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The Policies against Leapfrogging in Unjust Enrichment: A Critical Assessment

Document Cited authorities 1 Cited in Related
Vincent
Author
DOI10.3366/elr.2018.0455
Published date01 January 2018
Date01 January 2018
Pages55-85
INTRODUCTION

In this article I will critically examine the merit of the policy reasons against leapfrogging one's contractual counterparty in unjust enrichment.1 Where the benefit of a performance, which is rendered by someone (C) pursuant to a contract with his counterparty (T), ends up with someone (D) who is not a party to that contract, will the law of unjust enrichment then allow the performer (C) to recover that benefit directly from its recipient (D)?2 The utility of allowing the leapfrog arises where recovery by C from T under general rules of contract becomes impossible (mainly) due to the insolvency of T. As we will see below, the most important policy reasons brought forward against leapfrogging are insolvency-related. These policy reasons will be assessed in this paper with reference to Dutch and English cases in particular. In past decades the comparative approach has proven to be extremely fruitful for unjust enrichment.3 As I hope to illustrate with this contribution, also after ‘Brexit’ it will continue to be important and exciting to examine legal problems on a comparative basis in common law and civil law (and mixed) jurisdictions. As Daniel Visser observed, in an important contribution on three-party enrichment:

If legal systems generally accept the three basic elements as the cornerstones of enrichment liability, and given the fact that there are obvious policy factors that are relevant in every situation, it is very likely (if one accepts, as I believe one must, that there is a commonality to legal reasoning in Western systems) that similar patterns will emerge from the various systems.4

Common law and civil law systems are constantly faced with the same problems, from which – certainly in unjust enrichment – “similar patterns of solutions will emerge”. However, not all the policy factors are equally obvious in all common law and civil law jurisdictions. For that reason the solutions that emerge are not always identical. This is no reason for dispensing with comparative analyses in this area. On the contrary, the existence of different solutions provides a strong impetus for a critical assessment of their underlying policies.5

As it would be too lengthy and beyond the scope of this contribution, I shall not be going into all leapfrogging cases. I am therefore confining the cases discussed below and the issues they raise to leapfrogging in triangular sub-contracting cases. In a typical sub-contracting case, there is a contract between the owner of real estate (D) and the main contractor (T) for the construction or renovation of a building. For (part or all) of the work the main contractor then uses sub-contractor (C), who carries out (his share of) the work pursuant to the contract with the main contractor. However, as we will see in the illustrative cases reviewed below, there is not always a contract between T and D. Also cases where a performance in kind is factually rendered by C to D, exclusively pursuant to a contract between C and T, will in this contribution be regarded as sub-contracting cases. The crucial question here also is: can C leapfrog T by bringing an enrichment action against D?

 LEAPFROGGING ONE'S CONTRACTUAL COUNTERPARTY: TWO ILLUSTRATIVE CASES

The prevailing view in many common law and civil law (and mixed) jurisdictions is that if the real estate owner D has received a benefit at the expense of builders C, which was rendered pursuant to a contract with an intermediate party T, C shall not have an action based upon unjust enrichment against D. It is thought that C should bear the risk of the insolvency of his contractual counterparty T, as C himself chose to enter into contractual relationships with T. C has therefore himself to blame when T turns out to be not creditworthy. Moreover, in continuation of this point, it is regarded as a subversion of the insolvency regime when C would be able to claim the full value of his performance from D, while other creditors of T would have to file their claims in T's insolvency and may ultimately receive only a small portion of their claims. In one of the two illustrative cases reviewed below, the English case MacDonald Dickens and Macklin v Costello, this reasoning was used in order to deny leapfrogging; in the other illustrative case, the Dutch case, Vermobo v Van Rijswijk, it was not given consideration at all.

<italic>MacDonald Dickens and Macklin v Costello</italic><xref ref-type="fn" rid="fn6"><sup>6</sup></xref>

Mr and Mrs Costello were the owners of land, which they wished to develop by the construction of a number of houses. They approached builders, MacDonald Dickens and Macklin, (‘MacDonald’ or the ‘builders’) who had worked for them in the past at another of their properties. Mr and Mrs Costello were the sole shareholders and managing directors of Oakwood Residential Ltd (‘Oakwood’). This company had virtually no assets of its own and was only set up by Mr and Mrs Costello as a vehicle for financial and taxation purposes and as a conduit for making payments to third parties. Oakwood was used for this development project and the builders were informed that – for tax purposes – the building contract would be concluded with this company and that payments would be made through this company. The project would be funded by a credit facility from a bank entered into by Mr and Mrs Costello personally. The borrowed money would be channelled through Oakwood to make the payments to the builders. The builders assisted Mr and Mrs Costello in obtaining the credit facility by providing the bank with written information about the construction project and the stage payments to be made under the building contract. MacDonald carried out work on the site and for some time their invoices were duly paid from Oakwood's bank account. Then an invoice was only partly paid, disputes arose about the completion and quality of the work and MacDonald stopped work and left the building site. The builders sued Mr and Mrs Costello for unjust enrichment, for the services they rendered pursuant to the contract with Oakland.7 Were the builders allowed to leapfrog their contractual counterparty, Oakland? The Court of Appeal held that they were not entitled to restitution for unjust enrichment from Mr and Mrs Costello. 8

 <italic>Vermobo v Van Rijswijk</italic> <xref ref-type="fn" rid="fn9"><sup>9</sup></xref>

Van Rijswijk junior had entered into a contract with construction company, Vermobo, for building a piggery on land owned by his father (Van Rijswijk). When, after the work had been completed, Vermobo discovered that Van Rijswijk junior would be unable to pay the agreed price, they sued Van Rijswijk (i) in tort for inducing breach of contract; and (ii) on the basis of unjustified enrichment. With respect to the enrichment claim the Appellate Court established that the piggery was built on land owned by Van Rijswijk and that he had become the owner of the piggery. It was also established that Van Rijswijk had agreed to the building, had been aware of the construction contract and had often been present at the building site. Finally, it was established by the Appellate Court that Van Rijswijk had mortgaged his real estate, including the piggery under construction, in favour of a bank for a loan. On the basis of these facts the Appellate Court held that, if Van Rijswijk would be able to retain the ownership of the piggery for no consideration at all (zonder enige tegenprestatie), he would be unjustifiably enriched at the expense of Vermobo. The Appellate Court also held, however, that Vermobo's enrichment claim should nevertheless be denied if Van Rijswijk could prove his allegation that he had compensated his son for the piggery.10 Because Van Rijswijk could prove this, Vermobo's claim was ultimately rejected by the Appellate Court. The Hoge Raad, however, held that Van Rijswijk's defence would fail if it appeared that the decrease of the enrichment took place during a period in which he reasonably should have been aware of the existence of an obligation to pay compensation for unjustified enrichment.11 Unlike the English Court of Appeal, the Dutch courts do therefore sometimes allow builders to leapfrog their contractual counterparty by bringing a claim for unjust enrichment (subject to defences) against the owner of the building site.

 UNJUST ENRICHMENT AT THE EXPENSE OF ANOTHER

A critical assessment of the insolvency-related policy reasons against leapfrogging is only meaningful if it is at all conceivable that an enrichment claim by C against D would be within the parameters set by the general requirements for unjust enrichment. Unjust enrichment has three basic elements: (1) an enrichment; (2) which was at the claimant's expense; and (3) which was unjust.12 As an integral part of unjust enrichment analysis a fourth question must be answered: does the enriched party have any defences? A claim on the basis of unjust enrichment can only be awarded if the first three corresponding questions are answered positively and the last one negatively.13 In this section I will look at how these questions must be answered with regard to leapfrogging.14

Question 1: Was the defendant enriched?

In construction projects involving sub-contractors the owner of the building site is the recipient of benefits constituting an enrichment. The value of the real estate usually increases as a consequence of the sub-contractor's work. As Etherton LJ considered in MacDonald Dickens and Macklin v Costello: “There can be no doubt that Mr and Mrs Costello have benefited from, or in restitutionary terms, have been enriched by, the work carried on by [MacDonald] on the site”.15 Likewise, in Vermobo v Van Rijswijk the Appellate Court held that Van Rijswijk had been enriched at the expense of Vermobo.16 In sub-contracting cases, the question is not so much whether the defendant was enriched, as rather by how much he was enriched. One of the objections raised against leapfrogging in MacDonald Dickens and Macklin v Costello was:

… the existence of two remedies, one in restitution and...

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