant does not first incur an impoverishment there can be no later disimpoverishment. An additional objective of this chapter is to provide a clear understanding of two conflicting interpretations of ‘at the expense of ’: ‘loss’ and ‘from’. While there is considerable overlap between the two conceptions, ‘from’ is shown to be broader than ‘loss’ (which is defined to mean ‘corresponding pecuniary detriment’). Analysis of the ‘at the expense of ’ requirement continues in chapters 6 and 7. Having established clear definitions of ‘loss’ and ‘from’, attention here turns to whether the law does or should insist upon one or other requirement. In chapter 6 numerous cases are reviewed to determine how, in contexts outside the defence of disimpoverishment, this question has been resolved. Then, in chapter 7, various normative arguments are examined to ascertain, as a matter of principle and policy, whether ‘at the expense of ’ should be understood as meaning ‘loss’ or ‘from’. At the conclusion of chapter 7 it is suggested that the normative arguments weigh in favour of defining ‘at the expense of ’ to mean ‘from’, not ‘loss’. On this basis it is suggested that the defence of disimpoverishment cannot have any place in the law of unjust enrichment. Despite this conclusion, the arguments on which this interpretation of ‘at the expense of ’ rest, may not be beyond dispute. Consequently, chapters 8 and 9 assume a critical role in this book. That is because only by examining the defence of disimpoverishment on its own terms is it possible to categorically determine whether it should form part of the law of unjust enrichment. Chapter 8 is concerned with determining whether a defendant may ever be equally or more deserving of the money in dispute than the claimant. In all, six arguments for accepting the defence are considered. Of these, the final argument is the most credible and persuasive. It suggests that when the claimant has made good his loss by receiving an unjust enrichment at a third party’s expense, he is no more entitled to the money in dispute than the defendant. On this basis it is argued that the windfall should lie where it falls. Chapter 9 is divided into three parts. First, justifications that have been used to reject the defence, but which are considered erroneous, are discussed. Then, three reasons why the defence may be rejected under certain conditions are examined. For example, in certain cases concerning the recovery of unlawfully demanded tax, it is argued that restitution should be awarded as of right to ensure the maintenance of an important norm in public law. Finally, three arguments that support outright rejection of the defence are presented. On the basis of each of these contentions, and taken as a whole, it is recommended that the defence of disimpoverishment be rejected. The fourth part of this book is encapsulated in chapter 10. This chapter focuses on the rights of third parties at whose ultimate expense a defendant’s unjust enrichment may have come. This follows on from the argument in chapter 9 that
Chapter Summaries
5
a good reason for rejecting the defence is to allow a third party to claim restitution from the claimant who has been unjustly enriched at the third party’s expense. The mechanics of possible third party actions (against the claimant) are therefore examined. This is done in three ways. First, by reference to the circumstances in which a third party may bring an action against a claimant. Second, by considering the ability of third parties to bring a class action. And finally, by looking at the nature of the third party’s claim (against the claimant) in unjust enrichment (particularly in relation to the recovery of overpaid tax). The eleventh and final chapter has two purposes. The first is to collate the various propositions, conjectures and refutations contained in the preceding chapters. The second is to present a conclusion on what the law in relation to the defence of disimpoverishment is and should be. The view formed in chapters 8 and 9 and reiterated here is that the defence should be rejected. This is for two reasons. First, the claimant should be entitled to restitution of the defendant’s unjust enrichment where the claimant has made good his loss but, in doing so, is not unjustly enriched at a third party’s expense (chapter 8). The second reason is that even where the claimant has made good his loss and, in doing so, is unjustly enriched at a third party’s expense, the defence should be rejected (chapter 9). That is because the unjust enrichment of the claimant at the expense of a third party is of no relevance to the defendant, and the denial of restitution would prevent the best method of attaining the ideal ‘corrective justice’ solution—an action by a third party against the claimant. Thus, the defence of disimpoverishment should not form part of the common law of unjust enrichment nor be incorporated into any statutory enactments.
Part I
The Foundations The purpose of Part I is to lay the foundations of this book. This is done in two ways. First, Part I is foundational in the sense that the nature and scope of the defence is clarified. Chapter 2 defines the defence and its sphere of operation. Chapter 3 examines the defence’s reception at common law. And in chapter 4 the defence, as enacted statutorily in the United Kingdom, is explored. The second way in which Part I can be considered foundational is that the basis of the inquiry conducted in the remainder of this book is here established. Because the defence is shown to be poorly understood and inconsistently applied, the question arises as to how and whether it should form part of the laws of England, Australia, Canada and the United States.
2 Introduction to the Defence of Disimpoverishment
A. Introduction The intention of this chapter is to present a close analysis of the nature and scope of the loss-based defence: disimpoverishment. Seven aspects of it are considered. First, the defence is placed within the broader context of the law of unjust enrichment. Second, a definition is provided. The defence of disimpoverishment has long been afflicted with terminological problems. Many labels given to it have proven to be unhelpful, even misleading. Thus, the more familiar label of ‘passing on’ is discarded in favour of ‘disimpoverishment’. Third, events which trigger the defence are considered. Next, the various assumptions which underlie the defence are discussed. Following this, cases in which the defence of disimpoverishment appears relevant, but in fact is not, are revealed and put to one side. The issue of who should bear the burden of proving disimpoverishment is then considered. Finally, possible judicial responses to the defence are discussed. Here it is shown that the defence may not only affect the claimant and defendant, but also third parties.
B. Questions in Unjust Enrichment In his seminal work, An Introduction to the Law of Restitution,1 Professor Birks outlined a basic scheme for thinking about ‘the response which consists in causing one person to give up to another an enrichment received at his expense or its value in money’2—ie, restitution. He considered it necessary that the subject
1 2
P Birks, An Introduction to the Law of Restitution, revised edn, (Oxford, OUP, 1989). Ibid, p 13.
10
Introduction to the Defence of Disimpoverishment
acquire a stable set of large questions capable of breaking all problems into recognizable phases. He chose the following questions: i) ii) iii) iv)
Enrichment: Was the defendant enriched? Expense of: Did the enrichment come at the expense of the claimant? Reason for restitution: Was the defendant’s enrichment unjust? Defences: Does the defendant have any available defences?
Both the courts3 and academic commentators4 have generally accepted the appropriateness of these questions in the context of claims for unjust enrichment. Despite general and consistent agreement regarding the suitability of these elements in establishing an unjust enrichment claim, division has arisen over their meaning and content. This is particularly evident in the debate about whether the reason for restitution should be derived from a list of ‘unjust factors’5 or a generalized ‘absence of basis’.6 While this and other controversies impact on this book, they do so only in a peripheral way. This book is primarily concerned with exploring the meaning and boundaries of the second and fourth questions: ‘at the expense of ’ and ‘defences’. Like other defences to claims in unjust enrichment, the defence of disimpoverishment pertains to a particular element in the cause of action. This is because the defence of disimpoverishment does not seek to refute the fact that the defendant has received an unjust enrichment. Rather, by relying on proof that the claimant has subsequently made good his loss, the defendant contends that her unjust enrichment has no longer come at the claimant’s expense. Thus, as is illustrated in the following section, it is argued that the claimant should be denied restitution because he can no longer connect himself to the benefit received by the defendant.
C. Definition The defence of disimpoverishment can be defined in two ways: by reference to its effect and to its purpose. When the defence is accepted at law and established in 3 Banque Financiere de la Cite v Parc (Battersea Ltd) [1999] 1 AC 221 (HL) 227 (Lord Steyn) and 234 (Lord Hoffmann); Portman Building Society v Hamlyn Taylor Neck [1998] 4 All ER 202 (CA) 206 (Millett LJ); Rowe v Vale of White Horse DC [2003] 1 Lloyd’s Rep 418 (Admin Ct) 10–11 (Lightman J); McDonald v Coys of Kensington [2004] EWCA Civ 47, 22 (Mance LJ). 4 For example, A Burrows and E McKendrick, Cases and Materials on the Law of Restitution (Oxford, OUP, 1997) 53; G Virgo, The Principles of the Law of Restitution (Oxford, OUP, 1999) 9; A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2002) 15. 5 The archetypal example of an unjust factor is a payment made by mistake. Others include ignorance, duress, failure of consideration, illegality, necessitous intervention, undue influence, unconscionable dealing, legal compulsion and ultra vires demands by a public authority. 6 P Birks, Unjust Enrichment, 2nd edn, (Oxford, OUP, 2005) 129–60.
Change of Name
11
fact, it has the effect of reducing the defendant’s liability by the extent to which the claimant’s loss has been made good. The underlying purpose of the defence is to resolve a seemingly intractable dilemma. That is, between two undeserving parties engaged in legal disputation, should the defendant retain, or the claimant recover, the benefit in question? The defence of disimpoverishment resolves this dilemma in the defendant’s favour. These points can be illustrated by the following example. Suppose the defendant is a government, and it imposes a 10 per cent tax on the sale of cigarettes. In order to maintain existing profit levels, the claimant, a retailer, responds by increasing the price of cigarettes by the full amount of the tax. The burden of the tax is thereby passed on to the retailer’s customers. During the period in which the sales tax is in force, the retailer collects £1000 in tax receipts from his customers and transfers this money to the government. Later, however, the retailer discovers that the sales tax legislation is unconstitutional. The government should never have imposed the tax nor received the £1000. The question then becomes, as between the retailer and the government, who is entitled to the £1000? As stated, the defence of disimpoverishment resolves this question in the defendant’s favour. It holds that where the claimant incurs a loss by transferring a benefit to the defendant, but then makes good this loss by shifting it to a third party, the claimant cannot recover in an unjust enrichment action against the defendant. Thus, in the above example, because the retailer successfully passed on the full burden of the unlawful tax to his customers, any subsequent claim for restitution against the government would be wholly defeated. Consequently, the government would be entitled to retain the £1000. If disimpoverishment is accepted as a defence to claims in unjust enrichment, it may be either complete or partial in nature. This will depend on what proportion of the claimant’s loss has been made good. If the claimant has been restored to his original financial position he will not be entitled to anything. However, if, for instance, the claimant reduces his initial loss by 25 per cent, he will be entitled to recover the remaining 75 per cent from the defendant.
D. Change of Name The defence of disimpoverishment, a name first coined by Professor Birks,7 is widely known as the defence of passing on. Despite extensive use of the phrase ‘passing on’ in case law, statute, and academic literature, there are powerful reasons for insisting that it be expunged from our legal lexicon. Alternatively, where courts come to consider its meaning when found in legislative form, it is recommended that they do not adopt a simply literal or unduly narrow interpretation of the words. 7
Ibid, pp 219–21.
12
Introduction to the Defence of Disimpoverishment
1. History of ‘Passing on’ The term ‘passing on’, seems to have first appeared in a 1933 amendment to Sales Tax Assessment Act (Cth) 1930 Section 26(1).8 This amendment provided that a tax refund would only be granted by the Commonwealth of Australia if the cost of the tax had not already ‘been passed on by the taxpayer to some other person’ (emphasis added). It was not until nine years later, however, that the words ‘passing on’ appeared in a reported decision. In Leonard v Socony-Vacuum Oil9 the claimant retailer alleged that as a result of the defendant oil company’s antitrust violations, he had paid a higher than necessary price for gasoline. However, to recover under the relevant statute, the claimant had to prove that he suffered an injury to his business or property. In this context the Wisconsin District Court stated that: ‘[I]f the increase in price to plaintiff was passed on by him to his customers, he has suffered no pecuniary loss or injury to his business or property’.10 (emphasis added). Between 1942 and 1968, the term ‘passing on’ was applied only sporadically in American case law. When situations arose where the term could be appropriately used, other descriptions were relied on. Pursuant to Revenue Act (US) 1928 Section 424, many cases simply focused on who bore the burden of the tax in dispute.11 Other labels included the ‘pass through’ or ‘recoupment’ defence. It was not until the Supreme Court decision in Hanover Shoe Inc v United Shoe Machinery Corp12 that the term ‘passing on’ gained universal judicial and academic acceptance in the United States. By contrast, the phrase was not encountered judicially until 1959 in Australia,13 1979 in Canada,14 and 1993 in England.15 Thus, the label ‘passing on’ has only relatively recently formed part of our legal vocabulary. It is not too late to change.
2. Errors of Exclusion If one were to ask ‘when does the defence of passing on arise?’, the most likely response would be: ‘when (i) the defendant has been unjustly enriched at the expense of the claimant, and (ii) the claimant has shifted the cost of the defendant’s enrichment to a third party in the form of increased charges.’16 8
Sales Tax Assessment Act (No 1) (Cth) 1933 §7(a). Leonard v Socony-Vacuum Oil 42 F Supp 369 (USDC WIS, 1942). Ibid, p 371. 11 United States v Jefferson Electric Manufacturing Co 291 US 386, 54 S Ct 443 (USSC, 1934). 12 Hanover Shoe Inc v United Shoe Machinery Corp 392 US 481, 88 S Ct 2224 (USSC, 1968). 13 Mason v New South Wales (1959) 102 CLR 108 (HCA) 146 (Windeyer J). 14 Mississauga Hydro-Electric Commission v Ontario Hydro (1979) 102 DLR (3rd) 135 (OSC). 15 Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (HL) 175. 16 This definition was confirmed by the Judicial Committee of the Privy Council in Waikato Regional Airport Ltd v AG (NZ) [2003] UKPC 50, 77. 9
10
Change of Name
13
While these propositions, and thus the defence of passing on, are likely to cover most situations in which the claimant’s loss has been made good, this definition omits certain cases which should fall within the defence’s purview. The reason for their omission is that the above definition places an unnecessary limitation on the defence. That limitation is that the act of passing on must be evidenced by a price increase in respect of goods or services supplied. In other words, in order to establish the defence of passing on the claimant’s loss must be transferred to a third party via an increase in price. A simple profit and loss formula proves that this places an unnecessary restriction on the defence: Revenue (price × sales) – Expenses = Profit (Loss) This accounting expression shows that there are two ways a company can make good a loss. The first is by increasing revenue by a greater proportion than any associated rise in expenses. This can be done by (i) increasing prices and maintaining the level of sales (the traditional means of passing on), and/or (ii) keeping prices constant while increasing the level of sales. The other way in which a loss can be made good is by reducing expenses by a greater proportion than any associated reduction in revenue. For example, if a business expense (such as employee salaries) can be lowered, and revenue held constant, profits will rise. The purpose of this explanation is to show that a claimant can make good his loss without resorting to any change in prices. Financial performance can be improved, and a loss made good, by increasing revenue in other ways, or by reducing costs. Thus, while a preponderance of cases that consider the defence of disimpoverishment will be and have been concerned with claimants passing on their loss via increased prices, such a fact scenario is sufficient, not necessary. This conclusion is supported by Sloat v United States.17 In that case the government of the United States imposed an unlawful excise tax on the manufacture and sale of camper units. The claimant, who manufactured such units, sought restitution of the tax he had paid to the Internal Revenue Commission. Under Internal Revenue Code (US) 1954 Section 6416(a)(1), the claimant could only recover if he had not already included the tax in the price of camper units and collected that tax from his customers. The claimant failed to prove these requirements despite possessing invoices which showed that the tax had not been included in the stated price. Brewster J held that the claimant effectively included the tax in the price charged by cutting corners in the process of manufacturing his camper units. Thus, despite not passing on the cost of the defendant’s unjust enrichment via a price increase, the defence of disimpoverishment was nonetheless accepted because the claimant made good his loss by reducing his business expenses. 17
Sloat v United States 260 F Supp 73 (USDC TX, 1966).
14
Introduction to the Defence of Disimpoverishment
In summary, if the defence of disimpoverishment is accepted in principle, the claimant should be denied restitution whenever he suffers no loss. If a loss has been initially incurred, but then made good, it should make no difference how it has been made good. Consequently, the view taken in this book is that the phrase ‘passing on’ is unnecessarily restrictive. The neologism ‘disimpoverishment’ provides a more accurate description of the principle underlying the loss-based defence. It suggests that while the claimant may at one time have been impoverished by the defendant’s unjust enrichment, particular related events restored him to his original financial position. And, in these circumstances, restitution should be denied.
3. Errors of Inclusion The previous section argued that adoption of the phrase ‘the defence of disimpoverishment’ will help prevent ‘errors of exclusion’ by ensuring that all cases in which the claimant’s loss is made good are identified and accounted for. Use of the term ‘disimpoverishment’ is also likely to prevent ‘errors of inclusion’. In other words, it will prevent situations arising in which the defendant is able to defeat a claim for restitution despite the claimant’s loss not having been made good.
(a) Source of the Errors Errors of inclusion arise because of confusion over the label ‘passing on’. These words are troublesome. Instead of directing attention to the claimant’s net financial position, they concentrate on whether the claimant has attempted to ‘shift’ or ‘move’ his loss to another person. Thus, the phrase ‘passing on’ is action-orientated. By contrast, the term ‘disimpoverishment’ is outcome-focused. The problem with having a label that is action-orientated rather than outcomefocused is that instead of only allowing the defence to operate when the claimant successfully shifts the cost of the defendant’s unjust enrichment to a third party, mere attempts to pass on a loss become sufficient. Professor Burrows was one of the first to recognize this problem.18 He understood that: [T]o have any merit, the defence of passing on could not be made out simply by the defendant showing that the claimant had ‘passed on’ the loss by, for example, increasing the prices charged to its customers. The reason for this is that spreading the loss does not necessarily mean that the claimant has mitigated its loss. For example, the charging of higher prices ought in theory to reduce the number of customers. So to have any merit as a defence, the defendant would need to show that the claimant has passed on, and thereby avoided, its loss.19 18 A Burrows, ‘Public Authorities, Ultra Vires and Restitution’ in A Burrows, (ed), Essays on the Law of Restitution (Oxford, OUP, 1991) 59; A Burrows, The Law of Restitution (London, Butterworths, 1993) 475–76; A Burrows, The Law of Restitution, above n 4, p 592. 19 Ibid, p 15.
Change of Name
15
Professor Burrows’ solution was to break the inquiry into two parts. First, ascertain whether the claimant increased prices in an attempt to pass on his loss to third parties. He labelled this stage ‘passing on’. Second, determine whether the claimant was successful in making good his loss. This could be ascertained, for instance, by showing that sales remained constant despite prices having increased. He called this stage ‘mitigation’. While Professor Burrows’ identification and re-naming of the constituent elements of the defence of passing on were both necessary and beneficial, the same effect can be achieved in a simpler fashion. By dropping all reference to ‘passing on’ and recasting the defence as ‘disimpoverishment’, the need for a two-stage inquiry is avoided. Attention rightly turns to whether the claimant has incurred a loss. So long as it is causally related to the defendant’s unjust enrichment, how or why the claimant’s loss is made good becomes irrelevant.
(b) Problems with Errors While the source of ‘inclusion errors’ is apparent, it may not be clear why a distinction should be drawn between the act of passing on and the actual avoidance of loss. Put another way, why should a defence not be available in circumstances where the claimant has unsuccessfully attempted to shift his loss to a third party? The argument in favour of a pure passing on defence is that when a claimant increases prices in an attempt to shift the burden of his loss, third party consumers are thereby affected. Those who purchase the claimant’s product at an inflated price pay more than they should have. The claimant’s loss, caused by the defendant’s unjust enrichment, is passed on to them. Consequently, their purchases, at least in part, assist in making good the claimant’s loss. Consumers also suffer if they would have purchased the claimant’s product at the original price but cannot afford to at the inflated price. They must purchase an inferior or less desirable substitute, or miss out entirely. While it is easy to sympathize with the claimant’s affected customers, their plight diverts attention from the issue of primary concern. The point to remember in these cases is that the defendant will have been unjustly enriched. Under normal circumstances, the claimant would be permitted to recover the value of the benefit received by the defendant. The only reason preventing him from doing so is a decision to restrict restitution to those claimants who have suffered a loss. La Forest J put it in these terms: ‘[t]he law of restitution is not intended to provide windfalls to plaintiffs who have suffered no loss’.20 It therefore follows that if a claimant has suffered a loss which was caused by the defendant’s unjust enrichment, then he should be awarded restitution. The purpose of the defence of disimpoverishment is to prevent claimants accumulating in respect of the same loss. It is a prophylactic response to maintain the 20
Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC) 193 (La Forest J).
16
Introduction to the Defence of Disimpoverishment
integrity of unjust enrichment claims. The defence of disimpoverishment is not primarily intended to help third party consumers who have suffered as a result of the claimant’s attempt to pass on his loss. The existence of third party consumers is only relevant to show that external sources may have assisted in making good the claimant’s loss. The defendant should not be permitted to rely on their impoverishment to defeat the claimant’s action for restitution if the claimant himself remains impoverished.
(c) Example of the Errors There are numerous cases which illustrate the problems which can arise when the act of passing on is confused with the result of disimpoverishment.21 By concentrating on whether a third party customer has been made worse off (because it has had to spend more than necessary on product or service), the claimant’s continuing disimpoverishment may be overlooked. Shannon v Hughes Co22 provides a good example of this. In that case the claimant, an ice-cream retailer, was denied restitution even though he (i) transferred a sum of money to the government pursuant to an unlawful tax imposed on the sale of ice-cream, and (ii) had been unsuccessful in avoiding the cost of the tax even though he attempted to pass it on to his customers via higher prices.23 As the court did not reveal the exact figures, the following hypothetical ones can be used to illustrate what occurred:
Pre-tax position Price per ice-cream: $1.00 Cost incurred by the claimant on the sale of each ice-cream: 50c Quantity sold: 100 Profit: $50
Post-tax position Imposition of 10% sales tax Revised ice-cream price: $1.11 Quantity sold: 50 Cost incurred by the claimant on the sale of each ice-cream: 61c Revenue: $55.50 (50 × $1.11) Expenses: $30.50 (50 × 61c) Profit: $25 ($55.50 – $30.50) Tax paid: $5.50 21
In the context of Australian sales tax legislation, Case Y46 91 ATC 431 is an excellent illustration. Shannon v Hughes Co 109 SW 2d 1174, 270 Ky 530 (KYCA, 1937). 23 In fact, the claimant’s sale of ice-creams plummeted and he suffered significant loss and damage to his business. 22
Another Problem with Pseudonyms
17
While the Kentucky Court of Appeal denied the claimant restitution on the basis of a statute governing recovery, the case is a salient reminder of the dangers which arise when the concept of ‘passing on’ is confused with ‘disimpoverishment’. In this example, the defence of disimpoverishment would not defeat the claimant’s action for restitution of the $5.50 in tax he remitted to the government. The fact that the money may have come, in an indirect sense, from a third party, is irrelevant. As a result of the government’s unlawful imposition of tax, the claimant suffered a loss. Recovery of $5.50 would not put in him in a better position than if the defendant had never been unjustly enriched. On the contrary, the claimant would still incur a net financial loss (of $19.50). This conclusion does not, however, mean that if a company is operating unprofitably a relevant loss will have been incurred. As the court in Worthington Pump & Machinery Corp v United States24 rightly said: ‘[T]he fact that a firm is making a profit or loss does not in itself determine whether or not it has passed on the tax. The only test is whether the seller has made a profit less than or sustained a loss greater than had the tax not been imposed on him’.25 Bearing this in mind, it will consequently be argued in this book that the only acceptable version of the defence is one where the claimant has succeeded, and not merely attempted, to avoid the cost of the defendant’s unjust enrichment. As between the claimant and defendant, recovery should not be denied merely because a third party has also suffered a loss as a result of the defendant’s unjust enrichment.
E. Another Problem with Pseudonyms Apart from ‘passing on’, the defence of ‘disimpoverishment’ has been described in numerous other ways. In the United States it has been referred to by the clumsier question: ‘did the claimant bear the burden of the tax, or was it shifted to a third party’?26 In the United Kingdom, recovery is statutorily denied whenever restitution results in the claimant’s ‘unjust enrichment’.27 Courts have referred to the defence of disimpoverishment by other names as well. As already mentioned, the ‘pass through’ defence, for instance, gained popularity in some American courts,28 the phrase ‘windfall gain defence’ has been employed in Australia,29 and ‘passing off ’ has been used in Canada.30 24
Worthington Pump & Machinery Corp v United States 122 F Supp 843 (USCC, 1954). Ibid, p 847. 26 Revenue Act (US) 1928 §424. 27 Value Added Tax Act (UK) 1994s 80(3). 28 Howell Industries v Sharon Steel 754 F 2d 374 (USCA, 1984); Northern Arizona Gas Service Inc v Petrolane Transport Inc 145 Ariz 467, 702 P 2d (AZCA, 1985). 29 SCI Operations Pty Ltd v Cth (1996) 69 FCR 346 (FCA). 30 Law Society of Upper Canada v Ernst & Young (2003) 227 DLR (4th) 577, 65 OR (3rd) 577 (OCA). 25
18
Introduction to the Defence of Disimpoverishment
One consequence of giving different appellations to the defence of disimpoverishment has already been explored. The label ‘passing on’ gives rise to confusion and error. The other problem that may result from not applying a standard name to a particular fact scenario is that insights made in one context will not be readily applied to another. Consequently, like cases may not be decided alike. A salient example of this arose in the United States during the 1960s. On the one hand, there were courts hearing antitrust actions which had to determine whether claimants had ‘passed on’ the cost of a defendant’s unjust enrichment to a third party. On the other hand, there were courts seized with the task of determining whether, under statute, a claimant had ‘borne the burden’ of an unlawful tax. Though the language used to describe the event of ‘disimpoverishment’ was different, the issue, in substance, was identical. It so happened that, during this time, courts hearing antitrust cases became acutely aware of how difficult it was to determine when and if a cost had been passed on.31 In many antitrust cases, the defence of ‘passing on’ was therefore rejected because the defendant was unable to prove that the claimant’s loss had been made good. At the same time, however, courts hearing unlawfully demanded tax cases seemed impervious to the problems identified in the antitrust cases. This was despite the fact that the problem of determining when and if the claimant had borne the burden of the tax was, for all intents and purposes, the same as that which arose in the antitrust actions. It appears that this incongruity was not appreciated until 1990, when the United States Supreme Court, in deciding whether a Florida excise tax was unconstitutional, recognized that: [D]etermining whether a particular business cost has in fact been passed on to customers or suppliers entails a highly sophisticated theoretical and factual inquiry; a court certainly cannot withhold part of a refund otherwise required to rectify an unconstitutional deprivation without first satisfactorily engaging in this inquiry.32
In a footnote to this comment, the Court stated: ‘We have expressed particular concern about the theoretical, factual, and practical difficulties in engaging in satisfactory “pass-on” analysis in the context of antitrust doctrine. See ... Hanover Shoe Inc v United Shoe Machinery Corp’.33 A plausible explanation for why, during the 1960s and beyond, courts hearing unlawful tax cases did not become aware of problems with the defence, is that they referred to it by the words ‘bear the burden’, while the antitrust cases identified it as ‘passing on’. This illustration shows that when the defence of disimpoverishment 31
Hanover Shoe Inc v United Shoe Machinery Corp, above n 12. McKesson Corp v Division of Alcoholic Beverages and Tobacco, Department of Business Reg 496 US 18, 110 S Ct 2238 (USSC, 1990) 47 and 2255. 33 Ibid. 32
Triggering the Defence of Disimpoverishment
19
is obscured by other names or manifests itself in subtly different ways, courts operating in one area of the law may overlook illuminating insights provided in another. In this book all those cases in which a claimant makes good his loss following the unjust enrichment of a defendant are brought together. The single label ‘disimpoverishment’ is preferred and disparate names used to describe the same defence are discarded.
F. Triggering the Defence of Disimpoverishment 1. Not Restricted to Cases of Unlawful Taxation While almost a trite observation, it must be steadily borne in mind throughout this book that the defence of disimpoverishment is general to the law of unjust enrichment, not specific to cases of unlawful impositions by government authorities. This observation requires a brief explanation. There are two main reasons why the defence of disimpoverishment is encountered most often in cases of unlawful taxation. First, the defence has been widely incorporated in legislative enactments concerning the recovery of overpaid tax. In these statutes restitution is nearly always predicated on the claimant being able to prove that he bore the cost of the government’s unjust enrichment. Second, the facts which give rise to the defence are readily identifiable in tax cases. This is because a claimant will often adjust the price of a product which is subject to an unlawful tax immediately following its introduction. Despite the defence of disimpoverishment being encountered most often in cases of unlawful taxation, nothing necessarily prevents it from being accepted as part of the general law of unjust enrichment. Thus, while rejected by the English Court of Appeal, counsel was right to raise the defence in Birmingham City Council v Kleinwort Benson34 (‘Birmingham City Council’). As is explained in the following chapter,35 the facts of that case concerned the relevance of a hedge contract in reducing the claimant’s loss. The case had nothing to do with unlawful taxation.
34 35
Kleinwort Benson v Birmingham City Council [1997] QB 380 (CA). Text following, above n 6, ch 3.
20
Introduction to the Defence of Disimpoverishment
2. Anticipatory Disimpoverishment The other preliminary observation to make about the defence of disimpoverishment is that, like the defence of disenrichment,36 the facts which give rise to it may occur before, at the same time as, or after the defendant’s unjust enrichment. In other words, while a claimant will typically attempt to make good his loss once it has been incurred, it is not exceptional that the claimant will take steps to prevent any loss accruing in the first place. In these circumstances, the defence of disimpoverishment is equally applicable. Thus, for example, in unlawful tax cases, a defendant government will not be unjustly enriched until tax is remitted to it. If a claimant, in anticipation of a tax being imposed, increases the price of his products to neutralize the tax’s effect on his financial position, this will not prevent the defence of disimpoverishment later being used to defeat an action for restitution of tax remitted to the government.37
G. Assumptions The defence of disimpoverishment rests on two important assumptions. The first is that if the claimant is awarded restitution in circumstances where he has not incurred a loss, he will receive a windfall. The second assumption is that the cause of the claimant’s disimpoverishment is the unjust enrichment of the defendant. Both assumptions underpin the common law and statutory cases discussed in chapters 3 and 4. They also play an important role in chapters 8 and 9 in determining whether the defence should form part of the law of unjust enrichment. I shall therefore briefly introduce them here.
1. The ‘Windfall’ Assumption (a) The Defendant will Also Receive an Undeserved Windfall In cases where the defence of disimpoverishment is upheld it is commonly assumed that, if the claimant is awarded restitution after his loss has been made good, he will receive an ‘undeserved windfall’. That is because he will accumulate twice in respect of the same loss.
36 Also known as ‘change of position’, this defence enables a defendant to defeat a claim for restitution if, generally speaking, she is no longer in possession of her unjust enrichment. For anticipatory disenrichment see Commerzbank AG v Gareth Price-Jones [2003] EWCA Civ 1663; Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER 193 (PC) 204 (Lords Goff and Bingham) (PC); Cf South Tyneside Metropolitan Borough Council v Svenska International plc [1995] 1 All ER 545 (Clarke J) 566. 37 Vogel v Knox 147 F Supp 10 (USDC MN, 1957).
Assumptions
21
While the persuasiveness of the windfall argument is apparent, courts which deny restitution on this basis must, according to the view adopted in this book, also explain why the defendant should be entitled to retain her unjust enrichment. That is because the defendant, if permitted to retain the money in dispute, will also receive an undeserved windfall. Thus, the legitimacy of the defence of disimpoverishment should not be assumed simply on the basis that the claimant has made good his loss and restitution will result in him receiving an undeserved windfall. A court, in upholding the defence, must also explain why the defendant is more deserving of the windfall than the claimant.
(b) The Role of Third Parties It is sometimes thought that the reason why an unjustly enriched defendant or disimpoverished claimant may receive an undeserved windfall is because of the presence of a third party, at whose ultimate expense the money in dispute has come. In other words, it appears that both the claimant and defendant’s entitlement to the money in dispute is undeserved vis-à-vis this third party. It would constitute a windfall in either party’s hands. The view adopted in this book, however, is that just because a third party has incurred a loss, it does not automatically follow that the defendant or claimant will be undeserving of the money in dispute. A ranking of the parties’ entitlement should be determined by reference to the circumstances in which (i) the defendant received her enrichment, (ii) the claimant made good his loss, and (iii) the third party was left out of pocket. All three situations must be compared in order to determine who is most deserving of the disputed money.
2. Causation When the defence of disimpoverishment is raised to counter a claimant’s action for restitution, it is assumed that the claimant not only avoided any loss, but also made good his loss in response to the defendant’s unjust enrichment. This, of course, need not always be the case. There may be reasons, entirely unrelated to the defendant’s unjust enrichment, which result in the claimant’s apparent restoration of his former financial position. Thus, if, by chance, the claimant backs the winner of the Grand National Steeplechase immediately following the defendant’s unjust enrichment at his expense, it does not follow that the defence of disimpoverishment can be used to defeat his action for restitution. The proposition that a causal link, which is not too remote, must be established by the defendant when relying on this defence, is supported by the decisions of Kleinwort Benson Ltd v South Tyneside Metropolitan BC38 and Birmingham City 38
Kleinwort Benson Ltd v South Tyneside Metropolitan BC [1994] 4 All ER 972, 984–85, 987 (Com Ct).
22
Introduction to the Defence of Disimpoverishment
Council.39 In these cases, it was held that hedge contracts entered into by the claimant bank (by which the costs of the defendants’ unjust enrichment were made good) could not be considered relevant in assessing whether the claimant had been disimpoverished.40 There is, however, American authority which disputes the requirement of a causative link between the defendant’s unjust enrichment and the claimant’s disimpoverishment. In Honorbilt Products Inc v Comr Internal Revenue,41 the claimant, Honorbilt, manufactured bed mattresses. Following the introduction of a federal tax on the domestic processing of cotton, Honorbilt increased the retail price of its mattresses. When it was later discovered that the tax was unconstitutional, the claimant sought restitution of the tax it had remitted to the government during the intervening period. The defendant (the Commissioner of Internal Revenue) contended that the claimant had not borne the burden of the tax. Instead, it had been passed on to the consumers of bed mattresses. Thus, the claimant should not be permitted to recover. The President of Honorbilt testified that the introduction of the processing tax had nothing to do with his company’s decision to increase prices. He stated that the price of mattresses sold by Honorbilt was controlled by two other factors: the price set by its main competitor and the manufacturing costs it incurred (including the market price for raw materials). Although the President’s testimony was doubted by the court,42 it later proved to be irrelevant. This was because the court held that: Whether the petitioner intended it or not, the burden of the tax was not borne by it, but was borne by the purchaser of its mattresses who paid the increased price. In our opinion the motive for the increase in price is immaterial and it makes no difference that Honorbilt’s president testified that processing taxes were not taken into consideration in fixing the price per mattress.43
This decision provides an extremely broad interpretation of the defence of disimpoverishment. It states that whenever the claimant’s loss has been made good, even if for reasons entirely unconnected to the defendant’s unjust enrichment, restitution will be denied. With respect, this view provides an unprincipled extension of the defence. So much was recognized three years later in Interwoven Stocking Co v United States44 39 Kleinwort Benson Ltd v Birmingham City Council, above n 34, p 393 (Evans LJ) and pp 398–99 (Morritt LJ). 40 For further discussion of these cases see text following, above n 5, ch 3. 41 Honorbilt Products Inc v Comr Internal Revenue 119 F 2d 797 (USCA, 1941). 42 Ibid, p 798. 43 Ibid. 44 Interwoven Stocking Co v United States 114 F 2d 768 (USCA, 1944). See also C B Cones & Son Mfg Co v United States 123 F 2d 530 (USCA, 1941); American Chain Co v Hartford-Connecticut Trust Co 86 F 2d 105 (USCA, 1936); Hutzler Bros Co v United States 33 F Supp 801 (USDC MD, 1940).
Taxation Agents
23
where the same court limited the decision in Honorbilt to where: ‘[C]oincident with the imposition of the tax, or closely approximating it in point of time, the sale price of the product was increased in amount sufficient to absorb the tax, and there is no satisfactory showing that the increase was due to the increased cost of materials, of labor, or of manufacture generally.’45 Thus, in Interwoven Stocking, the claimant was entitled to recover taxes erroneously exacted because (i) at the time it increased its prices it did not know of the contemplated tax, and (ii) its labour, raw material and general manufacturing costs had increased. Thus, the preferable view, as expressed in Kleinwort Benson v South Tyneside Metropolitan BC and Birmingham City Council, is that the defendant must show a causal and not too remote link between her unjust enrichment and the claimant’s disimpoverishment.
H. Taxation Agents There are a large number of American cases in which recovery of unlawful tax is denied—not on the basis of the claimant having disimpoverished himself—but because the claimant is characterized as a collection agent of the government.46 Claimants in such cases have no standing to sue because the unlawful tax is not imposed on them, but on those from whom it is collected. Determining whether a tax has been imposed on a third party consumer, as opposed to the claimant who raises prices in consequence of the tax, is a matter of statutory construction. An example will help illustrate when and how such situations arise. In the case of Furman University v Livingston,47 the government of South Carolina placed a tax on paid admissions to places of amusement within the state. Furman University claimed that it was entitled to a refund of the tax collected on the price of the admission tickets to university football games because a provision in the Code exempted eleemosynary corporations from such levies. The Supreme Court of South Carolina denied recovery because the claimant was not the proper party to bring a claim for restitution. The decision of the Supreme Court is easily explicable. Section 65–801 of the 1960 Cumulative Supplement to the 1952 South Carolina Taxation Code imposed 45
Interwoven Stocking Co v United States, above n 44, p 771. Kesbec Inc v McGoldrick 278 NY 293, 16 NE 2s 288 (NYCA, 1938); Cook v Sears Roebuck & Co 212 Ark 308, 206 SW 2d 20 (ARSC, 1974); 20th Century Sporting Club v United States 34 F Supp 1021, 92 Ct Cl 93 (USCC, 1940); Maynard v Thrasher 77 Ga App 316, 48 SE 2d 471 (GACA, 1948); Commonwealth v Kaplan 311 Pa 539, 166 A 883 (RISC, 1922); State v Obexer & Son Inc 660 P 2d 981 (NVSC, 1983) 985. 47 Furman University v Livingston 244 SC 200, 136 SE 2d 782 (SCSC, 1993). 46
24
Introduction to the Defence of Disimpoverishment
the tax in question on football fans watching the game, not the university. Specifically, the Code provided that: ‘[The state licence] tax shall be paid by the person paying such admission price and shall be collected and remitted to the Commission by the person collecting it’. Thus, Furman University was never more than a conduit—a taxation collection agent—for the State. The only persons with standing to sue for return of the unlawfully levied tax were the spectators who had attended the relevant football games. A contrary example, where the tax was placed on the claimant (the party remitting the tax) and not the end consumer, can be found in Independent Linen Service Co v Stone.48 The relevant taxation provision was as follows: ‘[U]pon every person engaging or continuing within this state in any of the following businesses ... there is likewise hereby levied and shall be collected a tax, on account of the business engaged in, equal to two percent of the gross income of the business’. Thus, when Independent Linen Service Co shifted the burden of the Mississippi sales tax to its customers, its claim for restitution was not denied on the basis that it was not the relevant taxpayer. On the contrary, its action in unjust enrichment was upheld because the State Supreme Court rejected the defence of disimpoverishment. This book is primarily concerned with cases in which (i) the ultimate taxpayer is the person or company on whom the unlawful tax is imposed, and (ii) this person or company has been disimpoverished. Where, in cases such as Furman University v Livingston, consumers are characterized as the statutory taxpayers, intermediary collection agents are barred from bringing claims for restitution. Because the government’s enrichment is deemed to have come at the expense of the ultimate taxpayer, the defence of disimpoverishment is rendered redundant. Consequently, any change in the intermediary’s financial status after the imposition of the unlawful tax is irrelevant. Although this book is restricted to situations in which the tax is imposed on the claimant, mention should also be made of the fact that when a tax is imposed on the end consumer, the claimant is still liable to incur a financial loss. As Professor Woodward has noted, a tax on customers will still affect the claimant’s sales. That is because ‘the customers will have to pay more to purchase the middleman’s product’.49 Whether redress will be available to taxation agents who suffer a financial loss as a result of lost sales will depend entirely on the jurisdiction within which they are operating.50 While in England the unlawful taxation of a citizen or enterprise 48
Independent Linen Service Co v Stone 192 Miss 832, 6 So 2d 110 (SCMS, 1942), considering §61, Ch 158, Laws of 1936 as amended by §2–f(1), Chapter 113 Laws of 1938. 49 W Woodward, “‘Passing-on’ the Right to Restitution” (1985) 39 U Miami L Rev 873, 880 n 29. 50 McKesson Corp, above n 32, p 49 and p 2257.
Burden of Proof
25
does not constitute a breach of duty which may be compensated by way of damages, other countries take a different view.51
I. Burden of Proof There are important consequences which attach to a resolution of the question as to who should bear the responsibility of showing that the claimant has or has not suffered a loss as a result of a defendant’s unjust enrichment. That is because of difficulties in proving whether the claimant has made good his loss after the unjust enrichment of the defendant.52 Thus, if the rule is that the onus is placed on the defendant to show that the claimant has been disimpoverished, the defence may be infrequently upheld. Conversely, if the rule is that the onus is upon the claimant to prove that he remains impoverished, restitution may often be denied.
1. Onus is on the Claimant In English and Australian unjust enrichment cases, the claimant has the responsibility of showing that the defendant has been enriched, that the benefit received came at his expense, and that the transfer took place in circumstances which were ‘unjust’. Once the claimant’s prima facie cause of action is established, it falls to the defendant to disprove the claim. It is at this point that the defendant may seek to prove and rely on the claimant’s disimpoverishment.
2. Onus is on the Defendant In numerous Canadian cases the opposite stance has been adopted. Instead of the defendant having the burden of proving the claimant’s disimpoverishment, the onus is placed on the claimant. Thus, in establishing his cause of action, the claimant must show that the defendant’s unjust enrichment came at his continuing, not just initial expense. The decision to reverse the burden of proof in cases where the claimant’s disimpoverishment is in issue depends not on the elements in an unjust enrichment cause of action, but an interpretation of those elements. Canadian courts award restitution in unjust enrichment cases when (i) the defendant has been enriched, (ii) the claimant has suffered a corresponding deprivation, (iii) there is an absence of juristic reason for the defendant’s enrichment, and (iv) no defences 51 In France, for instance, it appears that such an action is available. See cases C–192/95 to C–218/95 Societe Comateb v Directeur general des douanes et droits indirects [1997] ECR I–165. 52 These difficulties are discussed in text following, above n 13, ch 9.
26
Introduction to the Defence of Disimpoverishment
are available.53 Although stages (ii) and (iv) correspond in a formal sense with the English and Australian approaches to unjust enrichment, the question of disimpoverishment is incorporated into the cause of action (stage (ii)) in Canada, not stage (iv). American courts and legislatures have oftentimes adopted a similar stance to the Canadian one. Evidence of this alternate approach can be found in numerous cases. For example, in Truro Carpet Factory Outlet v Nova Scotia,54 the Nova Scotia Court of Appeal held that ‘before there can be a refund based on restitutionary principles, the claimant must show that it bore the burden of the tax’.55 In Johnson v Nova Scotia (AG),56 Chipman JA stated that ‘for the appellants to succeed, they must not only establish that they paid tax not authorized by law, but that they bore the burden of that tax’.57 In Coho Creek Estates Ltd v Maple Ridge,58 Koenigsberg J held that the claimant had the task of proving that ‘it bore the burden of the charge and that it did not pass it on as part of its costs to its customers’.59 And, in the important case of Air Canada v British Columbia,60 La Forest J stated that if the claimant airlines ‘have not shown that they bore the burden of the tax, then they have not made out their claim’.61 There are also countless American decisions in which the burden of proof has been placed on the claimant to show that he has suffered a continuing financial loss.62 These cases reflect one of the statutory versions of the defence: ‘did the claimant bear the burden of the defendant’s unjust enrichment?’. United States v Jefferson Electric Manufacturing Co63 (‘Jefferson Electric’) usefully illustrates this point. In that case the United States placed an excise tax on automobile accessories. The claimant argued that the tax did not apply to its business because ignition coils, which it sold, were not automobile parts within the meaning of the relevant statutes. Thus, it sought a refund of tax remitted to the government during the relevant period. Under Revenue Act (US) 1928 Section 424(a)(2), the claimant could not recover if the tax had been directly or indirectly collected from its customers. The Supreme Court therefore determined that it could not: ‘[A]ssent to the view that a court may give a judgment awarding the taxpayer a 53
Pettkus v Becker [1980] 2 SCR 834, (1980) 117 DLR (3rd) 257 (CSC) 274. Truro Carpet Factory Outlet v Nova Scotia (1991) 103 NSR (2nd) 214 (NSCA). 55 Ibid, p 19 (Hallet JA). 56 Johnson v Nova Scotia (AG) (1990) 96 NSR (2nd) 140 (NSCA). 57 Ibid, p 78 (Chipman JA). 58 Coho Creek Estates Ltd v Maple Ridge (1995) 53 ACWS (3rd) 890, 27 MPLR (2nd) 129 (BCSC). 59 Ibid, p 75 (Koenigsberg J). 60 Air Canada v British Columbia, above n 20. 61 Ibid, pp 1203 and 194 (La Forest J). 62 Consolidated Distilled Products Inc v Mahin 56 Ill 2d 110, 306 NE 2d 465 (ILSC, 1973); Shannon v Hughes, above n 22; State v Obexer & Son Inc, above n 46; Sloat v United States, above n 17; Decorative Carpets Inc v State Board of Equalization 373 P 2d 637, 58 Cal 2d 252 (CASC, 1962); Kesbec Inc v McGoldrick, above n 46, p 278. 63 United States v Jefferson Electric Manufacturing Co, above n 11. 54
Burden of Proof
27
refund without inquiring whether he has borne the burden of the tax or has reimbursed himself by collecting it from the purchaser.’64 Most importantly, however, the Court went on to say that under Section 424 of the Act it was the claimant who ‘must show that he alone has borne the burden of the tax’.65 In respect of this shift of the burden of proof, the Court said: ‘We do not perceive in the restriction any infringement of due process of law. If the taxpayer has borne the burden of the tax, he readily can show it; and certainly there is nothing arbitrary in requiring that he make such a showing’.66 The case was eventually remitted to a lower court to ascertain whether, in fact, the claimant had shifted the cost of the tax onto its customers. Its relevance here, however, is to demonstrate that it is possible to reverse the burden of proof by altering the test of disimpoverishment. Congress effected this change by requiring the claimant to show, as part of his cause of action, that he did not collect the tax directly or indirectly from his customers. This represents a double blow to claimants. Not only is the burden of proof reversed, but recovery is also denied even if the claimant’s loss is not made good. While the Court in Jefferson Electric was asked to consider an Act of Congress, the principle enunciated has been thought to apply more generally in American cases of unjust enrichment. As the Kentucky Court of Appeal in Shannon v Hughes67 later stated, Revenue Act (US) 1928 Section 424 was simply: ‘[A] legislative recognition of the principle that a taxpayer who is allowed the refund of a tax, the economic burden of which has been borne by another, has been unjustly enriched. The doctrine of unjust enrichment has received a wide application in tax cases even without the aid of a statute’.68 Thus, the court in that case (which was considering similar facts as in Jefferson Electric), saw no difficulty in reversing the burden of proof and requiring the claimant to show he bore the cost of the unlawful tax.
3. Is Reversal of the Onus of Proof Apparent but Not Real? Despite the Canadian and American approach appearing to reverse the burden of proof and therefore disposing of disimpoverishment as a defence, it is possible to interpret these decisions in two other ways. If these alternative explanations are accepted, the concept of disimpoverishment may, even in these jurisdictions, still be seen primarily as a defence-based issue, rather than one concerned with the claimant’s cause of action. 64 65 66 67 68
Ibid, pp 400 and 448. Ibid, pp 401 and 448. Ibid, pp 402 and 449. Shannon v Hughes, above n 22. Ibid, p 1175.
28
Introduction to the Defence of Disimpoverishment
(a) A Presumption of Disimpoverishment The first way in which the Canadian and American cases can be rationalized in order to preserve disimpoverishment as a defence, rather than part of the cause of action, is by interpreting them as meaning that a presumption of disimpoverishment arises in certain instances. For example, following the government’s unlawful receipt of tax, it is presumed that the claimant will have made good his loss by passing it on to his customers via higher prices. Thus, while the defence of disimpoverishment does exist, the onus of proving it is immediately satisfied because of the presumption. The burden of proof then shifts back to the claimant to disprove his disimpoverishment. The problem with this interpretation, however, is that it has been specifically rejected in at least one Canadian case. Koenigsberg J, in Coho Creek Estates Ltd v Maple Ridge, stated: ‘Defence counsel appears to suggest that there is a presumption of passing on that must be rebutted. None of the cases ... suggest that the burden of proof includes a presumption. Rather, the cases put a positive duty on the plaintiff to make out, by way of evidence, that they have suffered a detriment’.69 Some other method for preserving the concept of disimpoverishment as a defence must consequently be found.
(b) It is Sufficient to Raise, but not Prove, the Defence The alternative means of rationalizing the shift in onus comes from two cases: one American and one Canadian. In both cases it was suggested that it is sufficient for the defendant to raise, but not prove, the defence. In Milwaukee Safeguard Insurance Co v Selcke,70 the court held that: ‘The party challenging a taxpayer’s entitlement to a refund, in this case the defendant’s, undoubtedly bears the burden of raising the pass-on defense. Once such a defense is raised, however, it becomes the taxpayer’s burden to show that it did not pass on the tax to another party ... ’.71 And in the Canadian case of Michelin Tires (Canada) Ltd v Minister of National Revenue (Customs and Excise),72 Reed J held that it was reasonable to assume, without specific evidence, that the cost of taxes mistakenly paid by the claimant was passed on to its customers. Thus, all the defendant need do is assert the defence of disimpoverishment without actually proving that the claimant has made good his loss. While both explanations are plausible, and do provide a means of preserving the issue of disimpoverishment as a defence, they are not wholly convincing. The 69
Coho Creek Estates Ltd v Maple Ridge, above n 58, p 121 (Koenigsberg J). Milwaukee Safeguard Insurance Co v Selcke 324 Ill App 3d 344, 754 NE 2d 349 (ILCA, 2001). 71 Ibid, pp 353 and 358. 72 Michelin Tires (Canada) Ltd v Minister of National Revenue (Customs & Excise) 158 FTR 101 (CFC). 70
Burden of Proof
29
hallmark of a defence is that it must not only be raised by the defendant, but also proved by her. Only once it is proved as a matter of evidence, the burden shifts back to the claimant.
4. Where should the Burden Lie? The contrasting approaches of the English and Australian courts and the Canadian and American courts gives rise to a problem: should the claimant’s disimpoverishment be considered in this book, and by courts and legislatures, as an issue going to stage (ii), the cause of action, or stage (iv), defences? As stated at the introduction of this section, resolution of this question is not merely academic. Important consequences attach to the solution adopted. Whichever party has the burden of proving that the claimant has or has not suffered a continuing loss as a result of a defendant’s unjust enrichment will have a significant impact on the outcome of the case. That is because of problems associated with calculating whether a loss has, in fact, occurred. The view adopted in this book, consistent with the English and Australian approach, as well as the European Court of Justice, is that attempts to diminish the standard of proof required of defendants, raise presumptions which adversely affect the claimant’s action, or shift the onus of proof altogether, should be rejected. In relation to diluted standards of proof for defendants, Sir Gordon Slynn, the Advocate General in Re Repayment of Illegal Taxes: EC Commission v Italy,73 had this to say: The burden of proof lies initially on the administration to show that the charges were passed on and that as a consequence there was an unjust enrichment. It cannot, however, be right for the mere assertion by the administration to be sufficient to transfer the burden of proof to the claimant or to raise presumptions, rebuttable or irrebuttable, that there has been a passing-on. [Only] If the administration produces evidence which shows that there has been a passing on then the evidential burden may pass to the claimant to rebut it or to counteract it by showing that even if the charges have been passed on there has been a loss of profit, which means that there has been in whole or in part no unjust enrichment.74
This view was consistent with one already expressed by the European Court of Justice in Amministrazione delle Finanze dello Stato v SpA San Giorgio.75 In that case, the Italian government imposed mandatory health inspections on imported animals, meat and animal products and residues, and exported cattle. Following 73 74 75
Re Repayment of Illegal Taxes: EC Commission v Italy [1988] ECR 1799. Ibid, pp 1810–11. Amministrazione delle Finanze dello Stato v SpA San Giorgio [1983] ECR 3595.
30
Introduction to the Defence of Disimpoverishment
an order of the Italian Constitutional Court that the scale of health inspection charges was unconstitutional, San Giorgio, a dairy, brought an action in unjust enrichment to recover money paid between 1974 and 1977. The Italian State Finance Administration sought to rely on Article 10 of Decree Law No 430 of 10 July 1982,76 which provided that the inspection charges were: ‘[P]resumed to have been passed on whenever the goods in respect of which the payment was effected have been transferred, even after processing, transformation, erection, assembly or adaptation, in the absence of documentary proof to the contrary’.77 (emphasis added) In considering the validity of Article 10, the Court stated that: [A]ny requirement of proof which has the effect of making it virtually impossible or excessively difficult to secure the repayment of charges levied contrary to Community law would be incompatible with Community law. That is so particularly in the case of presumptions or rules of evidence intended to place upon the taxpayer the burden of establishing that the charges unduly paid have not been passed on to other persons ... .78
Advocate General Mancini, in advising the Court, put the position in even stronger terms. He stated that: ‘[T]o impose upon the person who paid the charge the burden of proving that it has not been passed on and to make the repayment of unduly paid charges conditional upon such proof is tantamount to repudiating the right to repayment’.79 Thus, use of a presumption to reverse the burden of proof in disimpoverishment cases will be found contrary to Community law. Consequently, as Article 10 Decree Law No 430 called ‘for proof of a diabolically high standard’,80 it was held to be in breach. Consistent with this view, as well the common law position in England and Australia that once a claimant has shown that he suffered a loss (at the time the defendant received an unjust enrichment from him), the onus should fall on the defendant to prove that this loss was later made good.
J. Judicial Responses to Disimpoverishment The purpose of this final section is to provide an understanding of actual and theoretical responses to the defence of disimpoverishment. Of particular interest is 76 Gazzetta Ufficiale No 190 of 13 July 1982. Art 10 was later amended by Art 19 of Decree-Law No 688 of 30 September 1982, but the substance of the provision was not altered. 77 Amministrazione delle Finanze dello Stato v SpA San Giorgio, above n 75, p 3598. 78 Ibid, p 3613. 79 Ibid, p 3625. 80 Ibid, p 3626.
Judicial Responses to Disimpoverishment
31
the possibility that the defence of disimpoverishment may not only be rejected or accepted in fact or at law, but also rejected in a ‘qualified fashion’.
1. Acceptance of the Defence at Law When the defence of disimpoverishment is accepted at law, two alternatives arise. First, the defence can be accepted on the facts, so the defendant is permitted to retain the money in dispute. Second, the defence can be rejected on the facts resulting in the claimant’s recovery. These alternatives can be illustrated as follows: Disimpoverishment
Accept at law
Accept on the facts
Reject on the facts
Defendant retains the money
Claimant recovers the money
(a) Accept at Law and on the Facts The first alternative requires little clarification. The defendant is simply permitted to retain the sum in question.
(b) Accept at Law but Reject on the Facts When the defence of disimpoverishment is accepted as part of the law of unjust enrichment but not established by the defendant on the facts of the case, the only response is that the defendant be ordered to make restitution of the money in question to the claimant.
2. Rejection of the Defence at Law If it is decided that the defence of disimpoverishment has no place in the law of unjust enrichment, a court may immediately award the sum in question to the claimant. The inquiry need not proceed any further. The resolution of the problem looks like this:
32
Introduction to the Defence of Disimpoverishment Disimpoverishment
Reject at law
Claimant recovers the money
3. Qualified Rejection Once a defence has been accepted or rejected at law (and if necessary on the facts), judgment is usually entered in favour of either the claimant or defendant. The defence of disimpoverishment, however, offers another possibility. When the defendant is able to prove that the claimant has made good his loss, courts may decide not to make an award in favour of either the defendant or claimant. Instead, courts may require the money to be held on condition that it is returned to a third party, or distributed to a particular person. This set of circumstances can be illustrated as follows: Disimpoverishment
Reject at law but accept on facts
Money held on condition
Money distributed directly to third parties
The detail of these responses is considered in chapter 9. The purpose of introducing them here is simply to explain how a defence can be rejected in a ‘qualified’ manner. The most anomalous aspect of the so-called ‘qualified rejection’ of the defence of disimpoverishment is that it results in neither the defendant nor claimant being awarded the money in question. Instead, the money goes to a person or persons not party to the dispute. This result raises two important questions. First, why would a court be concerned with anything but a determination of whether the claimant has made out his cause of action, or whether the defendant has a viable defence? Second, how can a court make a decision to grant an award of money to a party not directly involved in a dispute?
Judicial Responses to Disimpoverishment
33
The reason why a court might be concerned with the effect of its decision on a party not involved in the immediate dispute turns on the special circumstances in which the defence of disimpoverishment is raised. A court may not want the defendant to retain the money in dispute because that may result in her unjust enrichment at the expense of the claimant. However, the court may also wish to prevent the claimant from recovering the money when he has made good his original loss by shifting the cost of it to a third party. This situation can be viewed in the following form: Defendant
Claimant
3rd party customer
1. Pre unjust factor
£0
£0
£0
2. Post unjust factor
£1
–£1
£0
3. Post disimpoverishment
£1
£0
–£1
Depending on whether the defence is accepted as a matter of law and on the facts, or the defence is rejected on the facts or as a matter of law, the following results are possible:
Defendant
Claimant
3rd party customer
4. Accept defence at law and on the facts
£1
£0
–£1
5. Reject the defence on the facts/at law
£0
£1
–£1
In both cases, the third party is left bearing the loss: an apparently undeserving victim of an unjust factor, which it played no part in inducing. Given this outcome, it is important to consider whether the parties can be restored to their positions at Stage 1, such that no one receives an apparently unmeritorious windfall and no one is burdened by a seemingly undeserving loss. One way for the parties to be returned to Stage 1 is to allow for a ‘qualified rejection’ of the defence. This solution, of which there are varying forms, comes in two parts. First, the defence of disimpoverishment is rejected as a matter of law. Thus, the defendant is denied retention of the sum in dispute. This is the ‘rejection’. Second, when the facts reveal that the claimant has made good his loss by shifting the cost of it to third party consumers, those third parties acquire a right to bring an action for return of that money. Thus, the claimant is also denied recovery. This is the ‘qualification’ of the rejection. An award of the money in dispute is then made in the third party’s favour.
34
Introduction to the Defence of Disimpoverishment
In chapters 3, 8 and 9 the mechanics of the ‘qualified rejection’ approach are further explored. The question of whether it should be adopted is also addressed.
K. Conclusion This purpose of this chapter has been to introduce the defence of disimpoverishment. By contextualizing its operation as well as providing an understanding of its meaning, its purpose, its scope and the assumptions which underpin it, the remainder of this book can focus on analyzing when, and in what way, the defence should form part of the law of unjust enrichment.
3 Common Law Cases on the Defence of Disimpoverishment A. Introduction The purpose of the second chapter was to introduce the defence of disimpoverishment by exploring its nature and scope. The objective of this and the next chapter is to complete the picture. In this chapter the common law defence of disimpoverishment, as considered by courts in England, Australia, Canada and the United States, is examined. In the English and Australian sections every case in which the defence has been considered—either explicitly or implicitly—is reviewed. By contrast, because of the large number of cases which have arisen in Canada and the United States, a different approach is adopted in these sections. In the Canadian section the cases are categorized by reference to whether the defence has been accepted at law and on the facts, accepted at law but rejected on the facts, or rejected at law. Then, in relation to the United States, the cases (all of which are concerned with unlawful demands for tax made by public authorities) are categorized by reference to whether the defence was rejected, rejected in a qualified fashion, or accepted. A startling fact emerges following this detailed review of the case law. That is, disagreement across and within the four jurisdictions over how and whether the defence of disimpoverishment should form part of the law of unjust enrichment is shown to exist. Because this state of affairs must be explained and a solution found to determine which of these competing views is correct, this chapter is of foundational importance for the remainder of this book.
B. England 1. Linz v Electric Wire Company of Palestine Ltd Some commentators have interpreted the 1948 decision of the Judicial Committee of the Privy Council in Linz v Electric Wire Company of Palestine
36
Common Law Cases on the Defence of Disimpoverishment
Ltd1 (‘Linz’) as indicating a preference in favour of the defence of disimpoverishment in English law.2 This claim, however, is extremely weak.3 The defence was not raised nor addressed in the case. It also did not form the basis of the decision. Moreover, as decisions of the Privy Council are binding only on the country from which the case emanates, this authority could, at best, only be considered persuasive in English courts. The facts of the case were as follows. In 1935 the claimant purchased 775 preference shares from the defendant company. Unbeknownst to both parties the defendant was acting ultra vires by issuing and selling the preference shares. When the company later discovered that it had been acting beyond its powers, it responded by offering to reimburse all existing shareholders. The claimant, having already sold her shares at a substantial loss, argued that she was also entitled to a repayment. As the issue and sale of the preference shares was void ab initio, she contended that there had been a total failure of consideration and that she never received what she had bargained for. The claim for money had and received was unanimously rejected by the Privy Council. In the opinion of Lord Simonds: ‘[H]aving been duly registered as a shareholder and having parted for value with her shares by a sale which the company recognized by issue of a share certificate to, and registration of, her transferee, she got exactly that which she bargained to get’.4 An alternative interpretation of this case is that recovery was denied because the claimant suffered no loss as a result of purchasing the void shares. This was because she had resold her shares to a third party. The problem with this analysis, however, is that such reasoning is not evident in the decision. If the defendant’s disimpoverishment provided a basis for rejecting the claim, she would have been awarded the difference between the amount she received when she sold her shares at a loss, and the amount she originally paid for them. As it was, however, she received nothing. She remained ‘impoverished’ as a result of the transaction.
2. The Swaps Cases (a) The Decisions Far more instructive are the ‘swaps cases’ which arose some fifty years after the decision in Linz. In both Kleinwort Benson Ltd v South Tyneside Metropolitan BC5 (‘South Tyneside’) and Kleinwort Benson Ltd v Birmingham City Council6 1
Linz v Electric Wire Company of Palestine Ltd [1948] AC 371 (PC). P Birks and R Chambers, Restitution Research Resource (Oxford, Mansfield, 1997) 54. 3 Also recognized by F Rose, ‘Passing On’ in P Birks, (ed), Laundering and Tracing (Oxford, OUP, 1995) 261, 262. 4 Linz v Electric Wire Company of Palestine Ltd, above n 1, p 377 (Lord Simons). 5 Kleinwort Benson Ltd v South Tyneside Metropolitan BC [1994] 4 All ER 972 (Com Ct). 6 Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380 (CA). 2
England
37
(‘Birmingham City Council’), local authorities entered into interest rate swap transactions with the claimant bank, Kleinwort Benson. Professors Birks and Mitchell describe the nature of these transactions in the following way: In a contract for an interest swap one party promises to pay another interest at a fixed rate on a notional sum for a fixed period, say 5% on £5 million for five years with quarterly settlement dates; on the same terms the counterparty promises to pay a floating rate determined by a formula. If interest rates fall the floating payer will win; if they rise the fixed payer will win. There is a vast market in swaps worldwide, and the UK authorities were deeply involved in that trade.7
The reason why local authorities were so deeply involved in swaps transactions was that they were able to borrow large sums of money which they were otherwise restricted from doing. The banks made up-front lump sum payments to the councils ‘which represented (discounted) fixed interest payments on a notional capital sum that would have been made over a period of time’.8 It was eventually decided that the interest rate swap agreements were not within the money management powers of the local authorities and were consequently held to be void.9 Following this determination, dispute arose as to whether the transactions could be unwound, resulting in monies which had already passed between the local authorities and banks being returned to the payers. South Tyneside and Birmingham City Council were two examples of this. In these cases the local councils argued that restitution should be denied on the basis that the claimant, Kleinwort Benson, had been ‘disimpoverished’ as a result of back-to-back swap and hedging agreements it had entered into with third parties. These parallel transactions meant that every time the bank ‘lost’ under a void swap, it ‘won’ under a hedge contract. The payments were effectively neutralized. Consequently, if awarded restitution, the local councils argued that Kleinwort Benson would recover even though they suffered no net financial expense as a result of their unjust enrichment. The defence of disimpoverishment was rejected in both cases. In South Tyneside the claimant bank was entitled to restitution of the £1.6m paid to the defendant council under the void contracts. Hobhouse J held that it was irrelevant that the claimant had entered into hedging agreements to minimize its liability. So long as the defendant’s enrichment was shown to have come from the claimant, subsequent events which altered the claimant’s financial circumstances were irrelevant. Hobhouse J put it in the following terms:
7 P Birks and C Mitchell, ‘Unjust Enrichment’ in P Birks, (ed), English Private Law, vol II (Oxford, OUP, 2000) 15.66. 8 J Edelman, Gain-based Damages (Oxford, Hart Publishing, 2002) 89. 9 Hazell v Hammersmith & Fulham London BC [1992] 2 AC 1 (HL).
38
Common Law Cases on the Defence of Disimpoverishment What is the legal principle which the defendants invoke? It can only be some unspecific principle which derives not from the law of restitution but from some concept of compensation. The essential feature in what the defendants here are asking the court to do ... is make an assessment of the loss suffered by the relevant plaintiff as if one were investigating a right to compensation . . . . But the primary answer is that such considerations . . . are not relevant to restitution . . . it suffices in the present case for the plaintiffs to show that they were the payers of the relevant money, that the defendants were unjustly enriched by the payments and that there is no obstacle to restitution.10
The Court of Appeal in Birmingham City Council unanimously agreed with and expanded upon this conclusion. Evans LJ decided that the defence of disimpoverishment had no place in English law largely because it was irrelevant whether the claimant had suffered a loss. That is because the requirement that the defendant’s unjust enrichment come ‘at the expense of ’ of the claimant merely ‘serves to identify the person by or on whose behalf the payment was made and to whom repayment is due’.11 Saville LJ, in a brief concurring judgment, agreed that Kleinwort Benson should be entitled to restitution in full. He also took the view that the claimant’s financial position was irrelevant to the instant inquiry. So long as the defendant had received an unjust enrichment, and the claimant could show that it was the source of the benefit, then restitution should follow. This opinion was expressed in the following terms: [W]hether the [claimant] payer is out of pocket or has recouped his outlay from other sources is entirely irrelevant. The [defendant] payee has been unjustly enriched by receiving and retaining money he has received from the payer and to which he has no right. He does not cease to be unjustly enriched because the payer for one reason or another is not out of pocket. His obligation to return the money is not based on any loss the payer may have sustained, but on the simple ground that it is unjust that he should keep something to which he has no right and which he only received through the payer’s performance of an obligation which did not in fact exist.12
Considered as a whole, the opinions of the courts in South Tyneside and Birmingham City Council provide an emphatic rejection of the defence of disimpoverishment. They also endorse the view that there is no requirement of a correlation between loss and gain in actions for restitution.
10 11 12
Kleinwort Benson Ltd v South Tyneside Metropolitan BC, above n 5, pp 984–85. Kleinwort Benson Ltd v Birmingham City Council, above n 6, p 393 (Evans LJ). Ibid, pp 394–95 (Saville LJ).
England
39
(b) Are the Decisions Binding? Hobhouse J in South Tyneside, as well as Evans and Morritt LJJ in Birmingham City Council, all agreed that there was another reason why the defence of disimpoverishment should not succeed in these cases. That is, even if the defence formed part of the English law of unjust enrichment, it was inapplicable on the facts because the ‘hedge contracts as were entered into by the bank in the normal course of its business were “too remote” to be taken into account’.13 Morritt LJ carefully explained this argument in the following terms: Let it be assumed that there are two precisely matching equal but opposite interest rate swaps only one of which is made with a local authority and therefore void. In such a case the valid transaction which the authority contends should be brought into account would have been concluded in reliance on the validity of the other, not on or as a consequence of its invalidity. Thus, even if the restitutionary claim were to depend on loss the usual rules as to mitigation would treat the matching swap transaction as unconnected.14
Morritt LJ’s point was that whilst there may have initially been a causal connection between Kleinwort Benson entering into a swap agreement with a local council and hedge contract with another bank, this link was severed when payments under one of them could not be received or made. The causal connection between the hedge and swap contracts was severed when it was determined that the swap agreements with the local councils were void. In addition to this reasoning, there is another explanation for why the swap contracts and hedge contracts in South Tyneside and Birmingham City Council were not causally connected in a relevant way. That is, the payments made or received under the contracts were entirely unrelated. Even when the swap agreements with the local councils were found to be void, the bank was not relieved from having to make payments out under its hedge contract. This point can be illustrated by another example. Suppose a liquidator was appointed to the bank with which Kleinwort Benson had a hedge contract. In these circumstances the insolvent bank would still be permitted to ‘collect’ under the hedge contract if interest rates moved in its favour. However, it would not be required to ‘pay out’ if interest rates moved against it. In either situation, however, the swap contract with the local council would remain unaffected. Payments would still have to be made by Kleinwort Benson under the swap contract, irrespective of the status of the hedge contract. The point here is that while in South Tyneside and Birmingham City Council Kleinwort Benson entered into hedge contracts to offset losses which may have 13 14
Ibid, p 393 (Evans LJ). Ibid, p 399 (Morritt LJ).
40
Common Law Cases on the Defence of Disimpoverishment
been incurred under its swap contracts (with the local councils), the payments made or received under both agreements were not causally connected. And, importantly, it is arguably the receipt of money, not the general hedging contract, which must be causally connected to the swap agreement if the defence of disimpoverishment is to be relied upon. The relevance of these observations for this book is that if the hedge contracts in Birmingham City Council and South Tyneside were not causally related to the swap contracts, the courts’ condemnation of the defence of disimpoverishment was unnecessary. It therefore follows that another English court, which later comes to consider the defence of disimpoverishment, need not be bound by the views expressed by the Court of Appeal and Hobhouse J at first instance. In other words, it is arguable that the defence of disimpoverishment may still, without a judge needing to overrule binding authority, find a home in the English law of unjust enrichment.
3. Woolwich Equitable Building Society v Inland Revenue Commissioners In Woolwich Equitable Building Society v Inland Revenue Comrs15 (‘Woolwich’) the reason for restitution rested not upon the non-voluntariness of the claimant’s actions, but a policy-motivated factor. The particular policy being the prevention of unlawful demands for payment by public authorities. Lord Goff put the principle in these terms: ‘[M]oney paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by a public authority is prima facie recoverable by the citizen as of right’.16 In Woolwich itself the House of Lords was asked to consider whether a private company could recover overpaid tax from the Inland Revenue. In accordance with the principle enunciated by Lord Goff, the claimant was awarded restitution of the entire sum plus interest. The defence of disimpoverishment was not raised in the case itself. However, this did not prevent Lord Goff from briefly discussing it. While he declined to provide an express view about its merits, his unease with the defence is evident. In considering the dissenting judgment of Wilson J in Air Canada v British Columbia,17 (‘Air Canada’) in which her Honour rejected the defence and held that the claimant should be entitled to restitution of tax paid pursuant to an unlawful demand, Lord Goff said: ‘[L]ike Wilson J, I very respectfully doubt the advisability of imposing special limits upon recovery in the case of unconstitutional or ultra vires levies . . . ’.18 (emphasis added) 15 16 17 18
Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (HL). Ibid, p 177 (Lord Goff). Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC). Woolwich Equitable Building Society v Inland Revenue Comrs, above n 15, p 176 (Lord Goff).
England
41
His Lordship then went on to say that: It will be a matter for consideration whether the fact that the plaintiff has passed on the tax or levy so that the burden has fallen on another should provide a defence to this claim. Although this is contemplated by the European Court of Justice in the San Giorgio case, it is evident from Air Canada . . . that the point is not without difficulties . . . .19 (emphasis added)
Lord Goff ’s appreciation of the problems that the defence of disimpoverishment raises in cases of unlawful demands for tax falls short of a direct condemnation. His comments, in any event, were made in obiter. Nonetheless, his remarks are consistent with the approach adopted in South Tyneside and Birmingham City Council. Some importance can also be attributed to them due to his status as a leading authority on the law of unjust enrichment.
4. Banque Belge Pour L’Etranger v Hambrouck The case of Banque Belge pour L’Etranger v Hambrouck20 (‘Banque Belge’) is traditionally understood as being solely concerned with the common law process of tracing. It appears that no academic commentator has ever viewed it as relevant to the defence of disimpoverishment. This possibility was not, however, lost to counsel nor the court in Kleinwort Benson v Birmingham City Council.21 In light of this recognition the case must be re-examined. The facts of Banque Belge were these. Hambrouck, the defendant, was the chief assistant accountant at a company known as Pelabon Works. Mr Charles Pelabon was the proprietor of the company. Hambrouck forged cheques to the value of £6000. He had the cheques made payable to himself but purported to be drawn by Mr Pelabon. The sum was debited against Mr Pelabon’s account at Banque Belge. Hambrouck subsequently paid the cheques into his own account at Farrow’s Bank (with Farrow’s obtaining payment from Banque Belge). He then drew cheques on his account and gave them to his mistress, Mademoiselle Spanoghe. She in turn deposited them into her account at the London Joint City and Midland Bank. When Hambrouck’s fraudulent activities were discovered, Mademoiselle Spanoghe’s account stood to the credit of £315. The claimant bank, Banque Belge, brought an action seeking return of this sum. It succeeded. At first glance, the relevance of the defence of disimpoverishment is not apparent. On closer examination however, the Court’s reasoning seems inexplicable without it. When a bank pays out money it cannot debit a customer’s account 19
Ibid, pp 176–77 (Lord Goff). Banque Belge pour L’Etranger v Hambrouck [1921] 1 KB 321 (CA). 21 Kleinwort Benson Ltd v Birmingham City Council, above n 6, pp 394 (Evans LJ) and 400 (Morritt LJ). 20
42
Common Law Cases on the Defence of Disimpoverishment
without the customer’s authority.22 Thus, when Banque Belge paid out £6000 to the fraudster, Mr Hambrouck, it and not its customer, Mr Pelabon, was prima facie liable for the sum. As it turned out, however, Hambrouck was considered to have ostensible authority to drawn down from Mr Pelabon’s account. Thus, Mr Pelabon’s chose in action against the bank was reduced by £6000. The bank, therefore, was left no worse off as a result of Hambrouck’s fraudulent activities. The money it had paid out was debited to Mr Pelabon’s account. As a consequence of Banque Belge not sustaining any loss as a result of Hambrouck’s unjust enrichment, counsel for Mademoiselle Spanoghe argued that the bank had no right of recovery. The £315 in the defendant’s bank account had not come ‘at the expense of ’ Banque Belge, but Mr Pelabon. As Messrs Langdon KC and Warren stated: ‘[T]he respondents are not the proper persons to sue. The person really damnified is M. Pelabon. Having parted with the money on his mandate they are not responsible to him’.23 Despite the possibility of Banque Belge obtaining a windfall of £315 at the expense of Mr Pelabon, the Court of Appeal was not deterred from awarding the bank restitution of the entire sum. The net effect of the transaction was irrelevant. It did not matter that crediting its customer’s account meant the bank avoided any loss. All that mattered was that ‘the money actually obtained by Hambrouck was the Bank’s money, even if they might debit their payments to the account of another’.24 Thus, the bank’s cause of action in unjust enrichment arose each time it paid money to the fraudulent Hambrouck. The fact the bank later made good its loss was of no consequence. The Court of Appeal’s implicit rejection of the defence of disimpoverishment may, however, be explicable on other grounds. If this case is interpreted as supporting a common law vindication of property rights, the defence of disimpoverishment will be irrelevant. The basis of recovery in such circumstances is the fact that the defendant is in possession of property which belongs to the claimant. Whether or not the claimant has made good his loss is irrelevant. Professor Smith argues that there are not only good reasons in principle for this interpretation of the case, but judicial support as well. He cites a passage of Millet J in Agip (Africa) Ltd v Jackson25 as evidence of this: I think that at first instance I am bound to regard that case [Banque Belge] as authority for the proposition that an action for money had and received is not limited to the immediate recipient or his principal but may be brought against a subsequent transferee into whose hands the money can be followed and who still retains it. But it is no authority for the proposition that it lies against a subsequent transferee who has parted 22 23 24 25
Barclays Bank Ltd v W J Simms & Son Ltd [1980] QB 677. Banque Belge pour L’Etranger v Hambrouck, above n 20, p 323. Ibid, p 329 (Scrutton LJ). See also comments of Bankes LJ at p 325. Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, 287–88.
Australia
43
with the money, and I doubt that it does. At this remove the action begins to take on the aspect of a proprietary claim rather than the enforcement of a personal liability to account.26 (emphasis added)
One of the reasons why the action in Banque Belge appears to be a proprietary rather than personal claim is because the claimant bank was only entitled to recover £315. This sum represented the value surviving rather than the value received by the defendant. As Professor Smith acknowledges,27 however, and Professor Burrows points out, because: [T]he claimant only ever sought restitution of the £315 it is understandable that there was no discussion in the judgments of its prima facie entitlement to a higher amount. . . . in any event, and assuming she did not know of the fraud, the defence of change of position meant that the claimant was not entitled to more than £315.28
While difficult to determine, it appears reasonable to assume that Banque Belge was a personal claim for restitution in which the defence of disimpoverishment was implicitly rejected.
C. Australia 1. Mason v New South Wales The defence of disimpoverishment first received judicial attention in Australia in Mason v New South Wales.29 The claimant company in that case was engaged in the business of interstate road haulage. As a carrier of goods, it was required to purchase a permit for each journey undertaken between the states of Victoria and New South Wales. The imposition of such fees by the New South Wales Government was held to be unlawful under the Commonwealth Constitution. The claimant was subsequently awarded restitution of the fees it had paid under the ultra vires Act on the basis of duress. Despite evidence of the fact that the claimant had shifted the cost of the licence fee to its customers, the defence of disimpoverishment was considered irrelevant. Three of the seven High Court justices did not address the issue. McTiernan J30 and Menzies J31 only discussed the claimant’s disimpoverishment insofar as it 26 27 28 29 30 31
L Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas L Rev 2115, 2165. Ibid, p 2165. A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2002) 189. Mason v New South Wales (1959) 102 CLR 108 (HCA). Ibid, p 122. Ibid, p 136.
44
Common Law Cases on the Defence of Disimpoverishment
provided evidence of whether payments were made under duress or voluntarily. Windeyer and Kitto JJ were therefore the only two judges who explicitly considered the applicability of the defence to unjust enrichment law in Australia. Both rejected it outright. Kitto J stated that: ‘What happened between them [the claimants] and their customers is irrelevant: it was still their money that they parted with, and there is nothing to account for their parting with it except the pressure they were under. In my opinion they are entitled by law to have it back’.32 Windeyer J, putting it in more specific terms, had this to say about the defence: It was argued [by the defendant] that, even if they were otherwise entitled, the plaintiffs were in some way estopped from recovering because they had ‘passed on’ to their customers the amounts paid for permits and are thus, it was said, not themselves at a loss. I can see no basis for this contention . . . . If the defendant be improperly enriched on what legal principle can it claim to retain its ill-gotten gains merely because the plaintiffs have not, it is said, been correspondingly impoverished? The concept of impoverishment as a correlative of enrichment may have some place in some fields of continental law. It is foreign to our law. Even if there were any equity in favour of third parties attaching to the fruits of any judgment the plaintiffs might recover—and there is nothing proved at all remotely suggesting that there is—this circumstance would be quite irrelevant to the present proceedings. Certainly it would not enable the defendant to refuse to return moneys which it was not in law entitled to collect and which ex hypothesi it got by extortion.33
Windeyer J’s view of the defence of disimpoverishment is particularly instructive. It has three limbs. First, the fact that the claimant may have made good his initial loss did not affect his claim in unjust enrichment against the defendant. Second, even if there existed a third party to whom the claimant’s loss had been passed on, this provided no basis for the defendant’s retention of the money in dispute. And third, the sum recoverable from the defendant was the value of the benefit received. Recovery was not capped by the extent of the claimant’s loss.
2. Commissioner State Revenue (Victoria) v Royal Insurance Australia Ltd It took another 25 years before the High Court of Australia was again confronted with the defence of disimpoverishment. On this occasion it arose in the context of payments made under a mistake of law. The case was Comr State Revenue (Victoria) v Royal Insurance Australia Ltd34 (‘Royal Insurance’). 32 33 34
Ibid, p 129 (Kitto J). Ibid, p 146 (Windeyer J). Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA).
Australia
45
The claimant, Royal Insurance, provided companies with insurance cover so that they might protect themselves in the event of successful claims for workers’ compensation. Pursuant to the Stamp Duty Act (Vic) 1958, Royal Insurance was required to pay stamp duty in respect of premiums received from its customers. In 1985 the Victorian Government introduced changes to how employees would be compensated for workplace injuries. Consequently, the imposition of stamp duty on workers’ compensation insurance was discontinued. Despite this, Royal Insurance continued to pay stamp duty to the State for another two years. Upon discovering its mistake it sought restitution of the $1,907,908 it had erroneously paid. The Commissioner for State Revenue refused to repay the money on the basis that Royal Insurance had suffered no loss because the cost of the stamp duty had been passed on to its customers. The High Court unanimously rejected the Revenue’s reliance on the defence of disimpoverishment. Brennan J, with whom Toohey and McHugh JJ concurred, held that it was irrelevant that the burden of the stamp duty had been borne by Royal Insurance’s customers. He stated that: The fact that Royal had passed on to its policy holders the burden of the payments made to the Commissioner does not mean that Royal did not pay its own money to the Commissioner. The passing on of the burden of the payments made does not affect the situation that, as between the Commissioner and Royal, the former was enriched at the expense of the latter.35
Mason CJ agreed. In a separate judgment he provided a detailed analysis of the defence. He rejected it on two bases. First, he rejected it on public law principles that ‘no tax can be levied by the executive government without parliamentary authority’.36 Second, he considered the defence according to general principles of unjust enrichment law, stating that: Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched. As in the action for money had and received, the defendant comes under an obligation to account to the plaintiff for money which the defendant has received for the use of the plaintiff. The subtraction from the plaintiff ’s wealth enables one to say that the defendant’s unjust enrichment has been ‘at the expense of the plaintiff ’, notwithstanding that the plaintiff may recoup the outgoing by means of transactions with third parties. On this approach, it would not matter that the plaintiff is or will be over-compensated because he or she has passed on the tax or charge to someone else.37
35 36 37
Ibid, p 90 (Brennan J). Ibid, p 69 (Mason CJ). Ibid, p 75 (Mason CJ).
46
Common Law Cases on the Defence of Disimpoverishment
The only caveat Mason CJ placed on his assessment of the defence of disimpoverishment was if the tax was itemized on a customer’s invoice, the claimant’s recovery would be impressed with a constructive trust in favour of the customer. However, as there was no evidence of this occurring in the case, Mason CJ awarded Royal Insurance the entire sum it mistakenly paid to the Revenue.
3. Roxborough v Rothmans Pall Mall Roxborough v Rothmans Pall Mall38 (‘Roxborough’) provides the most recent High Court consideration of the defence of disimpoverishment. In this case the claimants were retailers of tobacco products. Their supply of tobacco products came from the defendant wholesaler. Under the relevant state legislation, both the claimants and defendant were required to pay a licence fee for the sale of tobacco products. The defendant paid the fee on its own behalf as well as the claimant retailers. However, the financial burden of the fee did not fall on the defendant. In the first instance it was incorporated into the wholesale price of tobacco products paid by the retailers. In turn, the retailers passed it on to the end consumer via higher retail prices. When it was decided in Ha v New South Wales39 that the tobacco licence fee was a duty of excise and therefore infringed Section 90 of the Constitution, the issue arose as to whether moneys already paid were recoverable. It turned out that legislation prevented this. In Roxborough, however, the facts were slightly different. Money which had been allocated for payment of the licence fee had not yet been transferred to the New South Wales Government. It remained in the hands of the defendant wholesaler. As this money had come from the claimant retailers (via higher wholesale tobacco prices), they brought an action seeking its recovery. The High Court found in favour of the claimants. Restitution was awarded on the basis of a total failure of consideration. The invalidity of the state legislation rendered nugatory the purpose of the retailers’ licence fee payment to the wholesaler. It was irrelevant that the claimant retailers had shifted the burden of the licence fee to its customers. The claimant retailers were only required to show that the defendant’s enrichment had come from them. In other words, at their immediate expense. In their discussion of the defence of disimpoverishment, Gleeson CJ, Gaudron and Hayne JJ relied heavily on the decision in Royal Insurance. They agreed upon a decisive factor for rejecting the defence. That being that awards of restitution are directed at depriving the defendant of gains received or retained, not compensating the claimant for losses incurred. It was therefore irrelevant that the claimants’ consumers bore the economic burden of the tax. 38 39
Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA). Ha v New South Wales (1997) 189 CLR 465 (HCA).
Canada
47
Kirby J was the only judge in dissent. He first distinguished Mason v New South Wales and Royal Insurance on the basis that the defendants in those cases were public authorities. He then concluded that the defence of disimpoverishment had an important role to play in the law of unjust enrichment when the action was between private parties. In this case, because the defendant’s enrichment had come at the expense of the end consumers, he held that the claimants were not entitled to recover the money in dispute. Even if Kirby J was right to distinguish Mason v New South Wales and Royal Insurance, he stands alone in finding a place for the defence of disimpoverishment in the Australian law of unjust enrichment. The decision of the majority in Roxborough means the Australian position is now unequivocal. Outside specific instances of legislative intervention, the claimant’s disimpoverishment provides no defence to claims in unjust enrichment. Restitution will be awarded whenever the defendant’s unjust enrichment has come from the claimant, with the measure of recovery determined by the value of the benefit received.
D. Canada A large number of Canadian cases have considered the defence of disimpoverishment.40 It is neither possible nor necessary to analyse them all in detail. Only those cases which have either had a significant influence on Canadian jurisprudence or are useful to illustrate particular points, will be here considered.
1. Acceptance at Law and on the Facts The cases described in this section share one important feature. That is, they are all examples of where the defence of disimpoverishment has been used to defeat a claim in unjust enrichment with the result that the money in dispute remains with the defendant.
(a) Unlawful Demand by a Public Authority The leading case on the defence of disimpoverishment in Canada is Air Canada.41 Interestingly, the Supreme Court’s approval of the defence in this case came only 40 Those not considered in this chapter include: Hobart v Minister of National Revenue (1985) 61 NR 233 (FCA); Empire Life Insurance Co v Neufield Estate (1998) 22 Estates and Trusts Reports (2nd) 207 (BCSC); Canadian Pacific Airlines Ltd v British Columbia [1989] 1 SCR 1133, (1989) 59 DLR (4th) 218 (CSC); Johnson v Nova Scotia (AG) (1990) 96 NSR (2nd) 140 (NSCA); Michelin Tires (Canada) Ltd v Minister of National Revenue (Customs & Excise) 158 FTR 101 (CFC) confirmed on appeal by Michelin Tires (Canada) Ltd v Minister of National Revenue (Customs & Excise) [2001] FCA 145 (CCA) passing on not discussed; Neles Controls Ltd v Canada (2002) FCA 107 (FCA). 41 Air Canada v British Columbia, above n 17.
48
Common Law Cases on the Defence of Disimpoverishment
in the form of non-binding comments from La Forest J (with whom Lamer and L’Heureux-Dube JJ concurred). Despite this, the case has proven to be the cornerstone on which the defence has been developed in Canada. The dispute in this case concerned the unlawful exaction of gasoline tax by the province of British Columbia between 1974 and 1976. The claimants sought restitution of $30.5m they had paid to the government during this period. The government responded by introducing retroactive legislation which effectively validated their exaction of the money in dispute. At issue in the case was whether this legislation was valid, and if not, whether the fact that the claimants had shifted the cost of the unlawful tax to their customers barred recovery. Five of the six Supreme Court justices hearing the case held the retroactive legislation to be valid. The claimants’ action for restitution was therefore defeated on that ground. La Forest J nonetheless took the opportunity to analyze the defence of disimpoverishment in detail. He concluded that the defence formed a legitimate part of the law of unjust enrichment (largely) on the basis that the claimant ought to show that he incurred a net financial loss. In what has become an oftquoted passage, La Forest J stated: The law of restitution is not intended to provide windfalls to plaintiffs who have suffered no loss. Its function is to ensure that where a plaintiff has been deprived of wealth that is either in his possession or would have accrued for his benefit, it is restored to him. The measure of restitutionary recovery is the gain the province made at the airlines’ expense. If the airlines have not shown that they bore the burden of the tax, then they have not made out their claim. What the province received is relevant only insofar as it was received at the airlines’ expense.42
La Forest J also placed emphasis on the words of Professor Palmer, repeating the following quotation with approval: ‘There is no doubt that if the tax authority retains a payment to which it was not entitled it has been unjustly enriched. It has not been enriched at the taxpayer’s expense, however, if he has shifted the economic burden of the tax to others’.43 The requirement of a correlation between loss and gain in Canada therefore appears to demand not just an initial financial deprivation to the claimant, but a financial deprivation which is persistent. If the claimant later makes good his initial loss, restitution will be denied.
(b) Mistake The first case in which the defence of disimpoverishment was considered in the context of the unjust factor of mistake was Truro Carpet Factory Outlet Ltd v Nova 42 43
Ibid, pp 1202–3 and 193–94. G Palmer, The Law of Restitution, revised supplement (Boston, MA, Little Brown, 1986) 255.
Canada
49
Scotia.44 In that case the claimant, who was in the business of selling and installing carpet, incorrectly calculated sales tax payable under Health Services Tax Act (RSNS) 1989 Section 21. The Nova Scotia Court of Appeal upheld the decision of the Tax Review Board that recovery should be denied. They did so on the basis that: “[T]he claimant ‘did not suffer any loss because the tax was paid by the customers and therefore . . . [t]he repayment to Truro Carpet Factory Outlet Limited would amount to a windfall to the company at the expense of its customers’.” This decision was later supported by Allied Air Conditioning Inc v The Queen,45 where the claimant was denied restitution after mistakenly paying social services tax to the province of British Columbia. In that case the Court of Appeal held that there was sufficient evidence to show that the claimant did not suffer a deprivation because it had shifted the cost of the tax to its customers.
2. Acceptance at Law but Rejection on the Facts (a) Unlawful Demand by a Public Authority In Coho Creek Estates Ltd v Maple Ridge46 the claimant sought restitution of $97,848. It argued it had been overcharged for a development permit by the defendant, Maple Ridge Municipality. The circumstances of the case were as follows. The claimant was in the business of developing townhouses. On 18 January 1990 it submitted a completed application for a building permit to construct 36 townhouses. On 23 January the Maple Ridge Municipality adopted a new development charge by-law. It came into force on that date. On the same day the municipality’s planning department completed its processing of the claimant’s permit application. Six days later on 29 January, the engineering department completed its review. Finally, on 30 January, the claimant was informed that its permit was ready to be issued. When the claimant found out that the cost of its building permit had been calculated on the basis of the new development by-law (resulting in $214,920 having to be paid, rather than $117,072), it wrote a letter of protest to the defendant. The claimant contended that it should have been charged pursuant to the old development cost by-law as its application had been effectively completed 5 days before the new development by-law charges came into effect. Under protest, the claimant nonetheless paid the additional charge. It was later held that the claimant should only have paid $117,072 for its development permit. Following this finding, the issue arose as to whether the claimant had shifted the cost of the extra sum paid pursuant to the new by-law 44 45 46
Truro Carpet Factory Outlet v Nova Scotia (1993) 120 NSR (2nd) 392 (NSCA). Allied Air Conditioning Inc v The Queen (1994) 109 DLR (4th) 463 (BCCA). Coho Creek Estates Ltd v Maple Ridge (1995) 53 ACWS (3rd) 890, 27 MPLR (2nd) 129 (BCSC).
50
Common Law Cases on the Defence of Disimpoverishment
to its customers. Both at trial and on appeal47 it was held that it had not. The trial judge, Koenigsberg J, felt that the defendant’s unjust enrichment had come at the claimant’s expense because the claimant ‘did not, and could not, “pass on” the development cost charges to its potential customers’.48 In other words, there was no chance to make good its impoverishment. This was because it was operating in a fiercely competitive market.
(b) Mistake In Cherubini Metal Works Ltd v Nova Scotia (AG)49 the claimant, a manufacturer of structured steel, sought restitution of over $400,000. It did so on two bases. First, for having paid tax on profits which were in fact not taxable. Second, for calculating and paying tax based on initial estimates of costs provided when tendering for projects, not on the final cost of its construction projects (which were often lower). Despite recognizing the role of the defence of disimpoverishment, the Nova Scotia Court of Appeal nonetheless awarded the claimant restitution. In their opinion the defence constituted good law, but it did not apply on the facts. There were three reasons why. First, the claimant was operating in a highly competitive market. Thus, it did not have the capacity to increase prices for the supply of steel to cover the additional tax which it mistakenly paid. Second, the claimant’s competitors did not make the same mistake, and therefore their pricing structure was calculated on a lower level of taxation. And third, because it suffered: ‘[T]he economic burden of the overpaid taxes both because of jobs it lost as a result of having a slightly higher bid than its competitors and because in instances where it won the job, it would have won it whether it had calculated the tax properly or not’.50 Other cases have reached similar conclusions.51 They support the view that the defence exists in Canada, but also that the claimant’s disimpoverishment must still be proven on the facts.
3. Rejection at Law The cases thus far considered in this section have all concluded that the defence of disimpoverishment forms part of the law of unjust enrichment in Canada. It must be recognized, however, that these cases have all concerned situations in which the defendant party has been a federal, provincial or municipal government. The following cases suggest that the defence should be limited to this area. In other 47
Coho Creek Estates Ltd v Maple Ridge (1996) 78 BCAC 53, 128 WAC 53 (BCCA). Coho Creek Estates Ltd v Maple Ridge (1995), above n 46, p 93 (Koenigsberg J). Cherubini Metal Works Ltd v Nova Scotia (AG) (1995) 137 NSR (2nd) 197 (NSCA). 50 Ibid, p 205. 51 Sobeys Inc v Nova Scotia AG (1992) 112 NSR (2nd) 205 (NSSC); Air Canada v Ontario (Liquor Control Board) (1995) 126 DLR (4th) 301 (OCA). 48 49
Canada
51
words, the defence of disimpoverishment should be rejected whenever the cases involve private parties or independent but government-owned entities. The first reported case to consider the defence of disimpoverishment in Canada was Mississauga Hydro-Electric Commission v Ontario Hydro.52 In this case the claimant contended that it mistakenly paid the defendant $963,278 for the supply of power. In its defence Ontario Hydro maintained that even if it was responsible for billing errors, the claimant should not recover because it had passed on the cost of any overcharge to its customers. This was evidenced by the fact that the claimant was a not-for-profit monopolist and, as such, being required to breakeven each financial year, passed on any additional supply costs to its customers via higher prices. The claimant did not dispute this allegation. Despite this, Eberle J rejected the defence, stating that: ‘To accept this argument would require acceptance of the proposition that [the defendant] Hydro could charge exorbitant and unjustified rates, and cure its own wrong by authorizing the municipality to pass those charges on to its customers. I do not accept Hydro’s proposition.’53 Eberle J’s decision was upheld on appeal. And, as it was not cited in Air Canada, nor overruled in any subsequent cases, arguably remains good law in the province of Ontario. The defence of disimpoverishment was again rejected in Gainers Inc v Canadian Pacific Ltd.54 In this case the claimant meat packer entered into a contract of transport with the defendant railroad company. The costs of transportation were mistakenly calculated in accordance with an out of date tariff order. Under the new tariff order, the claimant would have been required to pay a substantially smaller sum. The claimant subsequently sought restitution of the money it had paid by mistake. A particularly interesting aspect of this case is the Court’s direct acknowledgement that the claimant had suffered no loss as a result of its mistaken payment. This was because it passed on the full burden of the transport costs to its customer. As Harradence, Conrad and Côté JJA said: While there was some evidence that [the claimant] Gainers passed the cost of the higher tariff 5180 in its bill to the [third party] consignee, it is established that there was a payment made from the consignee to Gainers. The natural inference is that the consignee would pay Gainers, and look to it in the same manner as Gainers would look to [the defendant] CP for payment under a mistake of fact.55
The Court of Appeal’s rejection of the defence of disimpoverishment was based on the fact that the third party, who bore the economic effect of the mistaken 52 Mississauga Hydro-Electric Commission v Ontario Hydro (1979) 102 DLR (3rd) 135 (OSC); confirmed on appeal in Mississauga Hydro-Electric Commission v Ontario Hydro (1982) 133 DLR (3rd) 256 (OCA). 53 Mississauga Hydro-Electric Commission v Ontario Hydro, above n 52, p 39. 54 Gainers Inc v Canadian Pacific Ltd (1995) 120 DLR (4th) 143 (ACA). 55 Ibid, p 16.
52
Common Law Cases on the Defence of Disimpoverishment
charge, would be able to recover the relevant sum from the claimant once restitution had been awarded. Thus, the claimant was permitted to make out a claim in unjust enrichment purely on the basis that it had suffered an initial financial expense in over-paying the defendant for the cost of transport. The final case in which a Canadian court has rejected the defence of disimpoverishment is Law Society of Upper Canada v Ernst & Young.56 While the reasoning in this case is problematic, it is of relevance here insofar as it supports the contention that the defence of disimpoverishment does not apply in unjust enrichment disputes between private litigants. As Ground J said: ‘[T]he passing on defence has been recognized in Canadian law only to the limited extent of a claim by a taxpayer for recovery of taxes paid under ultra vires legislation and that, even in that scenario, it is recognized by the courts as an exception, based upon public policy and fiscal considerations . . . ’.57 While such comments must be interpreted in light of general reservations with the reasoning in this case, they are nonetheless of interest. That is because they provide further support for the proposition that the defence of disimpoverishment has not been universally accepted as part of the law of unjust enrichment in Canada.
E. United States of America For over a century the defence of disimpoverishment has generated enormous academic, judicial and legislative interest in the 51 jurisdictions of the United States. It is outside the scope of this book to provide a complete survey of this vast literature. A comprehensive overview must suffice. In this section cases in which the defence of disimpoverishment has been considered in the context of a common law claim for unjust enrichment are discussed. All the cases discussed have arisen as a result of unlawful demands for payment by a government authority. The cases discussed in this section are divided into three categories. First, those cases in which the defence has been rejected at law. Second, cases in which the defence has been rejected in a qualified fashion. Finally, cases in which the defence has been accepted at law.
1. Rejection at Law The first reported case to consider the defence of disimpoverishment in relation to unlawful taxation was William C van Antwerp v State of New York.58 In this case 56 57 58
Law Society of Upper Canada v Ernst & Young (2002) 213 DLR (4th) 167, 59 OR (3rd) 214 (OSC). Ibid, p 37. William C van Antwerp v State of New York 218 NY 422 (NYCA, 1916).
United States of America
53
the State of New York placed a tax on the sale, transfer and delivery of shares. During the period in which the tax was in force, the claimant stockbrokers affixed (tax) stamps at a rate of two cents per share sold and transferred. Following a declaration that the relevant taxation provision was unconstitutional, the claimant sought recovery of the $857.80 it had remitted to the State. The Comptroller rejected the claim on the basis that the claimant had suffered no loss. This was because the cost of the stamps had been ‘deducted from the customers’ account in remitting the proceeds of sale of stocks to them’59 In a 4:2 decision the New York Court of Appeal overturned this finding.60 It was held that the stockbrokers, in affixing the stamps in question, used their own property. Thus, the loss suffered was completely their own. It was irrelevant that the burden of the unlawful tax was later shifted to their customers. Restitution was awarded on the basis that the defendant’s unjust enrichment came at the immediate expense of the claimant. Up until, and even shortly after, the introduction of the Revenue Act (US) 1928, the decision in William C van Antwerp remained the country’s guiding authority on the defence of disimpoverishment. It was explicitly endorsed by the United States Supreme Court when, in obiter, it recognized that: ‘If the tax was erroneous and illegal ... there accrued to the taxpayer when he paid the tax a right to have it refunded without any showing as to whether he bore the burden of the tax or shifted it to the purchasers’.61 The courts’ rejection of the defence of disimpoverishment was, however, shortlived. Introduction of Revenue Act (US) 1928 Section 424(a) resulted in a change of direction. As was discussed in chapter 2,62 the Act denied recovery to any claimant who did not bear the burden of the unlawful tax. This federal legislation had a profound influence on subsequent decisions of state courts. In circumstances where state governments were slow to introduce a statutory defence of disimpoverishment, state courts filled the gap. The defence thereby became part of the common law landscape in the United States. Pockets of resistance to the common law introduction of the defence of disimpoverishment did, however, remain. It is to these examples which I will now briefly turn. In Builder’s Club of Chicago v United States63 the claimant sought recovery of taxes illegally and erroneously collected. The basis of the claimant’s argument being that it was not a ‘social club’ within the meaning of the relevant Act and its membership fees were therefore exempt from tax. While it was agreed that the tax had been wrongfully exacted, the Commissioner for Internal Revenue nonetheless 59 60 61 62 63
Ibid, p 425. Seabury and Hogan JJ in dissent. United States v Jefferson Electric Manufacturing Co 291 US 386, 54 S Ct 443 (USSC, 1934) 401. See text, above n 64, ch 2. Builder’s Club of Chicago v United States 14 F Supp 1020 (USCC, 1936).
54
Common Law Cases on the Defence of Disimpoverishment
withheld part of it. He did so on the basis that, pursuant to Article 54 of Regulation 43, the claimant had not filed powers of attorney from club members authorizing it to recover the money it had paid over on their behalf. The Federal Court of Claims rejected the Revenue’s argument and awarded restitution of the remaining unlawfully collected tax to the Builder’s Club. It held that the claimant was the relevant taxpayer and therefore entitled to recovery. The regulation was considered invalid because it attempted to ‘ingraft upon the taxing act a provision that is neither within the language nor intent of the statute’.64 Most important, however, was the Court’s rejection of the Revenue’s proposed version of the defence of disimpoverishment: A tax illegally collected from one who is required to return and pay the same does not belong to the government. The Treasury Department may not retain it in the absence of legislative authority merely because it may believe that, if the amount collected is refunded to the person who returned and paid it, some portion of the amount may not reach the hands of the person who bore the burden of the tax.65
The view that restitution need not be restricted by the net financial loss suffered by the claimant was further endorsed in Independent Linen Service Co v Stone.66 The claimant in that case, Independent Linen, operated a service of laundering and leasing towels, linens, pillow cases and other similar items. It paid a 2 per cent sales tax on service charges, the cost of which was passed on to its customers. Later, however, it was held that Independent Linen was exempt from the relevant sales tax provisions. The issue which then arose concerned Independent Linen’s entitlement to recover the money it had already paid to the State. A majority of the Court held that the tax which had been remitted by Independent Linen should be returned to it. This was so irrespective of the fact that it had been collected from third party customers upon whom the economic burden of the tax ultimately fell. Interestingly, the overriding justification for the Court’s finding was to protect Independent Linen against a possible liability in unjust enrichment to make refunds to its customers.67 While this fear overlooks the fact that if the State had retained the money in dispute Independent Linen could have relied on a defence of disenrichment to negate any customers’ claims for restitution, it is nonetheless perceptive. Rather than allow the State to remain unjustly enriched, the Court felt it better that the money be returned to the party who remitted it. Then, if this results in that party’s unjust enrichment at the expense of its customers, the customers can then bring their own claims for restitution. The effect of this process 64 65 66 67
Ibid, p 1022. Ibid. Independent Linen Service Co v Stone 192 Miss 832 (MSSC, 1942). Ibid.
United States of America
55
is to have all the parties returned to the positions they were in before the State’s unlawful exaction of tax. While not as explicit, the Federal Court of Appeal in 123 East Fifty-Fourth Street Inc v United States68 reached the same conclusion. In that case a restaurant received advice from the Collector of Internal Revenue that it was liable to pay a cabaret tax. The restaurant shifted the burden of the tax onto its patrons by adding it to the cost of food, drink and other services. When it was later found that the restaurant was not, in fact, liable to pay cabaret tax, the issue arose as to whether it should be awarded restitution of the money already remitted. The State contended that the cost of the tax had not come at the expense of the restaurant, but at the expense of its customers. Thus, it argued that the restaurant’s claim should be denied. A majority of the Court disagreed. Chase and Swan JJ held that: [W]hat the plaintiff saw fit to charge became the price of that which it furnished its patrons and when paid that price became the plaintiff ’s money . . . . Though the patrons paid an item designated tax they did not become the taxpayers . . . only a debtor–creditor relationship was created and the actual money the plaintiff received when the checks were paid became its own to use as it pleased.69
Before moving to consider the current state of the law, a final case in which the defence of disimpoverishment was unequivocally rejected is worth noting. In City of Prichard v Hawkins70 the Supreme Court of Alabama held that a licence tax imposed by the State on the operator of gasoline filling service station was void. The Court allowed the operator’s claim for restitution despite protestation that tax moneys had come at the expense of those consumers to whom the cost of the tax had been passed on. As the Court said: ‘The fact that the operator of the service station passed the tax on to the customer would not in and of itself deprive him of the right to recover, in an action for money had and received, payments made by him under a void ordinance’.71 Following the decision in City of Prichard v Hawkins very few reported American cases rejected the defence of disimpoverishment. In 1984 the United States Supreme Court in Bacchus Imports Ltd v Dias72 again considered it. In that case, however, the Court refused to be drawn on the defence as there was not an adequate record about the facts of the claimant’s alleged disimpoverishment. It was therefore not until 1990 in McKesson Corp v Division of Alcoholic Beverages & Tobacco73 (‘McKesson Corp’) that the United States Supreme Court provided a thorough analysis of the defence. Having determined that Florida’s 68 69 70 71 72 73
123 East Fifty Fourth Street Inc v United States 157 F 2d 68 (USCA, 1946). Ibid, p 70 (Chase J). City of Prichard v Hawkins 255 Ala 676 (SCAL, 1951). Ibid, p 680. Bacchus Imports Ltd v Dias 468 US 263, 104 S Ct 3049 (USSC, 1984). McKesson Corp v Division of Alcoholic Beverages & Tobacco 496 US 18, 110 S Ct 2238 (USSC, 1990).
56
Common Law Cases on the Defence of Disimpoverishment
liquor-tax scheme violated the Commerce Clause of the US Constitution (because it discriminated against out-of-state products), Florida’s liability to those injured by the tax fell to be considered. The United States Supreme Court overturned the decision of the Florida Supreme Court that if the claimant recovered it would receive ‘a windfall, since the cost of the tax has likely been passed on to [its] customers’.74 In reaching this decision it first had to distinguish the earlier Supreme Court case of United States v Jefferson Electric Manufacturing Co75 (‘Jefferson Electric’). In that case the Supreme Court upheld the legality of provisions of the Revenue Act which sought to restrict restitutionary awards of overpaid tax. The Supreme Court stated: We do not perceive in the restriction any infringement of due process of law. If the taxpayer has borne the burden of the tax, he readily can show it; and certainly there is nothing arbitrary in requiring that he make such a showing. If he has shifted the burden to the purchasers, they and not he have been the actual sufferers and are the real parties in interest; and in such a situation there is nothing arbitrary in requiring, as a condition to refunding the tax to him, that he give a bond to use the refunded money in reimbursing them.76
The Supreme Court in McKesson Corp distinguished Jefferson Electric on the basis that the tax in that case was intra vires the constitution but involved an overassessment of the sums due. By contrast, in McKesson Corp, the tax was ultra vires the United States Constitution. Having differentiated the facts of Jefferson Electric from McKesson Corp, two reasons were provided as to why the defence of disimpoverishment, as thought to apply by the Supreme Court of Florida, was rejected. The first reason was entirely pragmatic. The Court held that it was not reasonable to speculate that the claimant might receive a windfall because it had ‘likely’ passed on the cost of the tax to its customers. A sophisticated theoretical and factual inquiry is necessary before such a conclusion can be reached.77 The second reason was that ‘equitable considerations’ relied upon by the Florida Supreme Court to deny the claimant’s recovery did not justify the State’s retention of the so-called windfall. This was because: i) payment of the tax left the claimant ‘poorer in an absolute sense than before’;78 74
McKesson Corp v Division of Alcoholic Beverages & Tobacco 524 So 2d 1000, 1010 (FASC, 1988). United States v Jefferson Electric Manufacturing Co, above n 61. Ibid, p 402. 77 McKesson Corp v Division of Alcoholic Beverages & Tobacco, above n 73, pp 48–49 and 2256–57 (USSC, 1990). 78 Ibid, pp 48 and 2256. 75 76
United States of America
57
ii) it placed the claimant ‘at a relative disadvantage in the marketplace vis-àvis competitors distributing preferred local products’79 who did not pay the tax; and iii) to whatever extent the claimant ‘succeeded in passing on the economic incidence of the tax through higher prices to its customers, it most likely lost sales to the favored distributors or else incurred other costs (eg, for advertising) in an effort to maintain its market share’.80 Thus, as stated, the Supreme Court reached the conclusion that: The State cannot persuasively claim that ‘equity’ entitles it to retain tax moneys taken unlawfully from petitioner due to its pass-on of the tax where the pass-on itself furthers the very competitive disadvantage constituting the Commerce Clause violation that rendered the deprivation unlawful in the first place. We thus reject respondents’ reliance on a pass-on defense in this context.81
The decision in McKesson Corp, delivered only shortly before Woolwich in England and Royal Insurance in Australia, proved to be indicative of a trend developing in common law countries to prevent governments from retaining unlawfully exacted tax moneys even where passing on may have occurred.
2. Qualified Rejection In chapter 2 reference was made to the possibility of the defence of disimpoverishment being rejected in a qualified fashion.82 It will be recalled that in these circumstances the defence is accepted on the facts but rejected at law. While this usually results in the defendant not retaining the sum in dispute, it also prevents the claimant from recovering it. What generally occurs instead, is that the money in dispute is returned to the claimant on condition that he pass it back to the relevant third party customers who bore the burden of the tax. Qualified rejection of the defence of disimpoverishment first arose in a series of disputes relating to the unlawful imposition of a tax on the sale and use of motor fuel.83 In each case the claimant operators had passed on the full burden of the tax to their customers in the price charged for fuel. When it was later decided that the tax had been unlawfully imposed, the question arose as to whether the claimants
79
Ibid. Ibid. 81 Ibid, pp 48–49 and 2256. 82 Text following, above, p 32 ch 2. 83 Richardson Lubricating Co v Kinny 337 Ill 122, 168 NE 886 (ILSC, 1929); Standard Oil Co v Bollinger 337 Ill 353, 169 NE 236 (ILSC, 1929); Benzoline Motor Fuel Co v Bollinger 353 Ill 600, 187 NE 657 (ILSC, 1933). 80
58
Common Law Cases on the Defence of Disimpoverishment
were entitled to unconditional restitution of the money remitted to the government. It was unanimously decided that they were not. In these cases the claimant was only able to recover if it was willing and able to pass-back the money in dispute to its customers. Conditional restitution was therefore awarded in Benzoline Motor Fuel Co v Bollinger84 because the claimant (i) had kept an accurate record of names and addresses, together with the number of gallons of motor fuel purchased by each customer and the amount of tax paid thereon; and (ii) it undertook to pass-back the recovered tax to these customers. By contrast, in Richardson Lubricating Co v Kinny85 (‘Richardson Lubricating’), conditional recovery was denied because the claimant had ‘not returned or offered to return to such purchasers any portion of such tax so paid by them’.86 Because restitution is denied in cases such as Richardson Lubricating, it appears as though the defence of disimpoverishment is actually accepted by the court. This, however, is illusory. The defence, as a matter of law, is first rejected. As a matter of fact, however, it is then accepted. It is only when the claimant refuses or is unable to return the money to the third parties from whom it came, that it will be awarded to the defendant. It is not the defence of disimpoverishment, per se, which is generating this response. Rather, it is the default position adopted when the money in dispute cannot be returned to the persons from whom, in substance, it came. This same qualification was imposed on the claimant’s recovery by Learned Hand J in 123 East Fifty Fourth Street v United States.87 The facts of that case have already been discussed in this chapter.88 What remained unsaid, however, was that Hand J delivered a powerful dissent. He concluded that as the claimant restaurant had most likely added the cabaret tax as a separate item on its patrons’ bills, the only permissible form of recovery was that it hold the money on trust for its guests. However, as the claimant was unlikely to be able to redistribute the money to its patrons, the government should retain the tax. For Hand J the distinction between the tax being separately itemized on the bill was critical: If [the bill] ... said nothing [about the cabaret tax], I should agree ... that the guests had no legally recognizable interest in the money collected, which gave them any claim to it superior to the plaintiff’s ... . On the other hand, if the plaintiff collected the money under what the guests must have understood to be a statement that it was obliged to pay it as a tax, and that it meant to do so, the money was charged with a constructive trust ... .89
84 85 86 87 88 89
Ibid. Richardson Lubricating Co v Kinny, above n 83. Ibid, p 126. 123 East Fifty Fourth Street Inc v United States, above n 68. Text following, above n 68. 123 East Fifty Fourth Street Inc v United States, above n 68, p 70 (Hand J).
United States of America
59
This distinction was later relied on by the court in Decorative Carpets Inc v State Board of Equalization90 in awarding the claimant restitution of overpaid tax on the basis that it return the same to its customers. In that case the claimant erroneously collected from its 882 customers $4337.45 in sales tax. In each transaction the sales tax was itemized on the invoices presented to customers. The case was remanded to the trial judge with directions: ‘[T]o enter judgment for plaintiff only if it submits proof satisfactory to the court that the refund will be returned to plaintiff’s customers from whom the excess payments were erroneously collected.’91 In conclusion, despite the attraction of the qualified rejection approach, it has not been relied on in many disimpoverishment cases. Decisions have instead been polarized between awards in favour of government defendants who are permitted to retain the unlawfully demanded tax, or claimants who may have shifted the burden of the tax to third parties.
3. Acceptance at Law The final category of cases concerns instances in which the defence of disimpoverishment has been accepted at law in the absence of statutory intervention. As there are a multitude of such examples,92 only a selection of cases will be discussed to illustrate the operation of the defence in this context. In Consolidated Distilled Products Inc v Mahin93 the claimant distributors of wine commenced an action against the Director of Revenue and State Treasurer of Illinois seeking recovery of illegally imposed tax. The claimants contended that the tax imposed by the Illinois Liquor Control Act unlawfully discriminated against distributors of wine made from grapes grown outside Illinois, or those who used fruits other than grapes in the production of wine. Irrespective of the illegality of the tax, the Supreme Court of Illinois rejected the claim for restitution, holding that: The general policy against unjust enrichment enunciated in the Bollinger decision, as well as the statutory policy enunciated in other tax acts, leads us to the conclusion that the plaintiff distributors do not have a right to a refund. That the plaintiffs remitted the tax is not alone determinative. There has been no showing that they bore the burden of the tax.94 90
Decorative Carpets Inc v State Board of Equalization 373 P 2d 637, 58 Cal 2d 252 (CASC, 1962). Ibid, pp 639 and 256. The State of Georgia, for example, has seen at least five decisions of this nature: Atlanta Americana Motor Hotel Corp v Undercofler 222 GA 295(1), 149 SE 2d 691 (GASC, 1966); Blackmon v Georgia Independent Oilmen’s Association 129 GA App 171(3), SE 2d 896 (GASC, 1973); Blackmon v Premium Oil Stations Inc 129 GA App 169(2), 198 SE 2d 900 (GASC, 1973); Eimco BSP Services Co v Chilivis 241 GA 263, 244 SE 2d 829 (GASC, 1978); James B Beam Distilling Co v Georgia 263 GA 609, 437 SE 2d 782 (GASC, 1993). 93 Consolidated Distilled Products Inc v Mahin 56 Ill 2d 110, 306 NE 2d 465 (ILSC, 1974). 94 Ibid, pp 119 and 469. 91 92
60
Common Law Cases on the Defence of Disimpoverishment
The same reasoning was relied on that year by the Florida Supreme Court in Szabo Food Services Inc v Dickinson.95 In that case a vending machine operator brought a claim against the Department of Revenue seeking restitution of improperly obtained sales tax. Recovery of unlawfully demanded taxes appears not to have been explicitly dealt with by the legislature. Instead, Florida State Act 1969 Section 212.07(1) merely required sales tax to be passed on to the consumers of food and drink purchased from vending machines. In consequence of the claimant complying with the Act, the Supreme Court denied recovery and upheld the defence of disimpoverishment at common law. Their conclusion was put in the following terms: ‘One who does not himself bear the financial burden of a wrongfully extracted tax suffers no loss or injury, and accordingly, would not have standing to demand a refund’.96 State courts have not been alone in supporting the defence of disimpoverishment. In United States v State of Colorado97 Kane J, a federal district court judge, also upheld the validity of the defence at common law. Using language familiar to the courts of England, Australia and Canada, Kane J rejected the federal government’s action against Colorado for the return of unlawfully collected gasoline sales tax: I have decided to dismiss without prejudice plaintiff ’s quasi-contractual claim for a refund of taxes paid. It is a clear prerequisite of such an action that defendants should have incurred some benefit at the expense of plaintiff. Here, however, at least a proportion, and possibly all, of the tax paid by the AAFES on gasoline purchased by it was passed on to the consumer. The law of restitution, to put it crudely, is designed to return to a plaintiff that which he has lost. It is not intended to facilitate the type of windfall plaintiff here anticipates.98
In a clear endorsement of the defence of disimpoverishment, Kane J also recognized the force of the claimant’s argument that ‘if the tax had not been imposed upon it, it should have made a greater profit over the six year period in question’.99 Confirming that the defence of disimpoverishment is not concerned with mere evidence that the defendant has passed on the cost of the claimant’s unjust enrichment to a third party, but requires the defendant to have also avoided its own loss, Kane J concluded that ‘[i]f plaintiff thinks it can sustain proof of this loss ... it may refile its claim for restitution’.100 The final case to be considered in this section is Milwaukee Safeguard Insurance Co v Selcke101 (‘Milwaukee Safeguard’). In this case an action was commenced by 95 96 97 98 99 100 101
Szabo Food Services Inc v Dickinson 286 So 2d 529 (FASC, 1974). Ibid, p 532. United States v State of Colorado 666 F Supp 1479 (USDC CO, 1987). Ibid, p 1480. Ibid, pp 1480–81. Ibid. Milwaukee Safeguard Insurance Co v Selcke 324 Ill App 3d 344, 754 NE 2d 349 (ILAC, 2001).
United States of America
61
a large number of insurance companies against the Illinois Department of Insurance and State Treasurer for the return of taxes paid pursuant to an unconstitutional levy. The result in the case, that the defence of disimpoverishment formed part of the State’s law of unjust enrichment, is, however, of secondary importance. Three other important comments about the operation of the defence were made. The first of these has already been discussed. In chapter 2 the case was referred to as standing for the proposition that the defendant need only ‘raise’ the defence in order for the burden of proof to be shifted back to the claimant to show he had not subsequently been disimpoverished.102 The second important comment made in this case was a clarification of the law in respect to the operation of the defence. The Court confirmed that the defence of disimpoverishment was not to be characterized as a question of standing, but rather as “a ‘refund’ issue that may be considered at the remedy phase of an action.”103 The third and most important aspect of the judgment was the confinement of the decision of the United States Supreme Court in McKesson Corp. It was concluded that this case ‘did not preclude the use of the pass-on defense in a discriminatory tax case’.104 This interpretation was reached by the court placing reliance on two other Supreme Court decisions in which the defence was raised incidentally. In Bacchus Imports Ltd v Dias105 (‘Bacchus’) the case was remanded to a lower court in order that the defence of disimpoverishment be considered in more detail. No disapproval of the defence was noted, and by implication, the fact that the state court was permitted to review the defence clearly left often the possibility of its acceptance. This interpretation was confirmed by the Supreme Court in James B Beam Distilling Co v Georgia106 (‘James B Beam’) when, in referring to the decision in Bacchus, the Court stated that: “[W]e remanded the case for consideration of the State’s arguments that appellants were ‘not entitled to refunds since they did not bear the economic incidence of the tax but passed it on as a separate addition to the price that their customers were legally obligated to pay’.”107 In James B Beam itself, the case was remanded to the Georgian Supreme Court and the defence of disimpoverishment upheld on the basis that the United States Supreme Court ‘invited the State to invoke, on remand, independent procedural bases for its refusal to provide a refund’.108 Thus, the Court in Milwaukee Safeguard, by relying on an implicit but restricted endorsement of the defence of disimpoverishment from the United States Supreme Court, incorporated it as part of the common law of Illinois. 102 See
text following, above n 70, ch 2. Safeguard Insurance Co v Selcke, above n 101, pp 353 and 357. 104 Ibid, pp 351 and 356. 105 Bacchus Imports Ltd v Dias, above n 72. 106 James B Beam Distilling Co v Georgia 501 US 529, 111 S Ct 2439 (USSC, 1991). 107 Ibid, pp 539–40 and 2445, quoting Bacchus Imports Ltd v Dias, above n 72, pp 276–77 and 2058. 108 James B Beam Distilling Co v Georgia, above n 92, pp 610 and 784. 103 Milwaukee
62
Common Law Cases on the Defence of Disimpoverishment
F. Conclusion The defence of disimpoverishment has not been treated consistently by courts across the common law world. While the defence has never been accepted by courts in England or Australia, it has received support in Canada and the United States. However, even within Canada and the United States there are numerous cases in which it has been rejected. Before turning to consider how these differences can be adequately explained and resolved, a final introductory item must be addressed. That is, how the defence of disimpoverishment may manifest itself in statutory form.
4 Statutory Defence of Disimpoverishment
A. Introduction The defence of disimpoverishment has thus far been explored by reference to its general nature and scope, and its application in a large number of common law cases. One further foundational aspect of the defence requires attention. That is, how it appears and operates in legislative form in the United Kingdom. This chapter is divided into four parts. First, the statutory defence of ‘unjust enrichment’ is outlined. Here it is shown that the defence of unjust enrichment is synonymous with the defence of disimpoverishment. The principle underlying both defences is that a claimant who has not suffered any loss should be denied restitution. In the second and main part of this chapter the statutory defence is examined by reference to the cases in which it has arisen. The focus of this section is on the mechanics of the defence and how courts or tribunals have decided whether a claimant has made good his loss. Third, the recovery for third parties of overpaid VAT is examined, including the statutory provisions specifically dealing with this. Finally, in the last part of this chapter, European Court of Justice jurisprudence is considered insofar as it impacts on our understanding and interpretation of the defence.
B. The Defence of Unjust Enrichment 1. Relevant Statutory Provisions Provision for restitution of overpaid value added tax (‘VAT’) was statutorily introduced by Finance Act (UK) 1989 Section 24. That section, now embodied in Value Added Tax Act (UK) 1994 Section 80(1), states that: ‘Where a person has . . . paid
64
Statutory Defence of Disimpoverishment
an amount to the [Customs and Excise] Commissioners by way of VAT which was not VAT due to them, they [the Commissioners] shall be liable to repay the amount to him.’ This right to restitution is not, however, absolute. In providing for the statutory recovery of overpaid VAT, Parliament also introduced a defence by way of Finance Act (UK) 1989 Section 24(3). It states that: ‘It shall be a defence, in relation to a claim under this section, that repayment of an amount would unjustly enrich the claimant.’ (emphasis added) This section was later incorporated into, and to this day remains, Value Added Tax Act (UK) 1994 Section 80(3). The statutory right to recover overpaid tax as well as the defence of unjust enrichment has been incorporated into a number of other tax-related statutes. These include Finance Act (UK) 1994 Schedule 7 Paragraph 8(3) (relating to insurance premium tax), Finance Act (UK) 1996 Schedule 5 Paragraph 14(3) (relating to landfill tax), Customs and Excise Management Act (UK) 1979 Section 137A(3) (relating to excise tax) (all three of which were inserted or amended by Finance Act (UK) 1997 Chapter 16 Schedule 5); Finance Act (UK) 2000 Chapter 17 Schedule 6 (relating to a climate change levy); and Finance Act (UK) 2001 Chapter 9 Schedule 8 (relating to an aggregates levy).
2. The Meaning of ‘Unjustly Enrich’ The defence of unjust enrichment is not defined in the Value Added Tax Act (UK) 1994, nor in any of the provisions outlined above. Thus, it has been left to the courts and tribunals to determine its nature and scope. This exercise has thus far been confined to circumstances in which restitution of VAT has been sought. Its meaning has now been considered in at least fifteen reported cases heard by the VAT and Duties Tribunal. Two of these decisions have been appealed to the High Court,1 while the Inner House of the Court of Session in Scotland has heard another.2 Two different methods have been used in the cases in interpreting the phrase ‘unjustly enrich’. The first approach has been to look at the phrase as a single, uniform concept in which the two words are inseparable. The alternative method has been to define each word separately—looking first at the meaning of ‘enrichment’ and then the meaning of ‘unjust’. While this two-step approach is arguably unnecessary, for ease of exposition it will be relied on here. 1 Marks & Spencer plc v Customs & Excise Comrs (No 1) [1999] 1 CMLR 1152, which was also appealed to the Court of Appeal, referred to the European Court of Justice, reheard by the Court of Appeal on separate points of law, then appealed to the House of Lords Marks & Spencer plc v Customs & Excise Comrs [2005] UKHL 53, which then referred it again to the European Court of Justice; Customs & Excise Comrs v National Westminster Bank plc [2003] EWHC 1822 (Ch), [2003] BVC 633. 2 Customs & Excise Comrs v McMaster Stores (Scotland) Ltd (1996) SLT 935, [1995] STC 846, [1995] BTC 5390.
The Defence of Unjust Enrichment
65
(a) The Meaning of ‘Enrichment’ The question of whether a claimant will be enriched if awarded restitution of overpaid tax is straightforward. That is because the receipt of money is incontrovertibly beneficial. Lord Hope confirmed this in Customs and Excise Comrs v McMaster Stores (Scotland) Ltd (‘McMaster Stores’) when he stated that: ‘In my opinion the test of enrichment will be satisfied where the amount claimed as overpaid value added tax is repaid to the claimant, irrespective of the capacity in which he received that sum or of the obligations, if any, to which he has subjected himself in the event of its receipt.’3 Because the meaning of the word ‘enrichment’ is uncontroversial, considerable importance attaches to the term ‘unjust’.
(b) The Meaning of ‘Unjust’ The word ‘unjust’ is open to numerous and potentially contradictory interpretations. In cases of overpaid VAT, however, it has been defined in a clear, consistent and stable fashion. A claimant will be unjustly enriched when awarded restitution of overpaid VAT if it places him in a financially superior position compared to the one he would have occupied had the tax never been imposed. Underlying this interpretation is the view that an award of restitution should be denied when the claimant successfully avoids any financial loss by shifting the burden of a tax to a third party. Two extracts usefully illustrate this interpretation. The first comes from Grantham Cricket Club v Customs and Excise Comrs4 (‘Grantham Cricket Club’). In that case the VAT and Duties Tribunal stated that an enrichment would be unjust if ‘the appellant would be in receipt of funds it would not have had in the first place and which it never expected to retain.’5 The second comes from Customs and Excise Comrs v National Westminster Bank plc6 (‘National Westminster Bank’). In that case, Jacob J said that the term ‘unjust’ directs the court to ask ‘what in the light of all the known facts would have been the financial position of [the claimant] ... if the undue tax had not been imposed?’7 The answer to his question was that if restitution placed the claimant in a financial position which was superior to the one he would have occupied had the tax not been imposed, recovery must be denied.
3. Correlation with the Defence of Disimpoverishment The primary purpose of the defence of unjust enrichment, as encapsulated in Value Added Tax Act (UK) 1994 Section 80(3) and various other statutes, is to 3 4 5 6 7
Ibid, p 5397. Grantham Cricket Club v Customs & Excise Comrs [1998] BVC 2272. Ibid, p 2273. National Westminster Bank, above n 1. Ibid, p 643.
66
Statutory Defence of Disimpoverishment
prevent claimants recovering overpaid tax in situations where they have incurred no financial loss. The statutory defence can therefore be viewed as analogous to the defence of disimpoverishment (as defined in chapter 2).8 At the heart of both defences is the concern that restitution should not be awarded in situations where the claimant, who has suffered no loss, would receive ‘an unjustifiable windfall’.9 There are only two differences between the defences of unjust enrichment and disimpoverishment. The first is that different labels are used to describe them. The second is that they seek to answer slightly different questions. The question that the defence of disimpoverishment seeks to answer is whether the claimant has sustained a continuing financial loss. By contrast, the defence of unjust enrichment asks what would occur if a claimant were awarded restitution in circumstances where he suffered no loss. However, these two questions, and therefore the defences, simply represent two sides of the same coin:
‘Disimpoverishment’
‘Unjust enrichment’
In the following section numerous cases are examined in order to explain how, in practice, tribunals and courts determine whether restitution will result in the claimant’s unjust enrichment.
C. Operation of the Unjust Enrichment Defence This section focuses on the mechanics of the statutory defence of unjust enrichment. In other words, how and when it operates. The cases reveal that three questions must 8 9
See the section immediately preceding, above n 7, ch 2. Daynes & Anor v Customs & Excise Comrs [1994] BVC 664, 665.
Operation of the Unjust Enrichment Defence
67
be answered affirmatively before the defence is established. The first is whether the claimant engaged in the act of passing on the cost of VAT to third parties. The second is whether, having attempted to pass on his loss, the claimant avoided some or all of it. And the third is whether, in these circumstances, an award of restitution will result in claimant being unjustly enriched. Before turning to these three considerations, an important point requires mentioning. Consistent with the opinion expressed in chapter 2,10 the view adopted in this book is that questions one (passing on) and three (unjust enrichment) are largely superfluous. Attention should be focused on whether the claimant avoided some or all of his loss. While the emphasis of this section will therefore be placed on determining how and whether the claimant has been disimpoverished, for the sake of completeness all three issues will be considered.
1. Condition #1: The Claimant Must ‘Pass On’ the Cost of the Tax One way for a claimant to avoid the cost of a defendant’s unjust enrichment is to pass it on to customers in its prices for goods sold or services provided. While not the only way in which a loss can be avoided, it is the only one thus far considered by cases concerned with the recovery of overpaid VAT. Determining whether the cost of a tax has been passed on in the price of goods or services is relatively straightforward. That is because in only rare circumstances will a claimant, acting as a rational profit-maximizing individual or entity, not attempt to pass on all his business costs, including undue taxes. Jacob J in National Westminster Bank agreed. In that case he stated bluntly: ‘[a]ll costs are passed on.’11 The reason why all costs are generally passed on can be explained in the following way. Whenever a claimant is in the business of making a profit on the sale of a particular good or service, he must consider a range of accounting equations. One of those is: Retail Price – Average Cost = Profit (per unit sold) In order to remain in business in the long term, an entity or individual must ensure that the price of a product sold exceeds the average cost of bringing it to market. In other words, a ‘profit margin’ must be guaranteed. As soon as average cost exceeds price, a loss will be sustained. The relevance of this equation to Jacob J’s comment that ‘all costs are passed on’ is simply this: if the claimant is a rational profit-maximizer he will ordinarily ensure that all business costs, including taxes, are incorporated into the price of a
10 11
Text following, above n 19, ch 2. National Westminster Bank plc, above n 1, p 638.
68
Statutory Defence of Disimpoverishment
good or service sold. In other words, he will, first of all, ensure that all costs are passed on to the consumer in setting an appropriate price for the good or service. Then, he will mark-up that price by a figure which represents the profit he wishes to make on the sale of each item or unit. ‘Passing on’, therefore, may relate to not just the question of whether the claimant has increased the price of a good or service to recoup the cost of the tax following its imposition, but simply whether the cost of the tax is borne by the consumer. In other words, the issue at this stage of the statutory inquiry is not whether the tax results in a decrease in the claimant’s profit margin (the concern of the second question), but simply whether at least some profit margin has been maintained. The following example will help illustrate these propositions.12 Ben sells cookies. The average cost of making a cookie is 50p. This figure incorporates the cost of ingredients, labour, equipment, advertising, renting and operating a corner store (all of which amounts to 40p). Most importantly, it also includes the cost of a tax which is imposed on the sale of cookies (10p). If the retail price of a cookie is set at 50p, it follows that Ben will pass on all his costs, including the tax, to his customers. Ben will not, however, make any profit.13 The example of Ben’s cookies can be applied to two other scenarios. The first is where Ben makes a profit. If Ben sets the price for his cookies at 75p he will make a 25p profit on each sale. His business expenses represent the first 50p and the remaining 25p represent his profit. There is no doubt that in this situation Ben passes on all his costs to the consumer. The second scenario is where Ben incurs a loss. If Ben sells his cookies for 40p he will make a loss of 10p per cookie. Only in this scenario could Ben argue that the cost of the cookie tax (10p) was not passed on to consumers in the final price. While it is unlikely that a rational profit maximizing individual or company would ever sell a good or service at a price below its average cost, there are some circumstances where this may occur. Thus, it cannot be assumed in every case that a claimant will, literally speaking, pass on the cost of an unlawful overcharge. The first example is of ‘loss leading’. Here the claimant deliberately makes a loss on the sale of a product or service in order to establish a reputation in a particular market. This is a common strategy used by new entrants attempting to establish a foothold in an industry. Thus, Ben, for example, may set the price of his cookies at 40p when he opens his first shop in Cambridge. However, once the business is well-established, he will increase the price of cookies to 75p in order to trade profitably. The second example is of ‘loss minimization’. This is well illustrated by an example from the airline industry. If British Airways has a regular flight from 12 Another example of how this operates in practice can be found in Avon Products Pty Ltd v Federal Comr Taxation [2004] FCA 475, [9]–[22] (Hill J). 13 Ben is deemed to pass on his business expenses first.
Operation of the Unjust Enrichment Defence
69
London to Berlin, it may prepay landing and docking fees, and other fixed costs. Assume these amount to £10,000. If, on the day before the flight, no tickets have been sold, and no refund of the £10,000 can be secured, British Airways may sell seats on the flight at a price below cost. If they sell 100 tickets at £50 each, it will at least recoup £5000 and thereby reduce its overall loss. No cases have yet arisen in which it has been argued that the cost of an unlawful tax has not been passed on to consumers in the price of the good or service sold. In most, if not all cases, a claimant will attempt to pass on all his costs in the final price even if this is not evidenced by a change in price. In conclusion, the question of whether a claimant has passed on the cost of an unlawful overcharge must be answered by looking at the retail price and average cost of each product sold. If the price of the product is lower than the cost incurred in bringing it to market, it may be argued that restitution would not result in the claimant being unjustly enriched. However, if an attempt is made to break-even or make a profit on each item sold, then the cost of any unlawful overcharge can be considered to have been included in the final price and passed on to consumers. This is so irrespective of whether the claimant incorporates the cost of the tax into the price of the product via a reduction in his profit margin (but not the retail price). In these circumstances the question then becomes whether the claimant, by passing on the cost of a tax, has also avoided any financial loss.
2. Condition #2: The Claimant Must Avoid Any Loss On the view taken in this book, the question of whether the claimant has avoided any loss is the only important question in applying the defence of disimpoverishment. Consistent with that, the main focus of the cases concerning the recovery of overpaid VAT has been on what effect passing on has had on the claimant’s net financial position. This is why Moses J in Marks & Spencer plc (No 1) v Customs and Excise Comrs14 (‘Marks & Spencer (No 1)’) said: The defence of unjust enrichment requires consideration not only of the question whether the taxpayer has passed on the overpaid tax to a customer but also whether by passing on the charge he has suffered damage, for example, by reducing sales in consequence of the increase in price or maintaining sales by having to reduce price, or losing profits which it would otherwise have received had the overcharged tax not been imposed.15
The question for consideration in this section is, therefore, whether the claimant has incurred (or avoided) any loss as a result of VAT being wrongfully imposed or 14 15
Marks & Spencer (No 1), above n 1. Ibid, p 1187.
70
Statutory Defence of Disimpoverishment
mistakenly paid. Six situations require examination. All of them are concerned with the effect of the tax on the prices of goods or services sold.
(a) No Change in Price A significant, but not necessarily determinative, factor in deciding whether a claimant has passed on the cost of a tax is whether there has been any movement in price. If taxes are imposed or removed without any change in the price of a product or service sold by the claimant, a prima facie case will be established for inferring that the cost of the tax will not have been avoided. The reason why a claimant incurs a loss in these circumstances is because costs increase as a result of the tax, but these costs are not offset by a corresponding increase in price. In terms of the accounting equation shown earlier, the effect of the tax is as follows: Retail Price – Average Cost ↑ = Profit ↓ (per unit sold) The case of Tayside Numbers Ltd v Comrs of Customs and Excise16 provides a useful illustration of this proposition. In that case the appellant dealt in ‘cherished’ vehicle registration numbers. The appellant was a middleman responsible for introducing sellers of unique registration plates to buyers wishing to purchase them. The appellant earned a commission on each sale. The Customs and Excise Commissioners ruled that the appellant was required to charge VAT. Consequently, the appellant explicitly charged VAT to those customers who were registered for VAT. However, in respect of those who were not VAT registered, the appellant paid the VAT out of its commission. Thus, despite business costs having increased, the appellant did not alter the price of registration plates sold to non-registered VAT customers. It was later found that VAT was not payable on the sale of the number plates. The appellant therefore sought recovery of the VAT paid pursuant to Value Added Tax Act (UK) 1994 Section 80(1). The Commissioners rejected the appellant’s claim on the basis that restitution would result in it being ‘unjustly enriched’ in accordance with Value Added Tax Act (UK) 1994 Section 80(3). The VAT and Duties Tribunal accepted the claimant’s argument on appeal. It found that far from being enriched by repayment, restitution would result in the appellant only being compensated for the loss it suffered. In reaching this decision much weight was put on the differential price structure adopted by the appellant. While the appellant explicitly shifted the cost of the tax to VAT registered customers, it suffered a loss in respect of non-VAT registered purchasers. That is because, in respect of these customers, price remained at its pre-tax level. Thus, the appellant absorbed the cost of the tax via a reduction in its profit margin. 16
Tayside Numbers Ltd v Comrs of Customs & Excise [1992] VATTR 406.
Operation of the Unjust Enrichment Defence
71
While, as this case shows, a claimant will generally incur a loss if, after the imposition of a tax, prices remain unchanged, it should be remembered that this rule is not absolute. This is particularly so in situations where there has been an alternation in the rate of tax, as opposed to the imposition of a new tax. In order to determine whether a claimant has made good a loss following an alteration in the rate of tax, we first have to determine who, prior to the change, bore the cost of the tax.17 For example, suppose a VAT charge was introduced and the claimant increased the price of his product by the full amount of the tax. If the rate of VAT was later reduced and the claimant did not alter the price of his product, it cannot be assumed that he will have incurred a loss. It must first be ascertained whether, when the tax was introduced, the claimant suffered a loss as a result of attempting to avoid it. If he did not, he will, by definition, also not suffer a loss when the rate of VAT is later reduced. Thus, just because the retail price of a product remains unchanged, it cannot always be assumed that a claimant will bear the burden of the tax.
(b) The ‘Price Taker’ Argument A claimant can be said to be a ‘price taker’ when he has no effective control over the price he sets for goods or services sold. There are at least three reasons why a claimant may be a price taker. First, because he has only a very small market share. Second, because the market in which the claimant operates is highly competitive and price sensitive. And third, because customers expect the claimant’s product or service to be priced at a certain level (which may or may not be the same as the price adopted by dominant rivals in the market). Common to all three explanations is the contention that the price of the product or service sold is set without the claimant giving any consideration to his profit margin. Thus, because price is effectively set by an external source and the cost of each item is fixed, the claimant has no ability to successfully avoid any newly imposed tax. Put another way, the claimant has no capacity to avoid the cost of a tax (even if he wanted to) because, in practical terms, he has no control over the price he sets for goods or services sold. In such a situation, if it later turns out that the tax should never have been imposed, the claimant will argue that he should be entitled to restitution. That is because such an award will only result in the recovery of profits which he would otherwise have earned and been entitled to retain. (i) Two Cases which Support the ‘Price Taker’ Argument In National & Provincial Building Society v Customs and Excise Comrs18 (‘National & Provincial Building Society’) the appellant was in the business of taking deposits of money and making loans to members of the public. Those who borrowed money 17 18
Avon Products Pty Ltd v Federal Comr Taxation [2004] FCA 475, [46] (Hill J). National & Provincial Building Society v Customs & Excise Comrs [1996] V&DR 153.
72
Statutory Defence of Disimpoverishment
from the appellant generally did so to assist in the purchase of a dwelling-house. In these circumstances the appellant took a mortgage over the property and retained the title deeds. Borrowers sometimes sought to inspect and copy the title deeds pertaining to their property. The appellant imposed a ‘deeds production fee’ on such occasions, charging a reasonable sum for expenses incurred in retrieving and copying the deeds. It was thought that VAT was chargeable on such fees. In 1990 the Customs and Excise Commissioners, the respondents in the case, issued a ruling stating that VAT was not chargeable on fees imposed for retrieving and copying title deeds. Subsequently, the appellants sought repayment of £393,194.45 for overpaid VAT during the period between 1979 and 1989. Though acknowledging the sums paid by the appellant were not due, the Commissioners refused recovery on the basis that it would ‘unjustly enrich’ the appellants. The premise of their argument being that the appellants had shifted the cost of the overcharge to the relevant borrowers without incurring a loss. The VAT and Duties Tribunal upheld the appeal, requiring the Commissioners to repay the £393,194.45 of overcharged VAT. In reaching this conclusion the Tribunal chairman, Mr Simpson, correctly focused on what effect restitution would have on the appellant’s financial position. He stated that: In my judgment the Appellant suffered loss by being compelled, as it thought, to account for VAT on the fees which it had fixed without reference to VAT, and the claimed repayment will make good that loss. . . . [T]he supposed impact of VAT merely reduced the amount which it would otherwise have received by way of the fees.19
Mr Simpson came to the conclusion that the appellant was a ‘price taker’, and had therefore suffered a financial loss as a result of the tax, for two main reasons. The first was because of the nature of the market in which the claimant operated. In this regard he said: ‘It is clear to me, and I find, that in fixing its deeds production fees, along with its other fees, the Appellant’s primary consideration was what the market would stand.’20 The second reason was that, after the Commissioners ruled that the deeds production fees were not subject to VAT, the appellant nonetheless did not reduce the price which was charged to borrowers. In Mr Simpson’s words, the appellant ‘merely ceased to account for VAT in respect of them.’21 The VAT and Duties Tribunal reached the same conclusion in Mr and Mrs J King, T/A The Barbury Shooting School v Customs and Excise Comrs22 (‘The Barbury Shooting School’). In that case the appellants, Mr and Mrs King, were a 19
Ibid, [53]. Ibid, [17]. 21 Ibid, [24]. 22 Mr and Mrs J King, T/A The Barbury Shooting School v Customs & Excise Comrs [2002] V&DTr No 17822. 20
Operation of the Unjust Enrichment Defence
73
husband and wife partnership trading as the Barbury Shooting School. Mr King provided instruction to individuals and small groups. Although clay pigeon shooting was the primary method of tuition, the classes were intended to prepare the students for all kinds of field sports shooting. The appellants’ claim concerned the overpayment of VAT in the order of £4882.85. The Commissioners of Customs and Excise, the respondents, refused to repay any of the £4882.85 on the basis that it would ‘unjustly enrich’ the appellants. The VAT and Duties Tribunal upheld the appeal and awarded the appellants restitution of the entire sum. In the tribunal’s opinion there was no evidence that the appellants shifted the cost of VAT to their customers. Prices were fixed according to what the market was prepared to pay and therefore £4882.85 represented profit which would otherwise have been earned by the appellants. There was, however, a notable difference between this case and National & Provincial Building Society. In this case the Tribunal held that the appellants were price takers and were effected by competitive pressures even though they made no effort to compare their prices with prices charged by rival shooting schools. Prices were simply set ‘at a level the market would bear.’23 Two other pieces of evidence persuaded the Tribunal in The Barbury Shooting School that the appellants were ‘price takers’—and therefore set prices without reference to the profit margin they wished to achieve. The first was that there was no change in tuition prices after VAT increased from 15 per cent to 17.5 per cent. The cost of the tax was simply absorbed by the claimants. The second piece of evidence was that when it became clear that VAT was not due on the supply of tuition services the appellants did not reduce their prices. That was despite the appellants making ‘no secret of the fact that there had been a change.’24 The Tribunal therefore concluded that ‘the appellants were charging amounts that would have been charged even if they had realized that ... the supplies were exempt.’25 (ii) Two Cases in which the ‘Price Taker’ Argument was Rejected It is not always the case, however, that a claimant will formulate prices based purely on what the market will bear. In other words, claimants are not always ‘price takers’. The cases of Grantham Cricket Club and National Westminster Bank illustrate why. In 1989 Grantham Cricket Club, the appellant, agreed to vacate its cricket ground on London Rd, Grantham. It entered into a deed of surrender with the landlords, Buckminster Trustees, in consideration of £70,000 plus £10,500 VAT. The £10,500 was remitted to the Customs and Excise Commissioners, the respondents. It later transpired that VAT was not payable on the £70,000. When 23 24 25
Ibid, [25]. Ibid, [33]. Ibid, [37].
74
Statutory Defence of Disimpoverishment
Grantham Cricket Club sought recovery of the £10,500 mistakenly paid by way of VAT, the Commissioners refused to return it on the basis that it would unjustly enrich the club. The VAT and Duties Tribunal agreed, finding that: ‘[R]etention of any repayment would be a fortuitous and unexpected benefit to the Appellant, prima facie at the expense of the Landlords who paid more than in the circumstances it had been intended and contemplated the Appellant would retain for itself as the price for giving up its lease.’26 In other words, because the appellant was only ever going to receive £70,000 for its surrender of the lease, it suffered no loss as a result of shifting the full cost of VAT to Buckminster Trustees. Jacob J in National Westminster Bank reached the same conclusion but based on different facts. In that case Natwest Bank sought recovery of VAT paid in respect of ‘manufacturers’ bonuses’. These bonuses were periodic payments which came from manufacturers who sold cars to Natwest’s trading company, Lombard (who then leased the cars for a specified period prior to selling them). Before July 1997 the bonuses were considered taxable supplies. However, after the decision in Elida Gibbs Ltd v Customs and Excise Comrs,27 the Commissioners treated them as discounts on the purchase price of cars and therefore not subject to VAT. When Natwest sought repayment of the tax it had remitted, the Commissioners refused on the basis that it would result in the company’s unjust enrichment. On appeal, Jacob J upheld this decision. An important reason for him doing so was that: ‘[I]t was common ground that the unjustified tax was levied uniformly on the car-leasing trade as a whole. And [Natwest’s trading company] Lombard positively asserted that their prices closely matched that of the competition.’28 Jacob J’s observation is astute. What he recognized was that just because a company operates in a competitive market, one cannot assume that it is a price taker (in the sense that it is unable to make good the cost of an unlawful tax by raising prices above the competitive market rate). The reason why this is so can be explained as follows. When a company operates in a competitive market, costs can be shifted to consumers without any loss being incurred if all the operators in that market tacitly agree to do so by increasing prices. In this way participants in the industry operate as a cartel, with the result that none of them will be immediately affected by the imposition of the tax. This kind of behaviour is often observed in the sale of gasoline at the petrol pump. Increases in government taxes on petrol are invariably passed on by petrol retailers, leaving motorists with little choice but to pay the higher fuel charges. The only reason a company may nonetheless sustain a loss in these circumstances is if the profitability of the entire industry drops. However, in National 26 27 28
Grantham Cricket Club, above n 4, p 2273. Elida Gibbs Ltd v Customs & Excise Comrs [1997] BVC 80. National Westminster Bank, above n 1, p 642.
Operation of the Unjust Enrichment Defence
75
Westminster Bank, Jacob J found that this was not the case in respect to the market in which Natwest’s trading company operated. So much could be inferred from the fact that the company did ‘not, and never have, suggested that the overpaid tax caused them to have a lesser market share or a lesser volume of customers or a lesser ultimate sales price.’29 Consequently, Jacob J stated that: ‘[T]he only reasonable inference from the evidence placed before the tribunal is that those who bore the loss caused by the wrongful treatment of manufacturers’ bonuses were Lombard’s customers, not Lombard. For Lombard to be repaid the tax would be unjust enrichment.’30 Thus, in conclusion, while in certain cases a claimant may contend that he is a ‘price taker’, this does not always mean that he will be unable to successfully avoid the cost of a tax. One has to consider whether the industry, as whole, has avoided the cost of the tax. If it has, then the defence of unjust enrichment may apply.
(c) Counter-factual Argument #1: Prices would have Increased Anyway The third argument that may be raised to defeat a defence of unjust enrichment relies on a counter-factual proposition. This proposition is made up of two parts. First, it involves the claimant acknowledging that, following the introduction of a tax or increase in the rate of tax, he increased prices and successfully avoided any loss. Second, it requires the claimant to argue that he should nonetheless be entitled to restitution because he would, irrespective of the tax, have increased prices. Thus, it was not the tax that caused him to increases prices, but some other factor. Consequently, were it not for the tax, he would have made a greater profit. The Tribunal in National & Provincial Building Society, the facts of which were described above, found this argument convincing. Quoting from Advocate General Mancini in Amministrazione delle Finanze dello Stato v SpA San Giorgio31 the Tribunal said: ‘And who indeed can say that, if the [claimant] importer had been released from the burden of the unlawful charge, he would not have applied the same price and sold the same quantity of goods? Had that been the case, he would have obtained higher profits than those he managed to earn whilst subject to the tax.’32 The same kind of argument was accepted by the VAT and Duties Tribunal in Marks & Spencer plc Customs and Excise Comrs (No 2).33 In that case the high street retailer wrongly included VAT on the price of boys’ socks between April 1994 and May 1995. The Tribunal hypothesized that: The removal of VAT in 1994 would, we think, have resulted in Marks & Spencer retaining what would have been the VAT ingredient in the selling price for socks in 29 30 31 32 33
Ibid, p 642. Ibid, p 643. Amministrazione delle Finanze dello Stato v SpA San Giorgio, below n 53. National & Provincial Building Society, above n 18, [51]. Marks & Spencer plc v Customs & Excise Comrs (No 2) [1997] BVC 2255.
76
Statutory Defence of Disimpoverishment the relevant range as part of their profit margin for as long as the market would allow them. And the market would, we believe, have allowed this for at least 12 months.34
The thrust of the Tribunal’s decision was therefore that, even though one could not know what Marks & Spencer would have done had it been aware in April 1994 that VAT on boys’ socks had been re-designated as zero-rated, it was fair to assume that it would have kept prices at the level actually charged. Thus, the money paid by way of VAT during the relevant twelve-month period constituted a loss to the company. Restitution would not result in Marks & Spencer receiving an unjust enrichment. The opposite conclusion was, however, reached in Marks & Spencer (No 1). In that case Marks & Spencer erroneously paid £3.5m in VAT on the sale of its teacakes between April 1973 and October 1994. The Tribunal in that case, with whom Moses J in the High Court35 and Stuart-Smith, Ward and Schiemann LJJ in the Court of Appeal36 agreed, held that had Marks & Spencer and its competitors become aware in April 1973 that teacakes should have been zero-rated, prices would, after a short period of time, have been reduced by the extent of the VAT charged. Thus, if VAT was 10 per cent and the price of teacakes was £1.11, prices would have eventually fallen back to £1. Moses J, hearing the case on appeal in the High Court, summarized and agreed with the Tribunal’s decision in the following terms: The Tribunal concluded that in a competitive market, as a rational retailer, Marks and Spencer would have reduced the price [of teacakes] in order to maintain or increase sales. Thus it concluded that after a delay of a year or two . . . prices would have dropped and the normal margin would have been achieved. These conclusions are attacked [by Marks & Spencer] because, it is said, they are based on assumptions. That is true, in a sense. Assumptions were inevitable bearing in mind that both sides were arguing as to an hypothesis. The hypothesis necessarily required an assumption in the sense that there could be no factual evidence as to what ‘would’ have happened. . . . [However, the Tribunal] was entitled to conclude that competitive forces would have compelled Marks and Spencer to reduce its prices and thus maintain rather than increase its margins if teacakes had been zero-rated.37
While it will often be difficult for a defendant, on whom the burden of proof is placed, to show that a claimant would not have increased or maintained prices at the VAT inclusive level, Marks & Spencer (No 1) shows that it is possible. Much, 34 35 36 37
Ibid, p 2257. Marks & Spencer (No 1), above n 1. Marks & Spencer plc v Customs & Excise Comrs (No 1) [2003] EWCA Civ 1448. Marks & Spencer (No 1), above n 1, p 1197.
Operation of the Unjust Enrichment Defence
77
however, appears to hinge on whether businesses would have increased and maintained prices at a level which includes the cost of any unlawful tax.
(d) Counter-factual Argument #2: Revenue would have Increased The second counter-factual argument that may be raised by a claimant is also speculative in nature. Here the claimant admits that, on its face, he has not incurred a loss. That is because, after increasing prices for goods or services sold, he successfully avoided the cost of a newly imposed tax to third party consumers. The argument the claimant nonetheless makes is that (i) had the tax never been imposed, (ii) he would never have increased prices, and (iii) had he maintained prices at their pre-tax level, then (iv) his net profit for the period would have been larger. This argument is most easily explained by use of figures. Suppose the claimant’s pre-tax position was this: Revenue £100 (sales 10 × price £10) – Expenses £50 = Profit £50 Suppose the claimant’s post-tax position was this: Revenue £150 (sales 10 × price £15) – Expenses £100 = Profit £50 The claimant nonetheless argues that had the tax not been imposed, he would have maintained his original price structure and seen the following result: Revenue £200 (sales 20 × price £10) – Expenses £50 = Profit £150 A claimant might justify such an argument on the basis that, after the imposition of VAT, economic conditions happened to improve dramatically, and, as a consequence, competitors who maintained their pre-tax price structure increased their profitability. This argument was made, and rejected, in Marks & Spencer (No 1). The Tribunal in that case stated that: We do not . . . accept Marks & Spencer’s contention that by reducing prices it would have improved sales and profits thereby earning it, over the next 21 years, £3.5m in extra profit. . . . On this basis we conclude that Marks & Spencer would not have made much more profit from sales of teacakes had the correct VAT treatment been in operation . . . .38
At the core of the Tribunal’s argument was that even if the pre-tax price had been maintained (or in this particular case, reinstated), sales would not have increased because there was no excess capacity in the relevant teacake market. Put another 38
Marks & Spencer plc v Customs & Excise Comrs (No 1) [1997] V&DR 85, [1997] BVC 2243, 2250.
78
Statutory Defence of Disimpoverishment
way, demand would not have increased by such an extent to offset the decrease in price, thereby resulting in a net increase in revenue and profitability.
(e) Increase in Price Not Matched by an Increase in Revenue The fifth situation in which a claimant may argue that he has incurred a loss as a result of a tax is when he raises the price of goods of services sold, but revenue does not increase sufficiently to offset the cost of the tax. Thus, he incurs a net financial loss. There are three instances in which this may occur. The first is where revenue increases, but by a sum which is less than any increase in expenses. This can be expressed in the following form: Revenue ↑ £50 (price ↑ × sales) – Expenses ↑ £100 = Loss £50 The second scenario is where revenue remains constant. This will occur when any increase in price is exactly offset by a decrease in sales. Such a situation can be depicted as: Revenue (price ↑ × sales ↓) – Expenses ↑ £100 = Loss £100 The third possibility is where revenue actually declines as a result of the increase in price. This may occur because the market in which the claimant operates is highly sensitive to changes in price. Any increase in price therefore results in a dramatic decline in demand. This can be represented as: Revenue ↓ £100 (price ↑ × sales ↓) – Expenses ↑ £100 = Loss £200 Although the situation in which increases in price are not offset by increases in revenue would appear the most basic and therefore common form of loss, there appear to be no cases where this point has been argued. The only explanation for this would seem to be that the Customs and Excise Commissioners do not contest claims for restitution in these circumstances. However, it must be recognized that even if a claimant is able to show that he incurred a loss following an increase in price, it is open to the Commissioners to argue that the price rise did not actually cause the loss suffered. Other factors may have played a more significant role, such as an alteration to the general economic environment or a change in consumer preferences. This is certainly the sort of argument which could have been made if, for example, VAT had been imposed on air travel commensurate with the 11 September 2001 terrorist attacks. If airlines had increased ticket prices to avoid the cost of a tax, the Commissioners could have argued that any diminution in sales was caused by fears over air travel safety, not higher prices. This kind of argument has recently been incorporated into Value Added Tax Act (UK) 1994 Section 80 by Finance Act (UK) 1997 Section 47. Mr Virgo has
Operation of the Unjust Enrichment Defence
79
summarized the function of ss 3A–3C, which were inserted into the Value Added Tax Act, as ensuring that: [W]hen determining the loss which the taxpayer suffered after paying the VAT to the Commissioners, this loss is restricted to that which flows from the payment of the tax. In other words, this provision introduces a test of remoteness of loss for the purposes of the unjust enrichment defence. Consequently, loss suffered by the taxpayer as a result of changes in market conditions will no longer be relevant, since this loss did not result from the taxpayer’s mistake about the operation of the VAT provisions.39
It should be noted however, that these provisions only apply in circumstances where the claimant adopts a mistaken assumption about the operation of VAT provisions. They do not apply when the taxpayer incorrectly assesses the level of VAT due.
(f) Potential Substitutability of Profitable Products In Marks & Spencer (No 1), Moses J considered a novel argument made by the Customs and Excise Commissioners. The argument consisted of two parts. First, when a rational profit-maximizing company increases prices following the imposition of a tax, but is unable to shift the full burden of the tax to its customers, it will replace the particular good or service with a more profitable substitute. However, if the particular good or service is not replaced by a substitute, it must be inferred that the original product has retained its level of pre-tax profitability. In other words, the claimant must not have incurred any loss as a result of the newly imposed tax. In the particular case of Marks & Spencer (No 1), the Customs and Excise Commissioners argued that because Marks & Spencer had not substituted a more profitable product for teacakes (upon which VAT had been wrongly imposed), the teacakes must have been equally profitable after (as before) the imposition of the tax. Thus, restitution should be denied because Marks & Spencer had not incurred any loss. Moses J rejected this contention and the VAT and Duties Tribunal’s earlier acceptance of it. There were two main reasons why. His Honour said, first of all, that: ‘If the trader has asserted that it has suffered losses in relation to a particular product and produces material to support that assertion it should not have the burden of dealing with the assumed prospect of success in relation to a different product.’40 Moses J’s second reason for rejecting the Commissioner’s argument was that: ‘Such an approach requires excessive speculation. It requires, amongst other 39 40
G Virgo, ‘Restitution of Overpaid VAT’ [1998] BTR 582, 588. Marks & Spencer (No 1), above n 1, p 1197.
80
Statutory Defence of Disimpoverishment
things, an assumption that the other product would be as successful as the product for which it was substituted and would not otherwise have been sold.’41 Therefore, in conclusion, just because a claimant may have had the opportunity to introduce a substitute for a product upon which an unlawful tax was imposed, it does not follow that the claimant will have avoided any loss. The defence of unjust enrichment will only be accepted when it is proved, as a matter of evidence, that an award of restitution would result in the claimant recovering more than once in respect of the same loss.
3. Condition #3: Recovery Must ‘Unjustly Enrich’ the Claimant There is little that need here be said about the requirement that restitution must result in the claimant being ‘unjustly enriched’ if the statutory defence is to be established. In the second section of this chapter it was shown that the cases have defined this requirement to mean that restitution must not place the claimant in a financially superior position compared to the one he would have occupied had the tax never been imposed. So long as condition two (disimpoverishment) is established, the cases have tended to assume that this third condition will automatically be fulfilled. One decision in which factors, that might be regarded as relevant to the injustice (that is the ‘unjust’ aspect of ‘unjustly enrich’), were carefully looked at, albeit to be rejected, was RIBA Publications v Customs and Excise Comrs42 (‘RIBA Publications’). The Tribunal in that case held that it was irrelevant that the Commissioners’ were at fault in wrongly classifying building contracts and related documents as subject to tax. It was also held to be irrelevant that whatever money was recovered would be returned to a charity, RIBA Publications. The decision clarifies, therefore, that what is ‘unjust’ does not turn on the blameworthiness or moral integrity of the defendant or claimant.43
4. Conclusion The purpose of this section has been to explore the mechanics of the defence of unjust enrichment by reference to the cases that have interpreted the Value Added Tax Act. In doing so, some of the mechanics of the defence of disimpoverishment have also been revealed. That is because the defences, while focusing on slightly different questions, are both concerned with determining whether the claimant should be denied restitution to the extent he has made good any loss initially incurred. 41 42 43
Ibid. RIBA Publications v Customs & Excise Comrs [1999] V&DR 230, [1999] BVC 2201, 2206. See also Grantham Cricket Club, above n 4, p 2274.
Recovery for Third Parties of Overpaid VAT
81
The cases reveal that the inquiry into whether a claimant has successfully avoided any loss as a result of the defendant’s unjust enrichment involves three elements. First, whether the cost of the defendant’s unjust has been passed on. Second, whether the claimant thereby avoided some or all of his loss (ie disimpoverishment). And third, whether the claimant, if awarded restitution in these circumstances, would receive an undeserved windfall. It must be reiterated, however, that the first and third elements are superfluous. The important question is whether the claimant has incurred a loss as a result of the tax.
D. Recovery for Third Parties of Overpaid VAT The focus of this chapter has been on the statutory defence of disimpoverishment as principally embodied in the provisions dealing with the recovery of overpaid VAT. But in order to provide a complete picture of the position regarding overpaid VAT, it is important to see that there have been decisions which have focused on the claimant recovering overpaid VAT on behalf of third parties and that statutory provisions have been enacted dealing specifically with this.
1. Direct Recovery by Third Parties Third party consumers have no direct rights to recover overpaid VAT under Value Added Tax Act (UK) 1994. That is because they are not entitled to ‘leapfrog’ the claimant and bring an action for restitution against the Commissioners. Such an action is precluded under the Value Added Tax Act (UK) 1994. That is because, pursuant to Section 80(1), recovery is restricted to the person who actually paid the tax directly to the Commissioners (ie the claimant). Furthermore, any common law right to restitution is ousted by Section 80(7) of the Act.
2. Claimant Recovering for Third Parties Although third party rights of recovery are severely curtailed by the Value Added Tax Act (UK) 1994, they do not remain entirely unaccounted for. That is because the Act provides for a qualified rejection of the statutory defence. It will be recalled that in the final substantive section of chapter 2 the notion of a ‘qualified rejection’ of the defence of disimpoverishment was introduced. It was there explained that if a defendant is able to prove that the claimant made good his loss at the expense of a third party, a court may do one of two things. First, make an award of restitution in favour of that third party. Or second, allow the defendant to retain the money in dispute on the basis that the claimant will not or cannot
82
Statutory Defence of Disimpoverishment
return it to the affected third party. Common law cases which support a qualified rejection of the defence of disimpoverishment were discussed in chapter 3.44 The following discussion shows that the same view has been adopted in some cases in relation to overpaid VAT and the statutory defence of unjust enrichment. In both McMaster Stores and Lamdec Ltd v Customs and Excise Comrs45 (‘Lamdec’) the argument was accepted that the claimant should be awarded restitution if the money received would not enure for its benefit, but the benefit of third party creditors. In McMaster Stores the claimant, McMaster Stores, owned a number of department stores which included internal shops let to concessionaires. The grant of the right to occupy such space was exempt as a taxable supply under Value Added Tax Act (UK) 1983 Section 2(1). However, in 1989, the claimant was provided with the option to waive the exemption and subject its tenants to VAT. It took this course of action. In the following two and half years it collected £936,987.37 in VAT which it remitted to the defendant, the Customs and Excise Commissioners. In 1992 a receiver was appointed to McMaster Stores. The receiver discovered that the claimant’s tenants had been wrongfully required to pay VAT. McMaster had failed to inform the defendant (as it was legislatively required to do) that it had elected to waive the exemption. Consequently, the receiver issued credit notes to all the tenants, entitling them, in their capacity as unsecured creditors, to 6.5 per cent of the money recovered from the defendant. Lord President Hope, with whom the other judges of the Inner House of the Court of Session agreed, stated that: In the present case the tribunal were of the opinion that there would be no unjust enrichment because there would not, due to the respondent’s insolvency, be any benefit as a result of the repayment for the company and its shareholders . . . I agree . . . . It is clear on the agreed facts that the tenants will get something as a result of the repayment, which is better than nothing. It is also clear that there will be no benefit to the company or its shareholders, as the remainder must be shared equally with the other unsecured creditors . . . .46
In reaching this conclusion Lord President Hope placed specific reliance on the decision in Lamdec. In that case the appellant carried out construction work for Petrolite Ltd, a chemical manufacturer. The appellant charged VAT on the work undertaken and this was paid by Petrolite. It later transpired that the work was zero-rated and VAT should not have been charged. The appellant then went into liquidation. The issue arose as to whether the appellant’s recovery of overpaid VAT would result in its unjust enrichment. The Tribunal held that: 44 45 46
See text following, above n 83, ch 3. Lamdec Ltd v Customs & Excise Comrs [1991] VATTR 296, [1991] BVC 721. McMaster Stores, above n 2, p 5397.
Recovery for Third Parties of Overpaid VAT
83
[T]here is no unjust enrichment if the repayment will be applied ... for the benefit of the person overcharged and the person to whom the repayment is made will not be entitled to keep the remainder, if any, for himself, in which expression, in relation to a company in liquidation, we would include the shareholders but not the creditors. In the instant case, therefore, we would hold that the repayment ought to be made.47
In summary, both McMaster Stores and Lamdec provide support for the view that the defence of unjust enrichment can be rejected in a qualified fashion. The justification for this approach is that the claimant, who has made good his loss, will not receive an unjust enrichment. The money will, instead, enure for the benefit of a third party at whose ultimate expense it came. In RIBA Publications the claimant tried to take the argument developed and accepted in McMaster Stores and Lamdec, one step further. It argued that it should be awarded restitution on the basis that it would not retain any money recovered, but would undertake to transfer it to a related charity, RIBA. In essence, the claimant contended that it would not be unjustly enriched if awarded restitution, and therefore the Commissioners should not be entitled to rely on the defence. The Tribunal rejected the claimant’s argument. It did so on the basis that in McMaster Stores and Lamdec the money in dispute was returned to the third party consumers at whose expense it had ultimately come. By contrast, in this case: ‘[T]here is no reason to think that any of the charitable objects [of RIBA] will be persons who have borne the cost of the VAT incorrectly paid on their purchases of the relevant booklets of the Institute.’48 The same conclusion was reached in PA Cowdy T/A Berriewood Farm.49 In that case the claimant operated a riding school and livery yard, paying VAT in respect of livery supplies. Although the claimant agreed not to withhold, for her own benefit, any money recovered in respect of overpaid tax, the Tribunal awarded her only eighty per cent of the total amount of tax she had remitted to the Commissioners. The reason for this decision was that the claimant had arranged for her accountants to retain twenty per cent of whatever money was recovered from the Commissioners. The Tribunal found this to be unacceptable, requiring the claimant instead to ensure that the money be returned to those consumers at whose expense it came. While qualified rejection of the defence of unjust enrichment provides some scope for third party recovery, it is nonetheless limited. That is because the decision to proceed against the Commissioners—seeking an award of restitution for the benefit of third party consumers—is left entirely in the claimant’s hands. The claimant cannot be compelled to pursue an action for restitution. Moreover, even when the claimant commences such an action, he is entitled to proceed on the 47 48 49
Lamdec, above n 45, p 727. RIBA Publications, above n 42, p 2207. PA Cowdy T/A Berriewood Farm VTD 18599 (unreported, 26 May 2004).
84
Statutory Defence of Disimpoverishment
basis that he will not pass-back money recovered to affected third parties, even if it means his own claim will be denied.50 In order to address this problem, Parliament specifically resolved that regulatory provision could be made: ‘[A]bout the cases where arrangements for reimbursement may be taken into account in determining whether a person would be unjustly enriched by a repayment under that section.’51 Subsequently, the Value Added Tax (Amendment) Regulations (UK) 1998, which amended the Value Added Tax Regulations (UK) 1995 by inserting a Part VA (comprising regulations 37A to 37H), provided for a more cost-effective reimbursement scheme for claimants prepared to seek awards of restitution on behalf of third party consumers. The basic effect of these regulations can be summarized as follows. Regulation 37C provides that after the Commissioners have repaid the claimant any overpaid tax, the claimant must, within 90 days, transfer all money received to affected consumers. After such time any remaining money must be repaid to the Commissioners. Regulation 37E requires the claimant to maintain detailed records of when, how much and to whom reimbursements were made.52 The benefit of this scheme is that it provides an administrative procedure by which claimants may seek recovery on behalf of third parties. Thus, it is more cost and time effective. The problem with it, however, is that claimants will only utilize it if they perceive that the cost of recovering and distributing overpaid tax is offset by benefits to their business (such as consumer satisfaction and increased brand loyalty). Moreover, because the scheme is predicated on claimants maintaining accurate records of how much tax each consumer paid and their relevant contact details, it will not be applicable in all cases.
3. Conclusion The prospect of third party recovery of overpaid VAT is limited. The main reason for this is that third party consumers have no right to bring a direct action for restitution against the claimant or the Customs and Excise Commissioners. The only way in which third party consumers may recover is if claimants bring actions for restitution on their behalf. Whether a claimant will be sufficiently motivated to bring such an action will depend entirely upon the perceived costs and benefits which may accrue to the claimant’s business. 50
Eg, Grantham Cricket Club, above n 4; Daynes & Anor v Customs & Excise Comrs [1994] BVC 664. House of Commons Hansard Debates for 3 December 1996 (pt 38) no 27 Value Added Tax (unjust enrichment). 52 Further details of how, in practice, the reimbursement scheme operates can be found in How to Correct VAT Errors and Make Adjustments or Claims, Notice 700/45, March 2002, located on the world wide web at: http://new.hmce.gov.uk/channelsPortalWebApp/downloadFile?contentID=HMCE_CL_ 000077. 51
Influence of European Jurisprudence
85
E. Influence of European Jurisprudence The final substantive section of this chapter concerns the influence of European Community case law on the operation of the statutory defence of unjust enrichment.53 As courts and tribunals in the United Kingdom are bound by decisions made by the European Court of Justice (‘ECJ’), a review of the main propositions emanating from these cases is necessary. The issue of primary concern is whether, and under what conditions, the defence of unjust enrichment will be compatible with Community law.
1. Three General Propositions from the ECJ The first main proposition that can be drawn from ECJ cases concerning the defence of unjust enrichment is that when a charge is unlawfully levied by a member state, the relevant sum must, in principle, be re-transferred to the person who paid it. The second consideration is that, as an exception to that general principle, there is nothing in Community law which prevents member states from implementing a statutory defence of disimpoverishment in response to claims for restitution. In other words: ‘[T]he Community legal order does not require the repayment of taxes, charges and duties levied in breach of Community law where it is established that the person required to pay such charges has actually passed them on to other persons.’54 The third proposition is that a defence of disimpoverishment is not mandatory. Each member state must decide for itself whether such a defence should be incorporated as part of its national laws.
53 Case 61/79 Amministrazione delle Finanze dello Stato v Denkavit Italiana Srl [1980] ECR 1205; Case 199/82 Amministrazione delle Finanze dello Stato v SpA San Giorgio [1983] ECR 3595; Cases 256/80, 257/80, 265/80, 267/80, 5/81, 51/81 and 282/82 Birra Wuhrer SpA v Council and Commission of the European Communities [1984] ECR 3693; Case C–343/96 Dilexport Srl v Amministrazione delle Finanze dello Stato [1999] ECR I–579; Case 130/79 Express Dairy Foods Ltd v Intervention Board for Agricultural Produce [1980] ECR 1887; Case 68/79 Hans Just I/S v Danish Ministry for Fiscal Affairs [1980] ECR 501; Case 238/78 Ireks-Arkady GmbH v Council and Commission of the European Communities [1979] ECR 2955; Cases 331/85, 376/85 and 378/85 Les Fils De Jules Bianco SA v Directeur General Des Douanes et Droits Indirects [1988] ECR 1099; Cases 197/80 to 200/80, 243/80, 245/80 and 247/80 Ludwigshafener Walzmuhle Erling KG v Council and Commission of the European Communities [1981] ECR 3211; Case C–62/00 Marks & Spencer plc v Customs & Excise Comrs [2002] ECR I–6325; Case 256/81 Pauls Agriculture Ltd v Council and Commission of the European Communities [1983] ECR 1707; Case 104/86 Re Repayment of Illegal Taxes: Commission of the European Communities v Italian Republic [1988] ECR 1799; Cases C–192/95 to C–218/95 Societe Comateb v Directeur general des douanes et droits indirects [1997] ECR I–165. 54 Dilexport Srl v Amministrazione delle Finanze dello Stato, above n 53.
86
Statutory Defence of Disimpoverishment
2. Three Specific Propositions from the ECJ When a member state chooses to statutorily adopt a defence of disimpoverishment, three specific considerations must be taken into account when applying it. The first is that ‘if the burden of the charge has been passed on [made good] only in part, it is for the national authorities to reimburse the trader the amount not passed on [made good].’55 The second consideration is that member states must not reverse the burden of proof so that the claimant is not only required to prove that the particular regulation was unlawful, but also that it did not avoid the cost of any unlawful charge. The final consideration is that member states may not treat claimants with an action under European law any less favourably than claimants with a similar action under national law. Of these three specific considerations the question which has proved most vexing for tribunals and courts in the United Kingdom is the operation of the burden of proof. The latest discussion of this point comes from the opinion of Jacobs AG in Weber’s Wine World v Abgabenberufungskommission Wien,56 which was subsequently endorsed by Jacob J in National Westminster Bank.57 Advocate General Jacobs’ opinion can be summarized by the following four propositions. First, the burden of proof rests entirely on the defendant to show that the claimant passed on, and avoided, the cost of any unlawful tax. Second, the claimant cannot be presumed to have avoided the cost of an unlawful tax merely because his retail prices are deemed to be inclusive of the tax. Third, in the case of self-assessed tax, the claimant must provide co-operation and access to relevant records. Finally, a court may draw reasonable inferences from the existing evidence as to whether restitution would result in the claimant’s unjust enrichment. So long as these considerations are accounted for in cases concerning the recovery of overpaid tax, courts and tribunals in the United Kingdom will operate in a manner which is consistent with the law set down by the ECJ.
F. Conclusion 1. Some Specific Observations The purpose of this chapter has been to examine the statutory operation of the defence of disimpoverishment in the United Kingdom. Four particular considerations have been highlighted by this analysis. 55
Societe Comateb, above n 53. Case C–147/01 Weber’s Wine World v Abgabenberufungskommission Wien (opinion, 20 March 2003, unreported) [58]–[60]. 57 National Westminster Bank, above n 1, p 641. 56
Conclusion
87
The first is that the defence of disimpoverishment has been statutorily adopted in the United Kingdom. It is referred to as the ‘unjust enrichment defence’. Just like the defence of disimpoverishment, it applies in all circumstances where the claimant has made good his loss. The second consideration highlighted by this chapter is that the mechanics of the defence of unjust enrichment have been extensively examined in cases of overpaid VAT. In this context it was explained that a claimant will only be awarded restitution if he can show that he has incurred a net financial loss as a result of (i) the tax being absorbed into his profits, or (ii) because he has been unsuccessful in shifting the tax to a third party. The third point is that the rights of third party consumers to recover overpaid VAT have been severely curtailed by statute. Third parties will only be awarded restitution if the claimant (i) brings an action on their behalf, and (ii) returns whatever money is recovered to them. The final consideration brought to light in this chapter is that in examining the statutory enactment of the defence of disimpoverishment, courts and tribunals in the United Kingdom must comply with decisions of the ECJ relating to this issue. One particular area of influence has been the development of rules relating to the allocation of the burden of proof.
2. Implications for this Book This chapter represents the conclusion of the foundational aspects of this book. While this and the previous two chapters have clarified how and when the defence of disimpoverishment (or, alternatively, the defence of unjust enrichment) operates in practice, confusion still exists. This confusion manifests itself in two ways. First, not least because numerous labels have been used to describe the defence (‘passing on’, ‘pass through’, ‘passing off ’, ‘unjust enrichment’, ‘bear the burden’, ‘windfall gain’, and ‘recoupment’) confusion exists as to its application and scope. One particular problem generated by this is that courts and tribunals in the United Kingdom, for example, take little or no account of the defence of unjust enrichment in its other manifestations. This not only leads to lost opportunities for productive ‘cross fertilization’, but also the possibility that divergent and inconsistent approaches will develop at common law and under statute. The second problem with the defence as it currently stands is that no clear rationale for accepting or rejecting it has arisen or been adopted in the case law. While the mechanics of the defence may be clear, the question of whether or not it should form part of the common law of unjust enrichment, or be incorporated into various statutory enactments, remains unanswered. Confusion over whether the defence should, as a matter of principle, be adopted, is highlighted by the fact that it has been: (i) rejected at common law in England and Australia, and in certain situations in Canada and the United States; (ii) accepted in particular common
88
Statutory Defence of Disimpoverishment
law cases in Canada and the United States; (iii) rejected in a qualified fashion in the United States; and (iv) statutorily adopted in the United Kingdom, but only in a partial fashion (ie in relation to value added tax, but not, for example, income tax). This state of affairs must be addressed. While a suggested definition of the defence has been provided, the question of when and if it should be accepted— be it at common law or in statute—must also be answered. The objective of the following chapters is to provide that answer.
Part II
‘At the Expense of ’ The purpose of Part II of this book is to determine what it means to say that the defendant’s unjust enrichment must have come ‘at the expense of ’ the claimant. Two alternatives are presented. The first is that the claimant need merely prove that the defendant’s unjust enrichment came ‘from’ him. The opposing interpretation is that the claimant must show that the defendant’s unjust enrichment caused a ‘loss’ to him. The importance of this inquiry cannot be understated. There will only be a possible place for the defence of disimpoverishment within the common law of unjust enrichment if ‘at the expense of ’ is interpreted to mean ‘loss’, not ‘from’. That is because coherence demands the consistent treatment of the ‘at the expense of ’ requirement (which is a condition of liability) and the defence of disimpoverishment. To turn the proposition round, if ‘at the expense of ’ is interpreted to mean ‘from’ not ‘loss’, the defence of disimpoverishment is automatically ruled out and no further arguments for or against the defence, at common law, need be considered.
5 What Might ‘At the Expense of ’ Mean?
A. Introduction Before a claimant’s ‘disimpoverishment’ can be considered relevant, the claimant must first be required to show that he incurred an initial ‘impoverishment’. In other words, before the defence of disimpoverishment is accepted as part of the law of unjust enrichment the claimant must, as condition of the defendant’s liability, be obliged to prove that he suffered a loss. That is what Mason CJ meant when he stated in Comr State Revenue (Victoria) v Royal Insurance Australia Ltd that the defence cannot be established if ‘the defendant’s enrichment has not been at the expense of the plaintiff ’.1 It is by no means certain, however, that the claimant is and should be obliged to show that he incurred a loss when establishing a prima facie claim for restitution. That is because the requirement that the defendant’s unjust enrichment must have come ‘at the expense of ’ the claimant need not be interpreted to mean that the claimant must have suffered a ‘loss’. As the first part of this chapter explains, an alternative interpretation of the phrase ‘at the expense of ’ exists. That is, the claimant need merely show that the defendant’s enrichment came ‘from’ him. Having identified the alternative interpretations of ‘at the expense of ’, a large part of this chapter focuses on just one of them—the less well understood concept of loss. That is because only after clearly defining ‘loss’ is it possible to determine whether the law of unjust enrichment does and should require restitution to be predicated on proof of the claimant’s initial impoverishment.
1 Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA) 75 (Mason CJ).
92
What Might ‘At the Expense of ’ Mean?
B. Two Interpretations of ‘At the Expense of ’ The phrase ‘at the expense of ’ is a label. Its purpose is to provide a shorthand method of identifying whether a claimant has been able to establish a sufficient connection between himself and the defendant’s unjust enrichment.2 What actually constitutes a ‘sufficient connection’, however, is disputed. Two plausible and possibly conflicting interpretations exist. On the one hand it may be argued that the claimant need simply prove that the defendant’s unjust enrichment came from him or his wealth. On the other hand, it may be contended that a defendant’s enrichment must result from the claimant having incurred a loss. As already stated, vitally important consequences for the defence of disimpoverishment attach to the outcome of this debate. If ‘at the expense of ’ is interpreted to mean ‘from’, not ‘loss’, there will be no place for the defence within the law of unjust enrichment. That is because if the claimant need only show that he or his wealth was the source of the defendant’s unjust enrichment, and not that he incurred a loss, his subsequent disimpoverishment will be irrelevant. In the overwhelming majority of unjust enrichment cases it is irrelevant whether recourse is had to ‘from’ or ‘loss’ in explaining the meaning of ‘at the expense of ’. Consider, for example, the standard case of a mistaken payment. If C mistakenly transfers £100 to D, C will incur a ‘loss’ of £100. The £100 will also have come ‘from’ C. There may, however, be some situations in which a defendant might be said to have received an unjust enrichment from the claimant without the claimant suffering a loss. Consider the following illustration provided by Professor Birks: Suppose that I use your bicycle while you are on holiday. By the time you come back, I have returned it. Let it be that there is be no perceptible wear and tear attributable to me. It is clear that I must pay the value of my use. Yet you have suffered no loss. I have taken three weeks’ riding ‘from’ you, but I have inflicted no corresponding impoverishment on you.3 (emphasis added)
There are two opinions expressed by Professor Birks in this example. First, the claimant suffered no loss. And second, restitution should nonetheless be awarded. Neither conclusion can be accepted at face value. A particular purpose of this chapter is to determine whether the first of these is correct. That is, whether the
2
P Birks, Unjust Enrichment, 2nd edn, (Oxford, OUP, 2005) 73–74. P Birks, ‘At the Expense of the Claimant: Direct and Indirect Enrichment in English Law’ in D Johnston and R Zimmermann, (eds), Unjustified Enrichment (Cambridge, CUP, 2002) 501; P Birks, The Foundations of Unjust Enrichment: Six Centennial Lectures (Wellington, Victorial University Press, 2002) 83. 3
The Meaning of ‘Loss’
93
claimant in the above example did, as a matter of fact, incur a loss. In other words, we need to look in some detail at what it means to say that a person has suffered a ‘loss’ in the context of unjust enrichment.
C. The Meaning of ‘Loss’ In this section a variety of possible interpretations of ‘loss’ are considered. A threefold division is drawn between loss meaning ‘detriment’ (pecuniary and nonpecuniary), loss meaning ‘deprivation’, and loss meaning ‘opportunity forgone’.
1. ‘Loss’ Meaning ‘Detriment’ The most common understanding of the word ‘loss’ in the context of the law of unjust enrichment is the ‘detriment or disadvantage involved in being deprived of something’.4 The Oxford English Dictionary, in explaining this interpretation, goes on to make the important parenthetical comparison: ‘[o]pposed to gain’.5 When ‘loss’ is used in this sense, attention is directed toward the effect or outcome of being deprived of something. Thus, unless a detriment is sustained as a result of something being denied, no ‘loss’ arises. A detriment can take one of two forms. It can either be pecuniary or nonpecuniary in nature. A pecuniary detriment is a financial or monetary loss. A non-pecuniary detriment concerns losses which are not ordinarily measured in money terms.
(a) Pecuniary Detriment There is no question that a pecuniary detriment constitutes a kind of loss which is sufficient to fulfill the requirement that the defendant’s unjust enrichment must have come ‘at the expense of ’ the claimant. Indeed, in every common law case considered in chapter 3 in which the defence of disimpoverishment was accepted, it was first necessary to show that the claimant incurred a pecuniary detriment. (i) Illustrations A claimant may incur a pecuniary detriment in at least six different situations. In each case the defendant’s unjust enrichment leaves the claimant financially worseoff. Those situations can be described as follows:
4 J Simpson and E Weiner, (eds), Oxford English Dictionary, 2nd edn, (Oxford, Clarendon Press, 1989) IX, 37. 5 Ibid.
94
What Might ‘At the Expense of ’ Mean? i) Money: The first and most obvious example of a pecuniary detriment is where the claimant transfers money to a defendant. ii) Reducible to money: The next case is of a claimant who transfers to a defendant something reducible to money. For example, the claimant transfers his bicycle or wristwatch by mistake. iii) Reduction in value: Third is the situation where the claimant transfers something to a defendant and, although the defendant later returns it, its value has decreased due to the defendant’s use or treatment of it. For example, a book that is returned with half its pages missing. iv) Use value: The fourth case is where the claimant transfers something, and that thing has an independent use value. For example, if a claimant mistakenly transfers money from his bank account to a defendant, he loses not only the value of the money itself, but its interest-bearing properties as well.
The final two examples relate to the provision of services. v) Depletion of an asset: In this case the claimant, in providing a service to a defendant, depletes an asset which, in its original form, is reducible to money. This may occur, for example, when a claimant mistakenly paints a neighbour’s fence and uses a tin of his own paint in doing so. vi) Opportunity cost: The final illustration is where a claimant provides a defendant with a service, for no financial reward, when he could have profitably provided it to another person. For instance, if a defendant watches a movie in the claimant’s cinema without permission and without paying, and in so doing occupies the last available seat, the claimant will lose the price of a movie ticket if he then turns away a paying patron. (ii) The Bicycle Example Re-examined Having identified the main forms of pecuniary loss that may arise in unjust enrichment cases, Professor Birks’ hypothetical example cited at the outset of this discussion can be reconsidered. The question that here needs answering is whether the claimant will have incurred a pecuniary detriment as a result of the defendant using his bicycle, in his absence, without permission. There are three ways a pecuniary detriment may have been suffered in these circumstances. None of them is apparent on the facts. The first kind of pecuniary detriment which may have been incurred is the missed opportunity for the claimant profitably to sell, hire or use his bicycle during the relevant period. Because the claimant was on holiday it must be assumed that no such possibility arose. The second type of pecuniary detriment which may have resulted is a reduction in the bicycle’s resale value as a result of wear and tear. Professor Birks eliminates this possibility. The final possibility is where the claimant is required to purchase a replacement. However, this predicament did not arise because the claimant was only temporarily deprived of his bicycle.
The Meaning of ‘Loss’
95
What this discussion highlights is that when the word ‘loss’ is restricted to mean ‘pecuniary detriment’, differences between it and the word ‘from’ emerge. Thus, if in order to connect himself to a defendant’s unjust enrichment the claimant must prove that he incurred a financial disadvantage, restitution will not always be awarded if the word ‘loss’, rather than ‘from’, is chosen to express the ‘at the expense of ’ requirement.
(b) Non-pecuniary Detriment The second kind of detriment that a claimant may incur is non-pecuniary in nature. As stated earlier, non-pecuniary detriments concern losses that are not ordinarily measured in money terms. The reason for this is that there is no market for their sale or purchase. (i) Illustrations It is possible to identify a wide range of non-pecuniary detriments. For the purposes of this inquiry, however, an exhaustive list need not be provided. Two illustrations suffice. Both show that the kind of detriments with which we are here concerned are non-financial in nature. The first and most common form of non-pecuniary detriment is a negative emotional or psychological response. Examples include ‘disappointment, worry, anxiety, fear, upset, grief and annoyance’.6 Such responses may be elicited if, for instance, a claimant transfers money on a basis that later fails. This may be so in the case of an avid football supporter who purchases a ticket to a game which is later cancelled. Upon cancellation, this football supporter may experience considerable disappointment and annoyance. Another obvious example of a non-pecuniary detriment is loss of time. Consider, for instance, a person who, on a lazy Sunday afternoon, agrees to mow a friend’s lawn. If he mistakenly mows a neighbour’s lawn instead, he will have wasted time that would otherwise have been spent sitting idly at home. The same may be true of a student whose bicycle has been stolen and has to rise twenty minutes earlier each day to walk to the library. In neither case will a pecuniary detriment have been incurred. (ii) Examples of Non-pecuniary Detriment in the Case Law? A number of Canadian matrimonial property dispute cases exist in which the claimant has incurred a non-financial detriment and been awarded restitution on the grounds that the defendant received an unjust enrichment at her expense. In
6 A Burrows, Remedies for Torts and Breach of Contract (London, Butterworths, 1987) 202. See also A Burrows, Remedies for Torts and Breach of Contract, 2nd edn, (London, Butterworths, 1994) 137.
96
What Might ‘At the Expense of ’ Mean?
Sorochan v Sorochan,7 for example, the claimant’s detriment was described by the Canadian Supreme Court in the following terms: She did all of the household work, including the raising of their six children. In addition, she looked after the vegetable garden, milked the cows, raised chickens, did farmyard chores, worked in the fields, hayed, hauled bales, harvested grain and helped to clear the land of rocks. She also sold garden produce, milk and eggs to pay for food and clothing for the family and for the schooling of the youngest child.8
At the time of trial Mrs Sorochan had received no remuneration or proprietary interest in the farm despite her partner (the respondent) accruing ‘valuable savings’ from her 41 years of work.9 Without making any attempt to quantify or explain the nature of Mrs Sorochan’s detriment, the Supreme Court of Canada awarded her a one-third interest in the farm and $20,000. Although the Supreme Court must have had in mind that the detriment incurred by Mrs Sorochan was the value of her labour (her contribution to farm duties and raising the children), the failure to enunciate or explain this means the case cannot be taken as an unequivocal endorsement of the proposition that a non-pecuniary detriment constitutes a ‘loss’ for the purposes of the law of unjust enrichment. More instructive is the decision in Strang v Inkpen.10 In that case the claimant assisted her partner in constructing a house. The Court accepted that she spent 600 hours of her time in doing so. The Court valued her labour at $6 per hour and therefore calculated her contribution, and thus her claim for restitution, at $3600. Even more explicit on this point was Sherstobitoff JA in Everson v Rich,11 who said: ‘The spousal services provided by the appellant were valuable services and did constitute a benefit conferred upon the respondent. The provision of those services was a detriment to the claimant by virtue of the use of her time and energy.’ Statements and decisions of this nature suggest that non-pecuniary detriments constitute kinds of losses that courts in Canada are prepared to recognize. Before this proposition can be accepted, however, two important points require mentioning. The first relates to a contrary case. The second concerns the nature of the event and response in matrimonial property dispute cases. The contrary case is Gidney v Feuerstein,12 the details of which are set out in chapter 6.13 In that case the claimant spent one hundred hours carrying out
7 8 9 10 11 12 13
Sorochan v Sorochan [1986] 2 SCR 38, 29 DLR (4th) 1 (CSC). Ibid, pp 44 and 5. Ibid, pp 44–45 and 5–6. Strang v Inkpen (1989) 33 ETR 130, 20 RFL (3rd) 393 (NSC). Everson v Rich (1988) 31 ETR 26, 16 RFL (3rd) 337 (SCA) 342. Gidney v Feuerstein [1996] 2 WWR 383 (MCA). See text accompanying, above n 66, ch 6.
The Meaning of ‘Loss’
97
repairs on an old canoe. He was not in the business of repairing canoes, but undertook the task in his spare time. Despite this, it was accepted that he increased its value by $900. Interestingly, and importantly for what has already been said in this section, the time the claimant spent undertaking the repairs did not constitute a loss. Put another way, the claimant’s non-pecuniary detriment was not accepted as a relevant form of loss for the purposes of unjust enrichment. Thus, this decision contradicts the position adopted in relation to non-pecuniary detriments in matrimonial dispute cases. One explanation for this (being the second point referred to earlier) may lie in the fact that the matrimonial dispute cases, though labeled by the Canadian courts as concerning the reversal of a defendant’s unjust enrichment, are not, in fact, true examples of unjust enrichment by subtraction. Professor Burrows suggests that these cases actually deal with entirely different objectives, such as to “uphold the parties’ intentions or to protect the claimant’s expectations or to effect a social policy of co-ownership between cohabitees’.14 Professor McInnes agrees. He has said that the Supreme Court of Canada has issued orders in these cases ‘that fulfil (purported) expectations, rather than effect restitution.’15 Professor Chambers has reached the same conclusion. He believes the response in these cases is ‘not restitutionary, but ‘perfectionary’, meaning that it arises by operation of law to give effect to the claimant’s expectations.”16 Alternatively, Professor Parkinson, agreeing that some of the cases focus exclusively on the sharing intent of the parties, has argued that in other instances it is ‘detrimental reliance on the security of the relationship that justifies the substantial relief awarded in such cases as Sorochan v Sorochan.’17 Two observations can be made about these contentions. First, common to them all is the view that the courts have either glossed over or wrongly applied the relevant unjust factor. Instead of focusing on failure of consideration as a basis for relief, they have been concerned with free acceptance18 or failed entirely to enunciate the relevant event. Thus, some of the cases cannot be said to fall within the well-defined focus of unjust enrichment by subtraction. Second, these critiques, while clearly correct in relation to some of the matrimonial dispute cases, do not
14 A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2002) 63. See also J McCamus, ‘Restitution on Dissolution of Marital and Other Intimate Relationships: Constructive Trust or Quantum Meruit?’ in J Nyers, M McInnes and S Pitel, (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004) 359. 15 M McInnes, ‘Reflections on the Canadian Law of Unjust Enrichment’ (1999) 78 Canadian Bar Rev 416, 430. 16 R Chambers, ‘Tracing and Unjust Enrichment’ in J Nyers, M McInnes and S Pitel, (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004) 263, 280. 17 P Parkinson, ‘Beyond Pettkus v Becker: Quantifying Relief for Unjust Enrichment’ (1993) 43 U Toronto L J 217, 253. 18 M McInnes, ‘Reflections on the Canadian Law of Unjust Enrichment’, above n 15, pp 428–31.
98
What Might ‘At the Expense of ’ Mean?
necessarily apply to all instances in which restitution has been awarded. Strang v Inkpen, discussed above, provides a useful counter example. It is no doubt cases of this kind that led Professor Parkinson to the view that there are and will be examples ‘where money is contributed, or services rendered, in circumstances where it was not intended that such financial or non-financial contributions were rendered gratuitously or in exchange for food or board’, and that in such cases, ‘[t]he ordinary principles of quantum meruit and the restitution of money or property transferred would be invoked’.19 In conclusion, Canadian matrimonial dispute cases appear to provide some, albeit limited, support for the view that non-pecuniary detriments can constitute a loss in the law of unjust enrichment. There are four reasons why this support is only limited. First, a number of the cases cannot be characterized as falling within the purview of unjust enrichment by subtraction. Second, courts often take little trouble to value precisely the detriment incurred by the claimant. Third, it has been assumed in these cases, without proper analysis, that non-pecuniary detriments should form a relevant form of loss in unjust enrichment law. And finally, there exists at least one case, Gidney v Feuerstein, which contradicts the view that non-pecuniary detriments do, in fact, constitute losses. With these considerations in mind, attention must now turn to what the law ought to be in relation to nonpecuniary detriments. (iii) What Should the Law be in Relation to Non-pecuniary Detriments? α) Arguments that Support Recognizing Non-pecuniary Detriments as (α Losses Implicit in the argument that non-pecuniary detriments should be considered a relevant form of loss is that restitution, if awarded in these circumstances, would not result in the claimant receiving an undeserved windfall. In other words, restitution would not result in the claimant being over-compensated because he would not be put in a better position than the one he was in prior to the defendant’s unjust enrichment. Bearing this in mind, there are two main justifications for including non-pecuniary detriments within the scope of ‘loss’. The first is that there is no reason for arbitrarily delineating between detriments which are financial in nature and detriments which are non-financial in nature. Both forms of loss are harms which are readily identifiable and worthy of protection. It seems unprincipled to circumscribe the meaning of loss on the basis that non-pecuniary detriments are not easily measured in money terms. The second justification for characterizing ‘non-pecuniary detriments’ as ‘losses’ is based on an appeal to consistency. Because, in the law of torts, losses are defined to include non-pecuniary detriments, there is no reason for them not to 19
P Parkinson, ‘Beyond Pettkus v Becker: Quantifying Relief for Unjust Enrichment’, above n 17, p 255.
The Meaning of ‘Loss’
99
be recognized by the law of unjust enrichment. This justification rejects any concerns over the cost and difficulty associated with valuing non-pecuniary detriments. If such problems are encountered and overcome in tort law, then there is no reason for them to be considered insurmountable in the law of unjust enrichment. β) Arguments Against Recognizing Non-pecuniary Detriments as Losses There (β are two main reasons for not allowing non-pecuniary detriments to constitute a relevant form of loss in unjust enrichment law. The first concerns calculation difficulties. The second relates to problems of causation. (1) Calculation Difficulties The appeal to consistency described above is only convincing if the two subjects under consideration are materially identical. In this sub-section it is contended that difficulties associated with calculating non-pecuniary detriments in the law of unjust enrichment are such that no parallel with the law of torts can be drawn. The reason for this is that if non-pecuniary detriments are accepted as part of the law of unjust enrichment, it follows that non-pecuniary enrichments must also be accounted for. Thus, if required to assess the non-pecuniary impact of a certain event, the law of unjust enrichment faces at least twice as many difficulties as the law of torts. Because of the added cost and complications associated with such assessments, it is arguable that the law of unjust enrichment should not embark on these inquiries. It is worth pausing for a moment to consider exactly why the law of unjust enrichment will face at least twice as many difficulties as the law of torts in assessing the non-pecuniary impact of a certain event. The reason is that the value of a defendant’s non-pecuniary enrichment (even if it correlates with the value of the claimant’s non-pecuniary loss), will not determine the appropriate level of restitution. The following example explains why. Suppose a claimant mistakenly pays a defendant £10. Suppose further that the value of his loss is £15, being made up of a £10 pecuniary detriment and £5 nonpecuniary detriment (such as the value of disappointment that results from discovering the money was paid by mistake). Assume that the value of the defendant’s gain is the same (£10 pecuniary gain, and a £5 non-pecuniary gain, being the value of her happiness upon receiving an unexpected sum of money). If both pecuniary and non-pecuniary detriments were accounted for in the law of unjust enrichment, it would ordinarily be thought that the amount of restitution should be £15. This, however, is incorrect. If the defendant was required to give up £15 to the claimant, her non-pecuniary loss would be likely to exceed £5. This is because of what behavioural economists call the ‘endowment effect’.20 This 20 D Kahneman, J Knetsch and R Thaler, ‘Experimental Tests of the Endowment Effect and the Coase Theorem’ (1990) 98 J of Political Economy 1325; H Hovenkamp ‘Legal Policy and the Endowment Effect’ (1991) 20 J Legal Studies 225.
100
What Might ‘At the Expense of ’ Mean?
hypothesis suggests that a person values a thing more highly when it is in his or her possession. Thus, while the defendant’s initial receipt of £10 may have resulted in her experiencing a £5 non-pecuniary gain, if she is required to make restitution of the £10 it is likely that she will incur a non-pecuniary loss which exceeds £5. The following experiment shows how the endowment effect operates: Knetsch gave some subjects coffee mugs and then offered to trade them a large Swiss chocolate bar for the mug, and he gave others the large chocolate bar and offered to trade them one of the same mugs for their chocolate. Of the subjects endowed with the mug, only 11% chose to give it up for the chocolate bar, while only 10% of the subjects endowed with the chocolate bar were willing to give it up for the mug.21
The problem which the endowment effect creates is that a court must not only account for the value of the defendant’s gain (in pecuniary and non-pecuniary form), but also the value of the defendant’s loss when she has to give up the value of her gain. The reason why both valuations must be accounted for is because of the general rule that a defendant must not be left in a worse position than the one that she occupied prior to her unjust enrichment. Thus, if a defendant were to experience a non-pecuniary loss of £8 upon being required to return the £15 to the claimant, her net loss would be £18 (£10 + £8). While, conceptually speaking, this may not be difficult to grasp, it is an entirely different matter when it comes to formulating accurate valuations of a defendant’s non-pecuniary gain (upon her unjust enrichment) and non-pecuniary loss (upon restitution). The process of calculating such gains and losses is timeconsuming, costly and imprecise. Impecunious parties would almost certainly be placed at a disadvantage in such cases. Thus, on purely practical grounds, there are strong reasons for limiting the concept of loss to pecuniary detriments in the law of unjust enrichment. (2) Causation The second reason why it might be argued that losses should be restricted to pecuniary detriments is based on a matter of principle. Consider the example of a claimant who transfers a £10 note by mistake. There is no doubt that the claimant’s pecuniary loss is £10 and the defendant’s pecuniary gain is also £10. Furthermore, what has come from the claimant is £10 and what the defendant has received is that same £10. It is arguable, however, that this same symmetry and therefore causal connection does not exist with non-pecuniary losses and gains. The reason why this is so can be explained as follows.
21 R Korobkin, ‘The Endowment Effect and Legal Analysis’ (2003) 97 Northwestern U L Rev 1227, 1233.
The Meaning of ‘Loss’
101
When a claimant mistakenly pays a defendant £10, he may incur a nonpecuniary loss of £5. This loss of £5, however, is not transferred from the claimant to the defendant. Any non-pecuniary gain the defendant experiences comes from her receipt of £10, not the defendant’s non-pecuniary loss of £5. To put it another way, the defendant’s unjust enrichment may cause the claimant to incur a non-pecuniary loss, but the claimant’s non-pecuniary loss will not cause the defendant’s (non-pecuniary) unjust enrichment. This discord suggests that nonpecuniary detriments should not be considered a legitimate form of loss and that non-financial gains should not be included in any award of restitution. Support for the view that it is the claimant’s loss which must be transferred to the defendant can be found in the judgment of Mason CJ in Comr State Revenue (Victoria) v Royal Insurance Australia Ltd, quoted with approval in Roxborough v Rothmans Pall Mall by Gleeson CJ, Gaudron and Hayne JJ: Restitutionary relief . . . operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched. . . . The subtraction from the plaintiff ’s wealth enables one to say that the defendant’s unjust enrichment has been ‘at the expense of the plaintiff ’.22 (emphasis added)
The point made in this section, which is re-enforced by Mason CJ, is that restitution should only extend to benefits which have actually been transferred from the claimant. Thus, unless the claimant can show that his loss has become the defendant’s gain, recovery should be denied. In conclusion, while non-pecuniary losses are accounted for in the law of torts, consistency does not support the argument that they be recognized in the law of unjust enrichment. Arguments of principle and practicality expounded in this section support this view.
2. ‘Loss’ Meaning ‘Deprivation’ (of a Right) The word ‘loss’, as defined in the Oxford English Dictionary, is not restricted to a ‘detriment or disadvantage involved in being deprived of something’.23 Rather, a loss can also occur as a result of ‘being deprived of, or the failure to keep a . . . right’.24 And this is so even where the deprivation does not constitute a pecuniary detriment. If a ‘loss’ is conceived of as a deprivation or denial of someone’s rights, there will be little to distinguish between what has come ‘from’ the claimant, and the value of the claimant’s ‘loss’. For example, consider the cases of a defendant who
22 Comr State Revenue (Victoria) v Royal Insurance Australia Ltd, above n 1, p 75 (Mason CJ), quoted with approval in Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA) 529. 23 J Simpson and E Weiner, (eds), Oxford English Dictionary, above n 4, IX, 37. 24 Ibid.
102
What Might ‘At the Expense of ’ Mean?
stows away on a claimant’s ship, or a defendant who watches a movie in the claimant’s empty cinema without paying. In neither case does the claimant incur a pecuniary detriment. One way, however, of saying that the claimant has nonetheless incurred a loss, is to conclude that his rights have been infringed. The claimant’s right of exclusive possession, at the time of the infringement, will have been lost.
(a) Examples in the Case Law of ‘Loss’ Meaning ‘Deprivation of a Right’ Research reveals no cases in the law of unjust enrichment in which a loss has been conceived of as a simple denial of a right. There are several cases in the law of torts, however, which appear to support the view that the claimant need not have suffered a pecuniary loss in order to receive an award of damages. It is instructive to examine these cases to determine whether the same approach should be adopted in the law of unjust enrichment. This analysis is best commenced with a review of the lightship cases heard at the end of the 19th century in England. In The Mediana,25 the claimants’ lightship was damaged as a result of the defendant’s negligence. The defendant argued that the claimants were not entitled to compensatory damages because they incurred no loss. The basis for this contention was that the claimants were able to replace the damaged lightship with another lightship, owned by them, which had been kept in reserve for just such occasions. While in Lord Shand’s view the claimants did, in fact, incur a pecuniary loss (as they spent £1000 each year to have a ship on standby), for the Earl of Halsbury LC this was irrelevant. As the following statement shows, his Lordship thought it was enough that the claimants had been deprived of the damaged vessel: Now, in the particular case before us . . . the broad proposition seems to me to be that by a wrongful act of the defendants the plaintiffs were deprived of their vessel. When I say deprived of their vessel, I will not use the phrase ‘the use of the vessel.’ What right has a wrongdoer to consider what use you are going to make of your vessel? More than one case has been put to illustrate this: for example, the owner of a horse, or of a chair. Supposing a person took away a chair out of my room and kept it for twelve months, could anybody say you had a right to diminish the damages by shewing that I did not usually sit in that chair, or that there were plenty of other chairs in the room? The proposition so nakedly stated appears to me to be absurd ... .26
Following their earlier decision in The Greta Holme27 the House of Lords awarded the claimants compensatory damages. 25 26 27
The Mediana [1900] AC 113 (HL). Ibid, p 117 (Earl of Halsbury LC). The Greta Holme [1897] AC 596 (HL).
The Meaning of ‘Loss’
103
This same view has been expressed elsewhere. For example, Lord Shaw in Watson Laidlaw & Co Ltd v Pott Cassells & Williamson28 stated that a claimant need not have incurred a pecuniary detriment in order to recover compensatory damages: [W]herever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as I say, either of price or of hire. If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish or without his knowledge, rides or drives it out, it is no answer to A for B to say: ‘Against what loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is the better for the exercise.’29
Although the comments of the Lord Chancellor and Lord Shaw appear supportive of the proposition that a ‘loss’ may be incurred simply because the claimant’s rights have been infringed, there may be problems with transplanting such views into the law of unjust enrichment.
(b) Should a ‘Deprivation of a Right’ Constitute a ‘Loss’? The first point to note about the ‘deprivation of a right’ constituting a ‘loss’ in the law of torts,30 and the proposition that this expansive understanding of loss should be accepted in the law of unjust enrichment, is that tort law arguably has multiple functions and purposes that differ from unjust enrichment. As Mr Weir has said: Sometimes . . . the claimant has suffered no actual harm but is aggrieved because he thinks his rights have been invaded. The law of tort is ready to assist him, if he is correct, because one of its roles, apart from determining whether compensation is payable for harm caused, is to vindicate essential rights when they have been invaded.31
The vindicatory role of tort law explains the presence of various forms of trespass as well as actions in conversion in that field of law. By contrast, it is not at all clear that unjust enrichment is, or should be, directly concerned with vindicating a claimant’s rights when they have been invaded. Should, however, the meaning of ‘loss’ in the law of unjust enrichment be broadened and understood as ‘loss of a right’? The most appropriate way to answer this question is to start by restating the requirement set out earlier in this chapter, in a quote from Mason CJ, that in a claim for restitution the defendant’s enrichment must have been transferred from
28 29 30 31
Watson Laidlaw & Co Ltd v Pott Cassells & Williamson (1914) 31 RPC 104 (HL). Ibid, p 139 (Lord Shaw of Dunfermline). And even this, it must be said, is not entirely secure. T Weir, Tort Law (Oxford, OUP, 2002) 15.
104
What Might ‘At the Expense of ’ Mean?
the claimant.32 Much is made of this requirement in the academic literature. Professor Mitchell, for example, states that ‘the law of unjust enrichment is not the law of giving up enrichments but the law of reversing transfers.’33 Professor Smith agrees. He maintains that it is the ‘transfer ... [that] unites the parties’34 and that the ‘measure of the transfer is the measure of the claim.’35 As a transfer, being part of the ‘at the expense of ’ requirement, is a necessary aspect of a claim in unjust enrichment, it is important to understand exactly what is meant by it. The Oxford English Dictionary uses the following synonyms to describe it: transmit, convey, make-over.36 These words are supplemented with the expression: ‘from one person or place to another’.37 In a restitutionary context these words call to mind the standard illustration of a person who mistakenly hands over a £10 note to another person. But what if we broaden this picture to Professor Birks’ example of a defendant who takes a claimant’s bicycle without permission, returns it, and yet the claimant suffers no pecuniary detriment? Has the claimant lost any proprietary rights in connection with the bicycle? And, most critically, if he has, have any of them been transferred to the defendant? The claimant in Professor Birks’ illustration can be said to have lost, among other things, his right to use, alienate and exclusively possess the bicycle. These rights were lost by the claimant in the sense of being infringed. And so long as the bicycle remained in the defendant’s possession, the value of those rights was diminished. That is so, even if the claimant never sought to assert them. And that is why, in the case of The Mediana, it could be said that the claimants incurred a loss. Attention can now turn to the defendant—the apparent transferee. When she took the bicycle, did she receive the claimant’s rights to use, alienate or exclusively possess it? The answer to this is ‘no’. Unlike the claimant, the defendant never obtained proprietary rights in the bicycle that were exigible against the whole world. At most, the defendant acquired proprietary rights in the bicycle exigible against everyone except the true owner.38 Having identified the rights held (and temporarily lost) by the claimant, and the rights received by the defendant, the two situations can be compared. It is clear that the claimant’s loss is not reflected in the defendant’s gain. The claimant’s proprietary rights were not transferred to the defendant. Although certain rights may have been obtained by the defendant, they were, in the very least, inferior to those
32 33
Above n 22. C Mitchell, ‘Review Article—At the Expense of the Claimant (Chapter 4)’ [2004] Restitution L Rev
267. 34 35 36 37 38
L Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas L Rev 2115, 2147. Ibid. J Simpson and E Weiner, (eds), Oxford English Dictionary, above n 4, XVIII, 395–96. Ibid. Armory v Delamirie [1722] Stra 505.
The Meaning of ‘Loss’
105
held by the claimant. And the reason why the defendant did not receive the claimant’s rights in their exact form is because those rights could only have been transferred by consent or operation of law—neither of which occurred in this case. And it follows that if what was lost by the claimant is not what was transferred to the defendant, the former cannot bring a claim for restitution against the latter to recover that gain. The claimant’s action for restitution will therefore be limited to the value of the thing transferred (the bicycle and its use value). If a claimant’s rights, when lost, are not transferred to a defendant in situations such as the one just described, an important difference between the law of torts and the law of unjust enrichment (insofar as ‘at the expense of ’ is taken to mean ‘loss’) emerges. Although one of the purposes of tort law is the protection of proprietary rights (achieved via an award of damages following an infringement of those rights), unjust enrichment, in requiring a transfer of wealth between two people to have taken place, has no scope for achieving this same purpose when ‘at the expense of ’ is taken to mean ‘loss’, and ‘loss’ is understood as meaning ‘deprivation of a right’.
3. ‘Loss’ Meaning ‘Opportunity Forgone’ The third way in which ‘loss’ may be defined for the purposes of the law of unjust enrichment is by reference to the concept: ‘opportunity forgone’. Before turning to this concept’s detail, however, a point of clarification is necessary. That is, a loss that is an ‘opportunity forgone’, as defined in this section, is different from a loss that is an ‘opportunity cost’, as encountered in the earlier section on pecuniary detriments. The relevance and content of this distinction will be made apparent in the following discussion. A loss in the sense of being an opportunity forgone may relate to the transfer of property or provision of a service. An example of each will assist in clarifying the concept. Let us turn first to the transfer of property. Let it be assumed that the claimant receives a second-hand bicycle as a surprise birthday present from his brother. At the time of its delivery the claimant knows nothing of its existence because he is overseas. The bicycle is left in the claimant’s yard awaiting his return. The claimant’s neighbour, the defendant, uses the bicycle, without permission, in the claimant’s absence. The bicycle is no worse off for having been ridden. We can now turn to the example of a service. The claimant owns a cinema complex. Each day, at noon, he screens a re-run of the film, Ben-Hur. Suppose the defendant surreptitiously slips into the cinema without paying the £10 admission fee. Suppose further that she is the only person, on that given day, who watches the film. She creates no mess or damage, and leaves unnoticed. In each case the defendant has been unjustly enriched. In the first case the defendant gained the valuable use of a bicycle. In the second the defendant was treated to a cinematic experience. In neither case, however, did the claimant incur
106
What Might ‘At the Expense of ’ Mean?
a pecuniary expense. The claimant did not know about the bicycle’s existence, so could never have arranged for its hire or sale. And the cinema proprietor did not lose a paying customer due to the defendant’s presence (unlike the ‘opportunity cost’ example discussed in the earlier section on pecuniary detriments). But has a loss, in some form, nonetheless been incurred by the claimant in either case? One way of insisting that a loss was sustained in both cases is by contending that an opportunity was forgone. That is, the claimant lost the opportunity to use his bicycle or determine who was entitled to ride it. Alternatively, it could be said that the claimant lost the opportunity to fill the cinema to its capacity and receive £10 from every person watching the film. When the meaning of ‘loss’ is stretched to incorporate an opportunity forgone, any difference between it and the concept of ‘from’ disappears. This being so, it would seem that Professor Birks was wrong to conclude that the claimant did not incur a loss in the bicycle example set out at the beginning of this chapter. Although this understanding of loss appears attractive, it is nonetheless flawed. Consequently, it cannot be relied on in the law of unjust enrichment to expand the instances in which a claimant, if required to prove that he sustained a loss, is entitled to restitution. The fundamental reason for this is that ‘loss’, in the sense of being an ‘opportunity forgone’, is here being used loosely and inaccurately. In order to sustain a ‘loss’ one must have, possess or be in a position to realize, that which is lost. For example, I may claim that I lost the opportunity to play in an FA Cup final because I was permanently impaired by a debilitating disease when fifteen years old. But if I never possessed any football talent, it is not right to say that playing in the FA Cup was ever an opportunity open to me. It was not one I was capable of losing. The same is true of the bicycle example. In theory, because the claimant was the owner of the bicycle, he had the opportunity to sell or hire it. And that opportunity was denied him, for a certain period of time, because the bicycle was in the defendant’s possession. But in reality, an opportunity to sell or hire the bicycle was never actually lost or forgone because it was impossible for the claimant to exercise either one of them. To claim that a loss was incurred in this circumstance is fictional. The case of the surreptitious film enthusiast is the same. The cinema proprietor never ‘lost’ the opportunity to fill the cinema and receive £10 from every patron. That is because no one sought admission to the film. No paying patron was turned away. Moreover, in that case, the supposed lost opportunity (to charge a paying customer) was not transferred from the claimant to the defendant. All that the defendant received was a free cinematic experience. When a claimant loses an opportunity, one must ascertain whether that opportunity is one that was ever realizable or exercisable. To forgo an opportunity presupposes its actual, and not just theoretical, existence. It follows that ‘loss’, insofar as it is understood in the broadest sense of an opportunity forgone, should be rejected as the part of the law of unjust enrichment.
Loss and Restitution
107
D. Loss and Restitution The conclusion that ‘loss’ should only be taken to mean ‘pecuniary detriment’ in the law of unjust enrichment, does not prevent further interpretative difficulties from arising. That is because, in the first instance, it is unclear whether proof of just some causally-related loss should enable the claimant to recover the defendant’s entire gain or whether restitution should be capped by the extent of the claimant’s loss. And, secondly, it is unclear whether a claimant’s loss should be measured at the time of the original transfer, or upon commencement of an action for restitution.
1. Corresponding Loss (a) Only ‘Some’ Loss is Necessary The view that a claimant need only prove that he has suffered some loss in order to recover a defendant’s entire unjust enrichment has received little, if any, judicial support.39 This interpretation is nonetheless commended by Mr Virgo in his book The Principles of the Law of Restitution.40 He there asserts that the size of the claimant’s loss compared with the defendant’s gain is irrelevant. That is because: [T]he function of the requirement that the benefit was obtained at the plaintiff ’s expense is simply to show that there is a causal link between the plaintiff ’s loss of an enrichment and the defendant’s gain. Once this causal link has been established it is no longer necessary to consider the ‘at the plaintiff ’s expense’ requirement since the law of restitution is concerned only with the identification and valuation of the benefit which was received by the defendant.41
The conclusion therefore reached by Mr Virgo is that the defendant should not be ‘liable to make restitution only to the extent that the plaintiff has suffered a loss.’42 Mr Virgo’s view effectively places him between two camps. While he does not go so far as to suggest that all the claimant need show is that the defendant’s unjust enrichment came from him or his wealth, he also rejects the idea that restitution should be restricted by the level of the claimant’s loss.
(b) A ‘Corresponding’ Loss is Required The alternative understanding of ‘loss’ is that it restricts restitution by the lesser of the defendant’s gain or the claimant’s loss. In other words, the claimant will only 39 40 41 42
Cf G Virgo, The Principles of the Law of Restitution (Oxford, Clarendon Press, 1999) 105. Ibid. Ibid. Ibid.
108
What Might ‘At the Expense of ’ Mean?
be permitted to recover the value of his loss which ‘corresponds’ with the defendant’s surviving enrichment. Like the opinion expressed by Mr Virgo, there is little judicial support for the ‘corresponding loss’ interpretation. Re BHT, a case discussed in detail in the following chapter,43 appears to be the only example of where restitution has clearly been restricted by the value of the claimant’s (pecuniary) loss. Despite a paucity of cases on the subject, there is considerable academic support for the view that a claimant’s pecuniary detriment should cap the level of restitution awarded. Professor McInnes, as well as Professors Grantham and Rickett, believe that: “[A]lthough the focus of the claimant’s claim is the defendant’s gain, the principle of unjust enrichment properly operates to ensure that the claimant’s restitutionary claim is limited to ‘the highest amount common to the defendant’s ultimate gain and the [claimant’s] ultimate loss’.”44 Professor Smith, and impliedly Professor Mitchell, both agree with this view. As already stated in this chapter, they contend that the ‘the measure of the transfer is the measure of the claim’.45
(c) The Preferred Interpretation of whether a Loss Must be Corresponding In terms of efficiency and practicability the position adopted by Mr Virgo has advantages. That is because as soon as a court is satisfied that the claimant has suffered at least some causally-related loss, it need not inquire into the exact extent of the detriment incurred. Rather, it need only concern itself with producing an accurate assessment of the value of the defendant’s enrichment. Courts and litigants are thereby saved both time and money. As a matter of principle, however, the ‘corresponding loss’ analysis presented by Professors McInnes, Grantham, Rickett, Smith and Mitchell, is more attractive. The reason for this is simple. If the notion of loss is considered at all relevant, it must be because the law of unjust enrichment has a purely restorative function. In other words, its role is to return the claimant to the position he was in prior to the defendant’s unjust enrichment. There can be no other justification for insisting that the claimant must suffer a loss. If, as Mr Virgo suggests, ‘the law of restitution is simply concerned with the award of remedies to deprive the defendant of benefits’,46 and the function of the ‘at the expense of’ requirement ‘is to show that there is a causal link between the plaintiff’s 43
See text accompanying, above n 5, ch 6. R Grantham and C Rickett, ‘Disgorgement for Unjust Enrichment?’ (2003) 62(1) CLJ 159, 166, quoting M McInnes, ‘Disgorgement for Wrongs: An Experiment in Alignment’ [2000] Restitution L Rev 516, 521. 45 C Mitchell, ‘Review Article—At the Expense of the Claimant (Chapter 4)’, above n 33, quoting L Smith, ‘Restitution: The Heart of Corrective Justice’, above n 34. 46 G Virgo, The Principles of the Law of Restitution, above n 39, p 739. 44
The Meaning of ‘From’
109
loss of an enrichment and the defendant’s gain’,47 it is more appropriate to adopt the view of Professors Birks48 and Burrows.49 That is, the defendant’s enrichment need only come from the claimant or his wealth. In conclusion, the arguments of principle appear more compelling than the practical considerations discussed. The view therefore adopted in this book is that ‘loss’ in the law of unjust enrichment should be interpreted to mean ‘corresponding pecuniary detriment’.
2. Initial or Ultimate Loss? Generally speaking, Professors McInnes, Grantham and Rickett and Smith all agree that an award of restitution should be capped by the extent of a claimant’s loss. The reason why this is only generally true, however, is that there exists a difference of opinion between them over whether the claimant’s loss should be calculated at the moment the defendant is unjustly enriched (the claimant’s initial loss), or later, when the claimant commences an action for restitution (the claimant’s ultimate loss). Professor Smith believes that consideration should only be given to the value of the claimant’s initial loss. For Professors McInnes, Grantham and Rickett, however, it is the claimant’s ultimate loss that provides the appropriate limit to an award of restitution.50 This difference of opinion has one, but nonetheless major, consequence. That is, those, such as Professor Smith, who suggest that only the claimant’s initial loss should be used to assess awards of restitution must, as a matter of logical necessity, reject the defence of disimpoverishment. That is because whatever step a claimant may take to avoid his loss, after the initial transfer, is irrelevant to his claim for restitution. To reiterate, it is the measure of the transfer that is the measure of the claim. By contrast, those who consider that the claimant’s ultimate loss provides the upper limit to any claim may endorse the defence of disimpoverishment.
E. The Meaning of ‘From’ The focus of this chapter has been on the meaning of ‘loss’. Attention now needs to be given to the meaning of ‘from’. This attention need only be brief. The concept of ‘from’ does not provoke the same semantic difficulties as ‘loss’.
47
Ibid, p 105. P Birks, Unjust Enrichment, above n 2, p 64. 49 A Burrows, The Law of Restitution, above n 14, p 30. 50 R Grantham and C Rickett, ‘Disgorgement for Unjust Enrichment?’, above n 44, p 166, quoting M McInnes, ‘Disgorgement for Wrongs: An Experiment in Alignment’, above n 44, p 521. 48
110
What Might ‘At the Expense of ’ Mean?
1. Things and Services: What Exactly Comes from the Claimant? If an enrichment received by a defendant is to be both properly valued and made the subject of a restitutionary award, it is necessary to have a clear understanding of what was transferred from the claimant. An enrichment can come in one of two forms. First, a thing that is either tangible or intangible in nature. And second, a service. I will consider each in turn.
(a) Things In the standard case when C mistakenly transfers £100 to D, there is no difficulty in concluding that what has come from C is £100 and D’s enrichment is £100. That, however, is not the end of the story. Tangible or intangible things have, what might be called, both an intrinsic value and a use value. The intrinsic value of a £100 note, for instance, is its face value and the value of the piece of paper itself. Its objective use value is, generally speaking, measured by a standard rate of interest. Thus, when C transfers a £100 note to D, what comes from C is the face value of the note itself, as well as the use value of that money. Although this analysis of the meaning of ‘from’ seems straightforward, disagreement arises when it is asserted, as it is by Professors Birks, that it is the ‘earning opportunities inherent in an asset’,51 not just the asset’s objective use value, that is captured by the expression ‘from’. Thus, as will be explained in the following two chapters, Professor Birks contends that if C transfers £100 to D (but property in the money does not pass), and D then profitably invests that sum, C is entitled to recover the original £100 plus the investment proceeds. Such an expansive understanding of the term ‘from’ is rejected by others. Professor McInnes, for example, though not commenting on this exact point, has contended that all that is transferred from a claimant to a defendant when money passes between them is the face value of the bill and its interest bearing capacity (its inherent earning opportunity measured objectively).52 Put another way, Professor McInnes believes that the earning opportunities inherent in an asset should not be measured by reference to what transpires following the defendant’s unjust enrichment (such as when a defendant profitably invests that initial sum). That is because the decisive factor in any subsequent increase in an asset’s value is the defendant’s skill and effort in unlocking the asset’s profit-making potential.
51
P Birks, Unjust Enrichment, above n 2, p 82. M McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’ (2003) 62(3) CLJ 697, 704. 52
The Meaning of ‘From’
111
This debate will be revisited in chapter 7. All that need here be understood is that the concept of ‘from’, when used to describe what is transferred when an asset moves from the hands of a claimant to a defendant, is not free from ambiguity. One can take the expansive view, like Professor Birks, that ‘from’ should incorporate the intrinsic value of a thing, including its earning opportunities. Alternatively, one can adopt a narrower position, that it relates only to an asset’s intrinsic value and its use value, measured objectively.
(b) Services Imagine a situation in which C rescues D from perilous surf in the Pacific Ocean. Assume D would have drowned had C not intervened. If, in this case, C is entitled to bring a claim for restitution based on necessitious intervention, what is the value of his claim? There are two ways of approaching this question. They represent two sides of the same coin. First, the value of the defendant’s enrichment could be measured. Alternatively, the focus could be on determining what came ‘from’ the claimant. In this book, the latter course is taken, so that ‘from’ provides a ceiling for any restitutionary claim. The first way of conceptualizing what came ‘from’ C upon his surf rescue of D, is to concentrate on the end product of his endeavours. That is, D’s life; her continued existence. But when framed in this way, reliance on the concept of ‘from’ to determine what came at the expense of C, seems entirely unreasonable. D should not be compelled to turn over to C the entire monetary value of her life. Fortunately, ‘from’ can be understood in another way. Instead of saying that what has come from the claimant is the end product of his labours, all that need be said is that what came from him is the value of the service he provided. So if, by way of further illustration, a claimant mistakenly repairs a defendant’s car (believing it to be his), and thereby significantly increases its value, an alternative understanding of what can be said to have come ‘from’ him, is the market value of his labour, not the car’s ultimate increase in value. And when applied to the case of D’s surf rescue, the integrity of the law of unjust enrichment is maintained by restricting any award of restitution by the value of C’s exertion. The concept of ‘from’, therefore, when used in the law of unjust enrichment in the context of services, can confuse analysis when its double meaning is concealed. It must be steadily borne in mind that the value of a service can be measured in at least two ways: by reference to the end product, or the market value of the labour provided. In conclusion, this and the previous subsection show that the meaning of ‘from’, like ‘loss’, is not free from difficulty. Choices must be made about how it should be best understood and applied in the law of unjust enrichment. The consequences of these choices are significant. They will be explored in the chapters that follow.
112
What Might ‘At the Expense of ’ Mean?
F. Differences between ‘From’ and ‘Loss’ At the outset of this chapter it was said that in the majority of cases it makes no difference whether the claimant asserts that the defendant’s unjust enrichment came from him or caused a loss to him. The example provided to illustrate that point was of C mistakenly transferring £100 to D. D’s unjust enrichment will have come at the expense of C both in the sense that C suffered a corresponding pecuniary detriment of £100 and D received £100 from him. The fact, however, that in the majority of cases it makes no difference how ‘at the expense of ’ is interpreted, implies that it does matter in a minority of cases. First, as far as the defence of disimpoverishment is concerned, it is vitally important to determine whether ‘at the expense of ’ means ‘from’ or ‘loss’. That is because even if the defendant’s gain equates with the claimant’s loss at the moment of receipt, unless it is the claimant’s ultimate loss which matters, the claimant’s later disimpoverishment will be irrelevant. Second, there are two situations outside the defence of disimpoverishment in which, depending on whether ‘at the expense of ’ is taken to mean ‘from’ or ‘loss’, discrepancies may arise. Common to both is that the defendant’s gain exceeds the claimant’s loss. The first is where the defendant’s gain exceeds the claimant’s pecuniary detriment at the moment of receipt. The bicycle example provided by Professor Birks illustrates this. The second is where, after receipt, the defendant increases her gain by more than any reduction in the claimant’s loss. An example of this is where a defendant profitably invests a mistaken payment. These two situations are examined in close detail in the following two chapters.
G. Conclusion This chapter has shown that the simple epithet ‘at the expense of ’ has the capacity to mask various problems of interpretation. The most important of these is whether ‘from’ or ‘loss’ is meant by the phrase, and then, beyond that, what is meant by both terms. If ‘from’ is the preferred construction, the claimant need only show that he or his wealth was the source of the defendant’s enrichment. The fact that the claimant may later make good any loss he has suffered will be irrelevant, and therefore render the defence of disimpoverishment redundant. On the other hand, if ‘at the expense of ’ is taken to mean ‘loss’—which, as has been explained in detail, is best interpreted to mean ‘corresponding pecuniary detriment’—the defence of disimpoverishment may have a role to play.
Addendum
113
H. Addendum The ‘at the expense of ’ requirement gives rise to a range of further difficulties which have not been discussed in this chapter. I shall briefly describe three of them here and then explain why they are irrelevant to this book. The first two situations in which the meaning of ‘at the expense of ’ is controversial concern cases where a benefit has been conferred on a defendant by a third party. Professor Burrows explains this issue by way of the following question: ‘[c]an a claimant (C) be entitled to restitution where the benefit has been rendered on the defendant (D) by a third party (X)?’53 The first circumstance in which this may occur has been described by Professor Birks as a case of ‘interceptive subtraction’.54 Here, D intercepts a benefit destined for C before it reaches him. The problem which then arises is in determining whether D’s unjust enrichment has come at the expense of C or the transferor (X). Professor Birks has labelled the second consideration ‘leapfrogging’.55 The difficulty here encountered is best explained by way of an example. Consider a situation in which X is unjustly enriched at the expense of C. However, before C can bring a claim for restitution, X transfers the gain received to D. Should C, in these circumstances, be permitted to ‘leapfrog’ X and bring a claim in unjust enrichment against D? Leaving aside any problem over the ‘unjust factor’, is D’s enrichment at the expense of C or at the expense of X? There is a third example of where the ‘at the expense of ’ requirement may give rise to interpretative difficulties. It is also best explained by way of an illustration. Suppose C takes X’s bicycle without permission. Suppose further that C then mistakenly transfers the bicycle to D. Can C, in these circumstances, bring a claim in unjust enrichment against D? The answer to this depends crucially on whether D’s unjust enrichment can be said to have come at the expense of C, when C was not, in fact, the true owner. There is considerable academic debate about the extent to which restitution is or should be allowed in each of these three cases. For the purposes of this book, however, these arguments can be put to one side. That is because the aim of this chapter was to develop a thorough understanding of what is meant by ‘loss’ and how it is different to ‘from’. And, in relation to the three examples discussed above, it can be seen that irrespective of whether ‘at the expense of ’ is interpreted to mean ‘loss’ or ‘from’, the same conundrums arise. Consequently, the difficulties encountered in respect of these examples need not here be resolved. They are irrelevant to the defence of disimpoverishment.
53 54 55
A Burrows, The Law of Restitution, above n 14, p 31. P Birks, An Introduction to the Law of Restitution, revised edn, (Oxford, OUP, 1989) 133. P Birks, Unjust Enrichment, above n 2, p 89.
6 What do the Cases say ‘At the Expense of ’ Means?
A. Introduction 1. Scope and Purpose The previous chapter established that there are two primary ways in which the phrase ‘at the expense of ’ can be interpreted. One way is to view it as meaning ‘from’. The alternative is to understand it as meaning ‘loss’. In this chapter English, Australian, Canadian and American cases are examined in order to establish which, if either, of these interpretations has been preferred. Omitted from this review are cases in which the ‘at the expense of ’ requirement has been discussed in the context of the defence of disimpoverishment. These examples have already been considered in detail in chapter 3. It was there revealed that in all those cases where the defence was accepted as a matter of law, ‘at the expense of ’ was necessarily interpreted to mean ‘corresponding pecuniary detriment’. Hence Kane J’s comment in United States v State of Colorado1 that ‘[t]he law of restitution . . . is designed to return to a plaintiff that which he has lost.’2 Chapter 3 also showed that in some cases where the defence was rejected ‘at the expense of ’ was understood to mean ‘from’. For example, as Saville LJ in Kleinwort Benson v Birmingham City Council said, the defendant’s ‘obligation to return the money is not based on any loss the payer may have sustained’.3 The reason why these decisions are here omitted is not just because they have been already reviewed. Rather, it is because if this inquiry reveals that ‘at the expense of ’ has been understood to mean ‘from’ or ‘loss’ in cases unrelated to the defence of disimpoverishment, consistency may demand that the phrase be interpreted in the same way when the defence is in issue. The important point is
1 2 3
United States v State of Colorado 666 F Supp 1479 (USDC CO, 1987). Ibid, p 1480. Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380 (CA) 394–95 (Saville LJ).
116
What do the Cases say ‘At the Expense of ’ Means?
therefore that if ‘at the expense of ’ has been interpreted, in these other cases, to mean ‘from’, the defence should rationally be rejected.
2. Structure As was pointed out at the end of the last chapter, where the value of a defendant’s gain exceeds a claimant’s loss, awards of restitution will vary depending on whether ‘at the expense of ’ is taken to mean ‘from’ or ‘loss’. If ‘from’ is the preferred interpretation, the claimant will be entitled to restitution of the defendant’s entire unjust enrichment. However, if ‘at the expense of ’ is taken to mean ‘loss’—and by this ‘corresponding pecuniary detriment’ is meant—restitution will be restricted by the value of the claimant’s corresponding financial deprivation. This chapter is structured according to the two situations flagged towards the end of the last chapter where the defendant’s gain exceeds the claimant’s loss.4 The first of these is where the defendant’s gain exceeds the claimant’s loss at the moment of receipt. The second is where the defendant’s gain exceeds the claimant’s loss because the value of the benefit received increases.
3. Outcome At the conclusion of this chapter it is revealed that, as a matter of establishing prima facie liability in unjust enrichment (that is, outside discussion of the defence of disimpoverishment), there have been very few cases where a decision has had to be made about whether ‘at the expense of ’ means ‘loss’ or ‘from’. Certainly, as a matter of case law, the meaning of ‘at the expense of ’ is an open one. Thus, the view adopted in this chapter is that considerations of policy and principle must dictate how ‘at the expense of ’ should be interpreted. Such considerations are analyzed in the next chapter.
B. Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt The following cases are all concerned with circumstances in which the claimant’s loss and defendant’s gain appears not to equate at the moment of the defendant’s unjust enrichment. The cases are of two types. First, there are those which require a real choice to be made between interpreting ‘at the expense of ’ as meaning ‘from’ or ‘loss’. Second, there are those cases which, though understood by 4
See section E in ch 5.
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
117
some academics as advocating the view that ‘at the expense of ’ means ‘from’ or ‘loss’, support neither interpretation.
1. England (a) Re BHT (UK) Ltd It is generally thought that when a defendant has been unjustly enriched by the receipt of money, nothing will turn on whether ‘at the expense of ’ is interpreted to mean ‘from’ or ‘loss’. The case of Re BHT (UK) Ltd,5 however, provides an exception to this rule. In this case administrative receivers appeared to act under a mistake of law in distributing proceeds of a company’s book debts to a floating charge holder. The question which arose was whether the applicant liquidator could recover the value of the proceeds paid to the floating charge holder on the basis that the latter was unjustly enriched. Determining the meaning of ‘at the expense of ’ was crucial to the outcome of the case. Counsel for the defendant floating charge holder, Gabriel Moss QC, argued that restitution should be denied on the basis that the claimant suffered no loss. He contended that the claimant suffered no loss because irrespective of whether the money in dispute was retained by the defendant, the claimant’s balance sheet position would remain unaffected. Because the claimant was insolvent, any money recovered by way of restitution would have to be distributed to the company’s preferential creditors. Counsel for the claimant liquidator, Paul Chaisty QC, presented the opposing view. He stated that ‘at the expense of ’ should be interpreted to mean ‘from’ not ‘loss’. Thus, because the proceeds of the book debts belonged to the company, the distribution to the defendant came at its expense in the sense that it came from it. Paul Chaisty QC submitted that the insolvency of the claimant was irrelevant in determining whether the defendant should have to give back the value of its unjust enrichment. Kevin Garnett QC, sitting as a deputy judge in the High Court, held that ‘at the expense of ’ should be interpreted to mean ‘loss’ not ‘from’. In his opinion, the defendant’s unjust enrichment came at the ultimate expense of the preferential creditors, not the company: In my judgment, [counsel for the respondent] Mr Moss is correct to submit that [the floating charge holder] NFL has not, on the assumed facts, been enriched at the expense of the Company. In the circumstances of this case, the Company would never have been entitled to receive any part of the book debt realisations . . . since anything recovered
5
Re BHT (UK) Ltd [2004] EWHC 201.
118
What do the Cases say ‘At the Expense of ’ Means?
from NFL would, subject no doubt to any unpaid costs of recovery, go straight to the preferential creditors . . ..6
Kevin Garnett QC therefore denied the liquidator’s claim, stating that the preferential creditors would be left ‘to pursue whatever claims they may have’.7 This decision is remarkable in two respects. First, it contradicts those cases considered in chapter 4 where restitution was awarded to insolvent companies even though any money recovered would ‘go straight to the preferential creditors’.8 Second, the vexing question about whether ‘at the expense of ’ should be interpreted as meaning ‘from’ or ‘loss’, was resolved in this case without any serious consideration of the relevant authorities, general principles or policy concerns. To this extent, the decision can be considered sorely defective, open to criticism and capable of being distinguished. Nevertheless, these concerns do not alter the fact that a High Court decision exists in which the ‘at the expense of ’ requirement demands that the claimant prove he has suffered a ‘corresponding pecuniary detriment’, not just that the defendant’s enrichment came from the claimant.
(b) Greenwood v Bennett Professor McInnes has contended that Lord Denning’s judgment in Greenwood v Bennett9 provides a ‘leading, if equivocal, precedent’10 that ‘relief in cases of subtractive enrichment should be limited by the extent of the claimant’s loss’.11 The facts of the case are as follows. The appellant purchased a damaged car for £75. Unbeknownst to him the car did not belong to the seller, but the respondent. In good faith, the appellant spent £226 repairing the car. This sum included the value of his labour. The respondent later asserted his title to the car, repossessed it and sold it for £400. The question which therefore appeared to arise was whether the appellant was entitled to restitution of £226 (being the value of his loss), or £325 (being the value of the respondent’s gain).12 It turned out that the Court of Appeal awarded the appellant the value of his loss, £226. Thus, the case seems support the view that ‘at the expense of ’ means ‘loss’, not ‘from’. The problem with this conclusion, however, is that closer analysis reveals another reason why restitution was restricted to the value of the appel-
6
Re BHT (UK) Ltd, above n 5, pp 24–25. Ibid, p 27. Customs & Excise Comrs v McMaster Stores (Scotland) Ltd (1996) SLT 935, [1995] STC 846, [1995] BTC 5390; Lamdec Ltd v Customs & Excise Comrs [1991] VATTR 296, [1991] BVC 721. 9 Greenwood v Bennett [1973] QB 195. 10 M McInnes, “‘At the Plaintiff ’s Expense’: Quantifying Restitutionary Relief ” (1998) 57 CLJ 472, 477. 11 Ibid. 12 The figure of £325 is reached by subtracting the original purchase price of the car (£75) from its post-repair sale price (£400). 7 8
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
119
lant’s loss: the sum of £226 was all that the appellant demanded. He never sought the value of the respondent’s gain.13 Additionally, or in any event, it could be argued that all that came ‘from’ the appellant was the value of his labour and incidental costs of repair. As explained in the previous chapter, the meaning of ‘from’, when concerned with the provision of services, can be interpreted to mean the end product of one’s labour and costs of repair (valued at £325 in this case), or the value of the labour itself and costs of repair (valued at £226). In summary therefore, while the case of Greenwood v Bennett appears to support the view that in England ‘at the expense of ’ means ‘loss’, not ‘from’, close inspection reveals that the decision cannot necessarily be interpreted in this way.
(c) Hambly v Trott The case of Hambly v Trott14 concerned the rights of a tort victim against the estate of a deceased tortfeasor. At issue was whether the claimant was entitled to ‘waive’ the tort and bring assumpsit against the deceased tortfeasor’s representative in order to avoid the actio personalis moritur cum persona (a personal action dies with the person) bar. However, the reason why this case is here considered is because Lord Mansfield, in the view of some academics, took the opportunity to also discuss (what might be described in modern terms) the meaning of ‘at the expense of ’. His observation took the form of an illustration: ‘[I]f a man take a horse from another, and bring him back again; an action of trespass will not lie against his executor, though it would against him; but an action for the use and hire of the horse will lie against the executor’.15 While Lord Mansfield’s comment was only made in obiter, it has been interpreted by Professor Birks as supporting the claim that English law does not impose a requirement of a corresponding loss and gain in unjust enrichment cases.16 Professor Birks reaches this conclusion because he believes it is otherwise impossible to explain why Lord Mansfield would impose liability on the defendant for the use and hire of the horse if the claimant suffered no loss. Despite the attractiveness of this interpretation, four counter-arguments must first be addressed before one can decide that Lord Mansfield’s observation does, in fact, support the view that ‘at the expense of ’ means ‘from’ not ‘loss’. The first of these counter-arguments is that Lord Mansfield actually says nothing about awarding a claimant restitution in circumstances where he has suffered no loss. Indeed, it may be that in the circumstances described, Lord Mansfield 13
Greenwood v Bennett [1973] QB 195, 200. Hambly v Trott (1776) 1 Cowp 371, 98 ER 1136. 15 Ibid, pp 375 and 1138. 16 P Birks, Unjust Enrichment, 2nd edn, (Oxford, OUP, 2005) 79. See also A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2002) 28. 14
120
What do the Cases say ‘At the Expense of ’ Means?
envisaged the claimant suffering a pecuniary detriment as a result of the horse being taken from him. This being so, the value of the defendant’s gain and claimant’s loss may well have corresponded. The second possible counter-argument against Professor Birks’ interpretation comes from a series of early decisions of the state courts of Massachusetts. In quoting with approval the decision of Strong J in the Court of Common Pleas, the Supreme Court in Jones v Hoar17 stated that: It is apparent from an examination of Hambly v Trott, that Lord Mansfield considers it as an exception to the general rule [of actio personalis moritur cum persona], and the decision is applicable to actions against executors and administrators only. All his observations apply to cases where the original defendant has deceased, and the distinction between cases which do and those which do not survive. . .. He does not state . . . that assumpsit will lie against the person who took the horse, but only against his executor.18 (emphasis added)
Justice Jackson in Cummings v Noyes19 was of the same opinion, reducing Lord Mansfield’s statement to the principle that: ‘As if one take a horse from another, and bring him back again, the owner may maintain trespass against the wrongdoer, or after his death, an action for the use and hire of the horse against the executor’.20 (emphasis added) The problem with both interpretations of Lord Mansfield’s dicta, however, is that first of all, there seems to be no good reason for allowing a claim against an executor but not personally against a defendant. Secondly, if Lord Mansfield was concerned with the pernicious effects of the actio personalis bar, it must be assumed that he would have seen fit to dispense with the rule altogether rather than create an exception via the law of unjust enrichment. Thus, while a strict reading of Hambly v Trott appears to vindicate the Massachusetts courts’ interpretation, it is difficult to accept that Lord Mansfield ever intended the limitation suggested. This therefore turns out not to be a counter-argument against Professor Birks. A third reason for suggesting that Professor Birks is wrong to rely on Lord Mansfield’s dicta as supportive of the view that ‘at the expense of ’ means ‘from’, not ‘loss’, is that Hambly v Trott has not been expressly supported by any English cases since it was reported in 1776. While this fact does not invalidate Professor Birks’ opinion, it certainly diminishes its strength and persuasiveness. The fourth and final point about Lord Mansfield’s comment is that it is possible to restrict its application to cases relating to restitution for wrongs, not unjust 17 18 19 20
Jones v Hoar (1827) 22 Mass 285, 5 Pick 285. Ibid, p 286. Cummings v Noyes (1813) 10 Mass R 433. Ibid, p 436.
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
121
enrichment. Indeed, Professor Birks’ only rejoinder to this point has been to say that it is not obvious that the claimant’s action should be so limited ‘and it is very unlikely that Lord Mansfield was thinking on those lines’.21 The most that can therefore be said about Lord Mansfield’s observation in Hambly v Trott is that it provides oblique support for the opinion that ‘at the expense of ’ should mean ‘from’ not ‘loss’ in the English law of unjust enrichment. Nonetheless, given the counter-arguments discussed above, it would be reasonable to conclude that even this interpretation is overly generous.
(d) Banque Financiere de la Cite v Parc (Battersea Ltd) Lord Clyde in Banque Financiere de la Cite v Parc (Battersea Ltd)22 spelt out his view of the meaning of ‘at the expense of ’. In order to connect himself to the defendant’s unjust enrichment, Lord Clyde was of the opinion that the claimant had to establish that he had incurred a loss. He stated that: Without attempting any comprehensive analysis, it seems to me that the principle [of unjust enrichment] requires at least that the plaintiff should have sustained a loss through the provision of something for the benefit of some other person with no intention of making a gift, that the defendant should have received some form of enrichment, and that the enrichment has come about because of the loss.23
It is difficult to know what to make of this conclusion. It is unfortunate that Lord Clyde does not undertake a ‘comprehensive analysis’ because it remains unclear why, in his opinion, the claimant must have suffered a loss in order to connect himself to the defendant’s unjust enrichment. It is simply an unexplained assertion. One possible explanation is that Lord Clyde, like Lords Steyn and Hoffmann in that case, placed considerable emphasis on the early writings of Professor Birks in looking at the structure and content of the law of unjust enrichment.24 The problem with this, however, is that in An Introduction to the Law of Restitution, Professor Birks considered that the phrase ‘at the expense of ’ required the claimant to show that he suffered a ‘subtraction’ or a ‘minus’.25 And, as the above discussion of Hambly v Trott showed, Professor Birks has since changed his mind on this issue.26 All this, however, is speculation. While it is true that Lord Clyde must be taken on his word, it also reasonable to conclude that given his disclaimer (that he did not intend to undertake any comprehensive analysis), and the fact that no serious 21 22 23 24 25 26
P Birks, Unjust Enrichment, above n 16. Banque Financiere de la Cite v Parc (Battersea Ltd) [1999] 1 AC 221 (HL). Ibid, p 237 (Lord Clyde). Ibid, pp 226–27 (Lord Steyn), 234 (Lord Hoffmann). P Birks, An Introduction to the Law of Restitution, revised edn, (Oxford, OUP, 1989) 132–33. P Birks, Unjust Enrichment, above n 16, pp 78–86.
122
What do the Cases say ‘At the Expense of ’ Means?
attempt was made to justify his position, his obiter comments must, to some extent, be marginalized.
(e) BP Exploration Co (Libya) v Hunt (No 2) (i) The Facts In BP Exploration Co (Libya) v Hunt (No 2)27 (‘BP Exploration’) the claimant (BP) and defendant (Hunt) entered into a joint venture agreement, the purpose of which was to determine whether an oil concession granted to Hunt by the Libyan government could be profitably developed. Under the agreement BP was to receive a half-share of the concession, while in return Hunt would receive money and oil. In the event oil was found, Hunt would repay 125 per cent of the total value of money and oil initially received, as well as half of BP’s exploration and extraction costs. Four years after the oilfield came on stream the Libyan government expropriated BP’s half-share. This incident resulted in the contract between Hunt and BP being discharged by frustration. Pursuant to Law Reform (Frustrated Contracts) Act (UK) 1943 Section 1(3), BP argued it was entitled to recover a ‘just sum’ for having increased Hunt’s share in the concession by $85m. Robert Goff J decided not to award BP the full amount of Hunt’s enrichment ($85m). Instead, he limited BP’s recovery to $35m (not accounting for any currency adjustment). This sum reflected the market value of the money and oil paid to Hunt, BP’s exploration and development costs, less the value of reimbursement oil received from Hunt. (ii) ‘At the Expense of ’ Means ‘Loss’? Professor Birks has interpreted this result as suggestive of a corresponding loss and gain requirement in English unjust enrichment law. As he says: ‘Otherwise it is not obvious why, having already made an allowance in the valuation of the benefit for that element which was not due to the efforts of BP, he [Robert Goff J] nevertheless allowed them to recover only a much lower amount, seemingly the amount it cost them to confer that benefit’.28 While this decision might be explained on the basis of the ‘the discretionary nature of the jurisdiction conferred by the Act’,29 this view cannot be accepted given that Robert Goff J ‘clearly thought of it as no more or less than a statutory application of the law of unjust enrichment’.30 Thus, it indeed appears as though ‘at the expense of ’ was interpreted in the case to mean ‘loss’, not ‘from’.
27 BP Exploration Co (Libya) v Hunt (No 2) [1979] 1 WLR 783, aff ’d [1981] 1 WLR 232 (CA), [1983] 2 AC 352 (HL). 28 P Birks, Unjust Enrichment, above n 16, p 80. 29 Ibid. 30 Ibid.
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
123
(iii) ‘At the Expense of ’ Does not Mean ‘Loss’ Despite the appearance that restitution was limited by the extent of the claimant’s loss in this case, another interpretation is available. It is an interpretation which suggests that restitution was not awarded on the basis that ‘at the expense of ’ should be taken to mean ‘loss’. Rather, it supports Robert Goff J’s comment, made near the end of his judgment, that ‘in assessing an award of restitution it is the value of the defendant’s benefit, rather than the plaintiff ’s expense, which controls the award . . .’.31 α) Law Reform (Frustrated Contracts) Act (UK) 1943 Before turning to the (α detail of this alternative interpretation, a brief review of the Law Reform (Frustrated Contracts) Act (UK) 1943 Sections 1(2) and 1(3) is necessary. Section 1(2) is concerned with the return of money paid under a frustrated contract. Under this section the judge is given no discretion to award a sum other than that received by the defendant (save for expenses incurred). The entire enrichment must be returned. By contrast, s 1(3) concerns the repayment of a ‘just sum’ for beneficial services provided by the claimant prior to frustration. This section directs the judge to first identify and value the benefit received by the defendant, and then to award a just sum. The just sum may not exceed the value of the benefit received, but it may be less than it. Professor Birks suggests that while Section 1(3) allows the judge to award a sum other than the defendant’s entire enrichment, to do so would be inconsistent with unjust enrichment law. Moreover, to state that one is applying the law of unjust enrichment and then not award restitution of the defendant’s entire enrichment, suggests that a version of unjust enrichment is being applied which requires the claimant to have suffered a corresponding loss. Importantly, however, this very same proposition was raised by counsel and then refuted by Robert Goff J: It was submitted by Mr Rokison, on behalf of BP, that the principle common to both subsections was one of restitution for net benefits received . . .. This is broadly correct so far as section 1(2) is concerned; but under section 1(3) the net benefit of the defendant simply provides an upper limit to the award—it does not measure the amount of the award to be made to the plaintiff.. . . I therefore consider it better to state the principle underlying the Act as being the principle of unjust enrichment . . ..32 (emphasis added)
The difference between the contrasting statements seems trifling. Close observation, however, reveals the distinction to be crucial. The reason why Sections 1(2) and 1(3) must be differentiated is that while both are concerned with the law of unjust enrichment, they provide for different measures of restitution. This is the 31 32
BP Exploration Co (Libya) v Hunt (No 2), above n 27, pp 783, 840. Ibid, p 799.
124
What do the Cases say ‘At the Expense of ’ Means?
point Professor Birks overlooks. There are numerous ways in which a defendant’s enrichment can be measured, particularly when concerned with the provision of services. There is no requirement that an award of restitution reflect the highest possible valuation of the defendant’s gain. To fully understand this point it is necessary to appreciate that unlike money, buyers and sellers will often disagree about the appropriate price of property and services because there are numerous ways in which such things can be valued. Consider this example. C produces oil. The minimum price he is prepared to accept for a barrel of oil is £100. If he sells a barrel of oil for anything less than £100 he will incur a loss. The current market price of oil is £200 per barrel. D wishes to purchase oil. He is not prepared to pay any more than £150 per barrel. C eventually agrees to provide D with a barrel of oil for £150. Is the value of the asset acquired by D £150 or £200? It is, of course, both. The answer depends on which method is chosen to measure the value of the oil. In light of this example Law Reform (Frustrated Contracts) Act (UK) 1943 Section 1(3) can be reinterpreted. The first stage requires the defendant’s benefit to be valued. This suggests that the highest valuation method should be used to assess what the defendant received. In the above example this would be the market price of £200. The second stage requires the calculation of a just sum. This sum will reflect the claimant and defendant’s joint valuation of the benefit transferred. This may be the market price, but it may also be something different. Whatever it is, it should be a sum which is at or below the defendant’s ceiling price and at or above the claimant’s floor price. In the above example it was £150. This discussion shows that the claimant’s loss and defendant’s gain may diverge in cases of incompletely performed contracts. However, if the contract price (or quantum meruit/quantum valebat) is used to determine the level of restitution, loss and gain will correlate. This is because loss and gain are expressions of the price at which the defendant and claimant were prepared to enter contractual relations. This conclusion highlights an interesting fact about the Law Reform (Frustrated Contracts) Act (UK) 1943. Section 1(2) could have been drafted using exactly the same language as Section 1(3). Assume the defendant received £100 from the claimant prior to the occurrence of a frustrating event. If a judge was required to value the defendant’s benefit, it would equate to £100. If then required to award a just sum by way of restitution, the same sum would be repayable: £100. The reasonable value of £100 is £100. It was only an application of Occam’s Razor that determined Section 1(2) not be drafted in the same way as Section 1(3). There is no need for a two stage test when one suffices. (ß) Robert Goff J’s Judgment This discussion and conclusion does not represent a reinterpretation of the decision in BP Exploration. Everything here said was put succinctly by Robert Goff J in his judgment. In relation to money claims he stated that:
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
125
Where, as in cases under section 1(2), the benefit conferred on the defendant consists of payment of a sum of money, the plaintiff ’s expense and the defendant’s enrichment are generally equal; and, subject to other relevant factors, the award of restitution will consist simply of an order for repayment of a like sum of money.33
He then distinguished money from non-money cases: But where the benefit does not consist of money, then the defendant’s enrichment will rarely be equal to the plaintiff ’s expense. In such cases, where (as in the case of a benefit conferred under a contract thereafter frustrated) the benefit has been requested by the defendant, the basic measure of recovery in restitution is the reasonable value of the plaintiff ’s performance—in a case of services, a quantum meruit or reasonable remuneration, and in a case of goods, a quantum valebat or reasonable price.34
Finally, Robert Goff J distinguished the cases where the benefit received is or is not referable to a pre-existing contract. He says that: ‘In the latter class of case, recovery is rare in restitution; but if the sole basis of recovery was that the defendant had been incontrovertibly benefited, it might be legitimate to limit recovery to the defendant’s actual benefit . . .’.35 The point here being made is that in the absence of a contract from which inferences about a joint valuation can be drawn, it is legitimate for an award of restitution to be calculated by reference to some other source, such as a market valuation. (iv) Conclusion In conclusion, while BP Exploration appears to be a case in which restitutionary recovery is restricted by the claimant’s loss, this appearance is deceptive. Closer analysis reveals that when recovery is restricted by the terms of a pre-existing agreement, restitution may be rationally effected without the defendant returning a sum which correlates with the highest value of the benefit received. The result in this case can therefore be equally squared with an approach which says that ‘at the expense of ’ should be interpreted as meaning ‘from’. Thus, the decision in BP Exploration provides no assistance in ascertaining whether English law caps restitution of a defendant’s unjust enrichment by the value of the claimant’s loss.
(f) Debt Discharged at Less than Full Value It is not difficult to think of hypothetical cases in which, depending on whether the ‘at the expense of ’ requirement is taken to mean ‘from’ or ‘loss’, awards of restitution will differ. An obvious example is when a defendant’s debt is discharged by 33 34 35
Ibid, p 805. Ibid. Ibid.
126
What do the Cases say ‘At the Expense of ’ Means?
a third party at less than full value.36 For instance, assume C and D owe X £100. Assume further that C and D are equally responsible for the debt, such that if C paid X £100, he would be entitled to recover £50 by way of contribution from D. If it so happened that C negotiated with X to discharge the debt at a discount, say £80, would he then be entitled to recover £50 from D (her gain) or only £40 (his loss)? Research by Professor Mitchell has revealed that when Lord Scarman introduced the bill which was later enacted as the Civil Liability (Contribution) Act (UK) 1978, his Lordship thought that only the claimant’s loss (£40, in the above example) should be recoverable. This conclusion is clear from his speech in which he stated that a claimant should not be permitted to ‘recover a higher amount from the person from whom he seeks [contribution] than that which he has agreed to pay the [creditor]’.37 More important than Lord Scarman’s stated view, however, is Professor Mitchell’s opinion that two lines of contribution cases exist which support the conclusion that ‘at the expense of ’ should be interpreted to mean ‘loss’ in the English law of unjust enrichment. The first line of authority concerns the situation where a surety, having paid the principal debt to a creditor, seeks recoupment from the principal debtor. Professor Mitchell cites the cases of Butcher v Churchill38 and Reed v Norris39 in support of the proposition that a surety will be prevented from recovering more than what he has paid to discharge the principal debt (even if that is less than the value of the debt).40 However, the problem with these cases, as Professor Mitchell himself recognizes, is that they: ‘[A]ll seem to have been concerned with the quantum of the surety’s contractual right to an indemnity, which is obviously focused on the amount of the surety’s loss, but which is based on a quite different ground from a claimant’s right in unjust enrichment to contribution or reimbursement’.41 Thus, Butcher v Churchill and Reed v Norris cannot be viewed as unequivocal support for the proposition that ‘at the expense of ’ means ‘loss’ in the English law of unjust enrichment. The second line of authority Professor Mitchell relies on to suggest that ‘at the expense of ’ means ‘loss’ to the claimant, is the situation: ‘[W]here a claimant, a defendant, and a third party all owe liabilities in respect of the same damage to a creditor, and the claimant pays the creditor and settles its contribution claim against the third party and then brings a further contribution claim against the defendant . . .’.42 36 37 38 39 40 41 42
C Mitchell, The Law of Contribution and Reimbursement (Oxford, OUP, 2003) 3.21. Ibid, p 3.22 quoting from Hansard, HL series 5, vol 395, col 251 (18 July 1978). Butcher v Churchill (1808) 14 Ves June 567, 575–76, 33 ER 638, 641. Reed v Norris (1837) 2 M&C 361, 375–76, 40 ER 678, 683. C Mitchell, The Law of Contribution and Reimbursement, above n 36, p 3.23. Ibid. Ibid, p 3.21.
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
127
Gnitrow Ltd v Cape plc43 concerned this exact circumstance. In this case the claimant and its insurer settled claims with eighteen employees in relation to industrial injuries they had sustained as a result of exposure to asbestos dust. The claimant then sought contribution (pursuant to the Civil Liability (Contribution) Act (UK) 1978) from two independent contractors who were partly responsible for the workmens’ injuries. It reached agreement with Newalls, the first independent contractor. It then sought contribution from Cape, the defendant and second independent contractor. Cape refused to enter into any arrangement until the claimant disclosed the terms of its agreement with Newalls. The Court of Appeal agreed with Cape, finding that disclosure was required. In Professor Mitchell’s opinion the Court of Appeal’s conclusion provides support for the view that a claimant cannot recover more than its loss. There is, however, another interpretation available. That is, that the Court of Appeal merely sought to ensure that, in accordance with Civil Liability (Contribution) Act (UK) 1978 Section 2(1), the claimant’s recovery was ‘just and equitable having regard to the extent of that person’s responsibility for the damage in question’. The only way in which the Court was able to ensure that, under the legislation, the claimant was held suitably responsible for the damage in question, was to require it to disclose its agreement with Newalls. This was to ensure that the claimant did ‘not recover more than it . . . paid to its employees’.44 The Court’s primary concern was not to cap the claimant’s contribution claim by the value of its loss. Rather, it was to ensure that the claimant did not profit as a result of receiving more by way of contribution than it actually paid to its injured employees. There is another reason why this case should not be viewed as supportive of the proposition that ‘at the expense of ’ may be interpreted as ‘loss’ in English law. That is, the claimant never asserted that it should be entitled to the defendant’s entire gain, irrespective of its loss. On the contrary, the claimant argued that the judge, but not the defendant, should be ‘given such information as is necessary to prevent excessive recovery’.45 Thus, the Court of Appeal was never asked to specifically rule on the question of whether the claimant could only recover its loss, even if the defendant’s gain exceeded it. In light of these difficulties it cannot be said with certainty that any of the existing contribution cases support or negate the view that ‘at the expense’ should be interpreted as meaning ‘loss’ or ‘from’.
(g) Necessitous Intervention A series of cases, often referred to by the Latin term negotiorum gestio, provide another set of circumstances in which the ‘at the expense of ’ requirement may give 43 44 45
Gnitrow Ltd v Cape plc [2000] 3 All ER 763 (CA). Ibid, p 767 (Pill LJ). Ibid, p 766 (Pill LJ).
128
What do the Cases say ‘At the Expense of ’ Means?
rise to controversy depending on whether it is taken to mean ‘from’ or ‘loss’. These cases generally concern situations in which a claimant, without the permission of the defendant, intervenes to save the defendant’s property or person in necessitous circumstances. It must be stated at the outset that these cases are problematic. There is considerable debate over whether necessitous interveners should ever be provided with a remedy.46 There is also disagreement over whether cases captured by the umbrella term ‘necessitous intervention’, should even be categorized as part of the law of unjust enrichment.47 Not only is it unclear whether necessitous intervention should be accepted as a unjust factor, but it is also not certain that awards in these cases are restitutionary, as opposed to reward-based. However, if these concerns are put to one side, and it is assumed that the cases do concern the reversal of a defendant’s unjust enrichment, the question for resolution here is whether they tell us anything about the meaning of ‘at the expense of ’. The first category of cases concerns the payment of money by a claimant on the defendant’s behalf. In Jenkins v Tucker,48 for example, funeral expenses which fell to the deceased’s husband were met instead by her father. And in Great Northern Railway Co v Swaffield,49 the claimant railway company paid for the defendant’s horse to be stabled at a nearby property. In both these and other cases the claimants recovered money spent on the defendants’ behalf. Problems over the meaning of ‘at the expense of ’ were avoided, however, because the claimant’s loss (expressed in money terms), and defendant’s gain, equated. The potentially more controversial (and for this book, interesting) cases involve the provision of services. In Tomlinson v Bentall,50 for example, a surgeon was successful in recovering the cost of medical services provided in circumstances where he had attended to a pauper who came within the parish’s responsibility. In this case, however, the claimant’s loss and defendant’s gain also equated exactly. The defendant parish was required to care for the pauper and the cost of doing so was the value of surgeon’s services. Nicholson v Chapman51 and The Goring52 concerned situations in which property, having floated downstream on the Thames, was recaptured and moved to safety. In both cases the interveners were denied recovery for the cost of the services they had rendered. It is possible to argue that these cases appear to support the view that the English law of unjust enrichment caps awards of restitution by 46 Nicholson v Chapman (1793) 2 H Bl 254, 259, 126 ER 536, 539 (Eyre CJ); Falcke v Scottish Imperial Insurance Co Ltd (1886) 34 ChD 234 (CA) 248 (Bowen LJ). 47 P Birks and C Mitchell, ‘Unjust Enrichment’ in P Birks, (ed), English Private Law, vol II (Oxford, OUP, 2000) 15.156–15.159; A Burrows, The Law of Restitution, above n 16, pp 314–21. 48 Jenkins v Tucker (1788) 1 Hy Bl 90, 126 ER 55. 49 Great Northern Railway Co v Swaffield [1874] L Rev 9 Exch 132. 50 Tomlinson v Bentall [1826] 5 B&C 733, 108 ER 274. 51 Nicholson v Chapman, above n 46. 52 The Goring [1988] AC 831 (HL).
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
129
the loss the claimant has suffered. This is because in both circumstances the interveners incurred no loss of earnings, nor spent any of their own money. On the other hand, the owners had had their timber and boat saved—a considerable and valuable benefit. The trouble with interpreting these cases as suggestive that the English law of unjust enrichment caps restitution by the claimant’s loss is that there is no support for such a view in the reasons for judgment. In Nicholson v Chapman recovery was denied on the basis that the defendant did not have a lien over the property in dispute. And in The Goring, the claimants’ action was denied on the narrow ground that the law of salvage did not apply to non-tidal parts of the Thames. In short, the claims were denied for reasons that had nothing to do with the fact that the claimants had suffered no financial loss. As English law is yet to provide restitution to a claimant who has not suffered a loss in the provision of services, but where the defendant has received a considerable benefit, one cannot conclude that ‘at the expense of ’ should simply mean ‘from’. Thus, as the law stands, cases of necessitous intervention do not shed any light on how ‘at the expense of ’ should be interpreted.
2. Australia (a) Interest Awards (i) Introduction Courts in Australia, just as in England, have the power to make awards of interest to reverse the effects of a defendant’s unjust enrichment. Thus, if a claimant mistakenly pays a defendant a sum of money, he will, as a general rule, be entitled to recover not only the sum transferred but also the use value of that money.53 The question which here needs answering is whether Australian unjust enrichment cases cap interest awards by the extent of the claimant’s loss. An example will help clarify this issue. Consider a claimant who hides all his money in a shoebox under his bed. The use value of his money is zero. No interest is earned on money stored in a shoebox. Suppose this claimant removes £100 from his shoebox and mistakenly transfers it to a defendant. Suppose further that he subsequently brings a claim for restitution. If, in these circumstances, the court hearing the action restricted recovery by the value of the claimant’s loss, restitution would be limited to £100. (ii) ‘From’ not ‘Loss’ In reviewing a broad spectrum of Australian unjust enrichment cases in which interest awards have been made, Dr Edelman has concluded that courts ignore the 53
Cth v McCormack (1984) 155 CLR 273 (HCA).
130
What do the Cases say ‘At the Expense of ’ Means?
value of the claimant’s loss. Instead, they only take into consideration the value of what was transferred. Thus: ‘Like the award of restitution that the interest award operates to perfect, it matters not whether the plaintiff would have invested the money . . . at market rates’.54 It appears that Dr Edelman’s conclusion rests largely on the fact that in all the relevant unjust enrichment cases in which interest has been awarded, the courts have never directly examined the value of the loss incurred by the claimant. Thus, because the courts have never looked at how the claimant used or intended to use the benefit which was transferred to the defendant, it must be presumed that they have only been concerned with reversing the value of the defendant’s gain. There are, however, three difficulties with Dr Edelman’s conclusion. I will discuss each of them in turn. α) Assumption of Loss The first problem is that in the majority of cases (α reviewed by Dr Edelman the claimant has been a commercial entity, concerned with maximizing its profits.55 It is quite plausible that no inquiry into the value of the claimant’s loss was undertaken by the courts because it was simply presumed that the loss suffered would equal or exceed the value of the interest award being made. The judgment of Kirby P in GIO of NSW v Healy (No 2)56 supports this inference: ‘[T]he claimants, represented by the claimant insurer, can point to the fact that they have been deprived of the excess during the time from payment until recovery. Had the insurer had the moneys during the time it would undoubtedly have invested the funds at commercial rates of interest’.57 It is, of course, difficult to know how far this assumption can be rationally extended. Not all cases involve claimants who can be presumed to be profit maximizers. Consider, for example, Nattrass v Nattrass.58 In that case the claimant, being an elderly lady suffering from dementia, made gifts of money to her former daughter-in-law. It was eventually decided that the claimant made the gifts while she was acting under a disability. An award of restitution plus compound interest followed. Even though there was no direct assessment of the claimant’s loss, it was nonetheless clear that it included the use value of the money: ‘Hazel [the claimant], with [the defendant] Kerry’s assistance, withdrew amounts from Hazel’s passbook savings account at the Mount Hawthorn branch of the Commonwealth Bank’.59
54 J Edelman and I Cassidy, Interest Awards in Australia (Sydney, Lexis Nexis, Butterworths Australia, 2003) 94. 55 Eg, State Bank NSW v Comr of Taxation (1995) 62 FCR 371 (FCA); SCI Operations Pty Ltd v Cth (1996) 69 FCR 346 (FCA). 56 GIO of NSW v Healy (No 2) (1991) 22 NSWLR 380 (NSWCA). 57 Ibid, p 383 (Kirby P). 58 Nattrass v Nattrass [1999] WASC 77 (WASC). 59 Ibid, [55].
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
131
The claimant’s loss was therefore the money she transferred, plus the interest she would have earned on the money had it remained in her savings account. Thus, this case does not provide support for the claim that ‘at the expense of ’ means ‘from’ in the law of unjust enrichment in Australia. (ß) A Contrary Case? The High Court case of Maguire v Makaronis,60 though not unequivocal on this point, appears to contradict Dr Edelman’s view that ‘at the expense of ’ means ‘from’ not ‘loss’ in relation to restitutionary awards of interest. The respondents entered into an unconditional agreement to purchase a poultry farm. They had not yet sold their dwelling-house and were therefore unable to raise the necessary finance for the new purchase. They subsequently accepted the assistance of their solicitors, the appellants, who arranged bridging finance from the Commonwealth Bank at a rate of 24 per cent. Though seemingly excessive, this was a standard rate for loans of this type in the late 1980s. The appellants, being obliged to guarantee repayment to the bank, took a mortgage over the respondents’ dwelling-house. The respondents later defaulted and the appellants sought repayment of the entire sum. The transaction was eventually rescinded and the mortgage set aside because the appellants acted in breach of fiduciary duty (owed in the context of their solicitor–client relationship). A question then arose as to the appropriate terms of rescission. In particular, what rate of interest should accompany repayment of the principal sum. It is clear that, at least for the initial period of the loan, the value which came from the appellants was the principal sum plus 24 per cent interest. The value of the appellants’ loss is less clear. No evidence was led regarding the interest which had to be paid by them to the bank. However, there was evidence that at the time the mortgage was executed the rate payable by the appellants was 22 per cent. In their reasons for judgment it appears that a unanimous High Court sought to restrict recovery by the level of the claimant’s loss. Interest on the principal was not assessed at 24 per cent nor at 22 per cent, but pursuant to ‘commercial rates as allowed from time to time by the Supreme Court of Victoria’.61 In reaching their conclusion Brennan CJ, Gaudron, McHugh and Gummow JJ stated: ‘[I]t is a matter of common knowledge that interest rates have fallen since [the Mortgage was executed]. It would, thus, seem likely that to impose a condition on the grant of relief requiring payment of interest at the rate stipulated in the Mortgage would result in a profit to the appellants’.62 Whenever restitution is awarded by reference to the defendant’s gain rather than the claimant’s loss, there is always potential for the claimant to make a profit. The 60 61 62
Maguire v Makaronis (1997) 188 CLR 449 (HCA). Ibid, p 477 (Brennan CJ, Gaudron, McHugh and Gummow JJ). Ibid.
132
What do the Cases say ‘At the Expense of ’ Means?
fact that the High Court sought to avoid this result suggests that they impliedly interpreted ‘at the expense’ to mean ‘loss’, not ‘from’. (γγ) Incontrovertible Benefits and Losses There is a final potential difficulty for Dr Edelman’s conclusion that as far as interest awards in unjust enrichment cases are concerned, ‘at the expense of ’ means ‘from’ not ‘loss’. That is, it appears as though some courts have assumed that money and its use constitute incontrovertible benefits. Consider, for example, the following statement from Cth v McCormack: ‘Restitutio in integrum is the right of every successful appellant. An appellant who has satisfied a judgment for the payment of money is entitled, on the reversal of the judgment, to repayment of the money paid by him with interest’.63 (emphasis added) The problem with the view that money and its use incontrovertibly benefit a defendant is highlighted by Professor Birks: ‘[T]he availability of money to use is not unequivocally enriching in the same degree as the receipt of money. The use of money is in itself a non-money benefit and, whether the issue is enrichment or disenrichment, it has to pass the tests applied to other non-money benefits’.64 The point of this observation is that if money and its use value are thought to constitute incontrovertible benefits, it is a small step for courts also to conclude that money and its use value constitute incontrovertible losses. Thus, no inquiry into how the claimant formerly applied his store of wealth need be undertaken. (iii) Conclusion In conclusion, the Australian unjust enrichment cases in which awards of interest have been made to perfect an award of restitution do not unequivocally support the view that ‘at the expense of ’ means ‘from’ rather than ‘loss’. It remains to be seen how an Australian court would react in circumstances where the defendant was able to prove that the use value of the claimant’s money was zero.
3. Canada In chapter 2 it was explained that the Canadian law of unjust enrichment restricts restitution by the extent of the claimant’s corresponding deprivation.65 Interestingly, however, there is little evidence of this requirement being strictly imposed. The only Canadian case, outside the defence of disimpoverishment, in which the issue appears to have been considered, is Gidney v Feuerstein.66 The respondent in that case purchased a canoe for $100. He was unaware at the time that it had been stolen from the appellant. Due to its dilapidated state the 63 64 65 66
Cth v McCormack, above n 53, p 276. P Birks, Unjust Enrichment, above n 16, p 53. Text preceding, above n 53, ch 2. Gidney v Feuerstein [1996] 2 WWR 383 (MCA).
Situation 1: ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
133
canoe could not be used. The respondent spent 100 hours repairing it, $106.25 on necessary materials and $700 to have it professionally fibre-glassed. The respondent contended that his work resulted in the canoe’s market value increasing to $1906.25 (although no independent assessment of its value was produced). At trial Beard J held that the repairs constituted an incontrovertible benefit to the respondent despite the fact that he did not ask for, acquiesce in, nor perhaps want the repairs undertaken.67 Despite reaching a different conclusion as to the respondent’s liability, the Court of Appeal did not disagree with this finding. The respondent had been saved an inevitable expenditure. While the case was complicated because the claimant reached a $2000 settlement with a number of joined defendants, both at trial and on appeal the value of the appellant’s claim was held to be $806.25 (the actual money spent on repairs). On one view this result is consistent with the position that ‘at the expense of ’ should be interpreted to mean ‘loss’ not ‘gain’. That is because the appellant’s financial loss of $806.25 was held to be the maximum sum recoverable, despite the fact that the respondent’s gain was $1706.25 ($1906.25 minus its original value of $20068). There are, however, two problems with this conclusion. The first problem is that if loss is understood to incorporate a claimant’s opportunity cost (the value of what the claimant in this case could have done were he not repairing the canoe), the decision of Beard J appears to be at best incomplete, and at worst, incorrect. And second, as was earlier explained in relation to Greenwood v Bennett, it is possible to say that, in the view of the court, all that came ‘from’ the claimant in this case was his financial outlay in repairing the canoe. If considered in this way, the case cannot be understood as restricting restitution by the value of the claimant’s loss.
4. United States of America Ascertaining the relevance of a claimant’s loss in American unjust enrichment law can be difficult. That is because, unlike in England,69 the principle of unjust enrichment is said to undperin awards of restitution irrespective of whether the causative event is the defendant’s breach of duty or her receipt of a benefit transferred pursuant to an unjust factor.70 Consequently, when an American court asserts that restitutionary remedies ‘serve to deprive the defendant of benefits . . . even though the plaintiff may have suffered no demonstrable losses’,71 or that ‘the measure of 67
Gidney v Feuerstein [1995] 5 WWR 385, 101 Man R (2nd) 197 (MQB). The $100 originally paid by appellant reflected the fact that the canoe had been stolen. Its true value at that time was estimated to be $200. 69 Attorney General v Blake [2001] 1 AC 268 (HL). 70 For a critique of this approach, see P Birks, ‘A Letter to America: The New Restatement of Restitution’ (2003) 3(2) Global Jurist Frontiers, online edition, Art 2. 71 Mass Transit Administration v Granite Construction Company 471 A 2d 1121 (MDCA, 1984) 1125 (Bloom J). 68
134
What do the Cases say ‘At the Expense of ’ Means?
recovery is the gain to the defendant, not the loss by the plaintiff ’,72 it cannot be assumed that ‘at the expense of ’ is taken to mean ‘from’ and not ‘loss’. Although there is no doubt that a claimant’s loss is irrelevant in recovering from a defendant who has profited from her wrongdoing, it is less certain where the defendant is the innocent recipient of a benefit transferred pursuant to an unjust factor. This predicament is well illustrated by Edwards v Lee’s Administrator.73 This case has been interpreted by Professor Birks as supporting the proposition that there is no requirement of a corresponding loss and gain in American unjust enrichment law.74 A scenic cave ran underneath both the defendant’s and claimant’s land. The defendant charged tourists to enter the caves. The claimant brought an action to recover profits attributable to the use of his land. He was awarded one-third of the defendant’s profits on the basis that one-third of the cave extended under his land. It was irrelevant that (i) the claimant had suffered no loss as a result of the trespassing which had occurred, and (ii) could never realize the potential value of the cave under his land (the only entrance was via the defendant’s land). The problem, however, with Professor Birks’ interpretation (as he himself recognizes75), is that the Kentucky Court of Appeal appears to have awarded restitution on the basis of the defendant’s tort of trespass to land. As stated, it is generally accepted that in cases based on restitution for wrongs, the value of a claimant’s loss is irrelevant. Thus, only if this case can be considered to have been decided on the principles of unjust enrichment by subtraction—an interpretation which, while not ruled out by the case, appears unfounded—could one conclude that there is a view in the United States that ‘at the expense of ’ means ‘from’, not ‘loss’. Because, like Edwards v Lee’s Administrator, so many of the American cases are susceptible to dual analysis or relate only to situations in which what has come ‘from’ the claimant equates with his ‘loss’, no clear picture has emerged as to how ‘at the expense of ’ is interpreted.
5. Conclusion This section has been concerned with instances in which the claimant’s loss and defendant’s gain appear not to equate at the moment of the defendant’s unjust enrichment. Of the numerous cases reviewed, only one supports the conclusion that ‘at the expense of ’ should mean ‘loss’, not ‘from’.76 None unequivocally supports the conclusion that ‘at the expense of ’ means ‘from’, not ‘loss’. Consequently, while there a number of hypothetical situations in which controversy over the 72 73 74 75 76
Ibid, p 1126. Edwards v Lee’s Administrator 265 Ky 418, 96 SW 2d 1028 (KYCA, 1936). P Birks, Unjust Enrichment, above n 16, pp 84–85. Ibid, p 84. Re BHT (UK) Ltd, above n 5.
Situation 2: ‘Gain’ Increases After Receipt
135
meaning of ‘at the expense of ’ might arise, no clear view has emanated from the English, Australian, Canadian and American courts as to how it should be interpreted in these circumstances.
C. Situation 2: ‘Gain’ Increases After Receipt Every asset has the potential to increase or decrease in value over time. This fact can give rise to problems in measuring the defendant’s gain and claimant’s loss in unjust enrichment cases. That is because there will invariably be a delay between the moment at which the defendant is enriched and the point at which the claimant is awarded restitution. The dilemma which arises is whether the defendant’s gain and claimant’s loss should be measured at the time of the initial transfer or at the point of judgment. The basic principle guiding the assessment of claims for restitution is that the defendant’s enrichment should be measured at the moment of receipt, not judgment.77 Thus, save for the operation of defences, changes in the value of the defendant’s gain or claimant’s loss after receipt are irrelevant. The problem with this general principle, however, is that it may give rise to conflict in cases where the ‘at the expense of ’ requirement falls to be considered. Take, for example, this simple problem. The claimant mistakenly pays the defendant £10. The defendant then uses the money to purchase a winning lottery ticket. Should the claimant then be entitled to recover the initial £10 as well as the defendant’s subsequent winnings? If ‘at the expense of ’ is interpreted to mean ‘loss’, the answer will be ‘no’. However, if ‘at the expense of ’ is interpreted to mean ‘from’, the claimant may be entitled to restitution of the defendant’s entire winnings. This issue appears to have arisen in only two English decisions. The facts and results of each case are discussed below. The reasons for judgment and the application of the cases to the present discussion are then reviewed. Following this review, an Australian case is considered, followed by a series of American cases.
1. England (a) The Decisions (i) FC Jones & Sons v Jones In FC Jones & Sons v Jones78 (‘FC Jones’) the defendant, Mrs Jones, received three cheques from her husband, all of which had been drawn down on the FC Jones & 77 78
P Birks, Unjust Enrichment, above n 16, p 168. FC Jones & Sons v Jones [1997] Ch 159 (CA).
136
What do the Cases say ‘At the Expense of ’ Means?
Sons partnership account, for a total sum of £11,700. Mrs Jones invested the money in potato futures and increased its value five times over. The question which then arose was whether FC Jones & Sons’ trustee in bankruptcy was entitled to the £49,860 held by Mrs Jones in a deposit account at Raphaels. Millet LJ, who provided the leading judgment in the Court of Appeal, held that the trustee in bankruptcy was entitled to restitution of the entire £49,860. (ii) Foskett v McKeown In Foskett v McKeown79 an investment scheme was arranged by a Mr Murphy to purchase and develop land in Portugal. Money received by investors was held on trust in a company bank account controlled by Mr Murphy. It was later discovered that, in breach of trust, Mr Murphy fraudulently misapplied some of this money. Instead of using it to develop land in the Algarve, he spent £20,440 to pay for two (out of five) instalments on his £1 million life insurance policy. After Mr Murphy committed suicide, the question arose as to whether the claimant and numerous other beneficiaries were entitled to a proportionate share of the £1 million paid to Mr Murphy’s children by his insurer. On appeal, the House of Lords held that the beneficiaries were entitled to restitution not only of their loss, but also the value of the defendant’s gain. Thus, recovery was not limited to the value of the misapplied money (as well as interest), but the increase in value attributable to the £20,440 which was misapplied by Mr Murphy. Thus, the claimants were entitled to a proportionate share of the £1 million.
(b) Reasons for Judgment It must be stated at the outset that FC Jones and Foskett v McKeown differed in one respect. While the claim in FC Jones concerned the assertion of a personal right, the claim in Foskett v McKeown centered on the beneficiaries’ ability to assert a proprietary right over the increased value of the asset in question. What remains important for this section, however, is not so much the nature of the remedy sought, but the characterization of the event giving rise to the right in the substitute asset. Interestingly, and perhaps controversially, in both cases it was held that ‘property’, not ‘unjust enrichment’ was the source of the claimants’ rights. In FC Jones it is clear from the decision of Millett LJ that the trustee in bankruptcy’s right to the £49,860 did not arise because of the tort of conversion. Millett LJ also stated that the claim was not based on money had and received.80 Rather, in his view, the trustee in bankruptcy’s title to the money ‘persisted’. In other words, because title to the money never passed to Mrs Jones, she could never have been unjustly enriched. Thus, whatever money she initially received, plus what 79 80
Foskett v McKeown [2001] 1 AC 102 (HL). FC Jones & Sons v Jones, above n 78, p 168 (Millet LJ).
Situation 2: ‘Gain’ Increases After Receipt
137
ever money came from its investment, simply belonged to the trustee in bankruptcy. Millett LJ therefore reasoned that as the £11,700 never belonged to Mrs Jones (as it had already vested in the trustee in bankruptcy), she should not be entitled to retain the profits made from its investment. In Foskett v McKeown the House of Lords (consistent with an argument developed by Mr Virgo81), characterized the claimant’s basis of recovery as arising from a vindication of his proprietary rights. Moreover, the view that recovery was based on the law of unjust enrichment was explicitly rejected.82 As Lord Millett said: ‘The transmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not the law of unjust enrichment’.83 In conclusion, it appears that neither FC Jones nor Foskett v McKeown can be understood as endorsing the view that in the law of unjust enrichment, ‘at the expense of ’ means ‘from’, not ‘loss’.
(c) The True State of Affairs in FC Jones and Foskett v McKeown? While academic lawyers have generally considered the outcomes of FC Jones and Foskett v McKeown to be correct, the bases for the decisions have generated disagreement and criticism. Some commentators have applauded the reasoning provided in Foskett v McKeown,84 while others have attacked it. Professors Birks, Burrows and Chambers, for instance, have argued that the beneficiary’s interest did, in fact, arise as a response to the defendants’ unjust enrichment.85 In relation to the supposition that Foskett v McKeown was decided on the basis of property, not unjust enrichment, Professor Birks has said: In Foskett v McKeown . . ., where the share in the death benefit was infinitely more valuable than the trust money originally received, the House of Lords said that the claimants’ proprietary interest had nothing to do with the law of unjust enrichment. It was an application of the law of property. That is an impossible contrast. The law of property and the law of obligations are categories of response, and unjust enrichment is a causative event.86 81
G Virgo, The Principles of the Law of Restitution (Oxford, OUP, 1999) 15–17, 592–601. Foskett v McKeown, above n 79, pp 110 (Lord Browne-Wilkinson), 115 (Lord Hoffmann), 127 (Lord Millet). 83 Ibid, p 127 (Lord Millet). 84 J Stevens, ‘Vindicating the Proprietary Nature of Tracing’ (2001) Conveyancer and Property Lawyer 94; R Grantham and C Rickett, ‘Property Rights as a Legally Significant Event’ (2003) 62 CLJ 717; and implicit in G Virgo, The Principles of the Law of Restitution, above n 81, pp 15–17, 592–601. 85 P Birks, ‘Property, Unjust Enrichment, and Tracing’ (2001) 54 CLP 231; P Birks, Unjust Enrichment, above n 16, pp 32–36; A Burrows, The Law of Restitution, above n 16, pp 62–66; A Burrows, The Law of Restitution, above n 16, p 64; R Chambers, ‘Tracing and Unjust Enrichment’ in J Nyers, M McInnes and S Pitel, (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004) 263, 279–305. 86 P Birks, ‘At the Expense of the Claimant (2)’ (2004) Oxford U Lecture Handout 1. 82
138
What do the Cases say ‘At the Expense of ’ Means?
Then, in regard to the specific question of whether the event of non-consensual substitution can be characterized as a species of unjust enrichment, Professor Burrows has said that ‘[i]n reality, new proprietary rights are created in the substitute property to reverse the defendant’s unjust enrichment at the claimant’s expense’.87 And Professor Chambers, in respect of claims based on tracing, has said: ‘In the absence of another apparent source, such as consent or a statute, unjust enrichment provides a perfectly satisfactory explanation of claims based on tracing. This is because the claimant’s right is created by the defendant’s use of the claimant’s value without the claimant’s consent’.88 Thus, in the opinion of Professors Birks, Burrows and Chambers, Foskett v McKeown is best understood as a case based on the law of unjust enrichment. Professors Birks and Chambers reach the same conclusion in relation to FC Jones.89 In Professor Birks opinion ‘[t]he only satisfactory explanation [of the decision] is that she [the defendant] was unjustly enriched at his [the claimant’s] expense’.90
(d) Implications for the ‘At the Expense of ’ Requirement As the present law stands, FC Jones and Foskett v McKeown say nothing about whether ‘at the expense of ’ should be interpreted to mean ‘from’ or ‘loss’. If, however, Professors Birks and Burrows are right to conclude that both these cases should be viewed as applications of the law of unjust enrichment, important implications arise. As Professor Birks astutely recognizes, such an interpretation ‘ties in with the absence of a requirement that the plus to the defendant be matched by a minus to the claimant’.91 In other words, ‘at the expense of ’ will not be interpreted as meaning ‘loss’, but rather ‘from the claimant, or his wealth’.
2. Australia There appears to be only one Australian case in which the meaning of ‘at the expense of ’ has been considered in the context of a defendant increasing the value of any enrichment initially received. That was the New South Wales Court of Appeal decision in Say-Dee Pty Ltd v Farah Constructions Pty Ltd.92
87
A Burrows, The Law of Restitution, above n 16, p 64. R Chambers, ‘Tracing and Unjust Enrichment’, above n 85, p 306. 89 P Birks, Unjust Enrichment, above n 16, p 82; R Chambers, ‘Tracing and Unjust Enrichment’, above n 85, pp 289–90, 304. This is impliedly accepted by A Burrows, The Law of Restitution, above n 16, p 28. 90 P Birks, Unjust Enrichment, above n 16, p 82. 91 P Birks, Unjust Enrichment (Oxford, OUP, 2003) 69. By implication see also A Burrows, The Law of Restitution, above n 16, p 28. 92 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309. 88
Situation 2: ‘Gain’ Increases After Receipt
139
The appellant and respondent companies entered into a joint venture to purchase and redevelop real estate property. It was common ground that they each owed to the other fiduciary duties. Mr Elias, an experienced real estate developer, controlled the respondent company. He was responsible for obtaining planning approval as well as the construction of the property and its ultimate sale. The development application lodged by Mr Elias was ultimately refused by the relevant local council. Adjoining properties would need to be purchased and included in the redevelopment before approval was granted. Without disclosing this fact to his joint venture partner, Mr Elias made the relevant acquisitions. He did this by causing the adjoining properties to be purchased by various associated parties, including his wife and two daughters. Although the judgment of Tobias JA (with whom Mason P and Giles JA agreed) focused on the scope and breach of fiduciary duties owed by the respondent and Mr Elias to the appellants, his Honour also considered the liability of Mr Elias’ wife and two daughters. In particular, Tobias JA looked at their liability as recipients of trust property, distinguishing between liability for the wrong of knowing receipt and liability based on unjust enrichment. His Honour then concluded that, in accordance with the principles of unjust enrichment, the wife and daughters should be held strictly liable.93 More relevantly, Tobias JA stated that: Mrs Elias and the two children are liable to account for any profits or benefit they derived from the acquisition of their respective interests in [the property] No 15 as a result of Mr Elias’ and [his company] Farah’s breach of their fiduciary duties. They hold those interests on constructive trust for the joint venture.94
The critical aspect of this quote is that the wife and two children were held liable, based on the law of unjust enrichment, to account for any profits they derived as a result of their unjust enrichments. Put another way, if the value of each or any of their unjust enrichments increased following their initial receipt, the entire sum would be subject to a claim for restitution (presumably taking into account any skill and effort used in making this profit95). Although this section of Tobias JA’s judgment can be criticized on the basis that the remedy devised follows more closely and logically from knowing receipt (wrongs-based) cases than unjust enrichment (based on the unjust factor of ignorance) cases, this does not detract from the clear terms of the decision. In particular, it does not detract from the fact that an influential state appellate court has held that in cases of receipt of trust property, ‘at the expense of ’ will be taken to mean ‘from’, and ‘from’ in the broadest sense of that word.
93 94 95
Ibid, [222]. Ibid, [233]. Ibid, [246–52].
140
What do the Cases say ‘At the Expense of ’ Means?
3. United States of America All American cases that concern whether a claimant is entitled to recover the value of a defendant’s initial enrichment, as well as subsequent profit generated from her use of that enrichment, appear to involve the same fact scenario. That is, a claimant is required to transfer property to a defendant pursuant to a court order, but later, on appeal, has that judgment reversed. The question that then arises is whether, in addition to a retransfer of the property initially surrendered by the claimant, an award of restitution should extend to any profits made by the defendant when using the property (and not be limited to an assessment of the property’s intrinsic use value).96 Before commencing a detailed review of just one of these cases, an important point needs stating. That is, in none of the cases concerning restitution upon reversal of an erroneous judgment will the defendant have committed a breach of duty. Restitution is not predicated on the defendant’s wrongdoing. This is made clear by the Full Court of the Supreme Court of Oregon in Lytle v Payette-Oregon Slope Irr Dist: ‘Restitution is awarded, not upon the theory that the judgment creditor is guilty of any wrongdoing in enforcing his judgment, but because, in equity and good conscience, he ought to restore to the appellant whatever of value he caused to be taken from him by virtue of his erroneous judgment’.97 The relevant consideration underlying this conclusion is that ‘[a] judgment is an act of the law. Neither party can control the court, and neither is responsible for its act’.98 It follows that the unjust factor at work in these cases is legal compulsion. Though there are many cases that might be considered in this context, Fleer Corporation v Topps Chewing Gum Inc99 is of particular interest and relevance. The facts of the case and the decision of the Supreme Court of Delaware reveal why. The appellant and respondent were rival manufacturers of chewing gum, candy novelties and trading cards. The appellant, over a long period of time, had developed a strangle-hold on the baseball trading cards industry. It had entered into contracts with virtually every major league baseball player establishing exclusive rights of manufacture and sale of trading cards using the players’ names, pictures and signatures. The respondent filed suit alleging antitrust violations by the appellant. At first instance, the United States District Court found for the respondent. The appellant was permanently enjoined from enforcing its exclusive rights agreements and the respondent was granted a non-exclusive licence for the manufacture and sale of baseball cards. The appellant appealed to the United States 96 Explanation of ‘intrinsic use value’ is provided in the text immediately preceding, above n 51, ch 5. 97 Lytle v Payette-Oregon Slope Irr Dist 152 P 2d 934 (ORSC, 1944) 938 (Hay J). 98 Mann v Thompson 118 So 2d 112 (USCA, 1960) 116 (Wigginton CJ). 99 Fleer Corp v Topps Chewing Gum Inc 539 A 2d 1060 (DELSC, 1988).
Situation 2: ‘Gain’ increases after Receipt
141
Court of Appeals. Its motion to stay the orders of the District Court was denied and thus, while the appeal was pending, the respondent manufactured and marketed baseball cards under its own trademark. Eventually, the Court of Appeals reversed the decision of the District Court, finding that the appellant had not violated any federal antitrust laws. The appellant then brought a claim seeking restitution of the respondent’s profits generated by its sale of baseball cards during the time the District Court’s orders were in effect. The appellant was successful both at first instance and on appeal. The Full Court of the Supreme Court of Delaware rejected the respondent’s arguments that (i) its profits were earned under a court-mandated licence and therefore could not constitute an unjust enrichment; (ii) its profits were not the appropriate means of measuring an award of restitution; and (iii) retention of its profits would not constitute a windfall. In answering the respondent’s contentions, the Supreme Court looked first at the rights held by the appellant, and then their infringement by the respondent: In the present case, [the appellant] had labored for many years to obtain the exclusive right to market baseball trading cards. The rights contained in [the appellant’s] contracts and licensing agreements clearly constituted property owned by [the appellant] . . .. Because of the injunction issued by the District Court, [the respondent] was able to legally appropriate [the appellant’s] property rights and market baseball trading cards, an action which would have clearly infringed on [the appellant’s] exclusive rights except for the District Court’s order.100
The Supreme Court then focused on the appropriate response. It looked first at the respondent’s behaviour, and then the suitability and scope of an award of restitution: [The respondent’s] activity during the course of the litigation has not risen to the level of wrongdoing, and therefore [the respondent] may not properly be characterized as a wrongdoer or misuser . . .. [However] [r]estitution may require not only the restoration of the property to its rightful owner but also compensation or reimbursement for the benefits enjoyed by the defendant through the use or possession of plaintiff ’s property regardless of whether or not the defendant is classified as a wrongdoer . . .. An accounting for profits is a means of measuring the benefits bestowed on an unjustly enriched defendant. Accordingly, an unjustly enriched defendant may be ordered to turn over to the plaintiff the profits earned through the use or possession of the plaintiff ’s property.101 (emphasis added)
100 Ibid, 101 Ibid,
pp 1062–63. p 1063.
142
What do the Cases say ‘At the Expense of ’ Means?
Although one may question the Supreme Court’s resort to language such as ‘compensation’ and ‘account of profits’ to express the view that restitution for unjust enrichment should encapsulate money generated by a defendant through the use of a claimant’s property, the breadth and intention of its decision is clear. The respondent’s argument ‘that its profits were not the direct product of [the appellant’s] property rights but, rather, were the product of [its] capital investments, distribution network, and sales efforts’,102 was explicitly rejected. Importantly, for the purposes of this book, it can also be taken that the Court understood the phrase ‘at the expense of ’ to mean ‘from’, not ‘loss’. In particular, the Court can be taken as favouring the version of ‘from’ advocated by Professor Birks. That is, restitution includes not only the value of the asset transferred, but profits generated by making use of the earning opportunities inherent in that asset. A final point requires mentioning. That is, because the measure of recovery in cases of this kind has been ‘exactly that which was gained by the judgment creditor either in money, property, or the rents, issues or profits derived therefrom during the pendency of the appeal’,103 there is no question that restitution is assessed by reference to the defendant’s initial as well as subsequent gain, not the claimant’s loss. In conclusion, the series of American cases concerned with the reversal of erroneous judgments provides an illuminating insight into how courts in that country interpret the phrase ‘at the expense of ’. ‘From’ is clearly preferred to ‘loss’. And, unlike in England, there is no question of restitution being awarded to vindicate a claimant’s proprietary rights. Restitution is awarded to reverse a defendant’s unjust enrichment.
D. Conclusion Two situations in which it is crucial to decide whether ‘at the expense of’ means ‘from’ or ‘loss’ have been considered in this chapter. The first situation is where the defendant’s gain and claimant’s loss do not equate at the moment of receipt. The second is where the defendant increases the value of her enrichment after initial receipt. While numerous cases were discussed in both contexts, no absolutely and consistently clear picture has emerged as to whether the courts interpret ‘at the expense of’ to mean ‘from’ or ‘loss’. In Re BHT ‘loss’ seems to have been favoured. In Say-Dee v Farah Constructions and Fleer v Topps ‘from’ is preferred. Consequently, in order to determine whether, in situations beyond the defence of disimpoverishment, ‘at the expense of’ should be taken to mean ‘from’ or ‘loss’, various normative arguments must be examined. This is undertaken in the next chapter. 102 Ibid. 103 Mann v Thompson, above n 98, p 115 (Wigginton CJ) referring to earlier decisions of that court as well other jurisdictions.
7 What should ‘At the Expense of ’ Mean?
A. Introduction 1. The Inquiry The stated purpose of part two of this book was to examine the meaning and operation of the ‘at the expense of ’ requirement. Chapter 5 began by looking at how this phrase might be interpreted. ‘From’ and ‘loss’ were the two primary possibilities identified. Time was therefore spent determining what each of them should mean. Chapter 6 then considered what the courts’ response to these two interpretations has been. It was shown that outside the defence of disimpoverishment, no clear picture has emerged as to whether ‘at the expense of ’ means ‘from’ or ‘loss’. This chapter brings part two of this book to an end. It concentrates on normative arguments which have been, or may be, raised to support or negate the claim that ‘at the expense of ’ means ‘from’ or ‘loss’. Like in chapter 6, only two of the three possible scenarios in which a defendant’s gain may exceed a claimant’s loss are considered. Omitted from this review is the situation where the claimant reduces his loss following the defendant’s unjust enrichment. The reason for this is because if ‘at the expense of ’ is interpreted to mean ‘from’ in these other cases, consistency will demand that the claimant’s ‘loss’ be treated as irrelevant in all unjust enrichment disputes.
2. Structure and Outcome This chapter is divided into five parts. First, the problem of why a choice has to be made between whether ‘at the expense of ’ should mean ‘loss’ or ‘from’ is explained by reference to Aristotle’s Nicomachean Ethics.1 Next, an overview is presented of
1
Aristotle, W Ross, (tr), Nicomachean Ethics (Oxford, Clarendon Press, 1908) Book V(4).
144
What should ‘At the Expense of ’ Mean?
some of the competing opinions about how ‘at the expense of ’ should be interpreted when loss and gain do not equate. In the third section some of the actual arguments as to how ‘at the expense of ’ should be interpreted are considered. The reasons here discussed apply to all situations in which a defendant’s gain exceeds a claimant’s loss and all concern arguments in favour of ‘at the expense of ’ meaning ‘loss’. In the fourth part of this chapter arguments as to how ‘at the expense of ’ should be interpreted when the defendant’s gain exceeds the claimant’s loss at the moment of receipt are explored. Finally, the question of whether restitution should be restricted by the claimant’s loss when the defendant increases the value of her enrichment after receipt is examined. The arguments considered in this chapter about how ‘at the expense of ’ should be interpreted are finely balanced. The better view, however, is that ‘at the expense of ’ should be understood to mean ‘from’, not ‘loss’, where ‘from’ refers to the value of the asset or service initially transferred.
B. The Problem Restated: The Status Quo Ante cannot be Restored Whenever the value of the defendant’s unjust enrichment corresponds both with what has come from the claimant and the current value of the claimant’s loss, there are powerful normative justifications for awarding restitution. The reasons underpinning this conclusion are outlined in this section. There is, however, a more fundamental purpose underlying this examination. That is, once it is understood why restitution should be awarded when the defendant’s gain and claimant’s loss correspond, it also becomes evident why it is unclear what should occur when the status quo ante of both parties cannot be restored.
1. Restitution when Loss and Gain Correspond Whenever a defendant is unjustly enriched at the expense of a claimant, a question arises as to what the appropriate response should be. In the following passage taken from Aristotle’s Nicomachean Ethics, the view advanced is that (i) the defendant, should (ii) make restitution to the claimant, of (iii) the enrichment received: [W]hen something is subtracted from one of two equals and added to the other, the other is in excess by these two; since if what was taken from the one had not been added to the other, the latter would have been in excess by one only. It therefore exceeds the intermediate by one, and the intermediate exceeds by one that from which something was taken. By this, then, we shall recognize both what we must subtract from that which has more, and what we must add to that which has less; we must add to the latter that
The Problem Restated: The Status Quo Ante cannot be Restored
145
by which the intermediate exceeds it, and subtract from the greatest that by which it exceeds the intermediate.. . . Therefore the just is intermediate between a sort of gain and a sort of loss . . . it consists in having an equal amount before and after the transaction.2
As stated, this passage reveals three things. First, corrective justice requires the parties to be returned to their original positions. Second, it identifies the appropriate parties to be affected by an award of restitution. And third, it explains why an award of restitution is the suitable response. I will consider each of these in turn.
(a) Pre-exchange Equilibrium Corrective justice is attained when, after a disturbance to their pre-exchange equilibrium, the two affected parties are returned to their original positions. This can be explained in the following terms. After a transfer of value from the claimant to the defendant, equilibrium between the two parties will be disrupted. The defendant will have received a benefit (+1) and the claimant will have suffered a detriment (–1). Corrective justice will be achieved when the parties are returned to their original position (0). When the defendant returns the value of her gain to the defendant, the parties’ pre-exchange equilibrium will be restored.
(b) Identification of the Parties The second aspect of Aristotle’s conception of corrective justice centres on the identity of the parties. Aristotle argues that the defendant (and no one else) must give up her gain to the claimant (and no one else). Professor McInnes explains this requirement in the following terms: [C]orrective justice uniquely identifies each party as the proper object of the other’s response. The simple fact that the plaintiff ‘unjustly’ suffered a loss suggests that she should enjoy recompense but does not, in itself, explain why the defendant should be held responsible. Likewise, the simple fact that the defendant ‘unjustly’ received a gain suggests that he should be subject to divestment, but does not, in itself, reveal why the plaintiff should benefit from such relief. However, by proving that her loss was his gain, and vice versa, the plaintiff identifies the defendant to be the proper source of her reparation at the same time that she identifies herself to be the proper recipient of his divestment. The cumulative effect is restitution.3
(c) The Appropriate Response is Restitution The third and final aspect of Aristotle’s version of corrective justice relates to the nature of the response. Restitution, as Professor McInnes also points out,4 is the 2 3 4
Ibid. M McInnes, ‘The Measure of Restitution’ (2002) U Toronto L J 163, 195–96. Ibid, p 196.
146
What should ‘At the Expense of ’ Mean?
only conceivable award. Anything else would put at risk the parties being successfully returned to their pre-exchange equilibrium. Consider, by contrast, an award of compensation. Its focus is purely on the claimant’s loss. It is concerned with restoring the claimant to his original position. As the defendant’s pre-exchange position is irrelevant, it would only be by chance that the parties’ shared, original equilibrium is re-established. Thus, the only appropriate award is restitution.
2. Conclusion When cases of unjust enrichment mirror the circumstances Aristotle had in mind when discussing the fundamental precepts of corrective justice, a clear justification for an award of restitution emerges. The problem, however, is that not all unjust enrichment cases fit the theory. Sometimes the gain received by the defendant exceeds the value of the loss suffered by the claimant. Thus, the pre-exchange equilibrium shared by the parties cannot be restored. In these circumstances the meaning of ‘at the expense of ’ becomes controversial. A choice has to be made between whether the status quo ante of the claimant or the defendant should be restored.
C. Four Conceptions of what ‘At the Expense of ’ Means In this section the opinions of seven restitution scholars regarding how ‘at the expense of ’ should be interpreted are introduced. The views of these seven scholars are divided into three main groups. The reason why the views of these particular academics are here discussed is because many of the arguments considered in this chapter are derived from articles or books written by them. The arguments considered in this chapter are aimed at providing an answer to a question which lies at the heart of the law of unjust enrichment. That is, what is the purpose of restitution? One view is that it is to reverse the effects of a defective transfer by focusing on changes to the defendant’s financial position. The alternative is to say that restitution is simply concerned with ensuring that, following a defective transfer, the claimant’s original financial position is restored. Those who focus on the defendant’s financial position tend to view ‘at the expense of ’ as meaning ‘from’. Those who concentrate on the claimant generally consider ‘at the expense of ’ to mean ‘loss’. Broadly speaking, Professors Birks5 and Burrows6 and hold the view that ‘at the expense of ’ should be interpreted to mean ‘from’. Professor Smith,7 Professor 5 6 7
P Birks, Unjust Enrichment, 2nd edn, (Oxford, OUP, 2005) 82. A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2002) 30. L Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas L Rev 2115.
Four Conceptions of what ‘At the Expense of ’ Means
147
McInnes8 and Professors Grantham and Rickett9 hold the contrary opinion that ‘at the expense of ’ requires the claimant to have incurred a ‘loss’. Finally, sitting between both camps, is Mr Virgo.10 As seen in chapter 5, he believes that the claimant need only prove that he incurred some loss before being entitled to restitution of the defendant’s entire gain. These views can be depicted in the following way: ‘From’ Birks, Burrows
‘Loss’
‘Loss’ then ‘From’
✓
Smith, McInnes, Grantham and Rickett
✓
Virgo
✓
It was also explained in chapter 5 that differences of opinion have emerged within the camp that suggests that ‘at the expense of ’ should mean ‘loss’ not ‘from’. Professor McInnes and Professors Grantham and Rickett adopt the strictest approach. They all contend that if the claimant cannot show that he has suffered a net or continuing financial loss as a result of the defendant’s unjust enrichment, restitution should not be awarded. Professor Smith partially agrees with this view. He says that restitution should be restricted in circumstances where the defendant’s enrichment caused an initial loss to the defendant. However, contrary to Professor McInnes and Professors Grantham and Rickett, Professor Smith would not disallow a claim for restitution if the claimant later made good his loss. Professor Smith rejects the defence of disimpoverishment. The differing opinions can be illustrated as follows: From C or his Only some loss Ltd by C’s initial Ltd by C’s ultiwealth needed loss mate loss Birks, Burrows Virgo Smith McInnes, Grantham and Rickett
✓ ✓ ✓ ✓
8 M McInnes, “‘At the Plaintiff ’s Expense’: Quantifying Restitutionary Relief ” (1998) 57 CLJ 472; M McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’ (2003) 62(3) CLJ 697. 9 R Grantham and C Rickett, ‘Disgorgement for Unjust Enrichment?’ (2003) 62(1) CLJ 159. 10 G Virgo, The Principles of the Law of Restitution (Oxford, Clarendon Press, 1999) 105.
148
What should ‘At the Expense of ’ Mean?
In the following three sections the views of these restitution scholars are closely scrutinized. Particular attention is given to the justifications presented by these and other academics for the various positions they have adopted.
D. Whenever Loss and Gain Do Not Equate In this section general arguments about whether ‘at the expense of ’ should mean ‘loss’ are canvassed. All considerations here discussed may be relied on whenever the defendant’s gain exceeds the claimant’s loss. It turns out, however, that none of the arguments presents a valid reason for finding that ‘at the expense of ’ should mean ‘loss’.
1. The Work is Done Elsewhere The majority of cases in which the defendant’s gain exceeds the claimant’s loss seem susceptible to dual analysis. That is, they are capable of being viewed not only as unjust enrichment cases, but also disputes covered by the law of wrongs. Consider the case of the defendant who unlawfully takes the claimant’s bicycle while the latter is on holiday. While such a scenario may give rise to a claim for restitution based on the defendant’s unjust enrichment, it is equally plausible that the claimant might bring an action based on the tort of trespass or conversion. An argument which might therefore be used to support the view that ‘at the expense of ’ should mean ‘loss’, not ‘from’, is that if the law of wrongs already ensures that a defendant will be stripped of any unlawful gain, there is no need for the law of unjust enrichment to intervene. In support of this conclusion it may be contended that such an approach reduces unnecessary duplication and therefore complication in the law. By restricting restitution for unjust enrichment to cases where the claimant has incurred a loss ensures that a clear analytical distinction between restitution for wrongs and restitution for unjust enrichment emerges. That is because only in cases of wrongdoing will the claimant be entitled to recover the defendant’s gain irrespective of whether he has incurred a financial loss. A clear division between the law of unjust enrichment and wrongs ensures that the independence of both areas will be maintained.11 While this proposal may, at first blush, appear analytically elegant and therefore convincing, closer inspection reveals it to be flawed. Its first problem lies in the assumption that all cases in which the defendant’s gain exceeds the claimant’s loss 11 See P Birks, Unjust Enrichment, above n 5, p 81, citing R Grantham and C Rickett, ‘Disgorgement for Unjust Enrichment?’, above n 9, pp 174–75.
Whenever Loss and Gain Do Not Equate
149
are susceptible to dual analysis in the law of wrongs. This is untrue. The cases of Re BHT (UK) Ltd12 and Foskett v McKeown,13 discussed in chapter 6, show that in certain instances a claimant will be unable to recover the value of the defendant’s gain if his action in unjust enrichment is denied. The second problem with distinguishing between the law of unjust enrichment and the law of wrongs based on whether the claimant has incurred a loss is that the law of wrongs will not always provide a remedy in circumstances where the law of unjust enrichment would have. That is because actions for the wrong may differ from those in unjust enrichment in a number of crucial ways. Questions over conflicts of law, limitation periods and the operation of defences distinguish the two fields. In conclusion, the claim that restitution for unjust enrichment should be restricted by the extent of the claimant’s loss cannot be sustained on the basis that the law of wrongs already covers the field. While this may result in the law of wrongs and unjust enrichment overlapping in certain situations, the ‘temptation of elegance’ as Lord Goff once put it, must yield to the fact that ‘the law has to reflect life in all its untidy complexity.’14
2. The Meaning of ‘Restitution’ The meaning of the phrase ‘at the expense of ’ has been shown to be ambiguous. The term ‘restitution’ suffers from the same affliction. As Professor McInnes has pointed out, in common parlance ‘restitution’ has the capacity to: [R]efer to an action that (1) achieves restoration of a victim by ‘making reparation [of her] loss or injury,’ (2) returns a wrongdoer to his ‘previous status or position’ by forcing him to hand over his ill-gotten gain, or (3) reinstates the status quo ante of two parties by compelling a person to ‘giv[e] back something to its proper owner.’15
Professor McInnes maintains that only one meaning should be ascribed to the term ‘restitution’ when employed as a legal term of art.16 In his view: The legal response of restitution consists of requiring the defendant to ‘give back’ to the plaintiff that which he unjustly gained at her expense . . .. And the notion of ‘getting back’ presupposes that the claimant previously held that to which she judicially is entitled. If she did not, then her entitlement is not restitutionary.17 12
Re BHT (UK) Ltd [2004] EWHC 201. Foskett v McKeown [2001] 1 AC 102 (HL). 14 Lord Goff of Chievely, ‘The Search for Principle’ Maccabaean Lecture in Jurisprudence, 5 May 1983 in W Swadling and G Jones, (eds), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (Oxford, OUP, 1999) 318. 15 M McInnes, ‘The Measure of Restitution’, above n 3, pp 177–78. 16 Ibid, p 178. 17 M McInnes “‘At the Plaintiff ’s Expense’: Quantifying Restitutionary Relief ”, above n 8, p 476. 13
150
What should ‘At the Expense of ’ Mean?
In response to Professor McInnes’ claim that ‘restitution’ should be aligned with a notion of ‘giving back’, two difficulties are apparent. The first, as Professor McInnes’ recognizes, is that in instances where restitution is awarded on the basis that a defendant is enriched by intercepting a gain legally bound for the claimant, the defendant is required to ‘give up’ rather than ‘give back’ an enrichment.18 Although it might be claimed that, legally speaking, in cases such as these it is as if the defendant has subtracted the enrichment from the claimant, and therefore is only giving back the benefit when ordered by the court to make restitution, this obscures what is, factually speaking, a clear case of ‘giving up’. The second difficulty is that any linguistic assertion that the word ‘restitution’ should be interpreted to mean one thing and not another, with the result that claims are rejected or accepted depending on whether they fall within the purported definition, cannot be accepted on face value. It is, of course, necessary to carefully define the scope of words when they are used as terms of art. But it is not up to the linguist to determine what a word should mean and then demand that legal consequences should flow from that definition. Rather, it is for the courts or the legislature to decide upon an appropriate term to describe an event or response—such as ‘restitution’—and expand or limit its scope based on substantive justifications for what the law ought to be. Just as the words ‘at the expense of ’ contain no one, indisputable meaning, the term ‘restitution’ is open to numerous interpretations insofar as it relates to the law of unjust enrichment. Whether it should be restricted to cases of ‘giving back’ rather than ‘giving up’ is open to debate. The point is that only by analyzing and balancing legal argument about the merits of interpreting ‘at the expense of ’ to mean ‘loss’ or ‘from’, can a conclusion be reached about the appropriate attribution to be given to the term ‘restitution’.
3. Windfalls Perhaps the most common justification used to support the argument that ‘at the expense of ’ should mean ‘loss’ not ‘from’ is that: ‘[t]he law of restitution is not intended to provide windfalls to plaintiffs who have suffered no loss.’19 While not entirely clear, what this suggests is that the claimant, if awarded restitution, will receive an unexpected sum of money. And more importantly, it will be a sum of money that puts the claimant in a better position than if the defendant had never been unjustly enriched. The problem with this argument, as already discussed in chapter 2, is that it fails to explain why, if the claimant should be denied restitution, the defendant should 18 M McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’, above n 8, p 699. 19 Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC) 1202, 193 (La Forest J).
Whenever Loss and Gain Do Not Equate
151
be permitted to retain the windfall. In other words, the windfall argument does not provide a positive reason why the defendant should retain the money in dispute.
4. Conservation of Judicial Resources While the ‘windfall’ argument does not, on its own, provide a reason why ‘at the expense of ’ should mean ‘loss’ rather than ‘from’, it may form the basis of other justifications. One such argument, presented by Professor McInnes, is that because both the defendant and claimant stand to receive a windfall gain, the money should remain with the defendant. That is because scarce judicial resources will be wasted in transferring money from one undeserving party to another. Professor McInnes puts the argument in these terms: To award relief in excess of the plaintiff ’s loss in a case of subtractive enrichment . . . is objectionable insofar as it leads to public cost without concomitant public benefit. Given that neither [party] . . . positively deserves the [money in dispute] . . . why should the community be forced to pay to transfer wealth from the defendant to the plaintiff? Why should [the plaintiff]. . . be encouraged to activate the legal process, and to generate societal expense, in order to achieve the socially neutral effect of redistributing the windfall . . . ?20
Kirby J in Roxborough v Rothmans Pall Mall21 agreed with this conclusion. In his opinion there was no reason why a windfall held by a defendant ‘who is undeserving’22 should be transferred to a claimant who is ‘equally undeserving’.23 Thus, he also concluded that there is no justification for the law to intervene when: ‘[T]he “transfer of an unjust enrichment from defendant to plaintiff ” would necessarily consume scarce judicial resources towards achieving an outcome that was equally meritless . . ..’24 The position adopted by Professor McInnes and Kirby J is persuasive when couched in these terms. There are however, three problems with their view.
(a) Are the Parties Equally Undeserving? The first problem is that the argument is based on a false premise. Professor McInnes and Kirby J wrongly assume that the claimant and defendant are always equally undeserving of the money in dispute. They reach this conclusion by focusing on the original financial positions of both parties rather than the circumstances 20 21 22 23 24
M McInnes “‘At the Plaintiff ’s Expense’: Quantifying Restitutionary Relief ”, above n 8, p 476. Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA). Ibid, p 560 (Kirby J). Ibid. Ibid, p 561 (Kirby J).
152
What should ‘At the Expense of ’ Mean?
in which the defendant received her gain or, if relevant, the claimant made good his loss. Consider, by way of analogy, the famous case of Armory v Delamirie.25 Even though the chimney-sweep in that case found a ring belonging to someone with superior title, this did not mean that his claim to possession was equivalent to the goldsmith’s apprentice. On the contrary, while the chimney-sweep and the apprentice were equally undeserving of the ring vis-à-vis its true owner, the chimney-sweep was more deserving of the ring than the apprentice. This was because the ring came into the chimney-sweep’s possession first in time. The only circumstances in which the argument regarding the preservation of judicial resources carries any weight is where the defendant has a claim which is at least equivalent to the claimant’s. The question of whether the defendant and claimant are equally entitled to the money in dispute in cases where the defendant has been unjustly enriched is discussed in detail in chapter 9.26 It is suggested that in many, but not all, cases the claimant’s entitlement should be considered superior to the defendant’s.
(b) What if the Claimant Incurs Some Loss? The second difficulty with this argument is that in circumstances where a claimant’s loss and defendant’s gain do not equate, the claimant may still have incurred at least some loss. This being so, on Professor McInnes’ terms, the claimant should be entitled to restitution in order to compensate him for the loss he suffered. As soon as this proposition is accepted, however, the argument concerning the preservation of judicial resources is defeated. That is because, irrespective of whether restitution of the defendant’s entire gain is awarded, or simply that portion which corresponds with the claimant’s loss, judicial resources will be expended. Consequently, Professor McInnes’ concerns about avoiding societal expense without any concomitant benefit can only apply in situations where the defendant has not incurred any loss. As the cases in chapter 6 showed, this is a very rare occurrence. And, even in those rare circumstances, the claimant is still likely to maintain that a loss has, in fact, been incurred.
(c) Difficulty in Proving Loss Suppose the defence of disimpoverishment is upheld in a case on the basis that (i) the claimant and defendant were equally undeserving of the money in dispute, and therefore (ii) scarce judicial resources should not be wasted in
25 26
Armory v Delamirie [1722] Stra 505. Text following, above n 33, ch 9.
Whenever Loss and Gain Do Not Equate
153
reallocating a windfall. The effect of such a decision can only be observed ex ante—in the future. That is to say, while the instant case may have been decided on the basis that scarce judicial resources should not be wasted, this cannot reverse the fact that judicial resources will have been consumed in resolving the dispute. The milk will have already been spilt. Thus, the utility of such a judgment will only be realized if it operates as a deterrent to prevent similar cases from being litigated in the future. The question which therefore arises is how effective, as a deterrent, is the possibility that a claim for unjust enrichment will be defeated on the basis that the claimant is as undeserving of the windfall as the defendant? The answer, in short, is ‘not very’. The reason for this, as explored in chapter 9, is that from an evidential perspective it is often very difficult for a defendant to prove whether or not a claimant has been successful in making good his loss by shifting the burden of it to a third party. Consequently, save for a few rare, clear-cut cases, the claimant will have an incentive to bring an action for restitution even if his loss has been made good. The high probability that the defendant will be unable to prove the extent of his loss ensures this. It follows from the three counter-arguments made about the need to preserve judicial or societal resources that this justification, when applied to specific cases or sets of circumstances, loses its initial appeal.
5. Presumption of Self-reliance The ‘windfall’ argument discussed above may, in addition to the preservation of judicial resources contention, support another justification for restricting the meaning of ‘at the expense of ’ to loss, rather than from. That is, the common law presumes self-reliance and non-accountability between people, and courts will not intervene in a personal dispute unless the claimant has established a complete and compelling reason for doing so. Thus, if the claimant’s and defendant’s entitlement to the money in dispute is equal, there is and should be a presumption in favour of the defendant to retain the disputed sum. The problem with this argument, like the one just explored and many in the following chapters, is that it presupposes that the claimant and defendant are in fact equally deserving of the money in dispute and therefore the claimant cannot have established a complete and compelling reason for seeking intervention of the courts. This cannot be assumed. Moreover, as will be discussed below, it is arguable that even when a defendant receives an enrichment without the claimant incurring a pecuniary detriment, this ought not prevent the claimant from bringing a claim for restitution. Put another way, there is an argument presented as to why the claimant, even when he has incurred no loss, may still be able to establish a complete and compelling reason for being awarded restitution based on the defendant’s unjust enrichment.
154
What should ‘At the Expense of ’ Mean?
E. ‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt The two arguments considered in this section relate exclusively to the situation in which the value of the defendant’s gain does not equate with the claimant’s loss at the moment of receipt. The need to undertake this analysis is heightened by the fact that none of the arguments presented in the preceding section provides a knock-down blow as to whether ‘at the expense of ’ should be interpreted to mean ‘loss’ (or, for that matter, ‘from’).
1. Symmetry with Restitution for Wrongs (a) Restitution versus Disgorgement for Wrongs One of the most important propositions contained in Dr Edelman’s book, GainBased Damages,27 is that restitutionary and disgorgement damages constitute two independent measures of gain-based recovery in the law of wrongs. While restitutionary damages require defendants to ‘give back’ wrongful transfers of value, disgorgement damages require defendants to ‘give up’ profits they wrongfully accrue. An example will help illustrate this. Suppose D steals £100 from C. Suppose further that D then gambles C’s money on a horse race, and wins £900 (in addition to retaining the £100). If C brings a wrongs-based claim to recover the value of D’s gain, the sum awarded would depend on whether C sought restitutionary or disgorgement damages. Restitutionary damages, being the value of what was transferred from C to D, would entitle C to £100 plus interest (the face and use value of the money). Disgorgement damages would enable C to recover £1000 (the total profit of D’s wrongdoing). While disagreement exists over how to appropriately label these two responses, that the two forms of recovery exist appears not to be in doubt.28
(b) Restitution for Wrongs and Unjust Enrichment Having delineated restitution and disgorgement for wrongs, Dr Edelman goes on to point out that the policy-basis and measure of recovery in cases of restitution for wrongs is the same as restitution for unjust enrichment. That is, the attainment of corrective justice. The measure of recovery being the value which was transferred from the claimant to the defendant. He puts it in this way: ‘Restitutionary damages for a wrong are the counterpart to restitution for an unjust enrichment.
27
J Edelman, Gain-based Damages (Oxford, Hart Publishing, 2002). Tang Man Sit v Capacious Investment Ltd [1996] AC 514 (PC); P Birks, Unjust Enrichment, above n 5, p 282. Cf A Burrows, The Law of Restitution, above n 6, pp 461–62. 28
‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
155
The award of restitutionary damages, like the award of restitution, focuses upon reversing a transfer of value.’29 Thus, for Dr Edelman, ‘restitution’ and ‘restitutionary damages’ are symmetrical. It is simply that one responds to the defendant’s unjust enrichment while the other responds to a defendant’s wrongdoing.
(c) The Implications of Symmetry Chapter 6 showed that there are very few, if any, cases in the law of unjust enrichment where restitution has been awarded in circumstances where the claimant has not incurred a loss. By contrast, there are numerous cases where restitutionary (not disgorgement) damages have been awarded to reverse wrongful transfers of value even though no loss has been suffered by the claimant. Thus, ‘at the expense of ’ has been understood to mean ‘from’, not ‘loss’. One example of where ‘at the expense of ’ in the wrongs sense has been interpreted to mean ‘from’ not ‘loss’ is the case of Yakamina Dairy Pty Ltd v Wood.30 Dr Edelman has explained the facts and decision as follows: The defendants had wrongfully depastured cattle upon land belonging to the plaintiff. The District Court of Western Australia held that the plaintiff had suffered no financial loss and could therefore recover no substantial damages. The plaintiff appealed directly to the Full Court of the Supreme Court of Western Australia and the court unanimously affirmed a line of authority that allowed recovery based upon a ‘wayleave’ although no financial loss had been suffered. It was held that a ‘reasonable remuneration’ should be awarded to represent the value of the beneficial use wrongfully transferred from the plaintiff.31
The implications of this case and others like it for the meaning of ‘at the expense of ’ in the law of unjust enrichment are far-reaching. That is because if restitutionary damages and restitution share the same philosophical underpinnings (restoration of the status quo ante) and measure recovery in exactly the same way (the value transferred from the claimant), then it follows that both responses should be symmetrical. This is so irrespective of the fact that two different events— wrongs and unjust enrichment—generate the response. If restitutionary damages for wrongs and restitution for unjust enrichment should be treated consistently, then ‘at the expense of ’ should be interpreted to mean ‘from’ not ‘loss’. That is because when restitutionary damages are awarded in the law of wrongs, of which there are numerous examples, recovery has not been capped by the value of the claimant’s corresponding pecuniary detriment. 29 J Edelman, “The Meaning of ‘Damages’: Common Law and Equity” in A Robertson, (ed), Law of Obligations: Connections and Boundaries (London, UCL Press, 2004) 38. 30 Yakamina Dairy Pty Ltd v Wood [1976] WAR 57 (WASC). 31 J Edelman, “The Meaning of ‘Damages’: Common Law and Equity”, above n 29, p 39.
156
What should ‘At the Expense of ’ Mean?
Rather, the defendant has been required to give back the value of her gain, irrespective of whether it exceeds the claimant’s loss. It therefore follows that if the claimant brought an action in unjust enrichment instead of wrongs in Yakamina Dairy Pty Ltd v Wood, symmetry would demand the same response. The defendant would be required to make restitution of its entire gain.
(d) Wrongs and Unjust Enrichment: Different Events The proposition that cases decided in the law of wrongs have the capacity to inform decisions based on the law of unjust enrichment is rejected by some scholars. Professor McInnes is one academic who appears to adopt this view. Consider the following statement made by him: As a matter of policy, it makes perfectly good sense to preclude the plaintiff in a subtractive enrichment case from recovering more than she lost, even though the same limitation does not apply in a case of wrongful enrichment. In the latter situation, there is a strong social value in stripping the defendant of his ill-gotten gain: no person should be able to profit from his own wrongdoing.32
One criticism that may be levelled at this argument is that it does not explain why a person should not profit from his own wrongdoing. Nor does it explain why a person should be allowed to profit as a result of receiving an enrichment in circumstances which are unjust. That is, it may be that the labels ‘wrongs’ and ‘unjust enrichment’ are disguising what might be consistent normative justifications for granting restitution in both areas of law. Although such a criticism appears entirely justified, Professor McInnes’ contention resonates on two levels. The first is that the philosophy underlying the law’s intervention in cases of unjust enrichment and wrongs do differ, despite occasional uniformity in their response. The law of wrongs responds to a claimant’s breach of duty, whereas the law of unjust enrichment responds to a claimant’s impaired or non-existent intent, or some other policy-motivated factor. Thus, for example, while the law of torts is concerned with vindicating a claimant’s proprietary interests in cases of trespass to land, restitution for unjust enrichment is concerned with protecting a claimant’s autonomy. This may also be said to be reflected in the defences available in the two actions, and the fact that the defence of disenrichment (also known as change of position) has not been accepted by courts in wrongs-based claims. The second level on which Professor McInnes’ response may find support is his contention, made in another context, that many if not all the cases Dr Edelman cites as examples of situations in which restitutionary damages have been awarded, can 32
M McInnes, “‘At the Plaintiff ’s Expense’: Quantifying Restitutionary Relief ”, above n 8, p 473.
‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
157
be alternatively analyzed as compensation-based claims.33 In Yakamina Dairy, for instance, it may be contended that, like in the lightship cases discussed in chapter 5, the claimant incurred a loss. A loss of his proprietary rights. Though a formal response to this contention is yet to appear, Professor McInnes’ argument, coupled with the first objection that the philosophical underpinnings of unjust enrichment and wrongs differ in important respects, demands that a cautious approach be taken to Dr Edelman’s proposed solution. It cannot, at this stage, provide an unequivocal justification for concluding that ‘at the expense of ’ should mean ‘from’.
2. Corrective Justice and Kantian Rights In the second section of this chapter it was shown that in circumstances where the defendant’s gain and claimant’s loss correlate, there are powerful reasons for making an award of restitution. These justifications rested on Aristotle’s conception of corrective justice. The question which here arises is whether this same analysis can be used to determine what should occur when the defendant’s gain and claimant’s loss do not equate.
(a) Corrective Justice on Aristotle’s Terms Although Aristotle does not appear to directly discuss what response should emerge in situations where the defendant’s gain exceeds the claimant’s loss, the answer may lie hidden in the text of Nicomachean Ethics. One possible interpretation of how Aristotle’s vision of corrective justice could be most faithfully applied in such circumstances is for the court to divide any surplus gain equally between the parties. This answer can be gleaned from the following passage: Now the judge restores equality; it is as though there were a line divided into unequal parts, and he took away that by which the greater segment exceeds the half, and added it to the smaller segment. And when the whole has been equally divided, then they say they have ‘their own’—ie, when they have got what is equal. The equal is intermediate between the greater and the lesser line according to arithmetical proportion. It is for this reason also that it is called just . . ..34 (emphasis added)
An example will assist in clarifying this interpretation. Suppose the claimant unlawfully takes the claimant’s bicycle for three weeks while the latter is on holiday. Presume the expense saved by the defendant amounts to £100. If a judge were to equalize the inequality between the parties according to the above notion of 33
M McInnes, ‘Book Review of J Edelman, Gain-based Damages’ (2004) 39 Canadian Business L J
146. 34
Aristotle, Nicomachean Ethics, above n 1.
158
What should ‘At the Expense of ’ Mean?
corrective justice, this ‘whole’ sum should be divided in half. Thus, the defendant would be required to pay over £50 to the claimant, while effectively retaining £50 for herself. This interpretation, however, is not the only plausible understanding of Aristotle’s vision of corrective justice. There is another interpretation which can be gleaned from Aristotle’s statement that ‘the just is intermediate between a sort of gain and a sort of loss . . . it consists in having an equal amount before and after the transaction.’35 One way in which these words can be understood is that corrective justice will be achieved so long as both parties to the litigation are returned to the positions they occupied prior to the defendant’s unjust enrichment. Put in terms of the stolen bicycle example, the defendant would be required to give up the value of her saved expense (£100), while the claimant would receive nothing. The surplus £100 would go to a third party, such as the state. Even if it is accepted that this or the previous interpretation is plausible, the question remains as to whether either is acceptable. It is submitted that they are not. The fundamental problem is that neither is consistent with possible understandings of the phrase ‘at the expense of ’. If the word ‘from’ is chosen to express the ‘at the expense of ’ requirement, then the entire enrichment must be returned to the claimant. By contrast, if ‘loss’ is chosen as the appropriate interpretation, the claimant will recover nothing. There is no justification, at this stage of the inquiry, for allowing the gain to be evenly divided or given up to a third party. Though this may be an equitable social solution, and one which a legislature may wish to provide for, there is no basis for the attainment of such results in the law of unjust enrichment as it currently stands. Consequently, Aristotle’s vision of corrective justice appears not to provide any assistance in deciding how ‘at the expense of ’ should be interpreted when the claimant’s loss and defendant’s gain do not equate.
(b) Corrective Justice through a Kantian Lens Despite the conclusion that Aristotle’s Nicomachean Ethics does not, on its own terms, provide a stable base from which the ‘at the expense of ’ requirement can be understood, it may nonetheless provide a suitable starting point for undertaking such an inquiry. This is certainly the view adopted by Professor Weinrib in his influential book, The Idea of Private Law.36 In The Idea of Private Law Professor Weinrib explains that Aristotle’s conception of corrective justice is inadequate because it postulates ‘a form of pre-transactional equality between the parties, but never elucidate[s] the nature of this equality.’37 In other words, Aristotle assumes that the parties are in some sense 35 36 37
Ibid. E Weinrib, The Idea of Private Law (Cambridge, MA, Harvard University Press, 1995). L Smith, ‘Restitution: The Heart of Corrective Justice’, above n 7, p 2119.
‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
159
‘equal’ before the relevant transaction or event takes place, and that for corrective justice to be achieved they have to be returned to this state. What form, however, does this equality take? Clearly the equality Aristotle had in mind was not just the material kind. In the first place, no two parties have equal holdings of wealth. Thus, the law cannot be concerned with equalizing their overall financial positions. Secondly, even if corrective justice was thought, more narrowly, to be concerned with restoring the parties to their original financial positions, the above discussion has shown that this cannot be achieved within the established unjust enrichment framework. If, for example, any surplus gain is evenly distributed between the parties, or transferred to a third party once the defendant and claimant have been returned to their original positions, material equality will be restored. However, it will only be restored by ignoring the important question ‘at whose expense did the unjust enrichment come?’. One of Professor Weinrib’s important achievements has therefore been to provide an answer to the question of how the claimant and defendant might, before the relevant transaction took place, be considered ‘equal’. By drawing on Kant’s concept of right, Professor Weinrib concludes that persons should be thought of as equal in the sense that they enjoy the same capacity to act as self-determining, free-willed human beings. Thus, if a defendant acts in a way which curtails the claimant’s capacity to act as a self-determining agent, or if a claimant transfers a benefit to a defendant when his capacity for self-determination is impaired, the status quo ante will have been upset. Corrective justice will therefore only be achieved when both parties are returned to the positions they were in before the relevant event or transaction took place. Crucially, Professor Weinrib tells us that these positions do not just reflect the parties’ material status, but their condition as persons who act as voluntary, autonomous, self-determining agents. An example drawn from the law of unjust enrichment will help illustrate these ideas. It will also assist in explaining why, when a defendant receives a benefit as a result of a claimant not acting as a self-determining agent, restitution must follow. Take the simple case of a claimant who mistakenly transfers £100 to a defendant. The claimant has not, in these circumstances, acted as a free-willed agent. That is because his intent has been vitiated or impaired by a mistake. Some may think that this, in itself, provides a sufficient basis upon which to make an award of restitution of £100 in his favour. There exists, however, an even more powerful justification for why the defendant must give up the £100 to the claimant. Professor McInnes explains it in the following terms: [T]he parties are equals initially, regardless of their material holdings, because they enjoy the same capacity for ‘self-determining agency’. In other words, they both have the ability to rise above natural inclination and to choose freely from amongst different courses of action. But in exercising such choices, a person is morally required to
160
What should ‘At the Expense of ’ Mean?
recognize the same ability in others.. . . By resisting liability, the defendant broadly asserts the right to retain [the mistaken payment of £100] . . . until he freely chooses to part with it. Contrary to the Kantian imperative, however, he thereby claims for himself a right that he is unwilling to extend to others. Since the plaintiff ’s intention in conferring the benefit was vitiated by error, her payment was not truly an instance of self-determining agency. Consequently, if the defendant cannot be forced into an involuntary transaction, the plaintiff cannot be held to hers. The [defendant’s] operative right must therefore be qualified. Expressed in universal terms, one is entitled to exercise the right of self-determination only over assets that were not themselves acquired in violation of the right of self-determination.38
The conclusion reached by Professor Weinrib, elegantly captured in the above passage by Professor McInnes, augments Aristotle’s theory of corrective justice using a powerful logic. The question as to why restitution is the appropriate response in circumstances where a claimant has acted under an impaired intent has only one answer. By requiring the defendant to give up the value of her gain both parties are returned to their pre-transaction positions as free-willed, self-determining agents. In other words, they are returned to the positions they were in before the relevant transaction occurred because the effects of the claimant’s behaviour are reversed. Underlying this outcome is the important principle (and assumption) that if a defendant wishes to be respected as a self-determining agent, she must, as a corollary, give up any enrichment received in direct consequence of a non-voluntary transfer. That is, she cannot resist non-voluntary or arbitrary subtractions of her wealth if, at the same time, she is unwilling to recognize another’s right to restitution of a transfer made non-voluntarily, without intent, or pursuant to an unlawful demand.
(c) No Intent It may be clear why, in terms of corrective justice, a defendant should be made to give up the value of any gain received from a claimant who has acted under a mistake. This does not, however, explain why restitution should follow in circumstances where the claimant’s intent has not been at all affected. In the case of the stolen bicycle, for example, the claimant never knew of the defendant’s unauthorized use. How then can it be said that the claimant’s intent was somehow impaired or vitiated and his Kantian right thereby infringed? The answer to this problem is found not by looking at the claimant’s state of mind, but the circumstances of his loss. As Professor Smith says, anything that belongs to someone represents an external manifestation of his or her ability to act as a self-determining agent.39 Thus, for a claimant to be deprived of something 38 39
M McInnes, ‘The Measure of Restitution’, above n 3, p 188. L Smith, ‘Restitution: The Heart of Corrective Justice’, above n 7, p 2140.
‘Gain’ Exceeds ‘Loss’ at the Moment of Receipt
161
which he owns is inconsistent with his Kantian freedom to use his wealth as he chooses. Consequently, even if a claimant is ignorant of the fact that a possession belonging to him has passed into the hands of another person, this does not alter the fact that his right to act as a self-determining agent will have been compromised.40
(d) Policy-based Restitution Restitution for unjust enrichment is not limited to cases where a claimant’s intent has been impaired or a possession of his denied him. Indeed, in chapter 3, cases were discussed in which restitution was granted on purely policy-motivated bases. How can these cases be squared with Kant’s concept of right and Professor Weinrib’s explication of Aristotle’s understanding of corrective justice? Professor Smith again provides the answer. He says that the flaw in the transaction is not the violation of the claimant’s Kantian right, but the infringement of some other norm.41 He explains that the violation often concerns: [A] norm of public law. For example, the law in England and Wales is that a payment of tax under ultra vires legislation is recoverable, even if the plaintiff made no mistake and was under no compulsion, and the defendant did nothing wrong. This liability supports the constitutional principle that there should be no taxation without legislative authority.42
Professor Smith points out, however, that the essential difference between violations of public norms and transgressions of Kantian rights, is that while a material gain and loss appears necessary for restitution to be awarded in the former, there is no such requirement in the latter.43
(e) When Gain and Loss Do Not Equate The focus of the above discussion has been on establishing the view that private law is concerned with protecting and defending ‘our ability to make choices in our lives and our corresponding duty to allow others to do the same.’44 The question remains, however, whether Aristotle’s conception of corrective justice viewed through a Kantian lens tells us how ‘at the expense of ’ should be interpreted when the value of the defendant’s gain exceeds the claimant’s loss. Professor Smith is of the opinion that the claimant’s recovery should be restricted by the value of his initial pecuniary detriment.45 In other words, ‘at the 40 41 42 43 44 45
Ibid, p 2142. Ibid, p 2144. Ibid. Ibid, n 118. Ibid, p 2117. Ibid, pp 2147–48.
162
What should ‘At the Expense of ’ Mean?
expense of ’ should mean ‘loss’, not ‘from’. The justification for this conclusion is that there is no nexus of transfer when a defendant’s material gain has not come from a claimant’s material loss. Consider again the example of the bicycle, unlawfully taken from the claimant while on holiday, and used by the defendant. Professor Smith would contend that restitution should be denied in these circumstances. All the defendant did was engage in a profitable wrongful act. He did not receive an unjust enrichment at the expense of the claimant because there was no nexus of transfer between the claimant and defendant. The difficulty with Professor Smith’s conclusion that there is no nexus of transfer when a defendant’s material gain does not result from a material loss suffered by the claimant is that it appears to overlook an important consideration. That is, the whole basis of Professor Weinrib’s corrective justice analysis is that it is not based on an understanding of the parties being in a state of ‘material’ or ‘financial’ equality. They are said to be equal only in the sense that they enjoy the same capacity to act as self-determining, free-willed agents. It therefore seems problematic that although we are concerned with non-material states of being at the first stage of the analysis (the parties’ pre-transaction status), we should only focus on material gains and losses at the second stage (post-transaction status). It is suggested that the better view is that the normative effects of a defective transaction should be given equal consideration throughout the inquiry. How might this approach change the analysis in cases where the claimant has suffered no pecuniary detriment? In the bicycle example cited above, it would mean that a nexus of transfer does exist between the claimant and defendant. In the first place, an asset representing an external manifestation of the claimant’s ability to act as a self-determining agent has been transferred to (in the sense of coming into the possession of) the defendant. Second, as a direct consequence of that transfer, the defendant receives a non-money benefit: the use of the claimant’s bicycle.46 And that gain is capable of being measured in money terms and being the subject of an award of restitution. Thus, the claimant has suffered a normative loss and the defendant has received a normative and material gain. In order for each party’s pre-transactional status to be restored, the material effect of the defendant’s normative gain should be returned to the claimant. This view, in contrast to Professor Smith, leads to the conclusion that Professor Weinrib’s analysis supports the claim that ‘at the expense of ’ should mean ‘from’, not ‘loss’, in the law of unjust enrichment. Thus, when one person receives a gain in consequence of another’s failure or inability to act as a self-determining agent, restitution of the value of that enrichment—the value of the transfer—should follow. It matters not that the infraction of the claimant’s autonomy resulted in no pecuniary detriment being suffered.
46
J Edelman, Gain-based Damages, above n 27, p 68.
‘Gain’ Increases After Receipt
163
3. Conclusion This section has been concerned with justifications for why, at the moment of receipt, ‘at the expense of ’ should be interpreted to mean either ‘from’ or ‘loss’. Two arguments were considered. The first was Dr Edelman’s view that restitutionary damages for wrongs and restitution for unjust enrichment should be treated symmetrically. That is because the same policy basis underlies both responses. Consequently, because restitutionary damages are awarded by reference to the defendant’s entire gain and are not restricted by the claimant’s corresponding pecuniary detriment, restitution should be measured in the same way. In other words, ‘at the expense of ’ should mean ‘from’ not ‘loss’. To accept Dr Edelman’s argument one necessarily has to accept the distinction he draws between restitutionary and disgorgement damages. One also has to accept that it matters not that restitution and restitutionary damages are responses generated by two different events. Finally, one has to accept that the cases of restitutionary damages relied on by Dr Edelman are not, in fact, instances of the court awarding compensatory damages. While the first of these propositions may readily be accepted, these two other difficulties mean that at this point, the argument that ‘at the expense of ’ must therefore mean ‘from’, cannot be unreservedly accepted. The second argument considered in this section was whether, according to Aristotle’s notion of corrective justice imbued with Kant’s concept of right, ‘at the expense of ’ should be interpreted as ‘from’ or ‘loss’. Those, like Professor Smith, who believe ‘at the expense of ’ should mean ‘loss’, contend that there is no nexus of transfer when a defendant’s material gain does not come from a claimant’s material loss. It is concluded, however, that consistent with Professor Weinrib’s analysis, a material gain that comes directly from a claimant’s person or assets, is sufficient to create a connection between the two parties. Simply put, ‘at the expense of ’ should mean ‘from’, not ‘loss’.
F. ‘Gain’ Increases After Receipt 1. Introduction (a) The Issue and the Perspectives Consider the following example. I make a fundamental mistake in paying you £100. Believing the money to be yours, you purchase shares in a company listed on the London Stock Exchange. The shares increase in value by a further £1000. If, some time later, I declare that I did not mean for you to have the £100, should I be entitled, in the law of unjust enrichment, to recover the £1000 as well as the £100?
164
What should ‘At the Expense of ’ Mean?
The answer to this question turns crucially on one’s understanding of the phrase ‘at the expense of ’. If, like Professors McInnes, Smith, Grantham and Rickett, it is taken to mean ‘loss’, the claimant’s recovery will be limited to the value of the initial transfer (£100) as well as its use value (measured by prevailing lending rates). If, like Mr Virgo, only some loss is necessary, £1100 will be recoverable.47 Alternatively, if it is understood to mean ‘from’, or more precisely ‘from my property, therefore from me’, as Professors Birks, Burrows and Chambers construe it, then the claimant will be entitled to the £1100. Finally, there is a fourth possibility. Though not yet mentioned in this chapter, it was referred to in chapter 5. It was there revealed that ‘from’, particularly in cases where a service is the source of the unjust enrichment, can be understood in two ways: by reference to the end product (of the service), or the market value of the service itself. Consistent with this understanding of ‘from’, it might be contended that in the above example, all that came ‘from’ the claimant was the investable fund of £100, and the use of that fund (measured by prevailing lending rates). Thus, restitution should be limited to this sum, and not include the £1000 profit earned by the defendant.
(b) Four Preliminary Matters Before considering which of these four interpretations is to be preferred, some preliminary matters need addressing. The first is the nature of the defendant’s unjust enrichment according to Professors Birks’, Burrows’ and Chambers’ understanding of ‘from’. It seems that, according to these academics, there is more than one source of a defendant’s unjust enrichment when she profitably invests a benefit transferred to her. Thus, in the case of the profitable sharemarket investment described above, there are two events. First, the receipt of £100 (in consequence of the mistaken payment). And second, the making of the unauthorized investment (‘no consent’ being the relevant unjust factor). The second preliminary matter is that a defendant may profitably invest the value of an unjust enrichment in two distinct situations. First, when property in the investable fund passes to the defendant (as will occur in an ordinary mistake case). One may maintain in such a situation, if the claimant were to generate a £1000 profit, that that money has come ‘causatively from’ the claimant. This, however, would be an extremely expansive understanding of ‘from’, and not one contemplated in this book. The second situation concerns situations when property in the investable fund is retained by the claimant (as may occur in a fundamental mistake case). It is only with this example that we are here concerned. That is because only in this context might it be contended by the claimant that the increased enrichment (the profit) generated by the defendant has come ‘from my 47 Mr Virgo, however, contends that restitution is awarded in these circumstances based on a vindication of one’s proprietary rights, not the defendant’s unjust enrichment.
‘Gain’ Increases After Receipt
165
property, therefore from me’. That is, it has come about in consequence of the claimant’s property being profitably invested. The third preliminary matter concerns the nature of claims where the value of the gain increases after receipt. These are not ordinary claims for restitution. They differ in at least two respects. First, the value of the defendant’s total enrichment is measured at the time of trial, not at the time of the defective transfer. Second, there are two sources, not one, of the increased gain: the investable fund and the skill and effort of the defendant. A tension, as is evident in the two opposing definitions of ‘from’ described above, therefore exists. Any profit generated by the defendant’s use of her initial unjust enrichment comes ‘from’ the claimant’s property, and also ‘from’ the defendant’s skill and effort. Finally, it will be recalled that at the conclusion of chapter 6 the cases FC Jones v Jones & Sons (‘FC Jones’) and Foskett v McKeown were discussed. It was there stated that Professors Birks, Burrows and Chambers believe that both decisions should be interpreted as being based on the law of unjust enrichment. Consequently, in their opinion, a claimant should be entitled to the defendant’s entire gain when the latter profitably uses an asset belonging to the claimant. This view was also said to be supported by the New South Wales Court of Appeal decision in Say-Dee Pty Ltd v Farah Constructions Pty Ltd and the series of American cases, exemplified by Fleer Corporation v Topps Chewing Gum Inc, where awards of restitution were made following reversal of erroneous orders. Professor Birks originally justified the claimant’s ability to recover profits in such cases on the basis that they were ‘interceptively subtracted’ by the defendant.48 Professor Birks has, however, now modified his view. Consistent with Professor Burrows, he contends that the claimant should be entitled to recover the defendant’s entire gain when it has come from the claimant’s property.49
2. What has Come ‘At the Expense of ’ the Claimant? One of the most forceful critics of the argument developed by Professors Birks, Burrows and Chambers, and by implication the decisions which support their view, has been Professor McInnes.50 In an article largely concerned with debunking Professor Birks’ contention that ‘interceptive subtraction’ provides a basis upon which a claimant is entitled to recover a defendant’s increased enrichment, Professor McInnes provided numerous reasons why there was nothing to support
48
P Birks, Unjust Enrichment (Oxford, OUP, 2003) 66–72. P Birks, Unjust Enrichment, above n 5, p 81, in response to M McInness, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’, above n 8, p 697; A Burrows, The Law of Restitution, above n 6, p 30. 50 M McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’, above n 8, p 697. 49
166
What should ‘At the Expense of ’ Mean?
an award of restitution of profits earned by a defendant in consequence of an unjust enrichment. Underlying these reasons was the contention that: The gist of the claimant’s action is not that he wants to get something back, nor that he wants to get something that was owing to him before the triggering event occurred. It is, much more broadly, that he wants to get something that he never would have enjoyed in the normal course of events.. . . That is rather more work than autonomous unjust enrichment is used to doing and it is far from obvious that such relief is warranted.51
Consistent with this view, and as already mentioned above, Professor McInnes contends that all that has come ‘at the expense of ’ a claimant in profitable investment cases is the value of the initial transfer plus its objective use value. Thus, in recognition of her skill and effort, the defendant should be entitled to retain any profit generated by her investment of the benefit initially transferred. Professor McInnes’ contention appears to rest on three, inter-related arguments. They are that there is (i) no normative justification for restitution in these circumstances; (ii) recovery would result in the unjust enrichment of the claimant at the expense of the defendant (and thus, the claim for restitution would be futile); and (iii) the claimant should not be permitted ‘to reach beyond his transaction with the defendant.’52 I shall consider each of these contentions, plus a number of others, before determining how ‘at the expense of ’ should be understood.
(a) The Normative Position The first of Professor McInnes’ arguments is that there is no normative justification in the law of unjust enrichment for recovery of additional profits earned by a defendant following the use of an asset belonging to another person. This contention rests on the assumption that restitution should only be awarded when the defendant’s gain and the claimant’s loss correspond.53 Although it is unquestionably true that in corrective justice terms the clearest case for restitution arises when the defendant’s gain and claimant’s loss equate, it does not follow that there is no basis for restitution when gain and loss do not correspond. As highlighted in the previous section, if one takes the view that a nexus can be established between the claimant and defendant even when their material loss and gain do not correspond, then a normative justification for restitution may exist when a defendant increases the value of her unjust enrichment. Thus, one must look to other, substantive, reasons for restricting recovery (to the value transferred) when a defendant profitably invests an unjust enrichment.
51 52 53
Ibid, p 703. Ibid, p 704. Ibid, pp 705–6.
‘Gain’ Increases After Receipt
167
(b) Unjust Enrichment at the Expense of the Defendant One such substantive reason—Professor McInnes’ second argument—is that if a claimant recovers profits generated by a defendant’s investment of her unjust enrichment, this would actually result in the claimant being unjustly enriched at the expense of the defendant. This is because the claimant ‘would take the benefit of services with which she [the defendant] did not freely part.’54 In practical terms, this would mean that if the claimant were awarded restitution of the defendant’s unjust enrichment (including any profit generated by her), the defendant would in turn bring a claim for restitution of the profits, earned by her, transferred non-voluntarily to the claimant. As a result, the claimant would end up with only the value of the enrichment initially transferred to the defendant, plus its use value. Thus, the claimant’s action to recover the defendant’ entire profit would be rendered futile and wasteful. Despite this argument’s obvious appeal, there is a difficulty with it. That is, it presupposes that the value of the defendant’s claim for restitution would exactly equal the value of the claimant’s unjust enrichment. But, as has already been explained, this need not be the case. There are two ways a person’s skill and effort can be measured: by the value of the end of product, or the market value of the labour provided. If it is the latter (a kind of assessment with which the law is already familiar55), the claimant will retain a significant percentage of the profit generated by the defendant’s use of her unjust enrichment. Consequently, his action for restitution would not be futile. Moreover, so long the defendant is compensated for any services with which she did not freely part, her Kantian right to act as an autonomous, self-determining agent will be respected. It must be stated immediately, however, that Professor McInnes was keenly aware of the two contrasting methods of valuing the defendant’s skill and effort. He stated that: There is room for disagreement regarding the calculation of the defendant’s counterclaim . . .. [One can argue that] the entire profit belongs to the defendant and the claimant merely receives the return of the principal sum plus compound interest. An alternative analysis, however, might emphasize the claimant’s enduring interest in the principal sum. From that perspective, the proper analogy might be a case in which the defendant provides financial advice . . .. If so, the defendant should not receive the resulting profit, but rather a fee for advice and services.56
In the end, however, Professor McInnes concluded that the value of the defendant’s skill and effort must be calculated by reference to the entire profit generated, not 54
Ibid, p 703. Boardman v Phipps [1967] 2 AC 46 (HL). 56 M McInnes, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’, above n 8, p 704, n 29. 55
168
What should ‘At the Expense of ’ Mean?
the market value of equivalent advice or services. An important justification for this is presented in his final argument.
(c) Directness The third premise upon which Professor McInnes’ view is based is that the claimant should not be permitted ‘to reach beyond his transaction with the defendant.’57 In other words, the claimant must show that he is directly connected with the defendant’s enrichment, and that ‘since the profit arose between the defendant and a third party, it would be inaccessible to the claimant.’58 The attraction of the directness argument is that it provides a clear and logical limit to a claimant’s entitlement in an action for restitution. It avoids the ambiguity, inherent in the proposition ‘from my property, therefore from me’, that a claimant may be entitled, years down the track, to restitution of money generated by a defendant’s reinvestment of profits first derived from her unjust enrichment. Thus, it provides a simple and seemingly equitable solution to the case of a defendant who finds a £100 note (belonging to the claimant), who invests that sum and doubles her money, and then uses the £100 profit to develop, over a considerable period of time, a large portfolio of assets. If a directness requirement is imposed, the claimant who lost his £100 note is only entitled to recover that sum of money, as well as its use value, ‘most convincingly measured by reference to commercial lending rates.’59 The argument as to directness also recognizes, indirectly, that when a defendant generates a profit in consequence of being unjustly enriched at the claimant’s expense, there are self-evidently two sources of that profit. The first is the value of the defendant’s unjust enrichment. The second is the defendant’s skill and effort in profitably investing that unjust enrichment. How a defendant should be recompensed for that skill and effort, thereby reducing the value of the claimant’s claim for restitution, is then a matter of contention. On the one hand it may be argued that the defendant’s contribution should be calculated by reference to the market value of the service provided (for example, the cost of investment advice), on the other it may be maintained that the defendant’s contribution should be determined by the value of the resultant end product (for example, the investment proceeds). Professor McInnes contends that the latter approach is preferable. It avoids any concerns about indirect recovery, while ensuring that the claimant is left no worse off as a result of the defendant’s unjust enrichment. That is because, as already stated, the claimant will be entitled to restitution of the original unjust enrichment plus its use value.
57 58 59
Ibid, p 704. Ibid. Ibid.
‘Gain’ Increases After Receipt
169
(d) The Transfer It was explained in chapter 5 that the law of unjust enrichment is concerned with the reversal of defective transfers. And it is the value of the transfer that must determine the measure of the claim (subject, of course, to defences). This would seem to present a difficulty for those who suggest that the law of unjust enrichment should entitle a claimant, in cases such as FC Jones, to the value of the asset transferred, as well as any profit generated from its use. That is because the value of an asset’s earning capacity, when defined by reference to profits generated by the defendant, can only be ascertained long after the defective transfer takes place. By contrast, the technique for measuring the market value of the use or hire of an asset (for instance, commercial lending rates) can be identified at the time of the defective transfer. And it is this technique that is consistent with the general rule that a claim in unjust enrichment crystalizes, and is to be measured, upon the defendant receiving an enrichment, at the expense of the claimant, pursuant to an unjust factor. This approach is supported by the fact that when a defendant generates a profit from the use of her unjust enrichment, the relevant event (the unjust factor) is not the receipt of that profit, but the initial investment of the unjust enrichment without the claimant’s consent. Thus, rather than looking to the result of the nonconsensual investment to determine the value of the claimant’s action for restitution (a process that is entirely contingent on a positive return from that investment), one should focus on the event, giving rise to the defendant’s unjust enrichment, occurring at the time of the transfer. And, when one takes this approach, the only conceivable response to the question of what the defendant received at the time of her unauthorized investment, is the use of an investable fund free of charge. And this use, as Professor McInnes contends, is to be measured by reference to commercial lending rates. This argument suggests that if the ‘at the expense of ’ element is to be defined by reference to the term ‘from’, the integrity and coherence of this term is best maintained by ensuring its focus remains steadily on the defective transfer, and the means for valuing it, at the time it occurred.
(e) Symmetry (of Risk) with the Defence of Disenrichment Although the arguments thus far presented do not support the broad interpretation of ‘from’ adopted by Professors Birks, Burrows and Chambers, a requirement of symmetry with the defence of disenrichment may provide the necessary riposte. Whenever a defendant is unjustly enriched at the expense of a claimant, the claimant will, prima facie, be entitled to restitution of the benefit received. However, in some circumstances, recovery will be denied. One of those is when the defendant has, in good faith, disenriched herself. Restitution is therefore not absolute. It is restricted by the value of the defendant’s unjust enrichment surviving.
170
What should ‘At the Expense of ’ Mean?
A startling aspect about the defence of disenrichment is that an entirely blameless claimant may be denied restitution, even though the defendant may have received a benefit from consuming the gain transferred to her. The law, in these circumstances, has chosen to favour the defendant’s security of receipt over the claimant’s right to restitution. Thus, the risk of being left ‘out of pocket’ is placed on the claimant, not defendant. If the risk of non-recovery in cases of disenrichment is placed on the claimant, it seems, on its face, both fair and appropriate that the claimant should also accrue the benefit of any ‘increased enrichment’. Thus, if the defendant doubles the value of her unjust gain, provided she is compensated for her skill and labour, the claimant should be awarded restitution of the remaining sum. In this way, an honest defendant is never left worse off as a result of being unjustly enriched, and a claimant will receive the value of any profits made via the use of his wealth. In short, if the claimant bears the risk of losing his money to an honest recipient, he should also gain from any increase in value of the benefit transferred. Though seemingly compelling, this argument is, in fact, seriously flawed. One need only look to the policy underlying the defence of disenrichment to understand why. Although one of the effects of the defence of disenrichment is to leave no defendant worse off as a result of her entirely blameless unjust enrichment, the defence’s purpose is to actually ensure the defendant’s security of receipt and prevent the sterilization of wealth. That is, an innocent defendant must be able to deal with funds in her possession without fear that, at some point in the distant future, she may have to find the resources to refund a claimant from whom she unwittingly received an unjust enrichment. Moreover, when operating in an economic system dependent on investment and entrepreneurship for continued growth, it would create massive waste and inefficiency by implicitly demanding that people or business enterprises keep secure funds of money to meet future, but presently unknown, claims for restitution. To reiterate the point, the allocation of the burden of risk in unjust enrichment cases, and in particular in consequence of the defence of disenrichment, is an outcome of the policy that ensures security of receipts. It is not a justification for that defence, and therefore cannot form the basis of a contention, based on symmetry, that a claimant should be entitled to any profits generated from the unauthorized use of his property. In fact, to the contrary, the policy of security of receipts would tend to support the argument that an innocent defendant should not only be shielded from a claim for restitution if she dissipates her unjust enrichment (subject to certain exceptions), but also protected from a claim for restitution of money generated from the profitable investment of money she thought belonged to her. The other problem with the argument of symmetry of risk is that it does not account for the fact that there are situations in which a profit may be generated by a defendant without the claimant’s money ever being ‘on risk’. A simple example is of a defendant who knows that the money belongs to the claimant. In this case
Conclusion
171
the defence of disenrichment would not be available to the defendant. It therefore follows that the claimant cannot use the fact that his money was ‘on risk’ to recover any profit made by the defendant’s use of her unjust enrichment.
3. Conclusion The arguments considered in this section concerned the situation in which the value of the defendant’s gain exceeds the claimant’s loss because, after receipt, the defendant increases the value of her unjust enrichment. Some of the justifications drawn from Professor McInnes’ work that support the view that a claimant should not be entitled to restitution of increased gains were shown to be powerful, but not insurmountable. They included the fact that restitution would result in the unjust enrichment of the claimant and that there was thought to be a normative justification for the defendant’s retention of any profits generated by her. More compelling were the contentions that the claimant should only be entitled to restitution of funds received directly at his expense and that the means for measuring an award of restitution should be ascertainable at the time of the defective transfer. Put another way, it is the event giving rise to the defendant’s unjust enrichment, not the result or proceeds of that event, which should form the basis of a claim for restitution. Finally, these arguments were thought not to be defeated by the contention that symmetry with the defence of disenrichment, and the attendant allocation of the burden of risk, required the defendant to give up the value of any profits generated by use of her unjust enrichment. The allocation of the burden of risk in unjust enrichment cases was shown to be an outcome of the policy relating to security of receipts. It did not provide an independent foundation for restitution of the defendant’s entire gain. Although it follows from this conclusion that the expansive view of the term ‘from’, supported by Professors Birks, Burrows and Chambers, should be rejected, it does not mean that ‘at the expense of ’ must be interpreted to mean ‘loss’. Rather, it simply demands that ‘from’ be defined more narrowly. In cases where a defendant profitably invests an unjust enrichment (property belonging to a claimant), an award of restitution need only comprise the value of the initial transfer and the use value of that asset.
G. Conclusion The purpose of this chapter was to review various arguments about whether ‘at the expense of ’ should be interpreted to mean ‘loss’ or ‘from’. Many of the arguments presented were found to be erroneous or based on false assumptions.
172
What should ‘At the Expense of ’ Mean?
Some, however, were considered rational and persuasive. And these supported the view that a claimant should be entitled to restitution irrespective of whether he has incurred a loss. If it were clearly and incontestably established that ‘at the expense of ’ means ‘from’ not ‘loss’, it would follow that the defence of disimpoverishment should not form part of the law of unjust enrichment. That is because consistency demands that ‘at the expense of ’ should be interpreted to mean ‘from’ across the whole law of unjust enrichment. Disimpoverishment can have no role where impoverishment, ie, loss, is not an initial requirement. Although the arguments in this chapter supported the view that ‘at the expense of ’ should be understood as meaning ‘from’, there are still two reasons for turning to other arguments for and against the defence of disimpoverishment to ascertain its validity. First, the arguments as to the meaning of ‘at the expense of ’ were finely balanced. It is not inconceivable that a court may take the view that the value of a claimant’s ‘loss’ should cap any award of restitution. And second, any statutory recognition of the defence of disimpoverishment need not rest on a particular judicial interpretation of ‘at the expense of ’. Thus, it is to the arguments for and against the defence, according to its merits, that we must now turn.
Part III
Other Reasons to Reject or Accept the Defence of Disimpoverishment The purpose of Part III of this book is to ascertain whether there are any other arguments (that is, other than the meaning of ‘at the expense of ’) which justify acceptance or rejection of the defence of disimpoverishment. The arguments which favour acceptance of the defence are considered in chapter 8. Reasons for rejecting the defence are explored in chapter 9. At the conclusion of chapter 8 the view is expressed that at least some scope for the defence of disimpoverishment exists. In chapter 9, however, any potential basis for acceptance of the defence is rejected. A number of arguments are said to support this contention.
8 Other Arguments for Accepting the Defence of Disimpoverishment A. Introduction At the outset of part two of this book it was stated that unless a claimant is required to show that he suffered a loss, the defence of disimpoverishment cannot logically form part of the law of unjust enrichment. At the conclusion of chapter 7 the view was expressed that the claimant need not incur a loss as a condition of liability. Despite this, for reasons already enunciated, consideration must still be given to other bases which have or may be used in support of the defence of disimpoverishment. From here on, it will therefore be assumed that, insofar as the common law is concerned,‘at the expense of’ means by ‘loss to’ the claimant and not ‘from’ the claimant. Six arguments which support inclusion of the defence of disimpoverishment in the law of unjust enrichment are contained in this chapter. The first five are explored under the heading ‘false bases for accepting the defence’. That is because none of the arguments, upon close examination, are considered compelling. It is only the final argument, explored under the heading ‘a legitimate basis for accepting the defence’, that is persuasive. It suggests that when the claimant has made good his loss by being unjustly enriched at the expense of a third party, the claimant and defendant will be equally undeserving of the money in dispute. Thus, in these circumstances, it is contended that restitution to the claimant should be denied in order to preserve precious judicial resources and uphold the general policy that the law should not intervene in private disputes without a positive reason for doing so.
B. False Bases for Accepting the Defence 1. Inflation Reduction In most situations in which a defendant is unjustly enriched at the expense of a claimant, the claimant, prior to restitution, will have incurred a pecuniary
176
Other Arguments for Accepting the Defence of Disimpoverishment
detriment. Chapter 2 explored the numerous ways in which the effect of such a financial expense may be dispersed (‘made good’) by a claimant. One technique might be to reduce expenses. Another may be to increase revenue. If the later method is chosen, and the means by which this is achieved is to increase the price of goods or services provided by the claimant, there will be two kinds of ramifications. On a micro level, individual consumers will have to spend a greater proportion of their disposable income if they wish to maintain pre-existing purchasing patterns. On a macro level, price rises will contribute to an increase in the level of inflation.1 While inflation does not always impact negatively on an economy, there is general agreement that it can bring about individual and national disadvantages. For example, it can cause greater disparity in the distribution of income. This is because some people’s wages or incomes adjust more slowly to an increase in inflation than others. Those whose income is adjusted only once per year suffer from a relative diminution in purchasing power vis-à-vis those whose income is adjusted more frequently. Inflation can also cause all kinds of other damage. It may, for instance, result in (i) a country’s international trade competitiveness declining, (ii) the inefficient re-allocation of resources when time is spent protecting an asset’s value, (iii) money being replaced by a less efficient medium of exchange, or (iv) a rise in interest rates and subsequent reduction in capital investment. It is arguable that the introduction of a defence of disimpoverishment into the law of unjust enrichment would serve two purposes in relation to the deleterious effects of inflation. First, as a point of principle, the negative activity of a claimant shifting the cost of a defendant’s unjust enrichment to third parties via a price increase would be condemned, not condoned. Second, it would have the instrumental effect of discouraging persons or companies from seeking to make good losses via price increases. This would reduce the incidence of price rises throughout the economy, thereby minimizing the harmful effects of inflation. Moreover, it may in fact promote economic growth and higher living standards should a company seek to maintain existing profit levels via a business innovation or production of a new technology. The problem with this argument, like all of those considered in this section, is that its logic and persuasiveness is more apparent than real. There are four main reasons why. First, the likelihood that a defence of disimpoverishment would serve as an effective deterrent in preventing persons or companies from passing on costs via higher prices is very small. Consider the example of a newly imposed tax. In the majority of cases such levies are imposed lawfully. A rational businessman or businesswoman would therefore never avoid raising prices as a means of making
1 The impact on inflation will depend on the level of the price increase, the particular product’s volume of sales, and its Retail Price Index weighting.
False Bases for Accepting the Defence
177
good his loss if only a remote possibility existed that the tax was illegally imposed and therefore recoverable. The second reason why a defence of disimpoverishment should not be introduced to avoid the deleterious effects of inflation is that it may cause unforeseen economic harm. If companies are deterred from maintaining profits by increasing prices they may find it necessary to wind down their activities—partially or entirely. This would result in lower tax receipts for the government, reduced competition in the market in which they were operating, and an inefficient reallocation of resources. A third reason why this argument is unpersuasive is that governments already have the power to freeze prices—either generally or in response to a new tax. For example, introduction of a goods and services tax in Australia was accompanied by a statute which prohibited companies from increasing prices by more than the value of the tax.2 There is no need to introduce a defence of disimpoverishment to prevent inflation when it can be done far more effectively and transparently by other means. The final reason for rejecting the defence of disimpoverishment on the basis that it will help reduce inflation is that if the logic of this argument is accepted, it should be applied in all cases where prices are increased. In other words, even if the claimant has attempted but failed to make good his loss, restitution should be denied. This is because prices, and hence the rate of inflation, will still have increased. However, the difficulty with this conclusion, as already explored in chapters 2 and 4, is that the defendant will remain unjustly enriched at the expense of the claimant. This is because the defendant’s gain will have come at a (continuing) loss to the claimant. There is no reason why, in these circumstances, concerns over inflation should preclude recovery. In conclusion, while it may appear that a positive side-effect of introducing the defence of disimpoverishment would be the reduction of inflation and problems associated with it, this conclusion is unfounded. Not only will rational economic actors be undeterred about raising prices to maintain or increase profit margins, but the logic and structure of unjust enrichment law will be preserved if inflation is controlled by other more effective and transparent means.
2. Third Parties Incur Two Losses A novel argument first raised by counsel for the defendant in Amministrazione delle Finanze dello Stato v SpA San Giorgio3 sought to establish a basis for the defence of disimpoverishment on the premise that, without it, innocent third
2 3
Trade Practices Act (Cth) 1974s 75AU. Case 199/82 Amministrazione delle Finanze dello Stato v SpA San Giorgio [1983] ECR 3595.
178
Other Arguments for Accepting the Defence of Disimpoverishment
party consumers would suffer an undeserved loss twice over. The substance of this argument is as follows. Whenever a tax is imposed on a retailer and the cost of this tax is passed on to consumers in the form of higher prices, these consumers are necessarily left worse off. This is because they are required to spend a greater proportion of their disposable income on a particular good or service. By contrast, the retailer is (presumed to be) left no worse off as a result of the tax, while the government will benefit from an increased revenue stream. This scenario captures the ‘first loss’ incurred by consumers as a result of the government’s imposition. The ‘second loss’ which may be undeservedly imposed on consumers arises whenever the defence of disimpoverishment cannot be relied on by the State to defeat a claim for restitution. If it transpires that the imposition of tax has been unlawful and the claimant retailer is entitled to restitution of the State’s unjust enrichment, those consumers who suffered once, will be affected again; this time in their role as taxpayers. That is because the State must find the funds to repay the claimant pursuant to his entitlement to restitution. If the State has to raise further taxes to do this, part of the burden will fall on the consumers who bore the cost of the government’s original unjust enrichment. In short, certain third parties will incur two losses if the government cannot rely on the defence of disimpoverishment—first in their role as consumers and second in their role as taxpayers. While this argument might be considered ‘ingenious’,4 it is nonetheless flawed. This is because the relevant consumers only appear to, but never actually, suffer from an undeserved loss twice over. The primary reason why a consumer never suffers from an undeserved loss twice over rests on the nature of the ‘first loss’. The term ‘undeserved’, as used in this context, is emotive and misleading. While it is true that consumers may have paid a higher than necessary price for goods or services, it does not follow that their loss is ‘undeserved’ in the sense that it demands the intervention of a court. When a consumer purchases a product, albeit at an inflated price, if he or she cannot point to wrongdoing by the seller or show that his or her intention was vitiated or qualified, no legal cause for complaint arises. He or she, pursuant to an unimpeachable contract, will have received exactly what was bargained for. Thus, consumers do not suffer a relevant detriment as a result of paying a higher than necessary price for goods or services. Either the loss was never incurred (because the contract was legally enforceable), or is recoverable (because the consumer has a wrongs or unjust enrichment-based claim). There are three further reasons why a consumer never suffers from an undeserved loss twice over. These reasons focus on the misconception that customers pay a second time (in their role as taxpayers) when the government, pursuant to a court order, is required to repay unlawfully collected taxes to the claimant. 4
Ibid, p 3627 (Advocate General Mancini).
False Bases for Accepting the Defence
179
The first of these reasons concerns the fact that the government’s coffers may, at the time of the court order, remain swollen by tax receipts received from the claimant. If this is so, the government will never be required to extract extra funds from taxpayers to meet a claim for restitution. The second reason why customers are never inflicted with an undeserved loss twice over is because even in circumstances where unlawful tax receipts no longer swell the government’s coffers, the State may be entitled to rely on a defence of disenrichment.5 If so, this will negate the claimant’s action for restitution. There is a final reason why consumers never incur a double loss. This reason persists even in circumstances where (i) the government’s coffers are not swollen by unlawful tax receipts, (ii) a defence of disenrichment is unavailable, and (iii) the government has to raise additional taxes to repay the claimant. The argument here being that the net detriment suffered by the consumer will be one loss, not two. This is because if unlawful tax receipts no longer swell the government’s coffers, the relevant money must have been spent by the State on the provision of community services. Thus, while a consumer may have suffered two losses, one of those will have been returned in the form of a government benefit (however that may manifest itself). In conclusion, while certain consumers may appear to be sometimes inflicted with an undeserved loss twice over, this situation never, in fact, arises. Consequently, proponents of the defence of disimpoverishment must look elsewhere to support their claim that it be accepted as part of the law of unjust enrichment.
3. Symmetry with the Defence of Disenrichment The defence of disenrichment, widely referred to as ‘change of position’, protects a defendant from having to return the value of a gain received but not retained.6 To put it another way, if a defendant would not have acted in such a way but for her receipt of the benefit, her obligation to make restitution will be reduced by the extent of her surviving enrichment. Because the defence of disenrichment, just like the defence of disimpoverishment, is concerned with a defendant bringing to account dealings which (i) are causally connected to her enrichment, and (ii) reduce her restitutionary liability, it is arguable that for reasons of symmetry the defences should co-exist in the law of unjust enrichment. A desire for symmetry in the law is based on a belief that consistency is important. However, this desire must be tempered by the requirement that like cases 5 Cf P Birks, ‘Restitution from the Executive: A Tercentenary Footnote to the Bill of Rights’ in P Finn, (ed), Essays on Restitution (Sydney, The Law Book Company, 1990) 164, 200–1. 6 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL); Scottish Equitable plc v Derby [2001] 3 All ER 818 (CA); David Securities Pty Ltd v Commonwealth of Australia (1992) 175 CLR 353 (HCA); Storthoaks Rural Municipality v Mobil Oil Canada Ltd (1975) 55 DLR (3rd) 1 (CSC).
180
Other Arguments for Accepting the Defence of Disimpoverishment
should only be decided alike if the fundamental principle underpinning the original decision is both credible, and shared by the latter case. It is submitted that while on the face of it the defences of disenrichment and disimpoverishment operate in similar situations, the justifications for supporting the former, are not present in the latter. Thus, the law of unjust enrichment should not accept the defence of disimpoverishment on the basis that consistency with the defence of disenrichment demands it. There are two reasons why this is so. The first reason, which goes more to the nature rather than substance of the two defences, is that the defence of disenrichment is distinguishable from the defence of disimpoverishment on the basis that it focuses on the defendant’s enrichment as opposed to the claimant’s loss. Thus, with the defence of disenrichment, the defendant is not required to make restitution when her assets are no longer swollen by the benefit received. By contrast, the defence of disimpoverishment is directed at ensuring that the claimant is only awarded restitution when he has suffered a corresponding pecuniary detriment. The second factor which distinguishes the two defences is that the defence of disenrichment is concerned with the security of receipts. The reason being, as Professor Birks says, is that: ‘There is a general interest in our being able to freely dispose of that wealth which appears to be at any one time at our disposition. Otherwise wealth would be sterilized in contingency funds and special insurance premiums, to guard against the danger of unexpected restitutionary claims.’7 The problem, of course, with sterilizing wealth and having to meet new insurance premiums, is the inefficient allocation of resources. The opportunity to promote economic activity through the funding of research and development or capital investment expenditure is potentially forsaken. These same concerns are not apparent insofar as the defence of disimpoverishment is concerned. In these cases the claimant receives nothing, so the law does not have anything to protect. Moreover, the defence of disimpoverishment, unlike the defence of disenrichment, actually has the potential to stifle economic activity and promote the misallocation of resources. For example, suppose a claimant realizes that he mistakenly paid £10 million to a defendant only hours after the transaction took place. If the claimant is also aware that the defence of disimpoverishment forms part of the law of unjust enrichment, he will have no incentive to make good his detriment prior to trial. This is because if he manages to reduce his loss in the intervening period, the value of his claim for restitution will be reduced, and thereby leave the defendant better off. In conclusion, while the defences of disimpoverishment and disenrichment are alike in that they are both concerned with events causally related to the defendant’s gain, it is submitted that this similarity does not justify incorporation of the 7 P Birks, The Foundations of Unjust Enrichment: Six Centennial Lectures (Wellington, Victoria University Press, 2002) 130.
False Bases for Accepting the Defence
181
defence of disimpoverishment in the law of unjust enrichment. The claimant’s disenrichment is accepted as a defence to an action for restitution for reasons which are not reflected by the defence of disimpoverishment.
4. Litigation Chains A further unfounded justification for admitting the defence of disimpoverishment in the law of unjust enrichment is that, without it, awards of restitution may give rise to unwieldy, costly and pointless chains of litigation.8 The circumstance in which a ‘litigation chain’ may arise is as follows. Suppose D imposes a new (unlawful) tax of £10 per head of cattle sold by C, a grazier. Suppose further that whenever C sells his cows to X, the owner of a tannery, he passes on the cost of the cattle tax as an itemized expense. Then, when X produces leather from the cow’s hide and sells it to handbag and shoe manufacturers, Y1, Y2 and Y3, he too passes on the cost of the £10 tax by dividing it equally between each manufacturer. The ‘passing on’ of the tax may feasibly continue until the original £10 is finally borne by end consumers. The reason why such a sequence may develop into a ‘litigation chain’ is because if C is awarded restitution from D on the basis of an unlawful demand for tax, this may result in a right of recovery vesting in X, followed by Y1, Y2 and Y3, and so on. By contrast, if C’s action in unjust enrichment is denied on the basis of his disimpoverishment, the very first link in the chain will be broken and downstream litigation averted.
(a) Limited Application The question of whether litigation chains are a bad thing, and if so whether the defence of disimpoverishment is the appropriate mechanism for dealing with them, cannot be answered without considering the circumstances in which they arise. In this context, the first thing to note is that litigation chains are unlikely to be encountered outside unlawful taxation cases. That is because each link in the chain must amount to an actionable unjust enrichment claim, and the only foreseeable reason why a sub-sub-purchaser may have a claim for restitution against a sub-purchaser, is if the sub-purchaser included the cost of the unlawful tax as an itemized element of the final price. Otherwise, it is almost inconceivable that an invoice would ever reveal, as part of the product price, a cost which is referable to the unjust enrichment of a defendant. This is because the claimant, at the time of passing it on, would have had no reason for identifying it separately.9
8 M McInnes, “‘Passing on’ in the Law of Restitution: A Re-consideration” (1997) 19 Sydney L Rev 179, 206. 9 The same conclusion was reached in National & Provincial Building Society v Customs & Excise Comrs [1996] V&DR 153.
182
Other Arguments for Accepting the Defence of Disimpoverishment
The circumstances in which a litigation chain may arise are limited not only to taxation cases, but also situations in which the claimant makes good his loss by expressly shifting it to a third party. As was shown in chapter 2, there are numerous ways a claimant can restore his original financial position following a defendant’s unjust enrichment at his expense.10 For example, a claimant may reduce costs by targeting wasteful business practices, or increase revenue by extending his trading hours. The fact that litigation chains will only arise in the context of unlawful tax cases, and even then be limited to situations in which the claimant’s loss is expressly passed on to third parties, means that the argument is of restricted value insofar as the defence of disimpoverishment is concerned. In other words, general adoption of the defence of disimpoverishment is unacceptable so long as it is imported on the basis that litigation chains are wasteful and must be prevented.
(b) In Support of the Defence of Disimpoverishment Even if the foregoing caveats are accepted, the question remains as to whether reasons exist for introducing the defence of disimpoverishment in circumstances where litigation chains may arise. The main argument in favour of the defence’s adoption is that: As a cost is passed down a chain of purchasers, it is apt to become increasingly widely dispersed; as each purchaser in turn becomes a vendor, he is apt to sell to several new purchasers, and so on. At some point, individual purchasers will have little at stake and simply will allow unjust enrichments to lie where they fall. However, before the chain of litigation comes to an end, it may generate considerable costs for the legal system.11
While this justification is convincing, once the assumptions on which it is based are exposed, reasons for adopting the defence of disimpoverishment as a means of overcoming it, disappear.
(c) Unsupported Fears and Conclusions The first controvertible premise on which the above argument rests is that individual purchasers will ‘allow unjust enrichments to lie where they fall’. There are two reasons why this may not occur in practice. First, not all production chains are long. Thus, not all taxes are widely dispersed along it. Many production chains, such as in the services sector, consist of only one or two levels. Moreover, even in some industries where extensive production chains exist, it will not always be the case that a tax will be imposed upstream. It may just as frequently be imposed downstream, on retailers, who are only one step removed from the end consumer. 10 11
See text immediately preceding and following, above n 16, ch 2. M McInnes, “‘Passing on’ in the Law of Restitution: A Re-consideration”, above n 8, p 206.
False Bases for Accepting the Defence
183
The second reason why individual purchasers may not let unjust enrichments lie where they fall is because they could, in fact, have a sufficient financial incentive to bring a claim for restitution. Even if a tax is widely dispersed, it does not necessarily follow that the effect on the end consumer will be inconsequential. This is because the product being purchased may be a piece of extremely expensive capital equipment, not a handbag or pair of shoes. Furthermore, even if it is only shoes or handbags at issue, if consumers are able to bring representative proceedings at little or no cost, they may be incentivized to commence unjust enrichment actions. A final problem with introducing the defence of disimpoverishment in this context is that persons with legitimate claims to restitution will be denied recovery in favour of the ‘greater good’. Every court process involves some cost to the public purse. Deciding that one person may be permitted to bring a claim while denying another that same right, is likely to bring the legal system into disrepute. Moreover, the problem with disallowing restitution on the basis that someone may be unjustly enriched at the expense of a third party, assumes that all persons in the litigation chain, aside from the end consumer, are equally undeserving of the money in dispute. So long as the claimant has a valid reason for restitution, it should be irrelevant that recovery may result in his unjust enrichment at the expense of a third party. Such an outcome is of no business to the defendant and certainly should not be capable of supporting an argument for the retention of any fund in dispute.
5. Protection of Government Finances The justification provided in this section for including the defence of disimpoverishment in the law of unjust enrichment is particular to cases of unlawfully demanded tax. Thus, it does not apply to circumstances where the defendant is unjustly enriched by any other means. The basic premise of this argument is that awards of restitution ‘may seriously jeopardize public funds with consequent deleterious effects on the community.’12 This section is concerned, first of all, with determining whether fiscal chaos concerns should prevail over the principle that ‘where a public authority is not entitled to the money which it has received, then the money should be repaid to the citizen from whom it was unlawfully taken.’13 Consideration is then given to whether the defence of disimpoverishment is an appropriate vehicle for preventing fiscal chaos from arising.
12 13
G Virgo, The Principles of the Law of Restitution (Oxford, OUP, 1999) 423. Ibid, p 422.
184
Other Arguments for Accepting the Defence of Disimpoverishment
(a) Reasons for Refusing Restitution There are thought to be two justifications for denying restitution in cases where claims are made to recover unlawfully exacted tax. The first, and main argument, is that undue disruption to government finances must be prevented. The second and ancillary argument, is that if restitution is refused certain inefficiencies will be avoided and unnecessary costs saved. The argument that restitution should be denied whenever public finances may be seriously disrupted has received considerable, though not overwhelming, judicial support. The following excerpts, taken from a range of jurisdictions, provide a small sample. In Sargood Bros v Cth,14 Isaacs J thought that the doctrine of colore officii, if accepted by the High Court of Australia, ‘would throw the finances of the country into utter confusion ... and quite disorganize the public treasury.’15 In Air Canada v British Columbia,16 La Forest J of the Canadian Supreme Court, thought that ‘fiscal chaos would result if the general rule favoured recovery, particularly where a longstanding taxation measure is involved’.17 Similarly, Lord Clyde in Glasgow Corporation v Lord Advocate18 thought that restitution ‘in such circumstances has wider repercussions and affects far more interests than that of the one tax-payer, ... [Introducing] an element of quite unwarrantable uncertainty into the relations between the taxpayers and the Exchequer.’19 Finally, Commissioner Stanley of the Kentucky Court of Appeal in Great Atlantic & Pacific Tea Company v City of Lexington20 opined that if restitution was not denied, the government’s finances would be ‘disrupted, to the detriment of the people. There should be a sense of security in the economic program.’21 A further argument for rejecting restitution in situations where severe disruption to public finances may eventuate was posited by La Forest J in Air Canada.22 His Honour thought that rather than having parliament introduce new legislation to simply recover unlawfully collected tax, it was far more sensible to deny restitution in the first instance. This would prevent a new generation having to pay for the expenditures of the old. It would also avoid the unnecessary cost involved in paying a sum of money to one person, only then having to later recover it from others.
14 15 16 17 18 19 20 21 22
Sargood Bros v Commonwealth (1910) 11 CLR 258 (HCA). Ibid (Issacs J). Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC). Ibid. Glasgow Corp v Lord Advocate [1959] SLT 230. Ibid, p 244 (Lord Clyde). Great Atlantic & Pacific Tea Company v City of Lexington 256 Ky 595, 76 SW 2d 894 (KYCA, 1934). Ibid, pp 598–99, 895 (Commissioner Stanley). Air Canada v British Columbia, above n 16, pp 196–97 (La Forest).
False Bases for Accepting the Defence
185
(b) A Nuanced Response The blanket rejection of restitution claims in all cases where taxes have been unlawfully demanded is unnecessary. If concerns about fiscal chaos are at all meritorious, restitution should only be denied in appropriate circumstances. Professor Palmer has recognized the importance of distinguishing between the different situations in which taxes may be unlawfully imposed, and cases in which disruption to government finances may occur if restitution is awarded.23 By way of an example, he maintains that while restitution in unconstitutional tax cases may dislocate the fiscal affairs of government, isolated examples of payments made by mistake would be unlikely to have this effect. Similarly, he suggests that when protests are lodged regarding the legality of a tax, governments are put on notice that they might be obliged to make refunds in the future. The ability to meet that contingency obviates the need for a defence which promotes fiscal certainty. Similarly, Professor Crerar has argued that government will generally have the opportunity to rearrange its finances because of ‘the relative slowness of a class action, or any litigation’.24 Thus, lawsuits are unlikely to ‘suddenly cripple the government.’25 Notwithstanding acceptance of the argument that restitution should be denied in cases where fiscal chaos would arise, there is much to be said for adopting an approach which applies this principle in a nuanced fashion. Thus, not all unjust enrichment cases should be treated equally. The unique facts of each situation must be considered to determine whether the justification for rejecting recovery exists.
(c) Reasons for Awarding Restitution (i) General Rejection of the Fiscal Chaos Argument Even if it is accepted that in some circumstances restitution may cause disruption to public finances, powerful reasons exist for why the defence should still be rejected, even on this basis. Four justifications can be identified. The first reason, as already mentioned in passing, is that a government will often have the power to either turn an ultra vires tax into one which is intra vires, or simply impose a new and lawful tax that prevents any unexpected fiscal shortfall from eventuating. This argument was effectively accepted by the decision of the Canadian Supreme Court in Air Canada,26 implicitly endorsed by Mason CJ 23
G Palmer, The Law of Restitution (Boston, MA, Little Brown, 1978) §14.20. D Crerar, ‘The Restitutionary Class Action: Canadian Class Proceedings Legislation as a Vehicle for the Restitution of Unlawfully Demanded Payments, Ultra Vires Taxes, and other Unjust Enrichments’ (1998) 56 U Toronto Faculty L Rev 47, 71. 25 D Crerar, ‘The Restitutionary Class Action’, above n 24, p 71. 26 Air Canada v British Columbia, above n 16. 24
186
Other Arguments for Accepting the Defence of Disimpoverishment
in Comr State Revenue (Victoria) v Royal Insurance Australia Ltd,27 (‘Royal Insurance’) and adopted by the United States Supreme Court in McKesson Corp v Division of Alcoholic Beverages and Tobacco.28 The second reason for permitting recovery even if fiscal chaos may arise is that, as Professor Burrows has argued, there is no reason why such a principle should ‘be confined to public authorities when fiscal chaos to private companies would be happily judged an irrelevant defence to a restitutionary claim.’29 The third justification for awarding restitution even if the claimant has been disimpoverished and financial chaos may result has been expressed in terms of a ‘constitutional imperative’. Mason CJ in Royal Insurance, in words later endorsed by Kirby J,30 put it this way: ‘It would be subversive of an important constitutional value if this Court were to endorse a principle of law which ... authorized the retention by the executive of payments which it lacked authority to receive and which were paid as a result of causative mistake.’31 The fourth and final reason for rejecting the argument that restitution should be denied to preserve the financial affairs of the State was presented by Wilson J in Air Canada: Why should the individual taxpayer, as opposed to taxpayers as a whole, bear the burden of government’s mistake? I would respectfully suggest that it is grossly unfair that X, who may not be (as in this case) a large corporate enterprise, should absorb the cost of government’s unconstitutional act. If it is appropriate for the courts to adopt some kind of policy in order to protect government against itself (and I cannot say that the idea particularly appeals to me), it should be one which distributes the loss fairly across the public. The loss should not fall on the totally innocent taxpayer whose only fault is that it paid what the legislature improperly said was due.32
On the basis of this and the preceding three arguments, it is contended that restitution should not be denied even if the claimant’s recovery may cause serious disruption to government finances. (ii) The Defence of Disimpoverishment Implicit in the foregoing discussion has been the assumption that the defence of disimpoverishment is an appropriate tool for protecting public finances. It is suggested that this assumption is, in fact, misconceived. Rather than using the 27 Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA) 57 (Mason CJ). 28 McKesson Corp v Division of Alcoholic Beverages & Tobacco 496 US 18, 110 S Ct 2238 (USSC, 1990). 29 A Burrows, ‘Public Authorities, Ultra Vires and Restitution’ in A Burrows, (ed), Essays on the Law of Restitution (Oxford, Clarendon Press, 1991) 39, 58. 30 Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA) 569 (Kirby J); British American Tobacco Australia Ltd v Western Australia [2003] HCA 47, 90–96 (Kirby J). 31 Comr State Revenue (Victoria) v Royal Insurance Australia Ltd, above n 27, p 69 (Mason CJ). 32 Air Canada v British Columbia, above n 16, p 169.
A Legitimate Basis for Rejecting the Defence
187
defence of disimpoverishment to prevent fiscal chaos arising as a result of restitutionary awards, a tailored response would be far superior. In short, an ‘extreme fiscal chaos’ defence, rather than a defence of disimpoverishment, should, if anything, be adopted. There are three reasons why an extreme fiscal chaos defence, in any event, is the more appropriate response in this context than a defence of disimpoverishment. First, it is has the salutary effect of not concealing the true reason why restitution is being denied. The focus is on the defendant’s, not the claimant’s, position. Second, it enables the court to consider the defence on its merits and weigh up whether, in the particular circumstances, an extreme financial disruption would occur. Finally, and most importantly, a defence of extreme fiscal chaos would operate in every case where restitution may give rise to excessive disruption. In contrast, the defence of disimpoverishment would only operate on an ad hoc basis, entirely dependent on whether the claimant had succeeded in making good his loss. If the argument for restricting restitution to protect public finances is at all meritorious, it should be applied consistently and broadly, not sporadically or randomly. The only conclusion that can be drawn from this and the foregoing discussion, is that the defence of disimpoverishment should not be accepted as part of the law of unjust enrichment on the basis that it will help prevent disruption to government finances.
C. A Legitimate Basis for Rejecting the Defence 1. The Claimant will Receive a Windfall It has already been stated in chapters 2 and 7 that the fundamental assumption underlying the defence of disimpoverishment is that in situations where the defendant has been unjustly enriched and the claimant has made good his loss, both parties are equally undeserving of the money in dispute. Two justifications were said to underpin this conclusion. First, irrespective of whether the money in dispute goes to the claimant or remains with the defendant, the ‘losing’ party will be left no worse off compared with the position he or she occupied prior to the defendant’s unjust enrichment. Second, whoever is awarded the money in dispute will receive a windfall. That is because neither party ever anticipated being entitled to the sum in question in the circumstances in which it arose. In consequence of these observations it has been contended that whenever a claimant makes good his loss following a defendant’s unjust enrichment, restitution should be denied. This section is concerned with analyzing this proposition in closer detail. In the first instance the view is presented that even when a ‘windfall’
188
Other Arguments for Accepting the Defence of Disimpoverishment
arises, the defendant and claimant will not always be equally undeserving of its retention or receipt. That is because the manner in which the defendant is enriched and the claimant disimpoverished may vary. Thus, in circumstances where the claimant’s entitlement to the money in dispute is superior to the defendant’s, the defence of disimpoverishment should be denied and the claimant awarded restitution. But that leaves open the possibility that the defence is valid, and should be accepted, where the claimant is unjustly enriched at a third party’s expense. Both claimant and defendant are then equally undeserving of the money. In such a situation, as is contended below, a legitimate justification arises for inclusion of the defence of disimpoverishment in the law of unjust enrichment.
(a) Receipt via an Unimpeachable Contract or Gift The defence of disimpoverishment is raised in unique circumstances. When pleaded, the defendant must be effectively interpreted as saying that: I have been enriched pursuant to an unjust factor. I have either infringed a public law norm or received a benefit in consequence of your Kantian right being violated. However, because you have made good your loss, I should be entitled to retain my unjust enrichment. Your entitlement to the money in dispute is no better than mine.
It is, however, debatable whether the respective entitlements of the claimant and defendant are equal just because the claimant has made good his loss. Consider the situations in which a claimant makes good his loss via an unimpeachable contract of sale or gift. In both cases the purchaser of the claimant’s goods or services, or the donor of the gift, has enriched the claimant in entirely legitimate circumstances. The intent of the purchaser or donor has not been impaired or vitiated, nor has the claimant violated a norm of public law. The nature of the circumstances in which a claimant may disimpoverish himself can be illustrated by some particular examples. Consider a claimant who makes good the cost of a defendant’s unjust enrichment in one of the following ways: (i) (ii) (iii) (iv) (v)
working extra shifts in his job as a waiter; winning the lottery; receiving a ‘no strings attached’ gratuity from his uncle; increasing sales by investing in a risky advertising strategy; or reducing business costs and thereby increasing revenue.
What these contrasting situations vividly illustrate is that, as between a defendant who has been unjustly enriched, and a claimant whose loss has been made good via a bona fide contract or gift, it is the claimant who is the more ‘deserving’ of the money in dispute. That is because the claimant, if awarded restitution, will receive
A Legitimate Basis for Rejecting the Defence
189
what rightfully belongs to him. It will not result in him recovering an undeserved windfall. By contrast, if restitution is denied, the defendant will retain her unjust enrichment. She will, in these circumstances, truly receive a windfall. The same conclusion must logically follow even in circumstances where a claimant makes good his loss by passing on the cost of it to his customers via increased prices. As discussed in chapter 2, while we may feel sympathy for a customer who pays more for a particular product or service than he or she otherwise would have, this does not justify incorporation of the defence of disimpoverishment into the law of unjust enrichment. There are three reasons why. First, the customer nearly always has a choice not to pay the increased price for the good or service. Second, if the choice is made to pay the increased price, it is not because the purchaser’s intent has been vitiated or impaired. He or she will have acted on his or her own free will in entering into a binding contract with the claimant. And, most importantly, irrespective of how we view the customer’s plight, such considerations should not impact on the defendant’s entitlement (vis-à-vis the claimant), to retain the money in dispute. The principle that emerges from the above discussion is that a claimant who has made good his loss may be more meritorious than an unjustly enriched defendant; more specifically, this will be where the defendant is unjustly enriched at the claimant’s expense but the claimant is not unjustly enriched at a third party’s expense. In that situation, the defence of disimpoverishment should be denied and the claimant awarded restitution.
(b) Receipt via an Unjust Enrichment at the Expense of a Third Party If a claimant is more deserving of the money in dispute when his loss is made good via an unimpeachable contract or gift, that leaves open the possibility that the defence is valid where the claimant is unjustly enriched at a third party’s expense. Both claimant and defendant are then equally undeserving of the money. The defendant will have been enriched in circumstances which are unjust (ie pursuant to an unjust factor). And the claimant will have been disimpoverished in circumstances which are unjust. To summarize, the respective claims of the defendant and claimant will be equal once the following four conditions are satisfied: (i) the defendant is unjustly enriched at the expense of the claimant; (ii) the claimant makes good the cost of this unjust enrichment by shifting the burden of it to a third party; (iii) the circumstances in which the claimant shifts the cost of the defendant’s enrichment to the third party are ‘unjust’ (ie give the third party a right to restitution against the claimant according to the common law doctrine of unjust enrichment); and
190
Other Arguments for Accepting the Defence of Disimpoverishment
(iv) the third party has not succeeded in an action for restitution against the claimant at the time the claimant brings his action for restitution against the defendant. The only condition requiring clarification is the fourth one. The reason why a third party must not have succeeded in an action for restitution against the claimant is because, if this were so, the claimant would be more deserving of the money in dispute than the defendant. That is because, if awarded restitution, the claimant would simply be restored to his original financial position. However, if his claim was denied, the defendant would retain the windfall and the claimant would be left worse off overall. While prevention of the claimant’s unjust enrichment is a laudable objective, it does not, on its own, provide a positive reason why his claim for restitution should be rejected, thereby allowing the defendant to remain unjustly enriched. Put another way, it does not explain fully why the defendant, and not the claimant, should be entitled to the undeserved windfall. Positive reasons do, however, exist for permitting the defendant to retain her unjust enrichment in these circumstances. One argument, already encountered in chapter 7,33 is that a claimant who is equally undeserving of the money in dispute should not be incentivized to waste his, the defendant’s and the society’s resources in bringing an action for restitution. In addition, when a claimant cannot show a superior entitlement to an enrichment held by a defendant, the general policy of the law in not intervening in disputes without a positive reason for doing so is maintained. Thus, a prima facie case for at least partial acceptance of the defence exists.
D. Conclusion This chapter contained six arguments which favoured acceptance of the defence of disimpoverishment. The first five were shown to be erroneous or inapplicable. By contrast, the final reason for accepting the defence was shown to be meritorious. It was suggested that if restitution was to result in the unjust enrichment of the claimant at the expense of a third party, the defendant should be entitled to the money in dispute. The validity of this final justification for accepting the defence is the subject of the following chapter.
33
Text accompanying, above n 20, ch 7.
9 Other Arguments for Rejecting the Defence of Disimpoverishment
A. Introduction Nine arguments which may be used to support rejection of the defence of disimpoverishment are examined in this chapter. In the first section, three justifications for rejecting the defence are considered and discarded. It turns out that none of them provides effective support for the proposition that a claimant should be entitled to restitution after making good his loss. A further three reasons for rejecting the defence are explored in the second section. While all are meritorious in some respects, they do not provide a sufficient basis upon which to exclude the defence entirely from the law of unjust enrichment. Finally, three contentions are presented that are directed towards countering the argument, raised in the preceding chapter, as to why restitution should not be awarded to a claimant if it will result in him being unjustly enriched at the expense of a third party. It is concluded that on the basis of each of these arguments, the defence should be rejected.
B. False Bases for Rejecting the Defence 1. Symmetry with Tort Law The claim that a legal principle should be rejected on the basis of symmetry is another way of saying that like cases must be decided alike. The underlying justification for this argument is that consistent treatment of cases is important to promote fairness, coherence and confidence in our legal system. Although consistency is an important legal precept, caution must be exercised when relying upon it. That is because while two cases may be similar in many respects, they need only be treated ‘symmetrically’ if they are materially alike.
192
Other Arguments for Rejecting the Defence of Disimpoverishment
Professor Smith, in his article ‘Restitution: The Heart of Corrective Justice’,1 develops an argument, based on an appeal to symmetry, for rejecting the defence of disimpoverishment. He puts it in these terms: One might say that if an unjust enrichment claim requires a loss on the part of the plaintiff, then an inquiry into passing on is necessary, as an inquiry into the extent of that loss. However, this does not follow. An ordinary claim for loss based on a tort requires a loss on the part of the plaintiff; it does not follow, however, that every transaction which the plaintiff has entered into as a result of the tort, and which mitigates her loss, inures to the benefit of the defendant. Quite the reverse: ‘collateral benefits’ are generally ignored.2
The essence of Professor Smith’s argument is that if (i) the law of torts, which is largely concerned with awarding damages to compensate a claimant’s loss, (ii) does not account for the receipt of collateral benefits, then (iii) it follows a fortiori that the law of unjust enrichment, which is concerned with restitution of a defendant’s gain, should also ignore benefits received by a claimant that reduce his loss.3 The conclusion reached by Professor Smith follows logically from the assumptions on which it is based. The difficulty with his analysis, however, is that the second premise—that collateral benefits are generally ignored in tort law—is too broad. One cannot, at least far as the law in England is concerned, conclude that collateral benefits are generally ignored. As a Law Commission Report in 1997 made clear, there is ‘no single principled test [in the law of torts] for determining whether collateral benefits are to be deducted or not’.4 The Law Commission reached this conclusion after surveying seven different types of collateral benefits (charitable payments, insurance, disablement pensions, retirement pensions, sick pay, redundancy payments and social security benefits outside the statutory recoupment scheme), and finding that while the first four were ignored, the last three were included in the assessment of damages.5 While it may even appear incongruous that tort law sometimes ignores the receipt of collateral benefits in the assessment of damages, while the law of unjust enrichment (via the defence of disimpoverishment) seeks to have them accounted for in all cases, such conclusions, on closer inspection, may turn out to be entirely rational. The point is that only by exploring the justifications underpinning the few instances in which collateral benefits are ignored in tort law can one reach a conclusion as to whether the law of unjust enrichment should adopt the 1
L Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas L Rev 2115. Ibid, p 2154. 3 The same opinion is expressed by K Barker, ‘Riddles, Remedies and Restitution: Quantifying Gain in Unjust Enrichment Law’ (2001) 54 CLP 255. 4 Law Commission for England and Wales, ‘Consultation Paper: Damages for Personal Injuries: Collateral Benefits’ (Law Com No 147, 1997) 2.5. 5 Ibid, p 2.92. 2
False Bases for Rejecting the Defence
193
same approach. It is therefore submitted that the general statement made by Professor Smith does not provide a sufficient basis for rejecting the defence of disimpoverishment.
2. Undertaking to Pass-back (a) Rejecting the Defence The fundamental purpose underlying the defence of disimpoverishment is to ensure that restitution is not awarded in circumstances where a claimant has incurred no loss. This is because, to do so, would provide the claimant with an undeserved windfall.6 Thus, if a claimant (i) incurs a loss by unjustly enriching a defendant, then (ii) makes good this loss by shifting the cost of it to a third party, and (iii) still brings a claim for restitution against the defendant, recovery should be denied. What if, however, when the claimant comes to court, he undertakes to passback an award of restitution to the third party that bore the cost of the defendant’s unjust enrichment? The answer, as was shown at common law in Benzoline Motor Fuel Co v Bollinger7 and under statute in Customs and Excise Comrs v McMaster Stores (Scotland) Ltd8 and Lamdec Ltd v Customs and Excise Comrs,9 is that the defence of disimpoverishment must be rejected. That is because the very premise on which it is based, and thus the evil being protected against, does not arise: the claimant will not receive a windfall.
(b) True Rejection? While it appears, at first glance, that the defence of disimpoverishment is being rejected in circumstances where the claimant undertakes to pass-back an award of restitution to a third party, this is, in fact, not entirely accurate. That is because what is occurring in these cases is that while the premise on which the defence operates is upheld, the outcome that the defence produces is rejected. That is because a third party, not the defendant, recovers the money in dispute. Thus, at the same time the defence is rejected at law, with the effect that the defendant cannot retain the money in dispute, it is being accepted in fact, with the effect that restitution is awarded to a third party. Only if the claimant is awarded restitution can one claim that the defence of disimpoverishment has been or should be rejected. Thus, rejection of the defence 6 Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC) 193–94 (La Forest J). 7 Benzoline Motor Fuel Co v Bollinger 353 Ill 600, 187 NE 657 (ILSC, 1933). 8 Customs & Excise Comrs v McMaster Stores (Scotland) Ltd (1996) SLT 935, [1995] STC 846, [1995] BTC 5390. 9 Lamdec Ltd v Customs & Excise Comrs [1991] VATTR 296, [1991] BVC 721.
194
Other Arguments for Rejecting the Defence of Disimpoverishment
of disimpoverishment in circumstances where the claimant undertakes to passback an award of restitution is not a ‘false’ basis for excluding it from the law of unjust enrichment. Rather, it is simply a false basis for claiming the defence has been rejected according to our traditional understanding of what that response entails.
3. It is Only a Complete, Not Partial, Defence It might be said that the defence of disimpoverishment should be rejected because it can only operate in an unsatisfactory ‘all or nothing’ way. In Marks & Spencer plc v Customs and Excise Comrs (No 1)10 (‘Marks & Spencer (No 1)’) counsel for the appellant argued that the defence of disimpoverishment should only operate as a complete and entire defence. Thus, if the appellant could prove that he partially succeeded in making good his loss (caused by the imposition of the unlawful tax), he should be entitled to restitution of the entire sum. Moses J in the High Court rightly dismissed the argument. He stated that: ‘[T]here is dispute as to whether the defence of unjust enrichment is all or nothing. Marks and Spencer assert that the issue is whether repayment ‘in full’ would give rise to unjust enrichment. In my judgment it is not correct to say that the defence is all or nothing’.11 As was stated in chapter 2,12 there is no reason in principle or policy why the defence of disimpoverishment need be all or nothing in nature. The court should only be concerned with determining what portion of the claimant’s loss has been made good. This conclusion also has the beneficial effect (to the extent such effects are necessary) of aligning the defence of disimpoverishment with the defence of disenrichment. In cases where the defence of disenrichment is accepted, the defendant need only make restitution of that part of his enrichment which he has retained, not the entire sum he initially received.
C. Potential Bases for Rejecting the Defence 1. Problems of Proof The defence of disimpoverishment is predicated on an important assumption: that it is possible to prove when and if a claimant has been disimpoverished. If the defendant is unable to prove that a claimant has made good his loss, the defence must be rejected. 10 11 12
Marks & Spencer plc v Customs & Excise Comrs (No 1) [1999] 1 CMLR 1152. Ibid, p 1186. Text preceding, above n 7, ch 2.
False Bases for Rejecting the Defence
195
In this section the problems which arise when one attempts to ascertain whether a claimant has made good his loss are examined. It is conceded that it is often difficult to determine. However, because there are sufficient circumstances in which disimpoverishment can be proved the defence should not be rejected entirely on account of such obstacles.
(a) The Problems This discussion is best introduced by way of an example. Suppose a government imposes a 10 per cent tax on the sale of cigarettes. If cigarettes retailed for £1.00 before the tax, the full effect of the imposition could be passed on to consumers by increasing prices to £1.11.13 Suppose a cigarette retailer increases the price of cigarettes by 11p shortly after the new tax is introduced. Can one thereby conclude that the defendant will have been disimpoverished? The answer is that such a conclusion cannot be drawn. There are three reasons why. First, the above example does not tell us whether the claimant has actually made good his loss. All we are told is that the claimant attempted to pass on the cost of the tax to his customers. Second, even if the claimant successfully passed on the cost of the tax, there is no evidence to suggest that the government levy motivated the claimant to increase his prices. If the reason for the price change was entirely unrelated to the imposition of the tax then evidence of his subsequent disimpoverishment will be irrelevant. Finally, even if the claimant intended to pass on the cost of the tax to his customers, the explanation as to why he was able to make good his loss has not been isolated. There may be reasons, entirely unrelated to any price increase, which account for his disimpoverishment.
(b) Examination of the Problems (i) Motivation In chapter 2 it was stated that in order to defeat a claim for restitution the defendant must establish a causal link between her unjust enrichment and the claimant’s disimpoverishment. Thus, the defendant must not only be able to prove that the claimant made good his loss, but also that it was the defendant’s unjust enrichment that motivated him to do so. Let us begin by returning to the retailer who increased the price of cigarettes following the imposition of a new tax. Without the aid of additional facts, all we can say is that the tax may have been the reason, an irrelevant reason, or one of many reasons for the retailer increasing the price of cigarettes. If the only explanation for the claimant’s behaviour was his desire to pass on the cost of the 13 If a retailer only increased prices to £1.10, a 10% tax on that sum would mean 11p would have to be remitted to the government. This would leave the retailer with 99p—a 1p shortfall. Thus, price has to be increased by 11/10 (to £1.11). A 10% tax on that sum would require 11.1p to be remitted to the government. If this is rounded down, 11p will be remitted and therefore £1 retained by the retailer.
196
Other Arguments for Rejecting the Defence of Disimpoverishment
defendant’s unjust enrichment, the inquiry will be simplified. The defendant’s only difficulty will be in producing evidence of the claimant’s motivation. The inquiry will also be simplified if the claimant is able to provide an alternative explanation for why he increased the price of cigarettes when and to the extent he did. In such a scenario the defence of disimpoverishment will be rejected. Thus, it is only in those cases where the claimant has multiple motivations for acting in the manner he did (with the effect that the cost of the defendant’s unjust enrichment was made good), that serious difficulties will arise. In these situations one has to determine what effect the claimant’s intention to pass on the cost of the defendant’s unjust enrichment had on his ultimate decision to increase prices. The claimant’s motivation must then be weighted according to its influence on the final outcome. This task may present enormous evidential difficulties. Suppose, for example, the claimant increased the price of cigarettes soon after the imposition of an unlawful tax. One obvious explanation for his behaviour is the imposition of the tax. However, there may be numerous other reasons why he acted in this way. He may have been responding to inflationary pressures, a rival firm exiting the market, or speculation over an official interest rate adjustment. Deciding how to account for each of these factors is an evidential question. However, being able to accurately account for the influence of each factor, and the many others which may have been present, is a concern which the defence of disimpoverishment must address. Problems in deciphering what motivates a claimant to act in a certain way may be exacerbated by numerous of factors. Three of them include the timing, size and method of price adjustment. In relation to time, what if the price increase occurs six months or even a year after the imposition of the tax? At what point can one say that the tax was no longer a decisive factor in the price change? In respect of the size of the price change, what happens if the cost of the tax is not fully passed on by the claimant? For example, what if cigarettes are increased by 3.7 per cent following the unlawful imposition of a 10 per cent tax? Can a sufficient nexus between the two figures be inferred? And finally, in regard to the method of adjustment, what if the claimant spreads his loss across a number of items or in ways other than a price increase? For example, the claimant may respond to a 10 per cent tax on cigarettes by increasing the price of beer, crisps, soft drink and cigars by 2.5 per cent, or some other combination of values. Alternatively, a claimant could make good his loss by reducing costs or increasing revenue in other ways. In any of these circumstances may be very hard to explain, weigh-up and apportion the factors motivating the claimant’s behaviour. In the absence of documentary evidence it will be difficult to determine what motivated a claimant to make good any loss incurred as a result of the defendant’s unjust enrichment. Sometimes the court may be able to infer from the claimant’s behaviour that he intended to pass on the cost of the defendant’s unjust enrichment to a third party. For example, when a 10 per cent tax is immediately passed
Potential Bases for Rejecting the Defence
197
on to consumers and the claimant cannot explain why, absent the tax, this occurred, the defence of disimpoverishment may be applicable. However, the claimant’s response can be easily disguised. Consequently, one must ask whether the defence of disimpoverishment should form part of the law of unjust enrichment when it may give rise to significant evidential difficulties.14 (ii) Incorporating Other Situations Assuming the claimant’s ‘motivation’ for making good his loss is shown to be the defendant’s unjust enrichment, it does not automatically follow that the defence of disimpoverishment will be established. The defendant still has to prove that the claimant’s actions were actually responsible for his loss being avoided. The net financial position of the claimant must be calculated and compared with what would have occurred had there been no change in price. Only when this is done can one determine the true extent to which a claimant has been disimpoverished. Let us begin by considering the same example of a claimant who increases the price of cigarettes commensurate with a newly imposed 10 per cent tax. One reason why the claimant’s profits may not decline is because demand for cigarettes is inelastic. Thus, the higher prices charged, in concert with consumer preferences, explain why the claimant was able to avoid any decline in profits. There may, however, be many other reasons that better explain why the claimant did not incur a loss. For instance, aggregate demand in the general economy may have increased significantly. Alternatively, the product in question may have become particularly fashionable following a football star’s endorsement. To determine why a claimant’s loss might have been made good, all these and numerous other hidden possibilities must be accounted for. Then, just as with determining the effect of the claimant’s motivation, they must be individually weighed to ascertain what effect they had on the claimant’s revenue stream. Evidential difficulties arise when attempting to account for the numerous reasons why a claimant’s loss may have been made good. Accurately identifying them all, then accounting for their individual impact, may be problematic. Consequently, even if the defence of disimpoverishment should be accepted in principle, this may be another reason why, in practice, it should be rejected. (iii) Cost and Complications There is one final consideration. That is, even if it were possible to distinguish between ‘the innumerable variables which affect price formation in a free market’,15 it is arguable that it is inadvisable to attempt to do so. This is because the 14 Cf discussion of cases on this point in Worthington Pump & Machinery Corp v United States 122 F Supp 843 (USCC, 1954) 847–48. 15 Case 199/82 Amministrazione delle Finanze dello Stato v SpA San Giorgio [1983] ECR 3595, 3625 (Advocate General Mancini).
198
Other Arguments for Rejecting the Defence of Disimpoverishment
defence of disimpoverishment only adds significant time, complications and cost to unjust enrichment actions, without a concomitant benefit to the overall justice system. The incorporation of large amounts of evidence and complicated economic theories may undermine the efficient and effective administration of justice. In recognition of these problems, numerous judges16 and academic commentators17 have concluded that the defence of disimpoverishment should not form part of the law of unjust enrichment.
(c) Proof of Impoverishment Despite there being problems of proof associated with the defence of disimpoverishment, there are a number of situations in which it is possible to determine when a claimant has made good his loss. We have already seen evidence of this in chapter 3 in relation to common law cases in Canada and the United States, and in chapter 4 in relation to legislative provisions in the United Kingdom. This suggests that the defence is, in practice, workable. Of all the ways in which a claimant can make good the cost of another’s unjust enrichment, the best known example is when, by way of response, he increases the price of goods or services supplied. However, as explained in the first part of this book, it does not follow that just because the price of a good or service is increased, a claimant’s loss will be made good. A loss will only be avoided if, following a price increase, sales are not detrimentally affected. The purpose of this section is to explore the circumstance in which an increase in price has little or no negative effect on demand. That is, where the demand for a particular good or service is relatively or entirely insensitive (inelastic) to changes in price. (i) Price Elasticity of Demand and its Relevance to this Book Prior to commencing this examination, a brief explanation of price elasticity is necessary. Price elasticity is a concept which has been developed by, and frequently used within, the field of economics. Its purpose is to consider how changes in price affect demand for a particular good or service. If a change in price results in little or no alteration to quantity demanded, demand for the good or service is said to be ‘inelastic’. On the other hand, if a change in price results in a significant change in quantity demanded, demand is considered relatively ‘elastic’. In other words, it is more responsive to changes in price.
16 Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA) 72–73 (Mason CJ); Hanover Shoe Inc v United Shoe Machinery Corp 392 US 481, 88 S Ct 2224 (USSC, 1968) 492–93; McKesson Corp v Division of Alcoholic Beverages and Tobacco, Department of Business Reg 496 US 18, 110 S Ct 2238 (USSC, 1990) 47, 2255. 17 B Rudden and W Bishop, ‘Gritz and Quellmehl: Pass It On’ [1981] 6 ELR 243; M McInnes “‘Passing on’ in the Law of Restitution: A Re-consideration” (1997) 19 Sydney L Rev 179; G Virgo, ‘Restitution of Overpaid VAT’ [1998] BTR 582, 588–89.
Potential Bases for Rejecting the Defence
199
The concept of price elasticity is relevant to this book in the following way. If demand for a product is insensitive to price, it may be reasonable to suppose that whenever a product’s price is increased in response to a defendant’s unjust enrichment, the claimant will make good any loss he has incurred. (ii) Factors which affect Price Elasticity of Demand There are a number of factors which influence a product’s price elasticity of demand. Five of them are outlined below. α) Availability of Substitutes Whenever a product has a vast number of sub(α stitutes demand for it will be relatively elastic. In other words, it will be sensitive to changes in price. For example, if the price of Nike trainers increases from £50 to £100, whereas comparable Reebok trainers cost £60, it is likely that demand for Nike trainers will decrease. On the other hand, if a product has no or relatively few substitutes, such as Microsoft Windows, a change in price is less likely to have an effect on the level of demand. (ß) Habit Forming Goods Certain products, particularly those that are addictive in nature, are generally inelastic in demand. Drugs such as heroin and even cigarettes can be characterized as habit-forming goods. Because of the nature of these products consumers become de-sensitized to changes in price. It was for this reason that in Roxborough v Rothmans of Pall Mall18 there was no dispute as to whether the claimants—the retailers of cigarettes—had been successful in passing on the cost of an unlawfully imposed tax. As Kirby J said: ‘In the case of tobacco products, the Court could readily infer that demand for them was relatively inelastic. Such an inference arises from common knowledge about the qualities of the product and the consequent dependence of consumers upon its supply to fulfil their needs’.19 (γγ) Price as a Percentage of Income The greater the proportion of one’s income which has to be spent purchasing a product the higher will be its elasticity of demand. Take for example a car versus a pint of milk. If both increase in price by ten per cent, demand for the car is likely to fall by a greater amount than demand for milk. Thus, while demand for milk can be described as inelastic and insensitive to price changes, demand for cars is elastic and sensitive to increases in price. (δδ) Luxuries and Necessities Demand for necessitous products is relatively insensitive to changes in price while, on the other hand, demand for luxury items is relatively elastic in nature. While the habits of a general consumer in respect to the consumption of water are unlikely to change dramatically following a change 18 19
Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA). Ibid, p 573 (Kirby J).
200
Other Arguments for Rejecting the Defence of Disimpoverishment
in price, if the price of imported wine increases demand may decrease. Another example of this is air travel. If the price of a plane ticket between London and Paris increases by fifty per cent the level of tourists flying between the two cities is likely to fall dramatically. The same percentage change in price will, however, have little effect on business travel. (εε) Time Period Considered The final influential factor on price elasticity of demand is the period of time under consideration. In the short run demand tends to be relatively insensitive to changes in price. This is because it takes time for consumers to adjust to price changes and alter well-established consumption patterns. The reverse is true in relation to demand considered over the long run. (iii) Price Elasticity and the Defence of Disimpoverishment In chapters 3 and 4 numerous examples were considered of how price elasticity impacts on the defence of disimpoverishment. In nearly all cases where the defence of disimpoverishment was upheld it was assumed that a price increase did not alter the claimant’s ability to make good his loss. In other words, it was found that because, for example, the product in question had either no close substitutes, was addictive, constituted a small proportion of consumers’ income, or was a necessity, the claimant was able to make good his loss following an increase in the product’s price. In this sub-section the case of a monopoly supplier will be considered. The purpose of this examination is to determine whether, in circumstances where the demand for a product is inelastic, and its price is increased, a claimant will make good any loss he has incurred. If this can be shown, then problems of proof should not be accepted as a categorical reason for rejecting the defence of disimpoverishment. α) What is a Monopoly Supplier? A company which is the sole supplier of a (α particular good or service to an entire market is referred to as a monopolist. While monopolies appear far more regularly in economic textbooks than real life, modern day examples do exist. These illustrations are generally located in the area of utilities and prior to privatization could be identified as, for example, British Telecom, British Gas and British Rail. Royal Mail remains one of the few government-owned monopolies in Britain. Microsoft Windows is a good example of privately-owned product which services almost an entire market. The particular attributes of a monopoly provider of goods or services are the ability to restrict output and increase prices, all without altering market demand. The following example illustrates how the defence of disimpoverishment and the existence of a monopoly supplier can interrelate. (ß) Monopoly Supplier and the Defence of Disimpoverishment Suppose that in 1970 British Telecom mistakenly paid its managing director £1 million. In order to recoup the cost of this payment it increased line rental charges. In such
Potential Bases for Rejecting the Defence
201
a situation British Telecom’s customers would have little choice but to pay the new fee. The defence of disimpoverishment would have a role to play in these circumstances if British Telecom later sought restitution of the mistaken payment from the managing director. That is because the managing director could argue that the £1 million loss was recouped from the organisation’s customers. He would be able to show that British Telecom’s sales did not decrease as a result of the increased charges and therefore the cost of its mistake came entirely at its customers’ expense. Consequently, it should not be entitled to restitution of the £1 million. (γγ) Accounting for Long-term Losses The view that it is possible to determine whether a claimant has been disimpoverished in cases of monopoly supply appears persuasive. There is, however, reason to believe that, even in these circumstances, the claimant will incur a loss. Adherents to the Austrian School of Economics20 are known for adopting a dynamic, rather than static, approach to interpreting economic events. Thus, they would argue that while a monopoly supplier may, in the short-term, be able to make good any loss it suffers by increasing prices, over the long run this may result in a loss of revenue and therefore profits. This argument can be couched in terms of the British Telecom example provided above. While British Telecom may have felt no immediate financial effect from increasing line rental charges, their longterm profitability may have been negatively affected. Their actions may have encouraged the development of new and alternative modes of communication— such as email and mobile phones. This may, in turn, result in affected businesses (ie those that had to pay the increased line rental charges) canceling any arrangement with British Telecom and signing-up with an alternative provider. If this view is correct, it cannot be categorically stated that a monopoly supplier will ever be in a position to make good the cost of a defendant’s unjust enrichment without incurring a loss. Thus, even the most compelling example of where a claimant’s disimpoverishment may be accurately identified and calculated will not be sufficient to establish the utility and credibility of the defence. (δδ) Problems with Dynamic Analysis While the dynamic account of economic events provided by the Austrian school is compelling, it nonetheless does not support a rejection of the defence of disimpoverishment. There are three reasons for this. The first reason is that the phenomenon described in the textbooks may not always be mirrored by events in the real world. For example, the OPEC oil crisis in the 1970s is said to have created new competition in the energy market with the 20 P Boetke and P Leeson, ‘The Austrian School of Economics: 1950–2000’ in J Biddle, J Davis and W Samuels, (eds), Blackwell Companion to the History of Economic Thought (Basil Blackwell, Oxford, 2003).
202
Other Arguments for Rejecting the Defence of Disimpoverishment
development of alternative power producing techniques such as wind, solar and battery. Consequently, it is said that the OPEC oil-producing countries suffered long-term pecuniary damage to their businesses. The reality, however, is that the take-up of these new technologies has been slow and sporadic. Thus, monopoly suppliers may not, in fact, suffer long-term losses as a result of passing on costs to end-consumers. The second problem with ‘dynamic analysis’ is that while sustained price increases may eventually result in a company incurring long-term losses, there is little evidence to support the argument that one-off price shocks will have the same deleterious effect. Consumers may, for example, find that a slightly higher than normal phone bill does not warrant the necessary time and energy required to switch service providers. Thus, one needs to consider all the circumstances in which attempts are made to make good losses in response to another’s unjust enrichment. The final problem with ‘dynamic analysis’ is that it requires courts to speculate about events which have not yet come to pass. While courts are sometimes required to do this when assessing awards of damages or granting injunctions, they do so in circumstances which are relatively more certain and predictable. Because, as the above discussion shows, it is not always possible to determine whether monopoly suppliers will incur long-term losses, judges should not be permitted to theorize about whether disimpoverishment will, in fact, ever occur.
(d) Conclusion This section has shown that the defence of disimpoverishment can give rise to evidential difficulties. This is particularly so in cases where prices are increased or expenses saved in response to a defendant’s unjust enrichment. In these circumstances problems arise in determining whether a claimant’s loss has been made good and, even if it has, what the cause of such a disimpoverishment happened to be. Despite concerns over problems of proof, this section has also shown that there are circumstances in which a claimant’s disimpoverishment can be established. This is particularly so once it is appreciated that ‘disimpoverishment’ can occur outside cases where prices are increased in response to a defendant’s unjust enrichment. Consequently, difficulties of proof remain a potential but not absolute reason for rejecting the defence.
2. Recovery Based on Economic Assumptions should not be Permitted The focus of the previous subsection was whether it is possible to prove that a claimant has made good his loss. It has been concluded that sometimes (including
Potential Bases for Rejecting the Defence
203
by the use of economic theory) that is possible. By contrast, the linked concern of this subsection is whether it is appropriate for courts to rely on economic assumptions in proving the defence of disimpoverishment. In Marks & Spencer (No 1), Moses J awarded the high street retailer only ten per cent of the £3.5m which it had been unlawfully required to pay by way of tax. The basis of this decision was that the company would have otherwise received a sum of money in respect of which it had suffered no loss. In reaching this conclusion the VAT and Duties Tribunal earlier accepted the argument posited by the Commissioner’s expert economist, Dr Robinson, that prices (and therefore profits) would have fallen had it been known that the supply of teacakes was zerorated. The justification for this conclusion was that competition in the market would have driven prices back to their pre-tax level. In an attempt to have Dr Robinson’s evidence struck out or disregarded, Marks & Spencer contended, on appeal, that: ‘[E]conomic evidence as to the effect of VAT should not be admitted because it is based upon general assumptions which do not condescend to sufficient particularity as to the product in question’.21 Marks & Spencer also argued that reliance should not be placed on expert testimony from economists as this might prejudice indigent claimants who ‘cannot be expected to have the resources to deploy expert evidence to challenge experts called by the Commissioners’.22 While Moses J agreed, in part, with Marks & Spencer’s submissions, he did not consider them sufficiently meritorious to warrant awarding the company restitution of the entire £3.5m. In relation to the argument about reliance on economic assumptions he rightly stated that ‘expert evidence can be used as support but not to fill gaps in factual evidence. I do not think that the Tribunal, in this case, made that error’.23 Then, in relation to the issue about the cost of expert witnesses, Moses J said that: ‘I share Marks & Spencer’s anxiety as to the use of such evidence in other cases . . . [but] [t]hat was not the situation in this case’.24 In other words, Marks & Spencer was not an indigent claimant to whom this argument applied. It is therefore concluded that if the economic theory applicable to the defence of disimpoverishment is being used to fill evidential gaps or, alternatively, cannot be countered because of financial constraints faced by one of the parties, there may be reason to reject the defence. The important point to note, however, is that neither argument provides an absolute reason to support rejection of the defence. The facts of each particular case must be considered and the competing arguments appropriately balanced before such a conclusion is reached.
21 22 23 24
Marks & Spencer (No 1), above n 11, p 1198. Ibid. Ibid. Ibid.
204
Other Arguments for Rejecting the Defence of Disimpoverishment
3. Unlawful Demands for Tax A further possible basis for rejecting the defence of disimpoverishment derives from the policy that public authorities should never be permitted to retain the fruits of an unlawful tax. Put another way, the lawful imposition of tax is so fundamentally important that, despite the fact that there may be countervailing reasons (such as the claimant’s disimpoverishment) for denying recovery, an award of restitution must follow. Underlying the contention that the defence of disimpoverishment should be rejected in unlawful tax cases, with the right to restitution being automatic, is the general principle, found in the Bill of Rights, ‘[t]hat levying money for or to the use of the Crowne by pretence of prerogative without grant of Parlyament for longer time or in other manner than the same is or shall be granted is illegal’.25 As Professor Birks has said, it is upon ‘the absence of any legitimate basis for the money to be retained by the government, in short on the ultra vires character of the demand itself ’,26 that the claim rests. Considerable support exists for an automatic right to restitution—not based on mistake, duress or transactional inequality—in unlawful tax cases. Many of the relevant cases in this regard were earlier discussed in chapter 3. They nonetheless bear repeating, at least in summary form, again here. In the seminal English case of Woolwich Equitable Building Society v Inland Revenue Comrs,27 the claimant was awarded, as of right, restitution of overpaid tax. And, in what appears to be a direct reference to the defence of disimpoverishment, Lord Goff stated that ‘I very respectfully doubt the advisability of imposing special limits upon recovery in the case of unconstitutional or ultra vires levies’.28 In reaching this conclusion his Lordship agreed with Wilson J, in her dissenting opinion in Air Canada v British Columbia.29 In that case her Honour rejected the defence of disimpoverishment and awarded the claimant restitution (of unlawfully demanded tax) as of right. Wilson J stated, in the strongest terms, that there was no requirement that the claimant show that the defendant’s unjust enrichment came at its (and not a third party’s) ultimate expense, because ‘[w]here the payments were made pursuant to an unconstitutional statute there is no legitimate basis on which they can be retained’.30 Her Honour found support for this conclusion in the judgment of Dickson J in Amax Potash Ltd v Government of Saskatchewan,31 and from 25 An Act for Declaring the Rights and Liberties of the Subject and Settling the Succession of the Crown (1689) 1 Wm & Mary c 36, Art 4. 26 P Birks, ‘Restitution from the Executive: A Tercentenary Footnote to the Bill of Rights’ in P Finn, (ed), Essays on Restitution (Sydney, The Law Book Company, 1990) 164, 173. 27 Woolwich Equitable Building Society v Inland Revenue Comrs [1993] AC 70 (HL). 28 Ibid, p 176 (Lord Goff). 29 Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC). 30 Ibid, p 170 (Wilson J). 31 Amax Potash Ltd v Government of Saskatchewan [1977] 2 SCR 576, (1976) 71 DLR (3rd) 1.
Potential Bases for Rejecting the Defence
205
Professor Hogg in his treatise Constitutional Law of Canada, who stated that: ‘Where a tax has been paid to government under a statute subsequently held to be unconstitutional, can the tax be recovered by the taxpayer? In principle, the answer should be yes. The government’s right to the tax was destroyed by the holding of unconstitutionality, and the tax should be refunded to the taxpayer’.32 Support for an automatic and unfettered right to restitution in unlawful tax cases can also be found in some Australian cases. Consider, for example, Mason CJ’s judgment in Comr State Revenue (Victoria) v Royal Insurance Australia Ltd.33 In that case his Honour rejected the defence of disimpoverishment on two bases, one of which was that restitution of overpaid tax must be granted to protect the fundamental principle of public law that ‘no tax can be levied by the executive government without parliamentary authority’.34 Underpinning this conclusion was the view that: ‘It would be subversive of an important constitutional value if this Court were to endorse a principle of law which, in the absence of such circumstances, authorized the retention by the executive of payments which it lacked authority to receive . . .’.35 These sentiments were echoed by Kirby J, in obiter, in Roxborough v Rothmans Pall Mall,36 and thought by Professor Birks to underpin the High Court decision in Bell Bros Pty Ltd v Shire of Serpentine-Jarrahdale.37 A further source of support for the view that the defence of disimpoverishment cannot be relied on in overpaid tax cases is McKesson Corp v Division of Alcoholic Beverages and Tobacco (‘McKesson Corp’).38 Having decided that the State of Florida’s liquor-tax scheme violated the Commerce Clause of the United States Constitution, the Supreme Court went on to conclude that Florida could not invoke the defence of disimpoverishment. Thus, it mattered not that restitution may be awarded to persons or companies who had paid, but not necessarily borne the burden of, the liquor excise tax. As will be recalled, the Supreme Court in that case stated that: The State [of Florida] cannot persuasively claim that ‘equity’ entitles it to retain tax moneys taken unlawfully from petitioner due to its pass-on of the tax where the passon itself furthers the very competitive disadvantage constituting the Commerce Clause violation that rendered the deprivation unlawful in the first place. We thus reject respondents’ reliance on a pass-on defense in this context.39 32
P Hogg, Constitutional Law of Canada, 2nd edn, (Toronto, Carswell, 1985) 349. Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA). 34 Ibid, p 69 (Mason CJ). 35 P Hogg, Constitutional Law of Canada, above n 32, p 349. 36 Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA) 569. 37 Bell Bros Pty Ltd v Shire of Serpentine-Jarrahdale (1969) 121 CLR 137 (HCA) discussed in P Birks, ‘Restitution from the Executive: A Tercentenary Footnote to the Bill of Rights’, above n 59, pp 190–91. 38 McKesson Corp v Division of Alcoholic Beverages & Tobacco 496 US 18, 110 S Ct 2238 (USSC, 1990). 39 Ibid, pp 48–49 and 2256. 33
206
Other Arguments for Rejecting the Defence of Disimpoverishment
One of the interesting features of the decision in McKesson Corp is the manner in which the Supreme Court sought to distinguish its earlier decision in United States v Jefferson Electric Manufacturing Co (‘Jefferson Electric’).40 In that case the Court had ‘enforced a statutorily created pass-on defense in a refund action designed to redress a tax overassessment’.41 Brennan J, who delivered the opinion of the Court in McKesson Corp, held that the claimant was not challenging a tax that merely exceeded the amount authorized by statute, but based its claim on the fact that ‘the Florida tax scheme unconstitutionally discriminated against interstate commerce’.42 The distinguishing factor in the McKesson Corp case, therefore, was that the Florida liquor excise tax was ultra vires the Constitution. By contrast, in Jefferson Electric, the excise tax on automobile parts was intra vires the Constitution, but had been wrongly applied to the claimant’s sale of ignition coils. The reason why the distinguishing feature of McKesson Corp and Jefferson Electric is of interest for this book is that while there may be some argument that the defence of disimpoverishment ought to be available in cases where the tax imposed is unlawful but intra vires the constitution, there is a very strong case for awarding restitution, as of right, when the tax is unlawful and ultra vires a state’s constitution. Lying beneath the conclusion that restitution should be awarded as of right in, at the very least, ultra vires tax cases, is the contrasting circumstances in which the defendant (government) is unjustly enriched, and the claimant makes good his loss. On the one hand the claimant may make good his loss, at the ultimate expense of his customers, by adjusting to the financial circumstances in which he finds himself. He may do this by increasing prices, with the attendant risk of a diminution in sales and revenue. On the other hand, the defendant government’s receipt of taxation revenue will have arisen in consequence of a direct breach of the state’s supreme law, embodied in its constitution. Thus, to then permit a public authority to retain ultra vires tax receipts ‘would be tantamount to allowing [it] . . . to do indirectly what it could not do directly, and by covert means to impose illegal burdens’.43 In short, the circumstances of the defendant’s enrichment and the claimant’s disimpoverishment are not comparable. And because the equities between the two parties are not equal, the claimant ought to be awarded restitution. Although a claimant may receive a windfall when awarded restitution from a public authority that has made an ultra vires demand for tax, this response is dictated by the need to uphold an important constitutional value. By necessary implication, it also requires that an area of unjust enrichment law be carved out, and quarantined, from the operation of the defence of disimpoverishment. Thus, we find in cases of ultra vires demands for tax, a niche in which the defence should 40 41 42 43
United States v Jefferson Electric Manufacturing Co 291 US 386, 54 S Ct 443 (USSC, 1934). McKesson Corp v Division of Alcoholic Beverages & Tobacco, above n 38, pp 47 and 2256. Ibid, p 48 and 2256. Amax Potash Ltd v Government of Saskatchewan, above n 31, p 10 (Dickson J).
Three Reasons for Rejecting the Defence
207
be rejected. But because, however, these cases do not incorporate all instances in which claims for restitution based on a defendant’s unjust enrichment arise, consideration must turn to whether, in other circumstances, the defence should be accepted.
D. Three Reasons for Rejecting the Defence None of the arguments considered thus far in this chapter justifies outright rejection of the defence of disimpoverishment. The most that might be said is that in certain situations, or under particular conditions, it ought to be excluded from the law of unjust enrichment. In this section three further reasons for rejecting the defence are presented. They are, in part, concerned with rebutting the contention contained in chapter 8, that the defence should be adopted when an award of restitution would result in the claimant’s unjust enrichment at the expense of a third party. Individually and collectively, they provide reasons why the defence of disimpoverishment ought to be rejected.
1. Res Inter Alios Acta Alteri Nocere Non Debet An important justification for rejecting the defence of disimpoverishment, as conceptualized at the conclusion of the previous chapter, can be found in the maxim res inter alios acta alteri nocere non debet. Translated, this general rule of evidence demands that things done or transactions undertaken between others ought not effect or prejudice non-parties. Though ordinarily invoked by a defendant seeking to negative a claimant’s action, its application need not be so limited. The argument might be made that it should also apply to the circumstances under consideration in this book where a defendant relies on evidence of the claimant having made good his loss by passing it on to a third party. While important, the res inter alios acta maxim is not absolute. Well-known exceptions exist. For example, in breach of contract cases, evidence of a claimant having mitigated his loss may be used by the defendant to reduce the level of damages payable.44 Similarly, evidence of a tort victim having received a collateral benefit from a third party may reduce the defendant’s liability to compensate the claimant.45 On account of these exceptions there seems little reason in principle for permitting the claimant to invoke the maxim in cases where he has made good his loss at the expense of a third party. 44 Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL). 45 Hunt v Severs [1994] 2 AC 350 (HL).
208
Other Arguments for Rejecting the Defence of Disimpoverishment
This conclusion, however, overlooks an important difference between the receipt of collateral benefits in tort law, the mitigation of loss following breach of contract, and the facts with which we are here concerned. What it fails to account for is that determining whether a claimant has mitigated his loss or received a collateral benefit are simply questions of fact. Third parties are routinely called on to give evidence, and upon that evidence a court may make findings that, in the context of the dispute, are determinative. By contrast, the claim that restitution will result in the unjust enrichment of the claimant at the expense of a third party requires a court to not only make a factual finding, but to draw a legal conclusion from those facts. Put another way, it requires the court to make a finding of law in a potential unjust enrichment dispute between a third party and claimant despite the fact that it has not been seized of that case and its jurisdiction not invoked. Moreover, it may result in legal consequences being foist upon a third party, without that party’s consent. For example, if it results in the claimant retaining the windfall in dispute, the third party, at whose ultimate financial expense the unjust enrichment has come, may be prevented from ever recovering its loss. It follows that, while attractive on a theoretical level, the assertion by a defendant that the claimant will be unjustly enriched at the expense of a third party if awarded restitution cannot form the basis for a defence of disimpoverishment.
2. The Claimant’s Defective Transfer The second basis on which a defendant should not be entitled to rely on the defence of disimpoverishment is that claims for restitution are, as has been maintained throughout this book, concerned with reversing the direct consequences of a defective transfer. Only in special circumstances, based on particular policy justifications, is departure from this rule justified. The defence of disenrichment, based on the policy of security of receipts, is one example. There is no reason, however, why the defence of disimpoverishment should constitute a further exception. The fact that a claimant may have avoided any loss (by passing it on to a third party) incurred in consequence of the defendant’s unjust enrichment, does not affect the nature and quality of the impugned transaction as between the claimant and defendant. When a claimant pays a defendant £10 by mistake his intent will have been vitiated. He will not have acted as a self-determining, free-willed agent. Consequently, the defendant should be required to give up the value of her enrichment—her material and normative gain—irrespective of the transactions that may have taken place between the claimant and third parties. Such transactions do not affect the normative quality of any defective transfer that has taken place between the claimant and defendant.
Three Reasons for Rejecting the Defence
209
3. The Ideal Corrective Justice Solution will not be Attained A third reason exists for rejecting the defence of disimpoverishment even in circumstances where restitution would result in the unjust enrichment of the claimant. The basis of this contention is that once the defendant has identified that the money in dispute has come at the expense of a third party, every effort should be made to return that money to the third party. In doing so, the most effective and appropriate means of attaining corrective justice, as between the defendant, claimant and third party, will be achieved. The argument presented in this sub-subsection takes place on two levels. First, in a situation where a defendant has been unjustly enriched at the expense of a claimant, and the claimant, in making good his loss, has been unjustly enriched at the expense of a third party, the question of whether corrective justice can be achieved if the defence is upheld is analyzed. Then, on the basis that corrective justice cannot be achieved if the defence is upheld and the defendant retains the money in dispute, four alternatives are examined. Each presents, in effect, a reason for rejecting (either entirely or in a qualified fashion) the defence of disimpoverishment.
(a) Problems with Attaining Corrective Justice when the Defence is Upheld (i) No Third Party Action Against the Defendant (No Leapfrogging) The first reason why the ideal corrective justice solution may never be attained if the defendant is permitted to retain the money in dispute (ie the defence of disimpoverishment is upheld) is that ‘leapfrogging’ may not be permitted. In other words, the third party may not be permitted to by-pass the claimant (the party directly unjustly enriched at its expense) and bring an action for restitution against the defendant (the party who was directly unjustly enriched at the expense of the claimant). There is considerable support for the proposition that leapfrogging is not permitted in unjust enrichment cases, such as overpaid tax.46 The District Court of Indiana in Acme-Evans Co v Smith47 put it in these terms: The fact that such [third party] baking company may have paid to the complainant a sum of money, in addition to the regular price of the processed article, representing the amount of such taxes upon the processed article purchased by it, does not mean that it 46 Saleh v State Board of Equalization (unreported, 29 July 2003, SCCA); Pourier v South Dakota Dept Revenue 658 NW 2d 395 (SDSC, 2003); Snyderman v Isaacs 31 Ill 2d 192, 201 NE 2d 106 (ILSC, 1964); Benzoline Motor Fuel Co v Bollinger, 353 ILL 600, 187 NE 657 (ILSC 1933); Cauvin v Phillip Morris [2002] NSWSC 736; Contra: Comr State Revenue (Victoria) v Royal Insurance Australia Ltd, above n 16, p 78 (Mason CJ). 47 Acme-Evans Co v Smith 13 F Supp 356 (USDC IN, 1936).
210
Other Arguments for Rejecting the Defence of Disimpoverishment
can be said to have paid the taxes. It could not bring suit against the [defendant] government for refund, because no taxes were paid by it to the government.48
However, the problem with many of these cases, including the above statement from court in Acme-Evans Co v Smith, is that they fail to clearly enunciate why leapfrogging should be prevented. They do no more than restate the proposition that there is no connection between the third party and defendant because the defendant’s unjust enrichment came directly from the claimant. Professor Burrows, in his book The Law of Restitution, goes some way to filling this gap. He provides a list of general arguments which support the view that leapfrogging should not be permitted.49 However, following a thorough examination of the various contentions he concludes that the ‘arguments for and against restricting restitution . . . to direct providers are finely balanced’.50 While there is much to commend Professor Burrows’ analysis, it must be said that an exploration of the problems with leapfrogging in cases of overpaid tax—the situation in which the defence of disimpoverishment most commonly arises—is omitted from his review. Because of their importance for this book, they must be here considered. The first problem is practical in nature. It suggests that if governments are permitted to retain overpaid tax by relying on the defence of disimpoverishment, it is also likely that they will impose restrictions on its recovery by third parties. More precisely, they will prevent third parties, at whose ultimate expense the unjust enrichment has come, from bringing claims for restitution. This was the case, for example, in Snyderman v Isaacs,51 where the state of Illinois ‘provided both in the Use Tax Act and in the Retailers’ Occupation Tax Act that the only person entitled to receive credit [was] . . . the remitter of the tax’.52 The same approach was adopted in the United Kingdom in relation to value added tax. As the discussion in chapter 4 showed, overpaid value added tax can only be recovered by the party who remitted the tax (the claimant), not the person who bore its ultimate cost (the third party). The second difficulty with leapfrogging in cases of overpaid taxation is that, as already alluded to, there is no nexus between the third party and the government. In all cases under review in this book, the tax in question is placed on the claimant, not the third party. This fact is of vital importance. It tells us that the only legal relationship to which the government is a party is the one it shares with the claimant. The fundamental reason why the government should not have to 48
Ibid, p 358. A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2003) 31. See also P Birks, Unjust Enrichment, 2nd edn, (OUP, Oxford, 2005) 89. 50 A Burrows, The Law of Restitution, above n 49, p 34. 51 Snyderman v Isaacs, above n 46. 52 Ibid, pp 196 and 108. 49
Three Reasons for Rejecting the Defence
211
make restitution of overpaid tax to a third party in these circumstances is because it could never sue that same third party to recover unpaid tax. Because the government can only recover tax from the claimant (the person on whom the burden of the tax is imposed), consistency demands that the only party to whom it should be obliged to make restitution is also the claimant. As corrective justice is unlikely to be attained because of problems associated with third parties bringing claims against the ultimate recipients of the disputed enrichments (that have come at the third parties’ expense), the defence of disimpoverishment ought to be rejected. (ii) No Third Party Action Against the Claimant If it is accepted that the problem of leapfrogging presents difficulties for the efficient and effective attainment of corrective justice, the question remains as to whether these problems may be overcome by permitting a third party to bring an action against a claimant (the ultimate transferor of the disputed enrichment) after the defence of disimpoverishment has been upheld (in an action between the claimant and defendant). The answer, in short, is that such problems will not be overcome. Corrective justice cannot, in these circumstances, be achieved, because once the defence of disimpoverishment has been accepted, the claimant will be entitled to invoke the defence of disenrichment against any third party claim. The claimant will be entitled to rely on the defence of disenrichment because he will no longer be in possession of the unjust enrichment he originally received at the expense of the third party. He will, instead, have already transferred this money to the defendant.
(b) What are the Alternatives? The above discussion highlights a dilemma. On the one hand it has been shown that there is a reason for upholding the defence of disimpoverishment when the claimant has been unjustly enriched at the expense of a third party. On the other hand, the objective of attaining the ideal corrective justice solution (returning the defendant, claimant and third party to their original financial positions), is shown to be compromised when the defence of disimpoverishment is upheld. This is because of problems associated with leapfrogging and the associated fact that third parties will not be entitled to seek restitution from claimants who have changed their position. Four alternate means of obtaining the ideal corrective justice solution are therefore considered below. The first three seek to rely on, what has been described earlier in this book, as a ‘qualified rejection’ of the defence. (i) Direct Award in Favour of a Third Party The first means by which corrective justice as between the defendant, claimant and third party may be attained is if a court makes a direct award of restitution in
212
Other Arguments for Rejecting the Defence of Disimpoverishment
favour of a third party (during an action between a claimant and defendant). This approach appears to have been adopted in Pourier (d/b/a Muddy Creek Oil and Gas Inc) v South Dakota Dept Revenue.53 The claimant in that case was the sole shareholder of the corporation, Muddy Creek Oil and Gas. He brought an action against the South Dakota Department of Revenue to protest against the imposition of a motor fuel tax. The legislation provided that the legal incidence of the tax fell upon the consumer, not the claimant. The claimant nonetheless argued that, in reality, the burden of the tax fell on the company. Thus, the claimant argued that the company should be entitled to restitution. The South Dakota Supreme Court disagreed. It concluded that: Since Muddy Creek does not bear the legal incidence of the tax on the fuel it sold to consumers, by statute, it is therefore not entitled to a refund of all the taxes it has paid since 1995. However, the State is also not entitled to retain this illegally collected tax. The proper parties, namely, Muddy Creek’s consumers who were enrolled members of the Oglala Sioux Tribe, are entitled to the bulk of refund.54
While the means by which the overpaid tax was to be returned to the claimant’s customers is not made clear, the tenor of the judgment suggests that it was to be awarded directly to them. Although this solution provides an effective means of attaining corrective justice, it is also comes at a cost. As Konenkamp J stated, it is achieved at the expense of ‘the wise principle that courts must await whatever controversies may arise and decline to reach disputes not before them’.55 Support for the view that courts should not make direct awards of restitution in favour of non-parties can be found in a number of cases. The decision in Bronco Wine Company v Frank A Logoluso Farms56 is a good example. In that case the claimant was a grape grower. He brought an action against the defendant winemaker for breach of contract and unfair business practice. At trial the claimant was awarded $220,939.26. In addition, the trial judge made an award of $457,005, plus interest, in favour of 27 non-party grape growers. The Californian Court of Appeal reversed the trial judge’s award in favour of the 27 non-party grape growers. It held that the rendering of a judgment for or against a non-party constituted a denial of due process ‘because the nonjoined party has not been given notice of the proceedings or an opportunity to be heard’.57 In support of its conclusion the Court of Appeal cited, among others, the case of Fazzi v Peters.58 In that case the California Supreme Court had stated that: 53
Pourier v South Dakota Dept Revenue, above n 46. Ibid, p 406. 55 Ibid, p 409. 56 Bronco Wine Company v Frank A Logoluso Farms 214 Cal App 3d 699, 262 Cal Rptr 899 (CACA, 1989). 57 Ibid, p 717. 58 Fazzi v Peters 68 Cal 2d 590, 440 P 2d 242 (CASC, 1968). 54
Three Reasons for Rejecting the Defence
213
The elementary common law principle to which we have reference is that a judgment may not be entered either for or against one not a party to an action or proceeding.. . . The law of California is in agreement with this principle. ‘It is the general rule that a judgment may not be entered either for or against a person who is not a party to the proceeding, and any judgment which does so is void to that extent’. (In re Wren 48 Cal 2d 159, 163, 308 P 2d 329 (CASC 1957)).59
Two particular justifications for this principle were provided in Bronco Wine. The first was that the ‘nonparty growers had no opportunity to present their claims before the trial court by counsel of their own choice’.60 The second was that some of the non-party growers may have elected ‘to waive any such opportunity, preferring not to jeopardize an ongoing beneficial business relationship’.61 On the basis of these and other concerns relating to issues of procedural fairness, it is suggested that awards of restitution should not be made directly in favour of third parties, even when the money in dispute may have come at their expense. Another means by which corrective justice may be attained must be identified. (ii) Indirect Award in Favour of a Third Party α) In General It will be recalled that in chapter 2 the defence of disimpover(α ishment was shown to be capable of being not only rejected or accepted at law, but also rejected in a qualified fashion. A qualified rejection was said to operate in the following way. First, the defence of disimpoverishment is rejected as a matter of law. Thus, the defendant is not permitted to retain the sum in dispute. This is the ‘rejection’. Second, if the claimant is shown to have made good the cost of the defendant’s unjust enrichment by shifting it to a third party in circumstances which are unjust, the claimant is denied unconditional restitution. This is the ‘qualification’ of the rejection. Various cases were discussed in chapter 3 to illustrate how a qualified rejection of the defence of disimpoverishment operates in practice.62 Some of those cases awarded the claimant restitution on the basis that he pass-back the value of the award to any third party from whom it came. For example, in Benzoline Motor Fuel Co v Bollinger63 directions were given for the money to be returned by the defendant to the claimant in a manner which would ‘adequately protect and conserve the individual interests of each of the complainant’s customers’.64 59
Ibid, p 594. Bronco Wine Company v Frank A Logoluso Farms, above n 56, pp 718–19. 61 Ibid. 62 Text following, above n 83, ch 3. See also Mutual Pools & Staff Pty Ltd v Cth (1994) 179 CLR 155 (HCA) 177 (Brennan J) 191 (Deane and Gaudron JJ). 63 Benzoline Motor Fuel Co v Bollinger, above n 46. 64 Ibid, p 610. 60
214
Other Arguments for Rejecting the Defence of Disimpoverishment
The difference between this approach and the one considered immediately above is that restitution is not, at least in a formal sense, granted directly to a third party. The award is made in favour of the claimant. The claimant is then obliged to return the money received to the affected third party. Courts have shown an increasing preparedness to adopt this method of attaining corrective justice between the defendant, claimant and third party. Consider the words of the Supreme Court of California in Decorative Carpets Inc v State Board of Equalization: Parties to an action frequently have responsibilities to persons who are not parties. In Mallon v City of Long Beach . . . this court held that the City of Long Beach held funds derived from the sale of oil and gas from tidelands upon a resulting trust for the state, which was not a party to the action. In Lindheimer v Illinois Bell Telephone Co . . . the United States Supreme Court approved a district court order requiring the telephone company to refund to its customers, who were not parties, service charges collected in excess of lawful rates.. . . The district court devised a plan for accomplishment of the refund and compelled the telephone company to follow the plan.65
This statement is supported by English and Canadian cases where carers or those who have contributed financially to the care of a tort victim have been able to recover financial expenses they have incurred.66 There are two main methods for making indirect awards in favour of third parties. The first is the constructive trust mechanism. The second involves the claimant giving an undertaking to pass-back any money received. (ß) Constructive Trust Of the two available methods for making indirect awards in favour of third parties, a clear judicial preference for the constructive trust mechanism exists in cases of overpaid tax.67 The source of this preference, as Kirby J explained in Roxborough v Rothmans Pall Mall,68 appears to be Hand J’s celebrated dissent in 123 East Fifty Fourth Street Inc v United States.69 In that case Hand J decided that the claimant should only be entitled to restitution if it held the money on constructive trust for its patrons. While this approach overcomes, at least in a formal sense, the problems associated with making direct awards of restitution in favour of non-parties, it 65
Decorative Carpets Inc v State Board of Equalization 373 P 2d 637, 58 Cal 2d 252 (CASC, 1962) 255. Allen v Waters [1935] 1 KB 200 (CA); Dennis v London Passenger Transport Board [1948] 1 All ER 779; Schneider v Eisovitch [1960] 2 QB 430; Hunt v Severs, above n 45; Thornton v Board of School Trustees of School District No 57 (Prince George) (1978) 83 DLR (3rd) 480 (CSC). See further S Degeling, Restitutionary Rights to Share in Damages (Cambridge, CUP, 2003) 245, 42–3. 67 Roxborough v Rothmans Pall Mall, above n 18, p 573 (Kirby J); Comr State Revenue (Victoria) v Royal Insurance Australia Ltd, above n 16, p 78 (Mason CJ); Decorative Carpets Inc v State Board of Equalization, above n 65. 68 Roxborough v Rothmans Pall Mall, above n 18, p 571 (Kirby J). 69 123 East Fifty Fourth Street Inc v United States 157 F 2d 68 (USCA, 1946). 66
Three Reasons for Rejecting the Defence
215
nonetheless has difficulties of its own. These difficulties are of two types. The first is practical in nature. The second is policy-based. The practical problems associated with imposing a constructive trust are many and varied. The Law Commission in its report on for Personal Injuries Damages identified the first of these: ‘[I]t is unclear what duties the claimant would be under as a trustee of the money . . . should the plaintiff have a duty to invest? What of the possibilities of a conflict of duty and interest?’70. In addition to these concerns, it is also unclear what degree of particularity is required to ensure the trust does not fail for lack of certainty. When the proposed objects of the trust are large in number and dispersed over a wide geographic area, it is not clear that the beneficiaries can be identified with sufficient clarity. Moreover, even if the beneficiaries can be identified, it is unclear how a claimant should fulfill his trustee obligations in relation to them. Should the money be held on trust until every penny has been dissipated? How much time and money should be spent by the claimant in attempting to inform potential beneficiaries of their interest in the trust? What standard of proof should the claimant require from beneficiaries who claim an interest in the trust money? These various practical problems are augmented by a policy concern. That is, why should third parties be entitled to priority over equally deserving but unsecured creditors upon the insolvency of the claimant? The answer, it is submitted, is that they should not be provided with such protection in the event of insolvency. They, like other unsecured creditors, should only be entitled to share in the claimant’s funds pari passu. Thus, even if some of the practical concerns, discussed above, do not arise on the facts because the relevant third parties and their entitlements are easily identifiable, this objection must still be overcome. In conclusion, due to the problems associated with imposing a constructive trust in cases of overpaid tax, it is recommended that this approach be rejected.71 (γγ) Personal Obligation Rather than imposing a constructive trust as a means of distributing any award to affected third parties, a court may alternatively impose a personal obligation on the claimant to the same effect. This approach has been legislatively adopted in Scotland in relation to the recovery of damages on behalf of the carers of tort victims,72 and is supported by various common law cases as well.73
70 Law Commission for England and Wales, ‘Damages for Personal Injury: Medical, Nursing and Other Expenses; Collateral Benefits’ (Law Com No 262, 1999) 3.55(1). 71 Cf M Chowdry, ‘Unjust Enrichment and Section 80(3) of the Value Added Tax Act’ [2004] BTR 620, 631. 72 Administration of Justice Act (Scotland) 1982 §8. 73 S Degeling, Restitutionary Rights to Share in Damages, above n 66, p 244, n 41, p 245, n 44. See also Nelson v Nelson (1994) 184 CLR 545, where recovery was made conditional on a sum of money being repaid to the Commonwealth.
216
Other Arguments for Rejecting the Defence of Disimpoverishment
Legislative examples of this approach can also be found in relation to repayments of unlawfully demanded tax. For instance, under the Revenue Act (US) 1928 Section 424(a)(3), a tax refund would only be granted if: ‘[T]he taxpayer who had not borne the burden of the tax, filed a bond which was conditioned upon immediate repayment to the United States, if the refund was not distributed to the customer who bore the burden’. Similarly, the Value Added Tax (Amendment) Regulations (UK) 1998 rr 37A–H provide that a claimant will only be reimbursed if he undertakes to pass-back all money received to those persons who bore the whole or any part of the cost of the original payment to the Commissioners. Pursuant to these regulations the Customs and Excise Commissioners have stated that they will only make a refund if the claimant agrees to ‘sign an undertaking in the format set out in Section 16 of this notice’.74 Because the imposition of a personal obligation on the claimant avoids priority problems on winding-up, it is superior to the constructive trust approach. Nonetheless, it has problems of its own. The first is that it overlooks the important principle of bringing finality to litigation. Finality will not be achieved if the claimant is required to establish a mechanism for returning the money in dispute to third parties and to keep this procedure in place until all the money has been dissipated. In addition, if disputes arise as to the entitlement of a third party to recover money held by the claimant, recourse to the courts will once again be necessary. This has the potential to waste substantial judicial and societal resources. The second potential problem with this means of distribution is that it assumes that, in all cases, third parties will be able to establish, to the satisfaction of the claimant, that they are legitimately entitled to some or all of the money held by the claimant. The third problem is that the cost of establishing and administering any repayment scheme may exceed the amount repayable to affected third parties. This problem was identified in National & Provincial Building Society v Customs and Excise Comrs.75 The Tribunal in that case found that: [T]he average sum to be returned to the borrowers would be £1.05 per fee paid; about 374,000 fees were paid; only a few of the borrowers concerned are still known to the Appellant . . . [and] the cost of inviting, receiving, verifying and satisfying even the most straightforward claim would exceed the amount of the claim.76
74 How to Correct VAT Errors and Make Adjustments or Claims, Notice 700/45, March 2002, p 14.6, located on the world wide web at: http://new.hmce.gov.uk/channelsPortalWebApp/downloadFile?content ID=HMCE_CL_000077. 75 National & Provincial Building Society v Customs and Excise Comrs, [1996] VRDR 153. 76 Ibid, p 25.
Three Reasons for Rejecting the Defence
217
The final problem with this mechanism is that the claimant may refuse to participate.77 The issue this gives rise to is that the court is once again faced with the dilemma of deciding whether to allow the defendant to retain her unjust enrichment or permit the windfall to accrue to an equally undeserving claimant. (iii) Unconditional Restitution in Favour of the Claimant The fourth and final option open to the courts is to award the claimant unconditional restitution and thereby enable a third party to bring a direct action in unjust enrichment against the claimant. The obvious objection to this approach is that it does not, in fact, guarantee the attainment of corrective justice. It only means the money in dispute may be returned to the third party at whose expense it originally came. Nonetheless it is submitted that it is the best alternative method. There are two justifications for this conclusion. The first justification is that there is no reason for accepting the defeatist position that a claimant will forever remain unjustly enriched if awarded restitution. Consider the case of an identifiable third party who has a large and easily calculable financial interest in the outcome of the claimant’s action against the defendant. This is said to be a paradigm case of where a constructive trust may be usefully employed. However, in these circumstances, it is highly probable that the third party will have the means and incentive to bring an action for restitution once the claimant has succeeded against the defendant. Thus, the practical and policy concerns associated with awarding a constructive trust are avoided. Even if a third party does not have a large financial stake in the outcome of the dispute between the claimant and defendant, this does not mean that it will not bring an action against the claimant. For example, if restitution results in the unjust enrichment of the claimant at the expense of a large number of third parties, the availability of class actions, as considered in the following chapter, mean that third party actions may be brought where they otherwise would not have. The second reason for rejecting the defence of disimpoverishment in favour of awarding the claimant restitution is that third parties do not have to overcome the ‘leapfrogging’ problems (identified earlier) in bringing their claims for restitution. They will not have to overcome judicial scepticism, such as that expressed by Handley JA in Cauvin v Philip Morris, that ‘[t]here has never been an action for money had and received which has avoided privity in an appropriate restitutionary sense’.78 Or perhaps, more correctly, they will not have to establish an exception to the general rule that ‘restitution in unjust enrichment by subtraction [is] . . . confined to direct providers’.79
77 78 79
Eg, Roxborough v Rothmans Pall Mall, above n 18. Cauvin v Philip Morris (oral argument before the NSWCA, 19 June 2003) 55 (Handley JA). A Burrows, The Law of Restitution, above n 49, p 34.
218
Other Arguments for Rejecting the Defence of Disimpoverishment
In light of these considerations it is concluded that the best way to achieve corrective justice for the claimant, defendant and third party is to make unconditional restitution to the claimant (which then allows the third party to claim against the claimant). The defence of disimpoverishment should therefore be rejected and the claimant awarded restitution even if it initially results in his unjust enrichment at the expense of a third party.
E. Conclusion The purpose of this chapter was to consider numerous arguments which favour rejection of the defence of disimpoverishment. In all, nine arguments were examined. Of those, three were considered unconvincing, three were viewed as only potential bases for rejecting the defence, and a further three supported unconditional rejection. This conclusion, that the defence of disimpoverishment should not form part of the law of unjust enrichment, brings an end to the third part of this book. Importantly, it provides an answer to the unresolved problems highlighted in part one. It was there shown that disagreement exists within and among common law countries as to the applicability of the defence. A uniform approach can now be adopted. The defence should be rejected in all circumstances. Only one issue remains to be considered. It concerns the right of a third party to bring an action for restitution against a claimant who has been unjustly enriched at its expense. The importance of this inquiry cannot be understated. That is because a central part of the justification for rejecting the defence of disimpoverishment in the final section of this chapter was to enable a third party to bring a claim for restitution against an unjustly enriched claimant. We must now therefore turn to such claims.
Part IV
Third Parties
10 Third Parties
A. Introduction The preceding eight chapters of this book have been primarily concerned with explaining the rights and liabilities of two parties: the claimant and defendant. This chapter, like the final section of the previous chapter, focuses on the third parties who bear the ultimate cost of a claimant’s unjust enrichment. More particularly, in light of the conclusion that the defence of disimpoverishment should be rejected, it is concerned with the extent to which third parties may bring successful claims for restitution. As a matter of consistency and clarity, this chapter persists with the party designations adopted throughout the earlier chapters of the book. The ‘third party’ in this chapter, who is in fact the claimant, will remain known as the ‘third party’. Similarly, the party who has been referred to as the ‘claimant’ in the preceding chapters, will still be referred to by that appellation. That is despite the fact that he will, in actuality, be defending claims for an award of restitution. Three substantive sections are contained in this chapter. First, the situations in which a third party may bring an action for restitution against a claimant are examined. The second section focuses on the role of class actions. Finally, the third part of this chapter looks at the nature of a third party’s claim in unjust enrichment by focusing on cases of overpaid tax and whether, in these circumstances, a third party may be entitled to an award of restitution against the claimant.
B. When Can an Action be Brought Against a Claimant? 1. Third Party v Claimant There are three circumstances in which a third party may bring an unjust enrichment action against a claimant in disimpoverishment cases. The first is after the
222
Third Parties
claimant has succeeded in an action for restitution against the defendant. The second is if the claimant retains money paid to him by the third party which he never transferred to the defendant. This may occur, for example, when the claimant collects tax from the third party but, before remitting it to the government, discovers that the legislation imposing the tax is unlawful.1 The final case is more difficult. It concerns the situation in which a third party brings an action for restitution against the claimant where (i) the claimant has transferred the money received from the third party to a defendant, but (ii) the claimant has not yet had restitution from the defendant. In these cases it is ordinarily thought that the third party will not be entitled to restitution. That is because the claimant will be able to rely on the defence of disenrichment.2 Put another way, the claimant will argue that he is no longer enriched by the benefit initially received from the third party because it has been transferred to the defendant. Thus, the third party cannot establish that the claimant remains unjustly enriched at its expense. The question for resolution here is whether this is, in fact, correct. The view taken in this book is that it is not.3 The claimant, in these circumstances, should not always be entitled to rely on the defence of disenrichment because he may, in fact, not be disenriched. He may be left no worse off as a result of transferring the money in dispute if he has a valid claim for restitution against the defendant. If, for example, it has been established elsewhere that a defendant government unlawfully exacted tax paid by the claimant, his situation will be no different to a person who deposits the value of her unjust enrichment in a bank, and thereby obtains a chose in action. Only if his action is time-barred, or subject to some other defence, will the claimant be able to prove his disenrichment.
2. Parens Patriae A different means by which a third party’s claim for restitution could be brought against a claimant is when the state brings a parens patriae action on behalf of the third party. The term ‘parens patriae’ means, literally speaking, ‘parent of the country’. It first developed as a legal concept in the English Courts of Chancery where the king’s royal powers were exercised in his capacity as father of the country. In practice, this meant that the Courts of Chancery were entitled to exercise jurisdiction over minors, charities and people of unsound mind. The parens patriae doctrine has developed in the United States ‘to include actions by state governments to protect powerless citizens against threats to their physical 1
Roxborough v Rothmans Pall Mall (2001) 208 CLR 516 (HCA). G Virgo, ‘Restitution of Overpaid VAT’ [1998] BTR 582, 591. 3 See also M Chowdry, ‘Unjust Enrichment and Section 80(3) of the Value Added Tax Act’ [2004] BTR 620, 627. 2
Class Actions
223
and economic well-being’.4 Of particular interest for this book is that in the United States the parens patriae doctrine has been used at common law5 and under statute6 to enable state attorneys general to bring actions, particularly in the field of antitrust, on behalf of third party consumers. Such actions have most commonly been pursued when the class of affected consumers is large, difficult to identify, spread over a wide area and where each person has little financial incentive to bring a claim for restitution. If a state attorney general is successful in such an action, courts have various means of returning the money in dispute to the affected consumers.7 In theory, this power may be relied upon in cases under review in this book. In practice, however, this will rarely occur. That is because in cases of unlawful taxation an attorney general will have little incentive to bring an action for restitution against his or her own government. Only in situations such as Roxborough v Rothmans Pall Mall (‘Roxborough’),8 where a private party is in possession of the money in dispute, will an incentive to act exist. Even in these circumstances, however, it is arguable that legislation, and not litigation, is the more appropriate vehicle for resolving such disputes.9 While it is beyond the scope of this book to consider its particular application in the United Kingdom, Australia, Canada and the United States, the parens patraie doctrine appears to be provide a further, albeit limited, means by which third party recovery may be effected.
C. Class Actions Two types of action are available to third parties when seeking restitution of an unjust enrichment held by a claimant. First, the third party may initiate proceedings on its own behalf and for its own benefit. Alternatively, the third party can commence or become a member of a class action. Individual proceedings are common and well understood. By contrast, the class action mechanism requires examination. This is particularly so in light of the conclusion reached in the penultimate section of the previous chapter. It was there said that one basis for rejecting the defence of disimpoverishment and returning the money in dispute to the claimant was that third parties might be empowered to bring subsequent claims for restitution. One of the most important mechanisms for achieving this is the class action. 4 SB Farmer, ‘More Lessons from the Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought by State Attorneys General’ (1999) 68 Fordham L Rev 361, 362. 5 Eg, Georgia v Pennsylvania Railroad Co 324 US 439 (USSC, 1945). 6 Hart Scott Rodino Antitrust Improvements Act (US) 1976 amending the Clayton Act which was codified in 15 USC (US) 1994 §15c. 7 Eg, Holding the money on trust until it is claimed or distributing it ‘cy pres’. 8 Roxborough v Rothmans Pall Mall, above n 1. 9 This is exactly what was anticipated by the High Court of Australia in ibid.
224
Third Parties
1. What is a Class Action? A class action is a proceeding brought by a representative member of a group of people on behalf of those people. For this reason it is also referred to as a ‘representative proceeding’. In The Duke of Bedford v Ellis10 Lord MacNaughten confirmed that a representative suit could be maintained if the representative party and those he represented shared a common interest, common grievance, and relief, if granted, was beneficial to all. The rules pertaining to class actions across the common law world have now, generally speaking, been codified. For example, under Civil Procedure Rules (UK) 1998 r 19.6(1), courts have the power to order that a claim begin or be continued where more than one person has the same interest in a claim. And under r 19.6(4), any judgment or order given in a claim in which a party acts as a representative will be binding on all persons represented in the claim. Similar provisions can be found across and within Australia, Canada and the United States.11 Each jurisdiction does, however, have its own particular rules governing the formation, maintenance and other aspects of the class action. In the United States, for example, under Federal Rules of Civil Procedure (US) 1966 r 23, class actions may only be brought if: 1. the class is so numerous that joinder of all members is impracticable; 2. there are questions of law or fact common to the class; 3. the claims or defenses of the representative parties are typical of the claims or defenses of the class; and 4. the representative parties will fairly and adequately protect the interests of the class. While a thorough understanding of particular rules relating to class actions in the United Kingdom, Australia, Canada and the United States is vital for the success of any claim, a detailed discussion of these issues is beyond the scope of this book. The focus here is, instead, on the general workings of class actions and how third parties may make use of this procedural device as a means of facilitating recovery.
2. What are Some of the Advantages of Class Actions? Newberg on Class Actions states that: Historically, class actions were created in the English Courts of Chancery as a matter of convenience, to afford partial justice to parties before the court when they were unable 10 11
The Duke of Bedford v Ellis [1901] AC 1 (PC) 8 (Lord MacNaghten). R Mulheron, The Class Action in Common Law Legal Systems (Oxford, Hart Publishing, 2004).
Class Actions
225
to join all interested parties pursuant to the then compulsory joinder rule governing equity court procedures. This historical invention, born of convenience, continues to serve this important objective, as well as others . . . .12
The other advantages (as well as disadvantages) of class actions are well documented elsewhere.13 It is worth, however, briefly mentioning some of the reasons why third parties in cases under review in this book may benefit from using this procedural device. To contextualize this discussion, let it be assumed that a government has imposed an unlawful tax on the sale of cigarettes. Assume further that retailers have passed on the cost of this tax by increasing the price of cigarettes. If consumers have valid claims in unjust enrichment against the retailers, a class action presents itself as the ideal means of recovering an award of restitution. There are several reasons why. First, the class of potential litigants is large. Second, it is likely that the people affected are dispersed over a wide geographic area. Third, each person is only likely to have a very small financial stake in the outcome of any proceeding. The cost of actually commencing litigation, with the attendant risk of failure, will far outweigh the potential benefits of recovery. Finally, it is foreseeable that many of the affected consumers will not actually be aware of their right of recovery. In these circumstances there is considerable scope for utilization of the class action mechanism. It has the capacity to inform people of their rights, organize them as members of a coherent group and enable the expenses of litigation to be defrayed across a large number of people.
3. Two Illustrations In this section two cases will be considered. The first case presents an example of when a class action for the recovery of overpaid tax may be permitted. The second case shows why a class action may be refused.
(a) Javor v State Board of Equalization The facts of Javor v State Board of Equalization14 are as follows. The United States Congress imposed a manufacturer’s excise tax on vehicles and accessories. On 11 December 1971 it repealed the tax, giving it retrospective effect from 15 August of the same year. It so happened that the state of California had, between 15 August and 11 December 1971, also imposed sales tax on the price (including the federal excise tax) of vehicles and accessories sold. The representative claimant in this 12 13 14
A Conte and H Newberg, Newberg on Class Actions, 4th edn, (Thomson, West Press, 2003) §1: 6. Eg, ibid, ch 5. Javor v State Board of Equalization 527 P 2d 1153, 12 Cal 3d 790 (CASC, 1974).
226
Third Parties
particular case had purchased a Rolls Royce for $18,000 during the relevant fourmonth period. This sum included $1195 for federal excise tax and $990 for state sales tax. Of the $990 paid by way of state sales tax, $65.72 of that was referable to the fact the state tax had been imposed not only on the base price of the car, but also the federal tax. Two questions arose in this context. First, whether the claimant was entitled to return of the $65.72. And second, whether representative proceedings could be brought to recover the estimated $10 million in sales tax overpaid by Californian consumers during the relevant period. The Supreme Court of California answered both questions in the affirmative. Most importantly it held that the claimant was entitled to commence representative proceedings. In reaching this conclusion it stated that: The class of plaintiffs consists of approximately 500,000 persons or more. It is impractical to bring all members of the class before the court because they are not now known to plaintiff Javor, they are too numerous to be individually joined, it would be too great a burden on each individual plaintiff in view of the amount claimed by each, and the entire class can be correctly ascertained only from the records of the defendants.15
Despite the size of the potential class, the Supreme Court found that there was ‘a well defined community of interest in the questions of law and fact involved affecting the parties to be represented’.16 At the heart of the Supreme Court’s decision to allow the class action was the view that ‘[u]nless this class action is permitted defendant Board and defendant retailers will be unjustly enriched at the expense of plaintiff class.’17 Corrective justice between the State Board of Equalization, the motor vehicle retailer and the consumers was only capable of being achieved if the class action mechanism was adopted.
(b) Cauvin v Phillip Morris Immediately following the decision of the High Court of Australia in Roxborough,18 a class action was launched by consumers of tobacco products in the case of Cauvin v Phillip Morris19 (‘Cauvin’). The representative party, Cauvin, contended that consumers of cigarettes had borne the ultimate financial burden of the unconstitutional licence fee placed on the sale of tobacco products. Thus, they should be entitled to recover the $230 million awarded to the 25,000 retailers in Roxborough. 15 16 17 18 19
Ibid. Ibid. Ibid, p 1156. Roxborough v Rothmans Pall Mall, above n 1 the facts of which are discussed in above n 38, ch 3. Cauvin v Phillip Morris [2002] NSWSC 736.
Class Actions
227
Windeyer J, sitting in the Supreme Court of New South Wales, heard the defendants’ motion to have the case struck out summarily. In doing so he considered the nature of the claimant’s action against the retailers of cigarettes, as well as the validity of the proposed class. Of relevance to this discussion is the viability of the proposed class. On this issue Windeyer J concluded that because the identity of the three million persons the claimant purported to represent could never be established, the action could not be maintained. Two reasons underpinned this conclusion. The first was that: ‘[I]t has to be accepted there is no way that those class members could be notified because if an advertisement was published the consumer would not know whether he or she fell within the class description. If an ‘opt out’ or ‘opt in’ procedure were thought appropriate no consumer would know what to do.’20 The reason why no consumer would know whether or not she fell within the class turned on the particular facts of the case. The money in dispute related to tax which had been paid by the retailers and transferred to the wholesalers, but which had not yet been remitted the New South Wales government. It was therefore impossible to ascertain: ‘[W]hether the tobacco purchased was tobacco upon which it was thought a tax was payable so that in a general way the purchase price reflected the tax which was not paid.’21 What this concern appears to reflect is the fact that a consumer who purchased cigarettes would not know whether the price paid included a tax which had either (i) been remitted to the government, (ii) formed part of the $230 million held by the wholesalers, or (iii) did not include a tax component at all. The second reason why Windeyer J concluded that the class action could not be maintained was because: ‘[N]o consumer, if able to prove on the balance of probabilities that some relevant purchase was made, would be able to establish entitlement to a particular sum.’22 This conclusion appears to rest upon the fact that no cause of action based on failure of consideration could be maintained. That is because the consumers paid a composite price for cigarettes. In other words, the tax component of the purchase price was not separately itemized. On appeal to the New South Wales Court of Appeal23 and on application for special leave to appeal to the High Court of Australia,24 counsel for claimant contended that Windeyer J was incorrect to find that the relevant class could not be identified. In their further supplementary summary of argument presented in writing to the High Court, counsel contended that:
20 21 22 23 24
Ibid, p 37. Ibid. Ibid. Cauvin v British American Tobacco Aust Services Ltd [2002] NSWCA 253. Cauvin v Phillip Morris [2004] HCATrans 93.
228
Third Parties
Identification of the relevant class in Cauvin is simply a question of asking which smokers can establish on the balance of probabilities that they purchased cigarettes that had been bought by retailers from wholesalers between 1 July and 5 August 1997. This would include anyone who could demonstrate that they were a routine regular smoker from 1 July onwards and for a sufficient period afterwards for a Court to be reasonably certain (according to the civil standard of proof) that they purchased some of the relevant cigarettes. If Windeyer J’s true concern was that the class could be better expressed than had the Applicant in Schedule A, that concern could have been remedied by amendment. It was not a matter justifying His Honour’s order that the action not proceed as a representative action. The fact that there would be a very large number of potential members of the class is irrelevant.25
Despite this argument, the New South Wales Court of Appeal rejected the claimant’s appeal and the High Court of Australia refused her application for special leave.
(c) Conclusion The cases of Javor and Cauvin are illustrative of two propositions. First, Javor shows that class actions have the potential to act as an important vehicle in assisting restitutionary recovery in cases where third parties have little financial incentive or interest in bringing individual proceedings. Second, despite this potential, Cauvin reminds us that class actions are not a general solution and cannot always be used by parties in having their claims vindicated in court. As was recognized in Eisen v Carlisle & Jacquelin: ‘Rule 23 [Federal Court Rules (US) 1966] does not require or contemplate that courts will hear causes of action as class actions merely because they will not get to hear the case any other way.’26 Despite the difficulties that may exist in establishing a class action, this procedural mechanism provides an important means by which direct actions may be pursued by third parties against claimants.
D. Recovery of Overpaid Tax by a Third Party (from the Claimant) 1. The Issue (a) An Illustration This discussion is also best introduced by way of an illustration. Suppose D imposes a 10 per cent tax on the sale of cigarettes. C, a tobacconist, increases the 25 26
Cauvin v Phillip Morris (Applicant’s Summary of Argument, 2 April 2004). Eisen v Carlisle & Jacquelin 391 F 2d 555, 572 (USCA, 1973).
Recovery of Overpaid Tax by a Third Party (from the Claimant)
229
retail price of his cigarettes by the full amount of the tax. Because demand for cigarettes is relatively inelastic, C experiences no decrease in sales following the price increase. X, a smoker, purchases cigarettes from C. Prior to the tax being imposed X paid £1 for a packet of cigarettes. He is now charged £1.11. Suppose over the course of a month X purchases ten packets of cigarettes from C. The total amount of tax paid to D by X will be £1.10 (10 x 11p). If it is later discovered that the cigarette tax was unlawfully imposed, and C is awarded restitution of the £1.10 from D, the question arises as to whether X is entitled to recover the £1.10 from C. Assuming no contractual right to recovery, in these circumstances X may be able to bring a claim for restitution against C on one of two bases. The first is failure of consideration.27 In this situation X may contend that the basis of his payment—the legality of the tax—has failed. The alternate unjust factor which X may rely on is mistake.28 X may contend that his intention to enrich C was vitiated because his payment was made on the mistaken belief that D imposed a lawful tax. The following discussion is directed towards answering the question of whether, in either situation, C has been unjustly enriched at the expense of X and, if this is the case, X should be awarded restitution from C. The argument against awarding restitution in either circumstances is that the law of unjust enrichment has no role to play if the contract between C and X remains valid.
(b) The Purpose of this Inquiry There are two reasons for exploring, in this chapter, the question of whether restitution should be awarded in cases of overpaid tax where a contract between the claimant and third party remains valid. The first is that if, in these cases, it is decided that the third party should not be awarded restitution from the claimant, corrective justice will be achieved by allowing the claimant to retain the money in dispute. That is because he will not have been unjustly enriched at the third party’s expense. This result will render much of this chapter’s discussion about the mechanics of third party recovery in cases of overpaid tax redundant. The second reason for exploring this question here is that if the defence of disimpoverishment is accepted (because, for instance, problems with leapfrogging are overcome), its scope must be clearly identified. As stated in chapters 8 and 9, the defence should only apply when the claimant has been unjustly enriched at the expense of a third party. The issue which therefore arises is whether, when the relevant tax is later repealed or annulled, the claimant can be said to have been unjustly enriched at a third party’s expense—and thus, whether the defence should apply in this situation. 27
Roxborough v Rothmans Pall Mall, above n 1. M McInnes, ‘“Passing on” in the Law of Restitution: A Re-consideration’ (1997) 19 Sydney L Rev 179, 204–5; Cf Roxborough v Rothmans Pall Mall, above n 1, p 562 (Kirby J). 28
230
Third Parties
2. Is Restitution within a Valid Contract Permitted? The question of whether a claimant has been unjustly enriched at the expense of a third party in circumstances of overpaid tax depends crucially on whether the price paid by the third party is a ‘composite’ charge or the tax is separately ‘itemized’ by the claimant. While, as the following discussion shows, a claimant will never be unjustly enriched at the expense of a third party in cases of composite charges, a third party may be entitled to restitution based on a claimant’s unjust enrichment if the tax has been itemized.
(a) Composite Charge There are two ways in which a tax may be incorporated into the final contract price and presented on an invoice. The method under review in this section is when the price is presented as a global or composite charge. In other words, the customer does not know whether or to what extent a tax has been passed on in the final price. There appears to be universal agreement that in these circumstances a third party is not entitled to an award of restitution. In Cauvin, Windeyer J stated: The evidence is that retailers do not show any amount for tax as a separate item of price charged to consumers. They charge consumers one price and they collect from that consumer that price and pay it into their bank accounts. . . . There is on that basis no possible claim for money had and received. . . . Roxborough makes that clear. The acceptance [by Mason CJ] in Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd . . . of the dissenting judgement of Learned Hand J in 123 East Fifty Fourth Street Inc v United States . . . was pre-existing authority for this position.29
In addition to the cases cited in the above passage, the Supreme Court of Mississippi in Independent Linen Service Co v Stone30 recognized that: ‘The manner of payment by the customer—whether paid as a separate, distinct item of tax, or as part of the total price, increased by, but not separated as, a tax—appears to have determined the right of the customer to recovery or nonrecovery against the seller under many of the decided cases.’31 Various decisions were then cited by the Supreme Court in support of this conclusion,32 in addition to which many more can be added.33 29
Cauvin v Phillip Morris, above n 19, p 18. Independent Linen Service Co v Stone 192 Miss 832, 6 So 2d 110 (SCMS, 1942). Ibid, p 112. 32 Lash’s Products Company v United States 278 US 175, 49 S Ct 100 (USSC, 1929); Acme-Evans Co v Smith 13 F Supp 356 (USDC IN, 1936); Heckman & Co Inc v I S Dawes & Son Co Inc 56 App D C 213, 12 F 2d 154 (DCCA, 1926); Christopher v Hoger 160 Misc 21, 289 NYS 105 (NYMC, 1936); Texas Co v Harold 228 Ala 350, 153 So 442 (SCAL, 1934). 33 Eg, Wayne County Produce Company v Duffy-Mott Company Inc 244 NY 351 (NYCA, 1927); Richardson Lubricating Co v Kinny 337 Ill 122, 168 NE 886 (ILSC, 1929); Noll Baking & Ice Cream Co v Sparks Mill Co 304 Ill App 624, 26 NE 2d 425 (ILAC, 1940). 30 31
Recovery of Overpaid Tax by a Third Party (from the Claimant)
231
Though none of these cases makes it clear why an action for restitution would fail in these circumstances, the reason can be easily inferred. The only basis of the purchase of the good or service was its acquisition at the stated price. It cannot be suggested that the purchaser’s intent was qualified or vitiated to the extent that the tax component of the price paid was lawfully imposed. That is because the purchaser, by looking at the price stated, could not know whether a tax was included in the final charge.
(b) Itemized Charge The second way in which a tax may be incorporated into the final price is by a method of itemization. By ‘itemization’ what is meant is that prior to a purchase being made, the customer is aware of what portion of the final price is constituted by a tax. For example, if a bottle of water is purchased at a supermarket in the United States its shelf price may be listed as $1.50. However, at the point of sale, a tax is generally imposed. The final price then increases to account for this charge. It may, for example, be raised to $1.65. In these circumstances it is clear that 15c of the final price is referable to the sales tax. The question for resolution in this section is whether, in cases of itemization, a purchaser will be entitled to restitution of the tax component if it is later shown to have been unlawfully imposed. (i) Orthodox Position The orthodox view is that in circumstances where a contract between two parties remains effective (ie has not been discharged for reasons such as breach or frustration), restitution will not be granted. Numerous cases have been cited in support of this proposition.34 Of those, three decisions shall be considered here. The first is English, the second Australian and the third American. The claimant in Orphanos v Queen Mary College35 was charged and paid university fees at the rate of an overseas student. It was later shown that he should have been regarded as a home student and paid significantly less. Despite the obvious error, the House of Lords refused to grant the claimant restitution of the difference between the amount he actually paid and the sum he should have been charged. The main justification for this view was that the claimant was unambiguously informed that if he joined the college he would be classed as an overseas student and therefore liable to pay fees at the overseas rate.36 The claimant could not, therefore, be awarded restitution while his contract with the college remained effective. 34 Eg, Weston v Downes (1778) 1 Doug 23; Toussaint v Martinnant (1787) 2 TR 100; Goodman v Pocock (1850) 15 QB 576; Thomas v Brown (1876) 1 QBD 714; The Olanda [1919] QB 728; Green v Portsmouth Stadium [1953] 2 QB 190 (CA). See also A Burrows, The Law of Restitution, 2nd edn, (London, Butterworths, 2002) 323–24, 331–32; P Birks, Unjust Enrichment (Oxford, OUP, 2003) 106. 35 Orphanos v Queen Mary College [1985] AC 761 (HL). 36 Ibid, p 769 (Lord Fraser).
232
Third Parties
The second decision which supports the orthodox view that restitution for unjust enrichment should not be awarded within the parameters of a valid contract is the dissenting judgment of Kirby J in Roxborough. In that case Kirby J stated that a claim for restitution based on failure of consideration could not be sustained because: ‘The individual contracts between the wholesaler and the retailers were uncontestably valid. They were not ineffective. Nor were they terminated. Far from attempting to terminate the contracts for the supply of goods by the wholesaler, the retailers actually accepted the goods in every case.’37 Despite the strong protestations of Kirby J, the majority of the High Court of Australia found in favour of the claimant and awarded restitution. This decision, like others considered in the following section, represent a departure from the orthodox view. The final case which supports the orthodox view that restitution for unjust enrichment should not be awarded within a valid contract is 123 East Fifty Fourth Street v United States.38 While Hand J in that case decided that the claimant cabaret operator was not entitled to restitution because of the circumstances in which the tax had been passed on to its customers (in itemized form), Chase and Swan JJ disagreed. They awarded the claimant restitution on the basis that its customers had no right of recovery. As Chase J said: [W]hat the plaintiff saw fit to charge became the price of that which it furnished its patrons and when paid that price became the plaintiff ’s money . . . . Though the patrons paid an item designated tax they did not become the taxpayers . . . only a debtor-creditor relationship was created and the actual money the plaintiff received when the checks were paid became its own to use as it pleased.39
At the heart of the majority’s decision was the view that the claimant and its customers had entered into valid and binding contractual relations. No justification for restitution existed because if a patron ‘did not like the price charged he was free to refrain from patronizing the establishment.’40 (ii) Unorthodox Position While numerous cases can be found in support of the orthodox position, there are also a number of decisions which favour the view that restitution for unjust enrichment can be awarded even if the relevant contract has not been discharged.41 This 37
Roxborough v Rothmans Pall Mall, above n 1, p 577 (Kirby J). 123 East Fifty Fourth Street Inc v United States 157 F 2d 68 (USCA, 1946). 39 Ibid, p 70 (Chase J). 40 Ibid. 41 Eg, Queens of the River Steamship Co v Conservators of the River Thames (1899) 15 TLR 474; Comr State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA) 78 (Mason CJ); 123 East Fifty Fourth Street v United States, above n 38, pp 70–71 (Hand J); Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025 [52]. 38
Recovery of Overpaid Tax by a Third Party (from the Claimant)
233
opinion can once again be illustrated by reference to three cases: one from England, one from Australia and one from the United States. In Miles v Wakefield District Council42 the claimant, acting in breach of contract, refused to perform marriage ceremonies on Saturday mornings. Consequently, Wakefield District Council withheld that part of his salary which pertained to his Saturday morning work. The House of Lords rejected the claimant’s argument that he should be entitled to recover his unpaid salary. That is because he was not ready, willing and able to perform. In reaching this conclusion Lord Brightman and Lord Templeman also considered whether an employee might be entitled to a quantum meruit for services performed which fell short of the contractual requirement and are nonetheless accepted by the employer. Though only obiter comments, both judges agreed that restitution would be available in these circumstances. The second decision which adopts the unorthodox view that restitution for unjust enrichment may be awarded within the confines of a valid contract is Roxborough. There is little that need be said about the majority decision in this case. Despite recognizing that an action based on failure of consideration is not limited to failure of contractual reciprocation, the majority did not examine the implications of granting restitution when the contract between the retailer and wholesaler remained effective. Only Callinan J of the majority specifically addressed the point, stating: ‘I would reject the respondent’s submission that it is only in cases in which contracts have been frustrated, discharged for breach, or held to be unenforceable, or otherwise avoided, that a party may obtain restitution.’43 Callinan J considered that Gyles J, in his dissenting judgment in the Full Federal Court, was correct to conclude that if ‘formal termination by the appellants is necessary, then bringing these proceedings is sufficient.’44 How or why the commencement of proceedings terminates a party’s contractual obligations was, however, left unexplained. A further case which is considered representative of the view that restitution within a valid contract is permissible is Wayne County Produce Company v DuffyMott Company Inc45 (‘Wayne County Produce’). In that case a ten per cent tax was levied upon the sale of unfermented grape juice and other soft drinks. The cost of this tax was passed on to the claimant, who purchased cider from the defendant. Between November 1920 and August 1921 $2501.33 was remitted to the government, by the defendant, in respect of tax paid by the claimant. In 1922 it was decided that the tax did not apply to sales of sweet cider. The question which 42
Miles v Wakefield District Council [1987] AC 539 (HL). Roxborough v Rothmans Pall Mall, above n 1, p 588 (Callinan J). 44 Ibid. 45 Wayne County Produce Company v Duffy-Mott Company Inc, above n 33, cited in Roxborough v Rothmans Pall Mall, above n 1, pp 526–27 (Gleeson CJ, Gaudron and Hayne JJ). 43
234
Third Parties
therefore arose was whether ‘the money thus refunded by the government is held by the defendant to its own use or the use of the plaintiff who is suing to get the money back.’46 Cardozo J held that restitution should be awarded. Speaking on behalf of the Court of Appeals he said: ‘This is a case where the promise of the buyer is to pay a stated price, and to put the seller in funds for the payment of a tax besides. In such a case the failure of the tax reduces to an equivalent extent the obligation of the promise.’47 In reaching this conclusion Cardozo J specifically disagreed with two earlier decisions where the purchaser had been denied restitution in similar circumstances.48 (c) Conclusion A tax may be incorporated into the final price of a product or service in one of two ways: as a composite or itemized charge. When the price payable for a product or service is presented as a global figure, restitution will not be awarded. On the other hand, when the charge is broken into its constituent components, with tax separately stated, disagreement exists as to whether restitution should be awarded when the contract has not been discharged. The purpose of the following section is to determine which is the preferable view.
3. Is Restitution within a Valid Contract Justified? (a) The Item is Severable and Not Negotiated The level of confusion and disagreement within the case law as to whether restitution should be awarded within the confines of a valid contract is mirrored in academic debate on the issue.49 Support for both the ‘orthodox’ and ‘unorthodox’ views exists. Perhaps the most important contribution to this discussion has come from Professor Beatson.50 He argues that, in theory, if an award of restitution will not 46
Wayne County Produce Company v Duffy-Mott Company Inc, above n 33, p 353 (Cardozo J). Ibid. 48 Kastner v Duffy-Mott Co 213 NYS 128 (1925, NYSC); Heckman & Co Inc v I S Dawes & Son Co Inc, above n 32. 49 D Ibbetson, ‘Implied Contracts and Restitution: History in the High Court of Australia’ (1988) 8 OJLS 312; G Mead, ‘Restitution within Contract?’ (1991) 11 LS 172; J Beatson, ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in W Swadling and G Jones, The Search for Principle: Essays in Honour of Lord Goff of Chievely (Oxford, OUP, 1999) 143; L Smith, ‘Concurrent Liability in Contract and Unjust Enrichment: The Fundamental Breach Requirement’ (1999) 115 LQR 245; A Tettenborn, ‘Subsisting Contracts and Failure of Consideration—A Little Scepticism’ [2002] 10 Restitution L Rev 1; P Birks, ‘Failure of Consideration and its Place on the Map’ (2002) 2 Oxford U Commonwealth L J 1; M Bryan, ‘Rescission, Restitution and Contractual Ordering: The Role of Plaintiff Election’ in A Robertson, (ed), The Law of Obligations: Connection and Boundaries (London, UCL Press, 2003); R Cunnington, ‘Failure of Basis’ [2004] LMCLQ 234. 50 J Beatson, ‘Restitution and Contract: Non-cumul?’ (2000) Theoretical Inquiries in Law 83. 47
Recovery of Overpaid Tax by a Third Party (from the Claimant)
235
undermine the parties’ contractual allocation of risks, the law of unjust enrichment may have a role to play. He goes on to suggest, however, that the practical application of this theory will be limited. For example, he believes it did not justify an award of restitution on the facts of Roxborough.51 As a matter of principle, Professor Birks agrees with this view. He says: ‘Professor Beatson has argued, rightly, that a more sophisticated analysis [requires that] ... a distinction should be drawn between cases in which restitution would disturb legitimate hopes and fears inherent in the bargain and where it would not.’52 However, unlike Professor Beatson, Professor Birks says that this approach can be applied more broadly in practice. For example, he says it explains the outcome of Roxborough because the licence fee paid by the claimant was a severable aspect of the parties’ agreement and not the subject of negotiation.53 Restitution did not upset the parties’ contractual allocation of risks because ‘[h]ad the nullity of the tax come to light before payment the parties would simply have struck out that part of the contract.’54 In summary, the shared view of Professors Beatson and Birks is that, in principle, a middle course can be charted between the unorthodox and orthodox positions. While restitution should not, generally speaking, be awarded in cases where the parties’ contract remains effective, recovery is permissible if the item in dispute is severable and does not upset the parties’ allocation of risk. The factual circumstances in which this principle should apply, however, remain disputed. This is evidenced by the differences in opinion expressed by Professors Beatson and Birks in relation to the outcome in Roxborough.
(b) Analysis of the Beatson and Birks Perspective The view adopted in this book is that the principle enunciated by Professor Beatson, and endorsed by Professor Birks, is attractive. However, in order to decide definitively on its validity, consideration must be given to a range of arguments for or against its acceptance. The focus of these arguments is on determining who should be entitled to restitution of overpaid tax in circumstances where the parties’ agreement is silent on the issue. (i) Two Reasons Why the Claimant Seller should Retain the Money α) A Tax is Just an Ordinary Business Expense: The Risk is on the Seller The (α first argument in support of the view that restitution should never be awarded to 51
J Beatson and G Virgo, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR
352. 52
P Birks, ‘Failure of Consideration and Its Place on the Map’ (2002) 2 Oxford U Commonwealth L
J 1. 53 54
P Birks, Unjust Enrichment, 2nd edn, (Oxford, OUP, 2005) 124. P Birks, Unjust Enrichment, above n 53, p 124.
236
Third Parties
a third party customer in circumstances where a valid contract exists is best introduced by way of an example. Suppose Ravenscroft, a tailor, estimates that his total fixed and variable costs for the coming month will be £1000. His variable cost estimate is based on previous sales figures, which suggest he will be requested to make five suits. Thus, the cost of making each suit will be £200. Ravenscroft therefore decides to set the price of each suit at £500. Consequently, his estimated profit for the month is £300 per suit and £1500 overall. Now, suppose that at the end of the month Ravenscroft’s cost estimate proves to be incorrect. Assume this has occurred because his supplier of fabric returned £500 to him as part of a loyalty program. Ravenscroft will, in these circumstances, receive an unanticipated windfall. Despite this, none of his customers will be entitled to a partial refund. This is so irrespective of the fact that, had Ravenscroft known he was going to receive this £500 repayment, he would have reduced the retail price of his suits by a commensurate amount. The basis of this conclusion is that each customer paid £500 and received exactly what he or she bargained for: a Ravenscroft suit. The very same argument underpins the justification for why a third party consumer should not, in this situation, be entitled to recover the value of any overpaid tax. Taxes form part of the contract price between the vendor and the purchaser just like any other business expense. The vendor accepts the risk of losing a customer’s patronage by including the cost of a tax in the final price. The purchaser always has the choice of not purchasing the particular good or service because the price is too high. If the vendor happens to later receive a ‘kick-back’, either via a return of overpaid tax or in consequence of a loyalty program, this money should enure for his benefit alone. Emmett J reached the same conclusion at first instance in Roxborough.55 Similar opinions have been expressed in other cases. A good example is the Illinois Supreme Court decision in Martin Oil Service Inc v Dept of Revenue56 where it was stated that: The legal incidence of the Federal gasoline tax is on the producer, who is under no legal duty to pass the burden of the tax on to the consumer. If he does pass on the burden of the tax it is simply done by charging the consumer a higher price. This higher price is the result of the added cost, because of the burden of the Federal tax, to the producer in selling his gasoline. It is no different from other costs he incurs in bringing his product to market, including the costs of raw material, its processing and its delivery. All these costs are includable in his ‘gross receipts’ or the ‘consideration’ he receives for his gasoline. No reason has been given ... why the cost of the gasoline tax should be regarded differently from the other costs of the producer-retailer and we perceive none.57
55
Roxborough v Rothmans Pall Mall (1999) 161 ALR 253 (FCA) 264 (Emmett J). Martin Oil Service Inc v Dept of Revenue 49 Ill 2d 260, 273 NE 2d 823 (ILSC, 1971). 57 Ibid, pp 268 and 828, quoted with approval in Jones v Department of Revenue 60 Ill App 3d 886, 377 NE 2d 202 (ILCA, 1978) 206. 56
Recovery of Overpaid Tax by a Third Party (from the Claimant)
237
The point of this first illustration, as exemplified in the above passage, is that tax is just like any other business cost. Because the seller assumes the risk of a reduction in sales after passing on the cost of a tax, he (the seller) should be entitled to recover and retain whatever amount is remitted to the government by way of an overpayment. β) A Need for Consistency in the Distribution of Risk The second reason why (β it may be argued that restitution should not be awarded to a third party consumer in cases where the claimant recovers overpaid tax is based on a requirement of equal treatment. Consider the following example. Ravenscroft sells Ben a suit for £500. Later, Ravenscroft discovers that it is a taxable supply. In other words, VAT should have been accounted for. Had Ravenscroft realized this at the time of the sale he would have charged an extra £55 in order to pass on the cost of the 10 per cent tax to Ben. It is now too late for Ravenscroft to approach Ben and ask for £55 to cover the cost of the tax. This is so irrespective of the fact that Ben would have been prepared to pay £555 for the suit had this been the price originally charged. The point of this illustration is to show that, by way of analogy, there is no justification for allowing Ben, had he paid £555 for the suit, to recover £55 from Ravenscroft if it later turns out that the tax was unlawfully imposed. Consistency demands equal treatment of both cases. (ii) Reasons why the Consumer should be Awarded Restitution In order to justify an award of restitution in the consumer’s favour a two-stage inquiry must be undertaken. The first stage requires proof that the item in dispute is a severable part of the contract. In other words, it is separate and distinct. In cases where a tax has been itemized, the cases of Roxborough and Wayne County Produce show that this requirement is not problematic. That is because, by itemizing the tax, the supplier of the relevant good or service reveals that the contract price consists of two elements: a tax, and a base price. Far more difficult is the second stage of the inquiry. The third party consumer has to here explain why he should be entitled to restitution of the overpaid tax. A test has been established in order to determine this. It requires the court to ask whether the parties would have struck out that part of the bargain had the nullity of the tax come to light before any payment was made.58 If the third party can prove that the tax element would have been struck out on the basis that it was never intended to increase the level of the claimant’s overall profit, restitution should follow. Contained in the following five subsections are various arguments which may be used to support this view. 58 Wayne County Produce Company v Duffy-Mott Company Inc, above n 33, p 354 (Cardozo J); P Birks, Unjust Enrichment, above n 53, p 124.
238
Third Parties
α) The Claimant’s Message to the Consumer A claimant has two choices (α when he decides to pass on the cost of a tax to consumers. He can either include it as a part of a composite charge, or he can itemize it. There are specific reasons why itemization might be preferred. One of those is that it sends a message to consumers. It is a message which operates on two levels, both of which support the view that consumers should be entitled to restitution of any overpaid tax subsequently recovered from the government. The first level on which the message of itemization operates is the implicit suggestion that were it not for the government levy, the price of the product or service would be ‘Price without Tax’. Thus, because the claimant is only passing on the cost of the charge to maintain his pre-tax profit margin, consumers are left to infer that, if the tax was later reduced, repealed or annulled, a commensurate reduction in the retail price would follow. The decision to itemize the cost of a tax sends a message to consumers on a second level. The purpose here is to raise consumer awareness, understanding and submission. ‘Awareness’ is achieved because consumers are informed about the constituent elements of the price charged. In turn, awareness leads to ‘understanding’. Once a consumer is provided with a break-down of the charges being passed on, he or she may be more accepting of, and consider more reasonable, the final price of the product or service being sold. Finally, understanding may lead to a form of consumer ‘submission’. Knowing that the claimant is not profiteering, but is instead only passing on the cost of a government tax, may result in the consumer submitting to the price charged. That is because, first of all, the consumer will feel less like he or she is being exploited. And second, the consumer is more likely to assume that all other sellers of the product or service will also pass on the tax in question. In conclusion, the process of itemization sends a message to consumers: tax is not just an ordinary business expense. It is not an ordinary business expense because, if it were, it would be lumped together with all other costs as part of a composite charge. Itemization represents an attempt by the claimant to reduce or even nullify the risk that sales may decrease after passing on the cost of the tax. The implicit message received by consumers when a tax is itemized is that if it were annulled prior to payment, that part of the bargain would be struck out. β) The Claimant’s Message to His Rivals The second reason why a claimant (β may itemize the cost of a tax is to engage in, what is referred to in economic terms, an act of ‘market signalling’. Put another way, what the claimant hopes to do by publicizing the fact that he has explicitly passed on the cost of a tax is to generate similar behaviour by rival firms. By tacitly informing rivals that he has incorporated the cost of a tax into the final price of the relevant product or service, the claimant may be able to generate industry-wide collusion. If all sellers in the market shift the burden of the tax onto consumers, they are less likely to experience a
Recovery of Overpaid Tax by a Third Party (from the Claimant)
239
decline in sales as a result of the price increase. That is either because, as explained in chapter 9, there may not be any available substitutes, or the product in question may be a habit-forming good (ie addictive). Thus, the act of market signaling via itemization provides further evidence that claimants may not, in fact, bear the risk of a reduction in sales by passing on the cost of a tax. In these circumstances it is arguable that third party consumers should be entitled to restitution of any overpaid tax. (γγ) The Claimant’s Message to the Government A third reason why a claimant may itemize the cost of a tax is to actually reduce the effect of a government charge on the price of a product or service sold. This explanation is most easily described by way of an example. Suppose C is a Ferrari dealer. Suppose further that he ordinarily sells his Ferraris for £100,000. If the government imposes a 10 per cent tax on the sale of luxury cars, and C wishes to fully pass on the cost of this charge to his customers, he has two choices. As we have already seen, the first option is to pass on the cost of the tax as a composite charge. To fully pass on the effect of the tax using this method, C would have to increase the price of a Ferrari to £111,111. That is because 10 per cent of £111,111 is £11,111. Having accounted for tax, C would be left with £100,000. C’s second option is pass on the cost of the tax as an itemized charge. To fully pass on the cost of the luxury tax in this way, C would only have to increase the final price of a Ferrari to £110,000. That is because the price is made up of £100,000 plus £10,000 (being the 10 per cent tax on the £100,000). By adopting the itemized method of passing on a tax, a claimant gets the benefit of having the tax imposed not on the ultimate price paid by the consumer (Price + Tax), but on the price that would have been charged had the tax never been imposed (Price without Tax). The advantage of this method is that, because consumers are charged a lower price for the product or service in question (£110,000 as opposed to £111,111), a claimant is likely to generate a higher level of sales and revenue. The point of this illustration is not, however, just to prove once again that a claimant reduces the risk of losing sales by itemizing the cost of a tax. Rather, it is to show that when a claimant shifts the burden of a tax to consumers via itemization, he explicitly acknowledges to the government that had the tax never been imposed, the ultimate price charged would have been ‘Price without Tax’ (£100,000 in the case of the Ferrari). Having made this acknowledgement the claimant cannot then, after the relevant tax is later annulled, say that he should be entitled to retain any overpaid tax on the basis that the ultimate price of the good or service was ‘Price + Tax’ (£110,000 in the case of the Ferrari). That is because, if the true price of the item in question was ‘Price + Tax’, the amount of tax payable to the government should have been calculated on that basis (ie 10 per cent of £110,000 and not 10 per cent of £100,000).
240
Third Parties
The foregoing analysis can be summarized by a simple message: the claimant cannot retain his cake and eat it. The claimant has to choose between paying tax at the lower amount of ‘Price without Tax’ (and then be permitted to retain any subsequent award of restitution), and paying tax at the higher amount of ‘Price + Tax’ (and having to give up to the consumer any subsequent award of restitution). Cardozo J reached the same conclusion in Wayne Country Produce. In that case he awarded the end-consumer restitution of overpaid cider tax on the basis that: A form was adopted whereby the manufacturer was in a position to account to the government at the quoted rate per gallon, and to pay the tax with the excess. The defendant [manufacturer] had the benefit of the transaction as thus moulded in its dealings with the government. It is now attempting to set upon the transaction the impress of another quality in its dealings with the plaintiff [customer]. We find no evidence in the record to justify the change of front. The quality impressed at the beginning persists until the end.59
In summary, by passing on the cost of a tax in an itemized fashion, the claimant acknowledges and accepts that it was never intended to accrue for his benefit. He does this by representing to the government that the cost of the relevant good or service is ‘Price without Tax’. (δδ) The Claimant’s Behaviour when Tax is Reduced, Repealed or Annulled While the three points discussed above provide general reasons why a claimant should be required to make restitution of overpaid tax to consumers, the points made in this and the next subsection are specific in nature. They may or may not arise on the facts of a particular case. Much can be learned from the behaviour of a claimant when a tax is reduced, repealed or annulled. If, for example, there is evidence that following a reduction in the rate of tax a claimant habitually reduces, in a commensurate fashion, the price of the good or service sold, an inference might be drawn that had the tax been annulled prior to payment, he would have acted in the same way. In drawing this inference the conclusion may be reached that the claimant never considered the tax to constitute part of his profit structure. Put another way, if the tax was later annulled, he would not continue to charge his consumers ‘Price + Tax’, but instead reduce the cost of the product or service to ‘Price without Tax’. The same inference may be drawn, of course, if the claimant reduces the price of a product or service following annulment or repeal of the tax. In either circumstance a consumer may argue that he or she should be entitled to restitution. That is because recovery would not upset any hope or fears inherent in the bargain.
59
Wayne County Produce Company v Duffy-Mott Company Inc, above n 33, p 353 (Cardozo J).
Recovery of Overpaid Tax by a Third Party (from the Claimant)
241
(εε) Terms of the Contract Sometimes a contract will specify what should occur upon a reduction or increase in the price of a tax. For example, in Smith v Sparks Milling,60 the parties agreed to a tax clause which stated that ‘if the tax be increased, the purchaser should be charged the additional amount, but if it was decreased or abated, the amount thereof should be deducted.’61 Although the parties did not specify what should occur if the tax was later repealed or annulled, the court was able to draw the inference, from the inclusion of the above tax clause, that: ‘The parties to the contract were not interested in the item of tax as far as barter and sale was concerned. ... The thing they had in mind in adopting the tax clause was to take care of the Federal Tax; to protect both the vendor and vendee in case any change should be made affecting that particular item.’62 The Supreme Court of Indiana therefore rejected the vendor’s argument that it should be entitled to retain the overpaid tax. They considered such a construction of the contract to be ‘absurd’. The Court therefore awarded the consumer restitution. While they did so based on a particular construction of the contract, it is equally arguable that, like in Roxborough, such an award could have been made following an action in unjust enrichment. The purpose of this illustration is to show that, when parties agree that the price of a product or service is to be added to or deducted from depending upon any increase or decrease in tax, restitution may be legitimately awarded following its annulment or repeal. (iii) Conclusion The focus of the foregoing discussion has been on whether, in cases where a tax has been paid by a third party and is later annulled or repealed, the claimant (the party to whom the tax was initially transferred) can be said to have been unjustly enriched at the third party’s expense. Resolution of this question focused on whether a third party would be entitled to restitution from the claimant even though their contract remained effective. A number of reasons were identified at the outset of this section for undertaking this inquiry. First, because it helps determine the scope and relevance of the class action mechanism. Second, because it tells us whether the claimant or third party is deserving of the money in dispute and thus, what the ideal corrective justice solution is. And third, because it helps define, in practical terms, what the appropriate scope of the defence of disimpoverishment will be, should it ever be accepted as part of the law of unjust enrichment. It is clear that in circumstances where the parties’ agreement remains effective the question of whether the claimant has been unjustly enriched at the expense of 60 61 62
Smith v Sparks Milling 219 Ind 576, 39 NE 2d 125 (INSC, 1942). Ibid, p 600. Ibid, pp 600–1.
242
Third Parties
a third party, and therefore whether restitution should be awarded, is a difficult and much debated one. Powerful reasons for both the orthodox and unorthodox positions exist. While the arguments are finely balanced, the view adopted in this book is that when a tax has been itemized, paid by the consumer, and is later repealed or annulled, a third party should normally be entitled to restitution from the claimant. That is because the claimant will have been unjustly enriched at the third party’s expense. In other words, the view put forward by Professors Beatson and Birks is to be supported and, moreover, the broad approach to the application of restitution favoured by Professor Birks should be adopted. In stating this conclusion, an important point requires addressing. That is, while it is true to say that when a claimant passes on the cost of a tax he risks experiencing a decline in sales and revenue, this risk is partially or wholly overridden in cases of itemization. When a claimant itemizes the cost of a tax he chooses not to treat it like any other business expense. Rather, he makes a choice to shift the burden of the tax in a manner which is far more likely to result in him maintaining his pre-tax profits. That is because consumers are more likely to understand, accept and submit to the price being charged. Rival firms are more likely to tacitly collude and uniformly drive up the price of the product or service. And government will receive a lesser sum than would have been the case had the tax formed part of a composite price. When a claimant itemizes the cost of a tax he implicitly acknowledges the endconsumer’s right to restitution if the tax is later repealed or annulled. The claimant is therefore presented with a choice. On the one hand he can pass on the tax as a composite charge and recover it if it is later repealed or annulled and be immune to restitution from consumers. On the other hand, he can itemize it, and accrue the benefits of a lower tax charge and greater likelihood of maintaining existing levels of profit, but render himself susceptible to a restitutionary claim from consumers based on his unjust enrichment at their expense.
E. Conclusion The rights and remedies available to third parties were considered in three contexts in this chapter. The first section focused on the situations in which a third party will be able bring an action for restitution against the claimant. It was concluded that so long as the defence of disimpoverishment does not form part of the law of unjust enrichment, and the claimant is therefore not permitted to rely on the defence of disenrichment, the scope for third party recovery was enhanced. It was also shown that there is a potential for third party recovery following a parens patriae claim. In cases of overpaid tax, however, this potential was considered to be limited.
Conclusion
243
The role of class actions in facilitating third party recovery was discussed in the second section. It was there concluded that this procedural device may act as a useful tool in preventing claimants from retaining an unjust enrichment received at the expense of a large number of widely dispersed consumers. In the final section of this chapter the difficult (but most important) issue of when a third party may recover overpaid tax was confronted. After surveying the relevant cases and arguments, the view reached was that a third party should be entitled to restitution if the tax has been itemized, is distinct and severable, and does not constitute an aspect of the parties’ allocation of risk. While the question of whether the parties have allocated that risk is fact-sensitive, the ‘broad’ approach favoured by Professor Birks to facts such as those in Roxborough is to be preferred. That is, the parties should normally be regarded as not having allocated the risk of separately itemized but unlawfully demanded tax. Restitution by third parties from claimants should therefore be the norm (whether on the grounds of failure of consideration or mistake).
11 Conclusion
A. The Problems Restated Parts one, two and three of this book confirmed what was stated in the introduction: the law in relation to the defence of disimpoverishment is in a state of disarray. Part one revealed two main things. First, that disagreement exists between England, Australia, Canada and the United States as to whether the defence should be accepted at common law. And second, that the defence has been statutorily adopted in the United Kingdom, but only in a sporadic and seemingly inconsistent fashion. Part two showed that it is unclear whether, as part of a common law action for restitution, a claimant must show that the defendant’s unjust enrichment came at his expense in the sense that it caused a loss to him. Part three revealed disagreement over which, of the remaining arguments for accepting or rejecting the defence, should prevail.
B. The Conclusions Reached Six fundamental arguments were presented in this book as a means of responding to the charge that the law in relation to the defence of disimpoverishment is in disarray.
1. A Change of Name In chapter 2 it was revealed that the label commonly used to describe the defence of disimpoverishment, ‘passing on’, may result in the defence being used in a manner which is inconsistent with the principle underlying it. That principle, it will be recalled, is to prevent a claimant from being awarded restitution in circumstances where he has suffered no loss.1 1 Air Canada v British Columbia [1989] 1 SCR 1161, (1989) 59 DLR (4th) 161 (CSC) 1202–3 and 193–94 (La Forest J).
246
Conclusion
The problem with the appellation ‘passing on’ is that it wrongly directs attention to whether the claimant has shifted the burden of his loss to a third party by increasing the price of goods or services sold. Put another way, it suggests that the defence is concerned with the act of passing on instead of the result of a loss being made good. To ensure this error is avoided use of the neologism ‘disimpoverishment’ was recommended, and subsequently applied throughout the remainder of the book.
2. Three Possible Responses, Not Two Conventional wisdom dictates that a defence can either be accepted or rejected at law. Chapters 2 and 3 revealed, however, that the defence of disimpoverishment has the capacity to be rejected in a qualified fashion. This meant that while the defence was rejected as a matter of law (meaning that the defendant could not retain her unjust enrichment), it might be accepted as a matter of fact. Thus, if it is shown that the claimant avoided any loss as a result of the defendant’s unjust enrichment, he is allowed restitution but, only on a qualified basis, by which the money in dispute may be given up to the third party at whose ultimate expense it came. This is the qualification of the rejection. The implications for allowing the defence of disimpoverishment to be rejected in a qualified manner were explored in chapter 9. Although it was recognized that rejection of the defence in a qualified manner provided a means of facilitating a corrective justice solution as between the defendant, claimant and third party, this solution, on account of practical and policy concerns, was dismissed.
3. The Meaning of ‘At the Expense of ’ Chapter 3 revealed that the common law defence of disimpoverishment has been rejected in some jurisdictions but accepted, under certain conditions, in others. It was suggested that only one of these approaches was correct. The first method for resolving this disagreement was considered in part two of this book. There it was said that if the phrase ‘at the expense of ’ was interpreted to mean that the claimant must show that the defendant’s unjust enrichment resulted in him suffering a ‘loss’ the defence may be accepted. If, however, the words ‘at the expense of ’ were interpreted to mean that the defendant’s unjust enrichment need merely come ‘from’ the claimant, then the defence would be made redundant. Before determining whether ‘from’ or ‘loss’ was the better interpretation of ‘at the expense of ’, the meaning of both words was reviewed. Following a thorough examination of the various possibilities, the conclusion reached in chapter 5 was that ‘loss’, the more problematic of the two terms, should be defined to mean ‘corresponding pecuniary detriment’. With this in mind, attention turned to how the
The Conclusions Reached
247
phrase ‘at the expense of ’ was or should be interpreted. It turned out that the case law considered in chapter 6 did not conclusively resolve the issue. At the conclusion of chapter 7, however, the view expressed was that ‘at the expense of ’ should mean ‘from’, not ‘loss’. It was nonetheless conceded that the arguments marshalled in support of this contention may be the subject of disagreement. Thus, it was concluded that arguments other than about the correct meaning of ‘at the expense of ’ would need to be addressed in order to determine categorically whether the defence of disimpoverishment should be accepted. Particularly was this so in relation to the statutory defence, where interpretations of ‘at the expense of ’ bear less relevance for public authorities seeking to rely on the defence.
4. Other Arguments For and Against the Defence In chapters 8 and 9 consideration was given to whether other arguments relating to the defence of disimpoverishment justified its rejection or acceptance. It turned out that none of the reasons contained in chapter 8 provided an absolute and allencompassing justification for accepting the defence. It was concluded that only when restitution would result in the claimant being unjustly enriched at the expense of a third party should the defence constitute part of the law of unjust enrichment. That is because only in these circumstances would the claimant and defendant be equally undeserving of the ‘windfall’ in dispute. In all other circumstances the defence should be rejected. Having narrowed the defence of disimpoverishment and the principle underlying it to circumstances in which the claimant has been unjustly enriched at the expense of a third party, chapter 9 considered whether, even in this situation, the defence should be denied. The answer provided was that it should be rejected. Three important conclusions were reached in chapter 9. First, while calculation difficulties may be a reason for rejecting the defence, this argument should not be accepted at face value. Serious consideration must be given to economic theory, both now and in the future, before courts relieve themselves of the task of ascertaining whether the claimant has been disimpoverished. Second, there are strong reasons for rejecting the defence in the particular case of unlawful demands for tax. Where appropriate, it is necessary for the courts to uphold the important public law norm that the executive arm of government not be permitted to retain taxation revenue received in violation of the state’s constitution. Finally, it was concluded that beyond calculation difficulties and maintenance of public law norms, a number of reasons for outright rejection of the defence existed. First, it was contended that restitution ought to be awarded when the defendant is unjustly enriched at the expense of the claimant because, even if the claimant has incurred no loss, this should be of no relevance in his claim against the defendant. That conclusion was supported by the maxim res inter alios acta, and the contention that the law of unjust enrichment, subject to certain policy considerations
248
Conclusion
such as protecting security of receipts, is primarily concerned with reversing the effects of a defective transfer. Second, it was suggested that the most effective, efficient and fair means of restoring the status quo ante between the defendant, claimant and third party from whom the money in dispute may have ultimately come, was to award the claimant restitution. This would enable the third party to bring a claim for restitution against the claimant to reverse the latter’s unjust enrichment at its expense.
5. Implications for the Statutory Defence In chapter 4 it was shown that the statutory defence of unjust enrichment is synonymous with the defence of disimpoverishment. While the label ‘disimpoverishment’ focuses on whether the claimant has incurred a loss, the defence of ‘unjust enrichment’ suggests, in a slightly more complicated fashion, that the claimant should not be entitled to restitution if he has not suffered a loss. As proven in chapter 8, however, it is not sufficient to say that the defence of unjust enrichment should apply whenever the claimant has avoided any loss. Like the defence of disimpoverishment, the statutory defence should only apply, as its name correctly suggests, in cases where the claimant has made good his loss by receiving an unjust enrichment at the expense of a third party. Although this conclusion appears to provide scope for the principled application of the statutory defence, it is nonetheless concluded that it, just like the defence of disimpoverishment, should be rejected. That is because, if the claimant is denied restitution in these circumstances, the third party, at whose ultimate expense the defendant’s unjust enrichment has come, will be left remediless. In other words, only a denial of the statutory defence leaves open the method of achieving the ideal solution of corrective justice for the defendant, claimant and third party (by allowing the third party to claim restitution from the claimant).
6. Third Party Claims The above conclusion, rejecting the defence of disimpoverishment (or its statutory equivalent), is partly dependent on the possibility of a third party being entitled to restitution of the claimant’s unjust enrichment. In chapter 10, therefore, the rights of a third party to recover from a claimant, who had been unjustly enriched at its expense, were examined. Two issues were of particular concern in this chapter. The first was the problem that third party consumers may be unaware or have no financial incentive to bring an action for restitution against a claimant who has been unjustly enriched at their expense. It was concluded that the class action mechanism provides at least a means, though perhaps not the ultimate solution, of overcoming such obstacles.
Restatement
249
Second, it was noted that while third party recovery might be assisted by relying on the class action mechanism, restitution of overpaid tax will only be awarded to a third party if three conditions are fulfilled. First, the tax must be itemized. Second, the tax must be a separate, distinct and therefore severable part of the contract. And third, recovery must not upset the parties’ allocation of risks. Restitution is awarded in these circumstances because the claimant will have been unjustly enriched at the third party’s expense.
C. Restatement In chapter 8 it was concluded that the only way in which the defence of disimpoverishment can be rendered principled, appealing and consistent with the policy underlying it, was to redefine it. It was said that the defence should only apply in cases where the claimant makes good his loss by receiving an unjust enrichment at the expense of a third party. In contrast, where the defendant is unjustly enriched at the claimant’s expense and the claimant makes good his loss by means other than being unjustly enriched at the expense of a third party, the defence should not apply. So it is only when one considers the competing claims of an unjustly enriched defendant and unjustly enriched claimant, that the defence seems meritorious. As between these two undeserving parties, it appears that the windfall should remain with the defendant in order to preserve judicial and societal resources. However, having introduced a third party—the party at whose ultimate expense the money has come—it is clear that this outcome is indefensible. The circumstances in which a third party may have helped make good the claimant’s pecuniary loss, resulting in the claimant’s unjust enrichment at that third party’s expense, are irrelevant in the claimant’s action against the defendant. A court cannot draw a legal conclusion about the circumstances of the claimant’s disimpoverishment because its jurisdiction, and responsibility, extends no further than resolving the immediate dispute between the parties before it. It follows that the defence of disimpoverishment must be rejected both at common law and in statute.
Bibliography
Books and monographs ARISTOTLE, ROSS W, (tr), Nicomachean Ethics (Oxford, Clarendon Press, 1908). BIRKS P, An Introduction to the Law of Restitution, revised edn, (Oxford, OUP, 1989). ——, The Foundations of Unjust Enrichment: Six Centennial Lectures (Wellington, Victoria University Press, 2002). ——, Unjust Enrichment (Oxford, OUP, 2003). ——, Unjust Enrichment, 2nd edn, (Oxford, OUP, 2005). BIRKS P and CHAMBERS R, Restitution Research Resource (Oxford, Mansfield, 1997). BRIDGE M, Personal Property Law, 3rd edn, (Oxford, OUP, 2002). BURROWS A, Remedies for Tort and Breach of Contract (London, Butterworths, 1987). ——, (ed), Essays on the Law of Restitution (Oxford, OUP, 1991). ——, The Law of Restitution (London, Butterworths, 1993). ——, Remedies for Tort and Breach of Contract, 2nd edn, (London, Butterworths, 1994). ——, The Law of Restitution, 2nd edn, (London, Butterworths, 2002). ——, Hochelaga Lectures—Fusing Common Law and Equity: Remedies, Restitution and Reform (Hong Kong, Sweet & Maxwell, 2002). BURROWS A and MCKENDRICK E, Cases and Materials on the Law of Restitution (Oxford, OUP, 1997). BURTON S, Principles of Contract Law, 2nd edn, (Minnesota, MN, West Group, 2001). CONTE AH and NEWBERG H, Newberg on Class Actions, 4th edn, (St Paul, Thomson West, 2003). DEGELING S, Restitutionary Rights to Share in Damages (Cambridge, CUP, 2003). EDELMAN J, Gain-based Damages (Oxford, Hart Publishing, 2002). EDELMAN J and CASSIDY I, Interest Awards in Australia (Sydney, Lexis Nexis, Butterworths Australia, 2003). FLETCHER G, Basic Concepts of Legal Thought (New York, NY, OUP, 1996). GRANTHAM R and RICKETTS C, Enrichment and Restitution in New Zealand (Oxford, Hart Publishing, 2000). HOGG P, Constitutional Law of Canada, 2nd edn, (Toronto, Carswell, 1985).
252
Bibliography
JONES G, (ed), Goff and Jones on Restitution, 6th edn, (London, Sweet & Maxwell, 2002). KULL A, Restatement Third, Restitution and Unjust Enrichment, Tentative Draft No 3, (Philadelphia, PA, American Law Institute, 2004). MASON K and CARTER J, Restitution Law in Australia (Sydney, Butterworths, 1995). MCBRIDE N and BAGSHAW R, Tort Law (London, Longman, 2001). MCMEEL G, The Modern Law of Restitution (London, Blackstone, 2000). MITCHELL C, The Law of Contribution and Reimbursement (Oxford, OUP, 2003). MULHERON R, The Class Action in Common Law Legal Systems (Oxford, Hart Publishing, 2004). OGUS A, The Law of Damages (London, Butterworths, 1973). PALMER G, The Law of Restitution, revised supplement, (Boston, MA, Little Brown, 1986). SIMPSON J and WEINER E, (eds), Oxford English Dictionary, 2nd edn, (Oxford, Clarendon Press, 1989). SKELTON A, Restitution and Contract (Oxford, Mansfield, 1998). TETTENBORN A, The Law of Restitution in England and Ireland, 2nd edn, (London, Cavendish, 1996). TREITEL G, The Law of Contract, 10th edn, (London, Sweet & Maxwell, 1999). VIRGO G, The Principles of the Law of Restitution (Oxford, OUP, 1999). WEINRIB E, The Idea of Private Law (Cambridge, MA, Harvard University Press, 1995). WEIR T, Tort Law (Oxford, OUP, 2002). ZWEIGERT K and KOTZ H, Introduction to Comparative Law, 3rd revised edn, (Oxford, Clarendon Press, 1998). Articles and chapters in books AMES J, ‘The History of Assumpsit’ (1888) 2 Harvard L Rev 1. BACHAND F, ‘Restitution of Unlawfully Levied Taxes: Survey and Comparative Analysis of Developments in Canada, Australia and England’ (2001) 38 Alberta L Rev 960. BARES B, et al, ‘Scaling the Illinois Brick Wall: The Future of Indirect Purchasers in Antitrust Litigation’ (1978) 63 Cornell L Rev 309. BARKER K, ‘Riddles, Remedies and Restitution: Quantifying Gain in Unjust Enrichment Law’ (2001) 54 CLP 255. BEATSON J, ‘The Nature of Waiver of Tort’ in J Beatson, (ed), Use and Abuse of Unjust Enrichment (Oxford, OUP, 1991) 206. ——, ‘Restitution of Taxes, Levies and Other Imposts: Defining the Extent of the Woolwich Principle’ (1993) 109 LQR 401. ——, ‘The Temptation of Elegance: Concurrence of Restitutionary and Contractual Claims’ in W Swadling and G Jones, The Search for Principle: Essays in Honour of Lord Goff of Chievely (Oxford, OUP, 1999) 143.
Bibliography
253
——, ‘Restitution and Contract: Non-Cumul?’ (2000) Theoretical Inquiries in Law 83. BEATSON J and VIRGO G, ‘Contract, Unjust Enrichment and Unconscionability’ (2002) 118 LQR 352. BIRKS P, ‘Unjust Enrichment—A Reply to Mr Hedley’ (1985) 5 LS 67. ——, ‘Restitution from the Executive: A Tercentenary Footnote to the Bill of Rights’ in P Finn, (ed), Essays on Restitution (Sydney, Law Book Company, 1990) 164. ——, ‘Failure of Consideration’ in F Rose, (ed), Consensus Ad Idem: Essays in Honour of Guenter Treitel (London, Sweet & Maxwell, 1996) 179. ——, ‘Private Law’ in P Birks, (ed), Lessons of the Swaps Litigation (London, LLP Mansfield, 2000) 1. ——, ‘Unjust Enrichment and Wrongful Enrichment’ (2001) 79 Texas L Rev 1767. ——, ‘Failure of Consideration and its Place on the Map’ (2002) 2(1) Oxford U Commonwealth LJ 1. ——, ‘At the Expense of the Claimant: Direct and Indirect Enrichment in English Law’ in D Johnston and R Zimmermann, (eds), Unjustified Enrichment (Cambridge, CUP, 2002). ——, ‘A Letter to America: The New Restatement of Restitution’ (2003) 3(2) Global Jurist Frontiers online edition, Art 2. ——, ‘At the Expense of the Claimant(2)’ [2004] Oxford U Lecture Handout. BIRKS P and MITCHELL C, ‘Unjust Enrichment’ in P Birks, (ed), English Private Law, vol II (Oxford, OUP, 2000) Ch 15. BOETKE P and LEESON P, ‘The Austrian School of Economics: 1950–2000’ in J Biddle, J Davis and W Samuels, (eds), Blackwell Companion to the History of Economic Thought (Oxford, Basil Blackwell, 2003). BRYAN M, ‘Rescission, Restitution and Contractual Ordering: The Role of Plaintiff Election’ in A Robertson, (ed), The Law of Obligations: Connection and Boundaries (London, UCL Press, 2003) 59. BRYAN M and ELLINGHAUS M, ‘Before the High Court: Fault Lines in the Law of Obligations: Roxborough v Rothmans of Pall Mall Australia’ (2000) 22 Sydney L Rev 636. BURROWS A, ‘Public Authorities, Ultra Vires and Restitution’ in A Burrows, (ed), Essays on the Law of Restitution (Oxford, Clarendon Press, 1991) 39. ——, ‘Restitution of Payments Made Under Swap Transactions’ (1993) 143 NLJ 480. CHAMBERS R, ‘Tracing and Unjust Enrichment’ in J Nyers, M McInnes and S Pitel, (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004) 263. CHOWDRY M, ‘Unjust Enrichment and Section 80(3) of the Value Added Tax Act’ [2004] BTR 620. COOTER R, ‘Passing on the Monopoly Overcharge: A Further Comment on Economic Theory’ (1981) 129 U Pennsylvania L Rev 1523.
254
Bibliography
CRERAR D, ‘The Restitutionary Class Action: Canadian Class Proceedings Legislation as a Vehicle for the Restitution of Unlawfully Demanded Payments, Ultra Vires Taxes, and Other Unjust Enrichments’ (1998) 56 U Toronto Faculty L Rev 47. CUNNINGTON R, ‘Failure of Basis’ [2004] LMCLQ 234. DAVIS R, ‘Indirect Purchaser Litigation: ARC America’s Chickens Come Home to Roost on the Illinois Brick Wall’ (1997) 65 Antitrust L J 375. DEJARLAIS N, ‘The Consumer Trust Fund: A Cy Pres Solution to Undistributed Funds in Consumer Class Actions’ (1987) 38 Hastings L J 729. DESIDERIO J, ‘Private Treble Damage Antitrust Actions: An Outline of Fundamental Principles’ (1982) 48 Brooks L Rev 409. EDELMAN J, “The Meaning of ‘Damages’: Common Law and Equity” in A Robertson, (ed), Law of Obligations: Connections and Boundaries (London, UCL Press, 2004) 38. FARMER SB, ‘More Lessons from the Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought by State Attorneys General’ (1999) 68 Fordham L Rev 361. FRIEDMANN D, ‘Restitution for Wrongs’ in W Cornish, et al, (eds), Restitution, Past, Present and Future (Oxford, Hart Publishing, 1998) 87. GISSER M, ‘Indirect Purchaser Suits Under State Antitrust Laws: A Detour Around the Illinois Brick Wall’ (1981) 34 Stanford L Rev 203. LORD GOFF OF CHIEVELY, ‘The Search for Principle’ Maccabaean Lecture in Jurisprudence 5 May 1983 in W Swadling and G Jones, (eds), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (Oxford, OUP, 1999) 318. GRANTHAM R and RICKETT C, ‘Disgorgement for Unjust Enrichment?’ (2003) 62(1) CLJ 159. ——, ‘Property Rights as a Legally Significant Event’ (2003) 62(3) CLJ 717. HARRIS R and SULLIVAN L, ‘Passing on the Monopoly Overcharge: A Comprehensive Policy Analysis’ (1979) 128 U Pennsylvania L Rev 269. ——, ‘More on Passing on: A Reply to Cooter, Viton and Winston’ (1981) 129 U Pennsylvania L Rev 1533. HEDLEY S, ‘Unjust Enrichment as the Basis of Restitution—An Overworked Concept’ (1985) 5 LS 56. HOVENCAMP H, ‘The Indirect-purchaser Rule and Cost-plus Sales’ (1990) 103 Harvard L Rev 1717. ——, ‘Legal Policy and the Endowment Effect’ (1991) 20 J Legal Studies 225. IBBETSON D, ‘Implied Contracts and Restitution: History in the High Court of Australia’ (1988) 8 OJLS 312. JOHNSON I, ‘Restitution on Behalf of Indirect Purchasers: Opening the Backdoor to Illinois Brick’ (2000) 57 Washington & Lee L Rev 1005. JAFFEY P, ‘Failure of Consideration: Roxborough v Rothmans’ (2003) 66 MLR 284.
Bibliography
255
KARAS S, ‘The Role of Fluid Recovery in Consumer Protection Litigation: Kraus v Trinity Management Services’ (2002) 90 California L Rev 959. KAHNEMAN D, J Knetsch and R Thaler, ‘Experimental Tests of the Endowment Effect and the Coase Theorem’ (1990) 98 J of Political Economy 1325. KOROBKIN R, ‘The Endowment Effect and Legal Analysis’ (2003) 97 Northwestern U L Rev 1227. LANDES W and POSNER R, ‘The Economics of Passing on: A Reply to Harris and Sullivan’ (1980) 128 U Pennsylvania L Rev 1274. MCCAMUS J, ‘Restitutionary Recovery of Moneys Paid to a Public Authority Under a Mistake of Law: Ignorantia Juris in the Supreme Court of Canada’ (1983) 17 U British Columbia L Rev 233. ——, ‘Restitution on Dissolution of Marital and Other Intimate Relationships: Constructive Trust or Quantum Meruit?’ in J Nyers, M McInnes and S Pitel, (eds), Understanding Unjust Enrichment (Oxford, Hart Publishing, 2004) 359. MCGUIRE B, ‘The Passing-on Defence and the Right of Remote Purchasers to Recover Treble Damages Under Hanover Shoe’ [1971] U Pittsburgh L Rev 177. MCINNES M, “‘Passing on’ in the Law of Restitution: A Re-consideration” (1997) 19 Sydney L Rev 179. ——, “‘At the Plaintiff ’s Expense’: Quantifying Restitutionary Relief ” (1998) 57 CLJ 472. ——, ‘Reflections on the Canadian Law of Unjust Enrichment’ (1999) 78 Canadian Bar R 416. ——, ‘The Measure of Restitution’ [2000] U Toronto L J 163. ——, ‘Disgorgement for Wrongs: An Experiment in Alignment’ [2000] Restitution L Rev 516. ——, ‘Roxborough v Rothmans of Pall Mall Australia Ltd—Passing on’ (2002) 118 LQR 212. ——, ‘Interceptive Subtraction, Unjust Enrichment and Wrongs—A Reply to Professor Birks’ (2003) 62(3) CLJ 697. ——, ‘Book Review of J Edelman, Gain-based Damages’ (2004) 39 Canadian Business L J 146. MEAD G, ‘Restitution within Contract?’ (1991) 11 LS 172. MICHELL P, “Restitution ‘Passing-on’, and the Recovery of Unlawfully Demanded Taxes: Why Air Canada Doesn’t Fly” (1995) 53 U Toronto Faculty L Rev 130. MITCHELL C, ‘Review Article—At the Expense of the Claimant (Chapter 4)’ [2004] Restitution L R 267. NASH S, ‘Collecting Overcharges from the Oil Companies: The Department of Energy’s Restitutionary Obligation’ (1980) 32 Stanford L Rev 1039. PANNAM C, ‘The Recovery of Unconstitutional Taxes in Australia and the United States’ (1964) 42 Texas L Rev 777. PARKINSON P, ‘Beyond Pettkus v Becker: Quantifying Relief for Unjust Enrichment’ (1993) 43 U Toronto L J 217.
256
Bibliography
ROLLO E, ‘The Refund of Taxes Paid Pursuant to an Unconstitutional Tax Scheme and the Pass-on Defence: Beam’s Intellectual Dishonesty Threatens Every States’ Budgetary Stability’ (1992) 94 Western Virginia L Rev 1105. ROSE F, ‘Passing On’ in P Birks, (ed), Laundering and Tracing (Oxford, OUP, 1995) 261. RUDDEN B and BISHOP W, ‘Gritz and Quellmehl: Pass it on’ (1981) 6 ELR 243. SHEPHERD S, ‘Damage Distribution in Class Actions: The Cy Pres Remedy’ (1972) 39 U Chicago L Rev 448. SMITH L, ‘Concurrent Liability in Contract and Unjust Enrichment: The Fundamental Breach Requirement’ (1999) 115 LQR 245. ——, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas L Rev 2115. STEVENS J, ‘Vindicating the Proprietary Nature of Tracing’ [2001] Conveyancer and Property Lawyer 94. TETTENBORN A, ‘Misnomer: A Response’ in W Cornish, et al, (eds), Restitution, Past, Present and Future (Oxford, Hart Publishing, 1998) 31. ——, ‘Subsisting Contracts and Failure of Consideration—A Little Scepticism’ (2002) 10 Restitution L Rev 1. THOMAS T, ‘Permissible Methods of Distributing Unclaimed Damages in Federal Class Action’ (1992) 107 American L Rev 800. VENN J, ‘In the Face of Uncertainty—The Passing-on Concept in Civil Antitrust Litigation’ (1973) 27 Arkansas L Rev 83. VIRGO G, ‘Restitution of Overpaid Tax—Justice at the Expense of Certainty’ [1993] Cambridge L J 31. ——, ‘The Law of Taxation is not an Island—Overpaid Taxes and the Law of Restitution’ [1993] BTR 442. ——, ‘Restitution of Overpaid VAT’ [1998] BTR 582. VITON P, ‘Passing on the Monopoly Overcharge: The Welfare Implications’ (1981) 129 U Pennsylvania L Rev 1516. VOON T, ‘Roxborough v Rothmans of Pall Mall Australia Ltd: Contractual Fallout from Tobacco Licence Fees’ (1999) 15 J Contract L 81. WOODWARD W, “‘Passing-on’ the Right to Restitution” (1985) 39 U Miami L Rev 873. Reports Law Commission of England and Wales, ‘Restitution, Mistakes of Law and Ultra Vires Public Authority Receipts and Payments’ (Law Com No 227, 1994). Law Commission for England and Wales, Consultation Paper, ‘Damages for Personal Injuries: Collateral Benefits’ (Law Com No 147, 1997). Law Commission for England and Wales, ‘Damages for Personal Injury: Medical, Nursing and Other Expenses; Collateral Benefits’ (Law Com No 262, 1999).
Index
Anticipatory disimpoverishment 20 Antitrust cases passing on, and 18 Arguments for accepting defence of disimpoverishment 175–90 claimant receives a windfall 187–90 inflation reduction 175–7 prevent litigation chains 181–3 protect government finances 183–97 symmetry with defence of disenrichment 179–81 third parties incur two losses 177–9 Arguments for rejecting defence of disimpoverishment 191–218 claimant’s defective transfer 208 complete not partial defence 194 corrective justice, and. see Corrective justice false bases 191–4 potential bases 194–207 proof, problems of. see Proof, problems of recovery based on economic assumptions should not be permitted 202–3 res inter alios acta alteri nocere non debet 207–8 symmetry with tort law, 191–3. see also Tort law, symmetry with undertaking to pass-back 193–4 unlawful demands for tax. see Tax, unlawful demands for Aristotle corrective justice, on 157–8 Nicomachean Ethics 144–6 At the expense of cases 115–42
conservation of judicial resources, 151–3. see also Judicial resources, conservation of corrective justice, 157–62. see also Corrective justice difference of opinion as to meaning 146–8 ‘gain’ exceeds ‘loss’ at moment of receipt, cases where 116–35 Australian cases assumption of loss 130–31 ‘from’ not ‘loss’ 129–32 incontrovertible benefits and losses 132 interest awards 129–32 Banque Financiere de la Cite v Parc (Baltersea) Ltd 121–2 BP Exploration Co (Libya) v Hunt (No2), 122–5. see also BP Exploration Co (Libya) v Hunt (No2) Canadian cases 132–3 contribution claim 126–7 debt discharged at less than full value 125–7 dicta of Lord Clyde 121–2 dicta of Lord Mansfield 119–21 English cases 117–29 Greenwood v Bennet 118–9 Hambly v Trott 119–21 mistake of law 117 Re BHT (UK) Ltd 117–8 subtractive enrichment 118–9 surety seeking recoupment from principal debtor 126 US cases 133–4
258
Index
‘gain’ exceeds ‘loss’ at moment of receipt, arguments where 154–63 ‘gain’ increases after receipt 135–42, 163–71 ‘at the expense of ’ the claimant 165–71 Australian cases 138–9 directness 168 English cases 135–8 example 163–4 FC Jones & Sons v Jones 135–8 Foskett v McKeown 136–8 investment of value of unjust enrichment 164 nature of claims 165 nature of unjust enrichment 164 normative position 166 profits derived as result of unjust enrichments 139 reversal of erroneous judgment 140–41 symmetry of risk with defence of disenrichment 169–71 transfer 169 true state of affairs in FC Jones and Foskett v McKeown 137–8 unjust enrichment at expense of defendant 167–8 US cases 140–2 valuation of defendant’s skill and effort 167 interceptive subtraction, and 113 ‘from’, meaning. see From, meaning leapfrogging 113 loss, meaning. see Loss meaning 91–113, 246–7 meaning, four conceptions of 146–8 necessitous intervention, 127–9. see also Necessitous intervention normative arguments 143–72 restitution, and 113 restitution, meaning 149–50 restitution when loss and gain correspond 144–6 self-reliance, presumption of 153 status quo ante cannot be restored 144–6 sufficient connection 92 symmetry with restitution for wrongs 154–7 implications 155–6
restitution versus disgorgement for wrongs 154 restitution for wrongs and unjust enrichment 154–5 wrongs and unjust enrichment: different events 156–7 two interpretations 92–3 whenever loss and gain do not equate 148–53 windfalls 150–51 work done elsewhere 148–9 Austrian School of Economics dynamic analysis 201–02 Birks, P ‘at the expense of ’, on 109, 146–7, 164 BP Exploration Co (Libya) v Hunt (No2), on 122 disimpoverishment, on 11 distinction between loss and gain, on 92 Edwards v Lee’s Administrator, on 137–8 FC Jones v Jones, on 137–8 Foskett v McKeown, on 137–138 Hambly v Trott, on 119 incontrovertible benefits, on 132 leapfrogging, on 113 meaning of ‘from’, on 92, 110, 146, 164–5, 171 Roxborough v Rothmans Pall Mall, on 235 restitution within a valid contract, on 235 unjust enrichment, on 9–10 BP Exploration Co (Libya) v Hunt (No2) 122–5 ‘at the expense of ’ does not mean ‘loss’ 123–5 ‘at the expense of ’ meaning ‘loss’, whether 122 effect of judgment 125 facts 122 Law Reform (Frustrated Contracts) Act (UK) 1943, 123–4 Robert Goff J, judgment of 124–5 Burden of proof 25–30 Community law, and 29–30 diluted standards of proof, and 29–30 onus on claimant 25 onus on defendant 25–7 American cases 26–7
Index
259
Linz v Electric Wire Company of Canadian cases 25–6 Palestine Ltd 35–6 presumption of disimpoverishment 28 Mason v New South Wales 43–4 reversal 25–7 proprietary claim 42–3 apparent, whether 27–9 restitutionary relief 45–6 defence raised but not proved 28–9 Roxborough v Rothmans Pall Mall 46–7 Slynn, Sir Gordon on 29 stamp duty on workers’ compensation Burrows, A insurance 45–6 ‘at the expense of ’, on 109, 146–7, 164–5, swaps cases 36–40 171 decisions binding, whether 39–40 errors of inclusion, on 14–5 interest rate swap transactions 37–40 Foskett v McKeown, on 137–8 remoteness 39–40 leapfrogging, on 210 restitution 37–40 matrimonial property disputes, on 77 tracing 41–3 mitigation, on 14–5 United States of America 52–61 Causation 21–3 acceptance at law 59–61 American case law 22–3 discriminatory taxation 61 response to unjust enrichment 21–3 ‘equitable considerations’ 56–7 Chambers, R federal courts 60–1 ‘at the expense of ’, on 137–8, 164–5, 171 net financial loss 54 Foskett v McKeown, on 77–8 qualified rejection 57–9 matrimonial property disputes, on 97 rejection at law 52–7 Change of position. see Disenrichment restitutionary awards of overpaid tax Class actions 223–8 55–6 advantages 224–5 state courts 59–60 Cauvin v Phillip Morris 226–8 unlawful tax on sale and use of motor examples 225–8 fuel 57–9 Javor v State Board of Equalization unlawful taxation 52–7 225–6 unlawful demands for tax 40–41 meaning 224 vindication of property rights 42–3 US rules 224 Woolwich Equitable Building Society v Common law cases on defence of disimInland Revenue Commissioners 40–41 poverishment 35–62 Constructive trust Australia 43–7 indirect award in favour of third parties, Banque Belge Pour L’Etranger v and 214–15 Hambrouck 41–3 Corrective justice 157–62, 209–18 Canada 47–52 alternatives 211–18 acceptance at law but rejection on direct award in favour of third party facts 49–50 211–13 acceptance at law and on facts 47–9 indirect award in favour of third party mistake 48–50 213–7 rejection at law 50–2 Aristotle, and 157–8 unlawful demand by public authority ideal solution not attained 209–18 47–50 indirect award in favour of third party Commissioner State Revenue (Victoria) 213–7 v Royal Insurance Australia Ltd constructive trust 214–5 44–6 personal obligation 215–7 England 35–43 Kantian lens, through 158–61 haulage licence fees 43–4 no intent 160–61 licence fee for sale of tobacco products no leapfrogging 209–11 46–7
260
Index
no third party action against claimant 211 no third party action against defendant 209–11 policy-based restitution 161 problems with attaining 209–11 unconditional restitution in favour of claimant 217–18 Weinrib, Professor E on 158 when gain and loss do not equate 161–162 Defective transfer reversal of consequences 208 Detriment loss, and. see Loss Disenrichment, 179–81 claimant’s loss, and 180 defendant’s enrichment, and 180 economic activity, and 180 sterilization of wealth, and 180 symmetry of risk, and 169–71 symmetry with 179–81 Disimpoverishment anticipatory 20 arguments for accepting defence of 175–90 arguments for rejecting defence of 191–218. see Arguments for rejecting assumptions 20–3 causation, 21–3. see also Causation change of name 11–17, 245–6. see also Passing on definition 10–11 effect 10–11 purpose 10–11 disenrichment, and, 179–81. see also Disenrichment false bases for accepting defence of 175–87 general law of unjust enrichment, and 19 government finances, protection of, 183–7. see also Government finances, protection of implications for statutory defence 248 inflation reduction, 175–7. see also Inflation reduction legitimate basis for rejecting defence 187–90 claimant will receive windfall 187–90
receipt via unimpeachable contract or gift 188–9 receipt via unjust enrichment at expense of third party 189–90 litigation claims, and. see Litigation claims restatement 249 third party claims 248–9 third party incurring two losses, 177–9. see also Third parties incurring two losses three possible responses 246 triggering defence 19–20 unlawful taxation, and 19 unsettled law 1 windfall assumption 20–21 Edelman J, interest awards, on 129–32 restitution for wrongs and unjust enrichment, 154–6 Enrichment meaning 65 Errors of exclusion passing on, and 12–14 Errors of inclusion passing on, and 14–17 European Court of Justice unjust enrichment, and. see Unjust enrichment From, meaning 109–2 loss, and 112 services 111 things 110–11 Government finances, protection of 183–7 fiscal chaos, and 183 nuanced response 185 reasons for awarding restitution 185–7 disimpoverishment, defence of 186–7 general rejection of fiscal argument 185–6 reasons for refusing restitution 184 unlawfully demanded tax 183 Grantham, R and Rickett, C ‘at the expense of ’, on 108–9, 164
Index Inflation reduction 175–7 control of inflation by other means 176–7 disadvantages of inflation 176 Judicial resources, conservation of 151–3 claimant incurring some loss 152 difficulty in proving loss 152–3 parties equally undeserving 151–2 Judicial responses to disimpoverishment 30–4 acceptance of defence at law 31 accept at law but reject on facts 31 accept at law and on facts 31 qualified rejection 32–4 rejection of defence at law 31–2 Kant corrective justice, and 158–61 Law Reform (Frustrated Contracts) Act (UK) 1943, 123–4 unjust enrichment, and 123–4 Leapfrogging 113, 201. see also Corrective justice Litigation chaims 181–3 argument in favour of defence of disimpoverishment 182 example 181 limited application 181–2 unsupported fears 182–3 Loss 93–109 deprivation of a right 101–5 case law examples 102–3 lightship cases 102 tort law, and 103–4 transfer 104–5 detriment 93–101 ‘from’ distinguished 112 meaning 93–106 non-pecuniary detriment 95–101 arguments against recognition of 99–101 arguments that support recognition of 98–9 calculation difficulties 99–100 Canadian matrimonial property dispute cases 95–8 causation 100–101 examples 95–8
261 opportunity forgone 105–6 provision of service 105–6 transfer of property 105 pecuniary detriment 93–5 bicycle example 94–5 depletion of asset 94 examples 93–4 money 94 opportunity lost 94 reducible to money 94 reduction in value 94 use value 94 restitution, and 107–9 corresponding loss 107–9 initial loss 109 only ‘some’ loss necessary 107 preferred interpretation of whether loss must be corresponding 108–9 ultimate loss 109
McInnes, M ‘at the expense of ’, on 118, 147, 164–9, 171 conservation of judicial resources, on 151–2 corrective justice, on 145, 159–60 corresponding loss, on 108–9 Greenwood v Bennett, on 118 litigation chains, on 181 matrimonial property disputes, on 97 meaning of ‘restitution’, on 149–50 restitution for wrongs and unjust enrichment, on 156–7 Mitchell, C corresponding loss, on 108–9 ‘at the expense of ’ and debt discharge, on 125 Monopoly supplier 200–2 accounting for long-term losses 201 Austrian School of Economics 201–2 defence of disimpoverishment, and 200–1 dynamic analysis 201–2 meaning 200 Necessitous intervention 127–9 cost of recovery of property 128–9 payment of money by claimant on defendant’s behalf 128
262
Index
Recovery for third parties of overpaid VAT 81–4 administrative procedure 84 claimant recovering for third parties Opportunity forgone. see Loss 81–4 direct recovery by third parties 81 Parens patriae 222–3 ‘qualified rejection’ of defence of disimPass through defence 17 poverishment 81–3 Passing on 1, 11–17. see also Res inter alios acta alteri nocere non debet Disimpoverishment 207–8 American case law 12 collateral benefit, and 207–8 antitrust cases 18 exceptions 207 errors of exclusion 12–14 meaning 207 profit and loss formula 13 Restitution errors of inclusion 14–17 interpretations of term 149–150 example 16–17 loss, and. see Loss problems with 15–16 meaning 149–150 source 14–15 policy-based third party consumers, and corrective justice, and 161 15–16 Restitution when loss and gain correspond history of 12 144–6 unlawful tax cases 18–19 Aristotle’s Nicomachean Ethics 144–6 Pecuniary detriment. see Loss identification of parties 145 Price elasticity 198–202 pre-exchange equilibrium 145 concept of 198–9 restitution as appropriate response 145–6 defence of disimpoverishment, and 200–2 factors affecting 199–200 Self-reliance, presumption of habit forming goods 199 ‘at the expense of ’, and 153 luxuries 199–200 Smith, L monopoly supplier, 200–2. see also ‘at the expense of ’, on 146–7, 164 Monopoly supplier collateral benefits, on 191–3 necessities 199–200 corrective justice, on 160–3 price as percentage of income 199 corresponding loss, on 108–9 relevance of 198–9 Statutory defence of disimpoverishment substitutes, availability of 199 63–88 time period considered 200 Price taker argument, 71–5. see also Unjust Sufficient connection meaning 92 enrichment Proof of impoverishment 198–202 price elasticity of demand, 198–202. see Tax, unlawful demands for 204–7 automatic and unfettered right to restitualso Price elasticity tion 205–6 Proof, problems of 194–202 Bill of Rights 204 cost and complications 197–8 Taxation agents 23–5 incorporating other situations statutory construction 23–24 197 Third parties 221–43 motivation 195–7 action against claimant 221–3 multiple motivations 196 claimant itemizing cost of tax 242 price adjustment, and 196 class actions, 223–8. see also problems 195 Class actions proof of impoverishment, 198–202. see parens patriae 222–3 Proof of impoverishment provision of services 128 unjust enrichment, and 128
Index
263
correction with defence of disimpoverreasons why consumer should be ishment 65–6 awarded restitution 237–41 counter-factual arguments 75–8 claimant’s behaviour when tax prices would have increased anyway 75–7 reduced, repealed or annulled 240 revenue would have increased 77–8 claimant’s message to consumer 238 enrichment, meaning 65 claimant’s message to government European Court of Justice, and 85–6 239–40 burden of proof 86 claimant’s message to rivals 238–9 general propositions 85 terms of contract 241 specific propositions 86 recovery of overpaid tax from claimant European jurisprudence 85–6 228–2 increase in price not matched by increase composite charge 230–1 in revenue 78–9 example 228–9 loss minimization, and 68–9 itemized charge 231–4 meaning 64–5 orthodox position 231–2 operation of defence 66–81 unorthodox position 232–4 overpaid tax 63–4 restitution within valid contract 230–4 potential substitutability of profitable restitution within valid contract 234–2 products 79–80 analysis of Beatson and Birks ‘price taker’ argument 71–5 perspective 235–41 cases which reject 73–5 item severable and not negotiated cases within support 71–3 234–5 competitive market, and 74–5 need for consistency in distribution of VAT on title deed fees 72–3 risk 237 profit margin, and 67–8 reasons why claimant seller should rationale, lack of clarity in 87–8 retain money 235–7 recovery must ‘unjustly enrich’ claimant reasons why consumer should be 80 awarded restitution 237–41 recovery for third parties of overpaid risk on seller 235–37 VAT 81–4 tax as ordinary business expense statutory adoption in United Kingdom 87 235–7 statutory provisions 63–4 Third parties incurring two losses 177–9 unjust, meaning 65 ‘first loss’ 178 Unlawful taxation ‘second loss’ 178 disimpoverishment, and 19 Tort law, symmetry with 191–3 passing on, and 18–9 collateral benefits, and 192–3 Undertaking to pass-back 193–4 rejecting defence 193 true rejection, whether 193–4 Unjust meaning 65 Unjust enrichment 9–10, Unjust enrichment, statutory defence of 63–81 accounting equations 67–9 claimant must avoid any loss 69–80 no change in price 70–1 claimant must pass on cost of tax 67–9 confusion as to 87
Virgo, G ‘at the expense of ’, on 147, 164 corresponding loss, on 107–9 Foskett v McKeown, on 137 value added tax, on 78–9 Weinrib, Professor E corrective justice, on 158–60 Windfall assumption 20–1, 150 defendant will also receive undeserved windfall 20–1 third parties, role of 21 Windfall gain defence 17
