What is the state of Counter-Restitution in England and Australia?

AdvancedObligations &RemediesWhat is the state of the law of “counter-restitution” in Australia and England?

Alice HumeStudent No.: 306061120

Advanced Obligations & RemediesCambridge UniversityProfessor Elisabeth PedenJuly 2014

Word Count: 5910

Table of Contents

Advanced Obligations & Remedies................................1What is the state of the law of “counter-restitution” in Australia and England?........................................1

Introduction...................................................11. Unjust Enrichment....................................................3

2. Restitution for wrongs...............................................4

Restitution’s Development as a Body of Law.....................5Rescission....................................................5The development of restitution in the UK and Australia........6

What is Counter-Restitution?...................................8Counter-Restitution as a defence..............................8Failure of Consideration.....................................101. What is total failure?..............................................12

2. Must Failure of Consideration be total?.............................14

Counter-restitution impossible?..............................15Contracts entered into by Duress.............................19Rescission for undue influence...............................20Counter-restitution where there is an illegal purpose........21

Failure of Consideration and Counter-Restitution..............23A US example that has had an influence in Australia..........24When is counter-restitution is “easy”?.......................26

Conclusion....................................................29

Advanced Obligations & Remedies ii

Advanced Obligations & Remedies iii

Alice Hume

Advanced Obligations & RemediesCambridge University

Professor Elisabeth PedenJuly 2014

Advanced Obligations & RemediesWhat is the state of the law of “counter-restitution”

in Australia and England?

Introduction

Restitution is a remedy, not a cause of action.1 It is usually a

response to unjust enrichment. The law of restitution covers two

different areas – restitution of unjust enrichment where the

unjust enrichment is the cause of action and restitution for

wrongs where a civil wrong is that cause of action. Although it

has been available for a long time, the body of law of

1 Richard Farnhill, Restitution Claims: Getting your own back, www.allenovery.com/publications/en-gb/Restitution-Claims--Getting-your-own-back.aspx

Advanced Obligations & Remedies 1

restitution and unjust enrichment were unrecognised in English

law until fairly recently.2

In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd3 Lord Wright

remarked:

It is clear that any civilised system of law is bound to

provide remedies for cases of what has been called unjust

enrichment or unjust benefit, that is to prevent a man from

retaining the money or some benefit derived from another

which it is against conscience that he should keep. Such

remedies in English law are generically different from

remedies in contract or in tort, and are now recognised to

fall within a third category of the common law which has

been called quasi-contract or restitution.4

This dicta was nevertheless ignored until Goff and Jones

published their seminal work, The Law of Restitution, in 1966, which

2 Andrew Burrows, The Law of Restitution, 3rd edition, Oxford UniversityPress, 2011, page 3.3 [1943] AC 32.4 Ibid, at 61.


proposed that when one looks across common law and equity, there

actually is a “principled English law of restitution based on

reversing unjust enrichment”.5 Their thesis was finally given

authority in 1991 by the House of Lords in the important decision

of Lipkin Gorman v Karpnale Ltd6.

It has baffled many, however, as to what exactly restitution

covers and what is the relationship between restitution and

unjust enrichment. Goff and Jones, as well as Seavey and Scott7,

who led the way in the United States, all agreed that they were

inextricably linked and that restitution was the means of

reversing a defendant’s unjust enrichment at the claimant’s

expense.8

The most common reason for seeking this remedy is unjust

enrichment, but it is also available where there has been a civil

wrong:

5 Andrew Burrows, above n.2.6 [1991] 2 AC 548.7 Seavey and Scott, Restitution, (1938) 54 LQR 29, pages 31-2.8 Andrew Burrows, above n.2, at 4.


1. Unjust Enrichment

Four questions need to be answered as per Lord Steyn’s judgment

in Banque Financière de la Cité v Parc (Battersea Ltd)9 in order to establish

if someone has been unjustly enriched:

1. Has the defendant been enriched?

2. Was this enrichment at the claimant’s expense?

3. Was the enrichment unjust?

4. Are there any defences?

If the court can answer in the affirmative to the first three

questions and in the negative to the fourth, then the claimant

may be entitled to restitution. The claimant must also show that

their claim falls within the following categories:

Mistake;

Duress;

Undue Influence; or

Failure of Consideration.

9 [1999] 1 AC 221, at 227.


2. Restitution for wrongs

In this case, a claimant would have to bring an action in

contract or tort, however the remedy he would seek would be

restitution, rather than damages, for the gain that the defendant

has enjoyed. This is an unusual remedy.

There are several defences to a restitution claim, namely:

Exclusion of the right to restitution by contract;

Counter-restitution is impossible;

Change of position; and

Illegality.10

In this essay, I will focus on the defence of counter-restitution

and the state of the law of it in both England and Australia.

10 Richard Farnhill, above n.1.


Restitution’s Development as a

Body of Law

Since Lipkin, the English law of Restitution has developed at a

swift pace, with many important decisions being handed down in a

relatively short space of time. As Gerhard Danneman put it

“Preceded and helped by scholarly work, English courts have

unfrozen the law of restitution and have… achieved a rapid

development which might have taken a century in other areas of

the law.”11 Meanwhile, in Australia, 4 important cases in the

past 15 years have cast doubt on the principle of unjust

enrichment.

11 Danneman, Unjust Enrichment by Transfer: Some Comparative Remarks (2001) Texas Law Review 1837, 1843.


Rescission

Rescission, or setting aside, is a restitutionary remedy, albeit

a complex one. By way of background, the main effect of

rescission is to set aside a contract ab initio or from the start.

This differs from termination, then, as that only sets aside

future obligations. Rescission is subject to four bars – lapse

of time, affirmation, third party rights and restitutio in integrum

being impossible. This fourth bar is concerned with counter-

restitution, being the defendant’s counterclaim for

restitution.12

On a wide interpretation, rescission is always restitutionary.13

If one views contractual rights as a benefit, then rescission

allows a party to take away that benefit and in fact, reverse it.

12 Peter Birks, An Introduction to the Law of Restitution (Revise edition 1989) 415, 421-423.13 Andrew Burrows, above n.2 at 17.


The development of restitution in the UK and Australia

The last 15 years has seen a rift between restitution law in

Australia and England, with decisions in the latter taking the

law down a different path than in Australia.14 The spate of

litigation in the mid 1990s on credit swaps as well as the

ongoing litigation in the Hoechst15 case has been the basis for

such a departure by the English courts.

Andrew Burrows argues that the English courts have developed

certain aspects of restitution law there, including16:

1. Settling on a conceptual framework for restitutionary

questions;

2. Requiring claimants to plead a cause of action, not merely

“unjust enrichment”;

14 Andrew Burrows, The Australian Law of Restitution: Has the High Court Lost its Way? 2009 Hearn Lecture, Melbourne; reprinted in Elise Bant and Matthew Harding (eds), Exploring Private Law, Cambridge University Press 2010, pages 67-85, page 67.15 Metallgesellschaft Ltd v IRC and Hoechst AG v IRC C-397/98 and C-410/98, [2001] Ch 620.16 Ibid, at 68-9.


3. Focusing on restitution’s defences in order to ensure

security of receipt; and

4. Integrating areas of equity and common law.

Until around 2000, the HCA led the common law world in developing

and applying the principle of unjust enrichment. Since that

time, however, the HCA has cast doubt on that principle in a

series of important decisions on restitution.17

17 Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; and Lumbers v W Cook Builders Pty Ltd (2008) 232 CLR635.


What is Counter-Restitution?

Counter-Restitution as a defence

Where a contract is rescinded for mistake, duress or

misrepresentation, for example, the claimant must first make

counter-restitution to the defendant for any benefit they have

received under the contract before they are entitled to

restitution of their own. Furthermore, where restitution has

been awarded under to a void contract, the claimant must first

make counter-restitution for any money it has received from the

defendant.18 Counter-restitution is regarded as a defence. It

is considered a total defence when counter-restitution is

impossible, or where the claimant refuses to make counter-

restitution, or the sums that have passed both ways are equal.

It is considered a partial defence where the sums that have

18 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669.


passed differ, the sum being paid by the defendant being less

than that of the claimant, so that the claimant can only claim

the difference.19

When will counter-restitution be a necessary adjustment to the

rights of the parties? That is, when will restitution by the

claimant be considered necessary for restitution in favour of

them? The requirement of restitutio in integrum is often required

where a contract is rescinded or set aside ab initio. The result

is that money paid can be recovered by both parties even in the

case of a partial and not total failure of consideration.20 The

reason being that the parties must be restored to the positions

they occupied before the transaction occurred or relationship was

entered into and to do this orders of restitution and counter-

restitution are therefore required.21

19 Andrew Burrows, above n.2, at 569.20 Keith Mason, J.W. Carter & G.J. Tolhurst, Mason and Carter’s Restitution Law in Australia, Second edition, LexisNexis Butterworths 2008, page 606, paragraph [1433].21 See for example Brown v Smitt (1924) 34 CLR 160 at 164; Alati v Kruger (1955) 94 CLR 216 at 223-34; JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378 at 386.


Where counter-restitution is required, restitutionary orders fall

into 3 categories:

1. Orders for restitution of money paid, with interest, by the

claimant prior to rescission;

2. Orders for further restitutionary rights of the claimant

such as repairs and improvements and indemnities against

third party claims; and

3. Orders for the return of property and such to the defendant,

obtained prior to rescission.22

Orders in the second and third categories are made by way of

adjustment to give effect to counter-restitution. An issue with

such orders is the valuation of non-monetary benefits where

counter-restitution applies.

Total failure of consideration is the most obvious ground for

counter-restitution where the defendant is entitled to

counterclaim for the claimant’s unjust enrichment at their

expense. Hence, this may also be considered a set off defence as22 Keith Mason et al, above n.20, at [1432].


well as an unjust one.23 Counter-restitution applies even where

there is bad faith on behalf of the defendant and so differs from

change of position as a defence, although admittedly, the two may

produce the same result. The focus of counter-restitution is to

reverse the claimant’s unjust enrichment24 and should therefore

be applied before moving on the examine any other defences such

as change of position.

Before examining counter-restitution in any more detail, it is

useful to understand more about failure of consideration, as it

is the most common ground for a counterclaim of counter-

restitution.

Failure of Consideration

In terms of importance, failure of consideration is considered to

be only secondary to mistake.25 It is usually confined to the

restitution of money, but not always. Failure of consideration

23 Andrew Burrows, above n.2, at 570.24 Cheese v Thomas [1994] 1 WLR 129; Bant, The Change of Position Defence (2009) ch.4, pages 234-36.25 Andrew Burrows, above n.2 at 318.


has always been considered as having to be total. Arguably, this

is no longer the case according to case law as well as section

1(2) of the Law Reform (Frustrated Contracts) Act 1943. Importantly, a

defendant is always entitled to counter-restitution for failure

of consideration.

Failure of consideration is not only for failure of a contracted

for performance. According to Roxborough v Rothmans of Pall Mall Ltd26

this would be too narrow an interpretation. As Viscount Simon LC

stated in the seminal judgment of Fibrosa Spolka Akcyjna v Fairbairn

Lawson Combe Barbour Ltd27 the meaning of failure of consideration is

thus:

In English law, an enforceable contract may be formed by an

exchange of a promise for a promise, or by the exchange of a

promise for an act… and thus, in the law relating to the

formation of a contract, the promise to do a thing may often

be the consideration, but when one is considering the law of

failure of consideration and of the quasi-contractual right 26 (2001) 208 CLR 516.27 [1943] AC 32, 48.


to recover money on that ground, it is, generally speaking,

not the promise which is referred to as the consideration,

but the performance of the promise. The money was paid to

secure performance and, if performance fails the inducement

which brought about the payment is not fulfilled.

Hence failure of consideration can apply to a valid contract as

well as a void or an anticipated one. But it not only applies to

contractual promises. Its wider meaning, as enunciated by the

majority of the High Court of Australia in Roxborough v Rothmans of

Pall Mall Ltd28:

Failure of consideration is not limited to non-performance

of a contractual obligation, although it may include that…

[T]he concept embraces payment for a purpose that has failed

as, for example, where a condition has not been fulfilled,

or a contemplated state of affairs has disappeared.

In the past, judges required that failure of consideration be

total. Today, partial failure is also acceptable.28 Above n.26 at 16.


1. What is total failure?

Total failure of consideration arises in situations where there

is a failure of a promised performance. So in the case of the

contract for the sale of goods, if the property in the goods

never passes to the buyer, then that is a total failure of

consideration.29 A classic example is the Fibrosa30 case where the

claimants made an advanced payment of £1000 for machines, but due

to the outbreak of World War II, never received them and so were

able to recover their money due to the court deciding that there

had been a total failure of consideration, despite the fact that

the defendants had actually incurred significant expense and

manufactured them. As Lord Wright said, the recovery of money

for total failure of consideration “…was based on the simple

theory that a man who has paid in advance for something which he

has never got ought to have his money back.”31

29 Rowland v Divall [1923] 2 KB 500.30 [1943] AC 32. 31 Ibid, at 72.


However the test does not merely turn on whether the buyer has

received what he paid for. The leading case on the meaning of

total failure of consideration, Stocznia Gdanska SA v Latvia Shipping Co.,32

emphasises that “In truth, the test is not whether the promise

has received a specific benefit, but rather whether the promisor

has performed any part of the contractual duties in respect of

which the payment is due.”33

As Treitel also says, after Stocznia “the test is whether performance

has been rendered not whether it has been received.”34 This does

cause some problems, however, when applied to certain facts. In

Rowland v Divall35 for example, the Court of Appeal held that there

had been a total failure of consideration, despite the fact that

the claimant had used the car in question for 2 months, because

he had not been given title to the car. As Aitken LJ said, “It

seems to me that in this case there has been a total failure of

32 [1998] 1 WLR 574.33 Ibid, at 588.34 Edwin Peel, Treitel on the Law of Contract, 12th edition, 2007, paragraph 22-003, note 10.35 [1923] 2 KB 500.


consideration, that is to say that the buyer has not got any part

of that for which he paid the purchase money. He paid the money

in order that he might get the property and he has not got it.”36

Another interesting example is Rover International Ltd v Cannon Film Sales

Ltd (No. 3)37 where the Court of Appeal held that Rover’s receipt and

use of Cannon’s films did not prevent a claim for total failure

of consideration. This was because Rover had not achieved what

they had contracted for, which was to make profits from the film

(or at least break even). As Kerr LJ (Nicholls LJ agreeing)

said:

The question whether there has been a total failure of

consideration is not answered by considering whether there

was any consideration sufficient to support a contract or

purported contract. The test is whether or not the party

claiming the total failure of consideration has in fact

received any part of the benefit bargained for under the

contract or purported contract… Delivery and possession were36 Ibid, at 506.37 [1989] 1 WLR 912.


not what Rover had bargained for. The relevant bargain… was

the opportunity to earn a substantial share of the gross

receipts… with the certainty of at least breaking even by

recouping their advance. Due to the invalidity of the

agreement Rover got nothing of what they had bargained for,

and there was clearly a total failure of consideration.38

But were these really cases of total failure? Many commentators

do not think so.39 In these cases, as well as Goss v Chilcott40 and

DO Ferguson & Associates v Sohl,41 the failure was actually partial as

the defendants had rendered part of the performance which the

claimants had paid for.

2. Must Failure of Consideration be total?

Not necessarily. Both in England and Australia, the law has

moved away from failure of consideration being total which seems

to be not only logical, but fair. In 2 English decisions, Lord

38 Ibid, 923-25.39 Andrew Burrows, above n.2 at 325; Peter Birks, An Introduction to the Law of Restitution (revised edition 1989) at 465, 476.40 [1996] AC 788.41 (1992) 62 BLR 95.


Goff remarked on the judiciary’s willingness to move away from

failure of consideration having to be total. In Goss v Chilcott,42

Lord Goff said that partial recovery would be available for “…

cases in which apportionment can be carried out without

difficulty.”43 Again, Lord Goff made a similar remark in

Westdeutsche Landesbank Girozentrale v Islington London Borough Council:44

There has long been a desire amongst restitution lawyers to

escape from the unfortunate effects of the so-called rule

that money is only recoverable at common law on the ground

of failure of consideration where the failure is total, by

reformulating the rile on a more principled basis; and signs

that this will in due course be done are appearing in

judgments throughout the common law world , as appropriate

cases arise for decision.45

42 [1996] AC 788.43 Ibid, at 798.44 [1996] AC 669.45 Ibid, at 682.


Counter-restitution impossible?

An important defence to restitution claims following a rescission

of a contract is the inability to achieve restitutio in integrum.46 The

effect of this defence is that if a claimant cannot make the

required counter-restitution, then their claim for restitution

will fail, as per Lord Blackburn’s comment “as a condition to a

rescission there must be a restitutio in integrum.”47

What this means is that for a claimant to be granted rescission

of a contract, followed by restitution, they must be able to

firstly transfer to the defendant any benefit they received from

them, otherwise the claimant would end up unjustly enriched at

the defendant’s expense.

As Lord Wright said in Spence v Crawford48:

… if a plaintiff who has been defrauded seeks to have the

contract annulled and his money of property returned to him,46 Keith Mason et al, above n.20, page 845, paragraph [2324].47 See for example Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas1218 at 1278 per Lord Blackburn.48 [1939] 3 All ER 271, 288-89.


it would be inequitable if he did not also restore what he

had got under the contract from the defendant. Though the

defendant has been fraudulent, he must not be robbed, nor

must the plaintiff be unjustly enriched, as he would be if

he both got back what he had parted with and kept what he

had received in return.

In most cases, total failure of consideration is the unjust

factor that triggers counter-restitution. In effect, the

claimant’s rescission and restitution removes their performance

for which the defendant rendered the benefit to the claimant in

the first place.

But is it right to talk about counter-restitution ever being

impossible? Surely this is rarely, if never, true, assuming that

the claimant is solvent, as a benefit can always be given a

monetary value by a court. However, where the property has been

consumed or disposed of or the value has been difficult to

ascertain, as it is non-monetary, the bar to rescission has been


invoked in the past.49 This suggests that where precision in

assessing the value of the claimant’s non-money benefits is

impossible, the courts would prefer to leave things as is, and

refuse to rescind. Although times have changed, starting with

the decision in the non-disclosure case Erlanger v New Sombrero

Phosphate Co50 where the House of Lords decided that precise

counter-restitution was not required in order for there to be

rescission. In that case, it was decided that rescission could

occur so long as New Sombrero gave back the mine and an account

of profits (the defendant had bought the island on which the mine

sat for half the price that the shareholders had paid, but had

not disclosed this fact). Lord Blackburn stated that “… the

practice has always been for a court of equity to give relief

whenever, by the use of its powers, it can do what is practically

49 See for example Vigers v Pike (1842) 8 Cl & Fin 562, but compare that with Compagnie des Chemin de Fer Paris-Orleans v Leeston Shipping Co Ltd (1919) 36 TLR 68, 69 where substantial use of a ship did not bar rescission.50 (1878) 3 App Cas 1218.


just, though it cannot restore the parties precisely to the state

they were in before the contract.”51

Another example is MacKenzie v Royal Bank of Canada52 where a woman was

induced by a misrepresentation by the defendant bank to deposit

share certificates to said bank as security for a loan to her

husband’s company. The court held that the contract could be

rescinded and the share certificates returned, despite the bank

advancing money on the back of the security, so long as Mrs

MacKenzie paid back the dividends. The bank’s advancement of

funds was not considered a bar.

The following passage from Treitel explains the importance of the

MacKenzie decision on rescission being barred where counter-

restitution is impossible:

It is sometimes said that the object of rescission is to

restore the parties to the situation in which they would

have been if the contract had never been made, but in the

51 Ibid 1278.52 [1934] AC 468.


light of MacKenzie’s case such statements are not quite

accurate. The essential point is that representee should

not be unjustly enriched at the representor’s expense; that

the representor should not be prejudiced is a secondary

consideration.53

Another example of where a bar to rescission can be invoked is to

prevent loss to a defendant especially where the property in

question’s condition has been detrimentally changed to the extent

that the defendant would be worse off than if no contract had

been made at all. The Erlanger case would appear to support this

assertion as Lord Blackburn stated that rescission may be

accompanied by an account of profits as well as an allowance for

deterioration. This shows that there is actually no need to bar

rescission where counter-restitution is deemed impossible as

compensation can always be made.

53 Edwin Peel, Treitel on the Law of Contract, 12th edition, 2007, paragraph 9-098.


Contracts entered into by Duress

Halpern and Halpern54 established that the ‘restitutio in integrum is

impossible’ bar also applies to rescission for duress. In that

case, siblings fought over their parents’ estate and came to an

agreement that the defendant sibling would transfer substantial

assets to the claimant sibling, in return for the claimant

sibling destroying certain documents, which could have later

helped in the case that there was a dispute between them. The

claimant sued for breach of contract and the defendant sibling,

citing duress, sought to rescind the contract. The question for

the court was did the destruction of the documents make counter-

restitution by the defendant impossible.

The Court of Appeal upheld the court below’s decision55 that the

bar to rescission exists where counter-restitution is impossible

applies to duress as well as fraudulent misrepresentation and

undue influence. A complicating factor was if, indeed, the

54 [2007] EWCA Civ 291, [2008] QB 195.55 [2006] EWHC 1728 (Comm), [2006] QB 88.


documents had been destroyed at all. However, the Court of

Appeal implied that counter-restitution is always possible by

saying “it would be surprising if the law could not provide a

suitable remedy.”56 The Court of Appeal also pointed out that

counter-restitution is not always desirable, especially in cases

where it would lead to a result which contradicted the decision

that the demand was unlawful.57

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd58 deals with a

further problem where duress only relates to part of the

consideration paid. So in that case, the shipbuilders were

entitled to be paid for the work done in accordance with the

original contract irrespective of whether they were entitled to

the varied price. Hence counter-restitution is due under the

terms of the original contract, despite the fact that the varied

contract has been rescinded.

56 [2007] EWCA Civ 291, [2008] QB 195, at [76].57 Ibid at [74].58 [1979] QB 705.


Rescission for undue influence

In O’Sullivan v Management Agency & Music Ltd59 the claimant, Raymond

O’Sullivan, known professionally as Gilbert O’Sullivan, tried to

set aside contracts where he’d assigned copyright to his songs to

the publishing and recording companies engaged by his defendant

management company, once performed and expired, on the grounds of

restraint of trade and, more importantly for this analysis, undue

influence. On appeal, a key question was what was the

appropriate remedy for undue influence, with the Court of Appeal

dismissing the defendant’s submission that rescission could not

be effected as counter-restitution was impossible. The Court

relied on Erlanger and agreed that precise counter-restitution was

not necessary, instead stating (Dunn LJ):

Transactions may be set aside even though it is impossible

to place the parties precisely in the position in which they

were before, provided that the court can achieve practical

justice between the parties by obliging the wrongdoer to

59 [1985] QB 428.


give up his profits and advantages, while at the same time

compensating him for any work that he has actually performed

pursuant to the transaction.60

Hence the Court of Appeal upheld the trial judge’s decision to

set aside the contract and restore copyright to the claimant and

made the counter-restitutionary order of an account of profits of

the defendant subject to allowance for reasonable remuneration as

well as profit for managing and promoting the claimant.61

The court arguably stripped the defence of ‘counter-restitution

is impossible’ of its merit by demonstrating, by its complex

mutual restitution in this case, that counter-restitution,

although sometimes complicated, is never impossible. As Fox LJ

said, “The question is not whether the parties can be restored to

their original position; it is what does the justice of the case

require?”62

60 Ibid, at 458.61 Andrew Burrows, above n.2 at 287.62 Ibid at 466-67.


Counter-restitution where there is an illegal purpose

Where there is an illegal purpose and a contract is struck down

as a result, counter-restitution is usually not possible, except

in the case where the defendant can show that its counterclaim

was based on a mistake, and nor should there be a bar that

restitutio in integrum is impossible.63 This is supported by Hermann v

Charlesworth64 where Miss Hermann was allowed to withdraw from a

marriage brokerage contract even though she had had several

(unsuccessful) introductions. In contrast, Cross J in South

Western Mineral Water Co v Ashmore65 stated that “some sort of restitutio in

integrum must still be possible.”66 Similarly, Buller J in Lowry v

Bourdieu67 stated that withdrawal is only permitted “on the terms

of restoring the other party to his original situation.”68

63 Ibid.64 [1905] 2 KB 123.65 [1967] 1 WLR 1110.66 Goff and Jones, The Law of Restitution (7th edition), 2007, para 24-008.67 (1780) 2 Doug KB 468, 471; Andrew Burrows, above n.2 at 497.68 Ibid.


Failure of Consideration andCounter-Restitution

Both in the UK and Australia, where a claimant has received

payment in part and there has not been a total failure of

consideration, the courts have not awarded recovery in

restitution, indeed, the law has not allowed it.69

The leading statement on this was made by Lord Wright in Fibrosa

Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd70 who said that a

recovery of money paid or the value of services rendered is

available where “the consideration, if entire, has entirely

failed, or where it is severable, it has entirely failed as to

the severable residue.”71 As Viscount Simon LC also importantly

69 Baltic Shipping v Dillon (1993) 176 CLR 344 in Australia; Rover International Ltd v Cannon Film Sales Ltd (No 3) [1989] 1 WLR 912 at 923 in the UK.70 [1943] AC 32.71 Ibid at 64-5.


noted “…it is… not the promise which is referred to as the

failure of the consideration, but the performance of the

promise.”72 This was relied upon by the High Court of Australia

in both Davids Securities Pty Ltd v Commonwealth Bank of Australia73 and in Baltic

Shipping v Dillon74, in the former case stating:

…there has been an insistence that the failure of

consideration be total. The law has traditionally not

allowed recovery of money if the person who made the payment

has received any part of the ‘benefit’ provided for in the

contract.75

A US example that has had an influence in Australia

A good example of partial failure of consideration is when

building contracts go wrong. In the US this played out in the

decision of Boomer v Muir76 which allowed the building contractor 72 Ibid at 48.73 (1992) 175 CLR 353 at 382.74 Baltic Shipping, above n.69 at 351 per Mason CJ, 379 (per Dawson and Deane JJ), 381 (per Toohey J) and 389 (per McHugh J).75 Above n.73 at 382 per Mason CJ, Deane, Toohey, Gaudron and McHugh JJ.76 24 P2d 570 (Cal App 1933).


recovery due to breach by the owner and put them in a much better

position than if they had have fulfilled the contract. Boomer

terminated as Muir failed to deliver materials on time, having

received all but $20,000 of the contract price. The court then

awarded an additional $258,000 in restitution.77 As Andrew

Burrows concludes: “Cast in terms of failure of consideration,

therefore, the law of restitution of benefits in kind already

recognises that the failure need only be partial and not

total.”78

Sadly, the judgment in Boomer was not clear on whether the

court’s reasoning was based on rescission for breach or a total

failure of consideration and cannot be relied upon in the UK or

Australia as the House of Lords in Johnson v Agnew79 and the High

Court of Australia in McDonald v Dennys Lascelles Ltd80 agree that a

contract is not rescinded ab intio for breach.

77 James Edelman, Restitution for a Total Failure of Consideration: When a Total Failure is not a Total Failure, Newc Law Review Vol 1 No. 3 57 at 59.78 Andrew Burrows, above n.2 at 333.79 [1980] AC 367 at 396.80 (1933) 48 CLR 457 at 476-77.


Boomer has been relied upon in 3 cases in State Supreme Courts in

Australia involving situations where a builder was awarded a

quantum meruit where the owner was in breach but where progress

payments had already been made.81 None of these cases mention the

fact that in the US, rescission for breach is allowed, whereas in

Australia (and the UK) it is not.82 Furthermore, the High Court

of Australia has also done the same in its decision of Pavey &

Matthews v Paul83 where, although Mrs Paul had paid $36,000 for

renovations to her house by Pavey & Matthews at the market rate,

the HCA awarded a quantum meruit of an additional $27,000 to the

builders. Does this mean the payment was conditional on the

entire performance of the contract? So that if the condition

fails then there is a total failure of consideration and the

money must be returned. Mason CJ rejected this argument in

Baltic:

81 Minister for Public Works v Renard Constructions Pty Ltd, Supreme Court of NewSouth Wales (26 October 1989, unreported); Jennings Construction Ltd v QH and M Birt Pty Ltd, Supreme Court of New South Wales (16 December 1988, unreported); and Watkins Pacific Pty Ltd v Lezzi Constructions Pty Ltd, Supreme Court of Queensland (Full Court 1993, unreported).82 James Edelman, above n.77 at 60.83 (1986) 162 CLR 221.


…where the payee is required to perform work and incur

expense before completion… unless the contract manifests a

contrary intention it would be unreasonable to hold that the

payee’s right to retain the payment is conditional on

performance of the entire contractual obligations.84

These decisions appear to be out of the ordinary.

When is counter-restitution is “easy”?

Peter Birks argues that “the requirement of total failure of

consideration disappears when counter-restitution is easy”85

whereas Burrows calls out Boomer as an exception and states that

part payments of the contract price do not bar restitution. In

agreement, the High Court of Australia noted in David Securities Pty

Ltd v CBA86 that “In cases where consideration can be apportioned or

where counter-restitution is relatively simple, insistence on

failure or total failure of consideration can be misleading or

84 Above n.69 at 352-53.85 Peter Birks, An Introduction to the Law of Restitution, Oxford: ClarendonPress, 1990, at 242.86 Above n.73.


confusing.” Furthermore, “in circumstances where both parties

have impliedly acknowledged that the consideration can be ‘broken

up’ or apportioned in this way, any rationale for adhering to the

traditional rule requiring total failure of consideration

disappears.”87

However the HCA does not actually answer any of the questions

that arise as to the basis for awarding counter-restitution in

“easy” cases – does it only apply to monetary payments for

example? As Edelman writes, it would appear that counter-

restitution may be considered easy in partial consideration cases

if one implicitly accepts that “…if the parties can be placed

into the situation as if there was a total failure of

consideration, there would be no need for the initial requirement

that the failure of consideration be total.”88

In England, this has also been accepted as the new norm with Lord

Goff stating that the recognition that failure of consideration

87 Ibid at 383 per CJ Mason, Deane, Toohey, Gaudron, McHugh JJ.88 James Edelman, above n.77 at 62.


may be partial is “appearing in judgments throughout the common

law world, as appropriate cases arise for decision.”89

But when is counter-restitution difficult? When the benefit is

non-monetary as in Baltic? The High Court of Australia did not

shed much light on this. In Mason CJ’s judgment he stated that

in order to avoid over compensation, a claim for restitution of

the fare on a total failure of consideration will succeed only if

accompanied by counter-restitution of benefits received by the

claimant but that there cannot be total failure of consideration

if the incomplete performance results in a party receiving “any

substantial part of the benefit received under the contract.”90

Deane and Dawson JJ recognised partial failure in their joint

judgment saying that the whole of Mrs Dillon’s fare could not be

refunded as “benefits which were of real value had been provided,

accepted and enjoyed.”91 It would seem that the barrier to

accepting that failure of consideration may be partial is the

89 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961 at 967.90 Above n.69 at 350.91 Ibid at 379.


valuation of non-monetary benefits, however courts partake in

such valuation exercises often when ascertaining quantum meruit and

quantum valebant claims so it would appear inconsistent that they

are reluctant to do it in assessing partial failure of

consideration leading to counter-restitution. It would indeed be

more equitable if they did.


Conclusion

It would appear that the state of the law of counter-restitution

in both the UK and Australia has been very active over the past

20 years. Counter-restitution has always been considered an

important defence, however it seems that with both jurisdictions

moving away from failure of consideration having to be total, it

is being elevated to a much more logical and fair one.


Bibliography

1. Andrew Burrows, The Law of Restitution, 3rd edition, Oxford

University Press 2011.

2. Andrew Burrows, The Australian Law of Restitution: Has the High Court Lost

its Way? 2009 Hearn Lecture, Melbourne; reprinted in Elise

Bant and Matthew Harding (eds), Exploring Private Law, Cambridge

University Press 2010, pages 67-85.

3. Danneman, Unjust Enrichment by Transfer: Some Comparative Remarks

(2001) Texas Law Review 1837.

4. David JS Jackson, The Australian Law of Restitution: Is

Andrew Burrows right that the High Court has lost its way?

http://www.law.uq.edu.au/documents/cli-sem-series/commentary

/Restitution-Law-Paper-21-04-09.pdf

5. Goff and Jones, The Law of Restitution, 7th edition, Sweet &

Maxwell Ltd, 2007.

6. James Edelman, Restitution for a Total Failure of Consideration: When a Total

Failure is not a Total Failure, (1996) 1 Newc Law Review No 3 57,

pages 57-65.

7. Keith Mason, J.W. Carter & G.J. Tolhurst, Mason and Carter’s

Restitution Law in Australia, Second edition, LexisNexis

Butterworths 2008.


8. Edwin Peel, Treitel on the Law of Contract, 12th edition, 2007.

9. Peter Birks, An Introduction to the Law of Restitution, Revised edition

1989, Oxford University Press.

10. Peter Birks, No Consideration: Restitution after void contracts,

(1993) 23 Western Australian Law Review 195, pages 195-234.

11. Richard Farnhill, Restitution Claims: Getting your own back,

www.allenovery.com/publications/en-gb/Restitution-Claims--

Getting-your-own-back.aspx

12. Seavey and Scott, Restitution, (1938) 54 LQR 29.


http://www.allenovery.com/publications/en-gb/Restitution-Claims--Getting-your-own-back.aspx

http://www.allenovery.com/publications/en-gb/Restitution-Claims--Getting-your-own-back.aspx

What is the state of Counter-Restitution in England and Australia?

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