Two decades ago, unjust enrichment was described as “the Cinderella of law, barely 10 years old but growing up rapidly. Until recently unrecognised and overshadowed by the ugly sisters, Contract and Tort, Cinderella’s day has arrived.” In England a claim for unjust enrichment was initially referred to as a claim in ‘quasi contract’. This language has now been abandoned and unjust enrichment has a strong foothold in the landscape of commercial law and its role and limits are becoming more clearly defined. Despite this, it is only infrequently pleaded in construction cases and when argued it is often set out in broad terms where the facts do not support such a claim. However, this is cause of action that should not be overlooked by a contractor or employer – especially if they have claims that fall outside the four corners of their construction contract.

Two decades ago, unjust enrichment was described as “the Cinderella of law, barely 10 years old but growing up rapidly.  Until recently unrecognised and overshadowed by the ugly sisters, Contract and Tort, Cinderella’s day has arrived.”[1]   In England a claim for unjust enrichment was initially referred to as a claim in ‘quasi contract’.  This language has now been abandoned and unjust enrichment has a strong foothold in the landscape of commercial law and its role and limits are becoming more clearly defined.  Despite this, it is only infrequently pleaded in construction cases and when argued it is often set out in broad terms where the facts do not support such a claim. However, this is cause of action that should not be overlooked by a contractor or employer – especially if they have claims that fall outside the four corners of their construction contract.

The Principle of Unjust Enrichment

The principle of unjust enrichment under English law^[2] is that no one should receive a benefit at another person’s detriment without being required to pay a reasonable value for that benefit. The court needs to ask itself four questions: (a) Has the Defendant been enriched? (b) Was the enrichment at the Claimant’s expense? (c) Was the enrichment unjust? (d) Are there any defences available to the Defendant?   In the recent case of Bank of Cyprus UK Limited v Menelaou^[3] the Supreme Court applied these principles to a claim by a bank that it should have a charge over a property where the bank had lent money for the purchase of that property but had not exercised a valid charge against the owner.

The Defences

There are a number of defences to a claim for unjust enrichment.  The first, and perhaps the most significant, is that the parties’ rights and remedies are set out within a contract.  If the parties have agreed to a contract then they will be bound to the terms and conditions of that contract and the law will not permit a claim for unjust enrichment to be used to avoid the consequences of that contract.  The second defence is where restitution would be impossible; for example, where goods have been destroyed.^[4]  The third defence is where one party has changed its position following his enrichment;^[5] for example, where a party has spent the monies it received in good faith.^[6]  The fourth defence is that of illegality.

Unjust Enrichment and Construction Contracts

As stated above, a claim for unjust enrichment will fail where the rights and remedies of the parties are determined by a valid contract.  So, for example, where a variation to a contract occurs, the contractor must claim under the variation provisions of the contract.  Only in cases where there are no variation provisions in the contract or the variation falls outside of the variation provisions may a claim for unjust enrichment succeed.

In cases where there is no contract,^[7] or where the contract is subsequently held to be illegal, a claim for unjust enrichment may be successful.^[8]  However, while the construction industry is notorious for carrying out works where contracts have not been signed or where there is a letter of intent, it does not follow that there will be no contract.  Recent case law has shown that the courts are ready to construe that a contract has come into existence by conduct, even where not all terms are agreed.  In the recent case of Reveille Independent LLC v Anotech International^[9] the Court of Appeal held that there was a contract, despite the fact that a written document stated that a contract would not come into existence until the document was signed, which the parties never did.  In this case the acceptance of the contract was evidenced by the clear performance of the obligations under the contract that showed that the parties intended to be bound by the contract.

In the case of ISG Retail Ltd v Castletech Construction Ltd^[10] the court had to consider whether a claim for unjust enrichment could succeed where there had been a total failure of consideration by one party.  In this case one party was claiming back by way of restitution a deposit paid where the other party had failed to provide any consideration under the contract.  The court held that “restitution is based on unjust enrichment, and that that is a different cause of action from breach of contract… But… there is a type of breach of contract (total non-performance) that can give rise to an alternative remedy by way of restitution. There is nothing in the Scheme [for Construction Contracts] that deprives an adjudicator of the power to grant relief by way of restitution if that is an available remedy for the breach of contract in question.”

However, although claims for unjust enrichment rarely succeed where a contract is in place, the use of unjust enrichment is becoming more relevant to the construction industry.  There are a number of situations that can arise where one party may be unjustly enriched.  The first example relates to where an adjudicator or DAB awards a sum to one party which is greater than the actual loss incurred.  The recovery of the money paid can be claimed by way of unjust enrichment.  The second example is where a call is made on a bond and where the amount paid under the bond is more than the loss incurred.

Unjust Enrichment and Adjudication

Claims for unjust enrichment have been successfully made in cases relating to an overpayment made under an adjudicator’s decision.  In the case of Aspect v Higgins^[11] the Supreme Court held that a claim for the recovery of monies paid under an adjudicator’s decision could be advanced by “contractual implication or, if not, then by virtue of an independent restitutionary obligation.”   Here the claim is not being made under the construction contract but under the terms of the adjudication agreement which requires or infers that a party is entitled to re-payment if he proves that the adjudicator awarded more than was due.

In Kitt & Anor v The Laundry Building Ltd & Anor^[12] the court considered what the cause of action was where one party paid an adjudicator for its decision and that party was subsequently awarded the costs of the adjudication.   The court suggested that a claim could be made under the adjudication agreement but that if there was no contractual remedy a claim could be advanced for unjust enrichment.  The court stated that an adjudication agreement creates a tripartite contract between the parties to the adjudication and the adjudicator in respect of the latter’s fees. “The parties will therefore have agreed that, if the decision required one rather than the other party to pay the adjudicator’s fees, that party would pay those fees. Although both parties are jointly and severally liable to the adjudicator in respect of those fees, and, therefore, the adjudicator could sue either party for those fees, in logic, and in law, it must follow that, where the adjudicator has felt it necessary to sue the party which has not been ordered to pay his fees by virtue of the decision, that party must have a legal entitlement pursuant to the tripartite agreement, contractually, to recover what it has been required to pay the adjudicator.”  The court then proceeded to set out an alternative position that where two parties owe a common liability and the party who is not primarily liable to pay discharges that liability, then the paying party is entitled to reimbursement by way of a claim for restitution so as to avoid unjust enrichment.^[13]

Unjust Enrichment and Bonds

Where a party (for example, an Employer) makes a call on a performance bond which is paid by the bank then the question arises whether the other party (the Contractor) can claim part of the monies back from the Employer under the basis of unjust enrichment if it can show that the losses incurred by the Employer were less than the monies paid under the bond.  It is well established that a claim can be made under an implied term that the beneficiary will account to the other party where it has been overcompensated.^[14]  As Staughton LJ stated in the Cargill case: “The general situation as to performance bonds is that they provide that the bank or the other party giving the bond has to pay forthwith, usually on demand. But subsequently there has to be an accounting between the parties to the commercial contract.”  Recently in Wuhan Guoyu Logisitics Group Co Ltd v Emporiki Bank of Greece^[15]  Tomlinson LJ held that, in addition to a right to claim under an implied term, there was also a right to claim based on equitable principles of restitution to prevent unjust enrichment.

However, it may be beneficial for a contractor to formulate its claim based on an implied term to account rather than as a claim for unjust enrichment.  In many construction contracts there are often caps on liability; for example, a cap on delay damages.  In cases where the Employer’s losses exceed the cap then a claim for unjust enrichment may fail where the Employer can show that its actual losses exceed the cap and therefore it has not been unjustly enriched by the calling on the bond.^[16]  In such a case the contractor will be better of framing its claim as an implied term to account having regard to the terms of the underlying contract.

Conclusion

Twenty years ago unjust enrichment was seen as the new Cinderella of the law.   Twenty years on unjust enrichment has developed her own place in the law but remains in the shadows of tort and contract.  More recently unjust enrichment has been used to fill gaps in the law where no remedy previously existed. It is an equitable right which prevents a person profiting unjustly from another’s loss.  Unjust enrichment is a cause of action which should not be overlooked especially where there are no express contractual rights or remedies or where there has been a total failure of consideration by one of the parties.

¹Unjust Enrichment, Davenport and Harris (1997) at page 1
²Benedetti v Sawaris [2013] UKSC 50 at para 10
³[2015] UKSC 66
⁴Arnold v National Westminster Bank [1989] 1 Ch 63 at 67.
⁵Lipkin Gorman v Karpnale Ltd [1991] 2 AC 58
⁶Niru Battery Manufacturing Co v. Milestone Trading Ltd [2003] EWCA Civ 1446.
⁷Claymore Services Ltd v Nautilus Properties Ltd [2007] EWHC 805
⁸Referenced in The Doctrine of Unjust Enrichment, Long R. & Avalon A., Long International Inc at p.2
⁹[2016] EWCA Civ 443
¹⁰[2015] EWHC 1443
¹¹[2015] UKSC 38
¹²[2014] EWHC 4250
¹³Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] EWCA Civ 487, paras 66-72
¹⁴Cargill International SA v Bangladesh Sugar and Food Industries Corp. [1998] 1 WLR 461 (CA)
¹⁵[2012] EWCA Civ 1629
¹⁶See The Law of Guarantees, Andrews & Millett, Sweet & Maxwell 6th edn (2011) at page 682

The English Supreme Court has ruled that losers in adjudications have six years to challenge an adjudicator’s decision from the payment date, while winners' rights to seek improvement end with the original claim's limitation period. This article considers the implications.

How long do you have to challenge an adjudicator’s decision?

Controversially, the English Supreme Court has now ruled as follows:

• If you were the loser and required to pay monies, you will have the full limitation period, typically six years, to bring your claim to recover those monies starting from when you were required to make payment to the winner; whereas

• If you were the winner, your right to seek an improvement of the result will come to an end at the same time as the limitation period for the original claim.

In our last issue we discussed the background to the then forthcoming Supreme Court’s decision in the Aspect v Higgins case (“the Decision”).

If I had been forced to lay my cards on the table then about which way the Decision might go, I would have predicted that Aspect would succeed and the Court of Appeal’s decision would be upheld. That would have been a fairly unpopular opinion since many considered this would be not just an unfair result but one that would seriously undermine the adjudication process.

We are now going to see how prophetic those views turn out to be because the five members of the Supreme Court, with Lord Mance delivering the single judgment, have unanimously found in favour of Aspect. [1]

The Key Facts

The rather complicated factual background of this case can be summarised as follows:

• In April 2004 Higgins engaged Aspect to provide asbestos advice on a project;
• In July 2009 Higgins obtained an adjudicator’s decision condemning Aspect’s advice and awarding damages of approximately £658,000 which Aspect duly paid in August 2009;
• By August 2010 the six-year limitation period had expired for any claim that Higgins might have brought against Aspect;
• Subsequently, Aspect issued proceedings at first instance in the Technology and Construction Court to recover the full £658,000 which it had paid to Higgins in complying with the adjudicator’s decision, claiming it had been an over-payment;
• Higgins defended the proceedings by arguing that Aspect’s claim was time-barred;
• At first instance, before Akenhead J, Aspect’s claim was indeed held to be time-barred [2];
• That decision was overturned by the Court of Appeal. [3]

The nature of Aspect’s Case for Recovery of the Monies

Readers will recall that, both at first instance and in the Court of Appeal, Aspect had pursued a two-pronged case against Higgins.

Firstly, Aspect had based its claim upon a term which should be implied into the Scheme for Construction Contracts (which itself takes effect as a series of implied terms), giving a party who is required to pay monies under an adjudication decision the right to recover any over-payment (“the Contract Argument”).

Secondly, Aspect pursued an alternative claim based upon restitutionary principles and more specifically unjust enrichment (“the Restitution Argument”).

The Nature of Higgins’ Case Against Aspect

Before examining how the Supreme Court approached these two arguments, it is worth reminding ourselves of the thrust of Higgins’ case against Aspect at first instance and before the Court of Appeal because it was here that the battle-lines for the Supreme Court were really drawn.

It was central to Higgins’ case that Aspect’s position was inherently unfair and, if supported by the courts, would seriously undermine adjudication as we have come to know it. Higgins contended that the facts of this case showed precisely why that was so.

Instead of seeking a final determination of the underlying dispute, as it had been entitled to, Aspect had just sat back and done nothing until the limitation period had expired for any claim that Higgins might have wished to advance. This meant that, in any subsequent action for recovery of monies which Aspect might pursue, Higgins would be unable to pursue any set-offs or counterclaims in relation to these matters.

Such a result, Higgins contended, was clearly unfair and, by potentially doubling the limitation period for such claims, would undermine the intended finality and therefore the efficacy of the adjudication process itself. Those propositions have received much support from commentators ahead of the Supreme Court’s judgment in this matter.

In the Decision, Lord Mance described Higgins’ complaint about the Court of Appeal’s approach to limitation as being that it “gives Aspect a one-way throw and undermines finality”.  However, he had a simple but, in his view, complete answer to that complaint:-

“That consequence follows, however, from Higgins’s own decision not to commence legal proceedings within six years from April 2004 or early 2005 and so itself to take the risk of not confirming (and to forego the possibility of improving upon) the adjudication award it had received. Adjudication was conceived, as I have stated, as a provisional mechanism, pending a final determination of the dispute. Understandable though it is that Higgins should wish matters to lie as they are following the adjudication decision, Higgins could not ensure that matters would so lie, or therefore that there would be finality, without either pursuing legal or arbitral proceedings to a conclusion or obtaining Aspect’s agreement.”

One gets the feeling that if ever there was a case where the merits, whichever way they are perceived, seem to be dictating both popular opinion and judicial outcome, then this is surely that case.

In any event, having reached that view on the “merits” of this case, the precise route that the Supreme Court adopted to arrive at the appropriate conclusion almost seems superfluous. Nevertheless, in summary, we explore below how the Supreme Court arrived at its conclusions.

The Contract Argument

Their Lordships had no real hesitation in deciding the following, which was central to Aspect’s arguments:

“[I]t is a necessary legal consequence of the Scheme implied by the 1996 Act into the parties’ contractual relationship that Aspect must have a directly enforceable right to recover any overpayment to which the adjudicator’s decision can be shown to have led, once there has been a final determination of the dispute.”

In reaching that conclusion, the Supreme Court agreed with the Court of Appeal’s analysis that the legal basis for that right is an implied term arising from the Scheme which provided a positive “right to recover an alleged over-payment”.

Furthermore, since the right was in essence a right to recover an over-payment that had been made, their Lordships considered that it was obvious that the right would accrue as and when the payment in question had taken place.  It followed that, for limitation purposes, a claim based upon that right could be brought at any time within six years from that date.

It also followed from that relatively straightforward analysis of the situation that Aspect had been perfectly within its rights to bring the claim when it had done.

Readers will recall that the contractual analysis advanced by Higgins, with which Akenhead J at first instance had agreed, was very different. There was no room or necessity, Higgins had argued, to imply a term of the sort accepted by the Court of Appeal and now also the Supreme Court.

Instead, Higgins argued, Aspect did have an appropriate right, which it should have exercised within six years from when the contract had been performed, and that was to obtain a negative declaration confirming that it was not liable for the monies which Aspect claimed.

The Supreme Court had little hesitation in rejecting this “negative declaration” approach, Lord Mance commenting:-

“It ignores a core ingredient of and the immediate trigger to Aspect’s current claim, which is that it has been ordered to make and has made a large payment in 2009. It is artificial to treat a claim to recover that sum as based on an alleged cause of action accruing in 2004 or early 2005. To treat Aspect’s remedy as being to seek a declaration, and then to invite the court to use its alleged consequential powers in order to grant relief which is the true object of the proceedings, is equally artificial.”

Lord Mance helpfully clarified that, in providing for the final determination of matters decided in adjudication, “what the Scheme contemplates is the final determination of the dispute referred to the adjudicator, because it is that which determines whether or not the adjudicator was justified in his or her assessment of what was due under the contract”.

This process will involve the court or tribunal in reviewing the “substantive merits of the original dispute”, in his Lordship’s words, although limitation will be irrelevant. The Decision is not entirely clear regarding the extent to which matters occurring after the adjudicator’s decision can be relied upon in the final determination process and this will need clarification in future court decisions.

Lastly, in the context of final determination, Lord Mance confirmed that, in defending its position, Higgins would be entitled to advance all matters upon which it relied in the adjudication, including any set-offs which the adjudicator may have rejected, given that the adjudicator’s reasoning would have “no standing” in the process. This softens the blow somewhat for successful parties facing final determination in these circumstances.

The Restitution Argument

The Restitution Argument had been raised, without really going anywhere, at first instance. The Court of Appeal disposed of the appeal from Akenhead J’s decision on the basis of the Contract Argument without feeling it necessary to look into restitutionary issues.

However, in giving Higgins permission to appeal, the Supreme Court went to the lengths of stating that it might require the parties to address it on “the legal position regarding restitution”.

As it happens, the Supreme Court, like the Court of Appeal before it, felt it unnecessary to look into the Restitution Argument in any great detail in the Decision.  What Lord Mance did say, in considering the limitation position, was the following:

“Since Aspect’s cause of action arises from payment and is only for repayment, it is, whether analysed in implied contractual or restitutionary terms, a cause of action which could be brought at any time within six years after the date of payment to Higgins, i.e. after 6 August 2009. For this purpose an independent restitutionary claim falls to be regarded as “founded on simple contract” within section 5 of the Limitation Act…”

The fate of the Restitution Argument therefore remains slightly unclear. However, the reality is that it would only really have come into play had Aspect failed on the Contract Argument or if there had been limitation issues about it in circumstances where the position in restitution would have been more favourable for Aspect.

The Consequences of the Decision

Much has already been made about the damaging effect that the Decision will have on the adjudication process. My own view is that these concerns are exaggerated and that the Decision’s future impact on a user can be summarised as follows:

• The law is now settled regarding the steps that a party must take if he believes that the adjudicator has required him to make an over-payment; he should commence proceedings to seek final determination of the matters in issue; he will have six years to do so from when the payment was actually made;

• In the final determination proceedings, although the successful party will be able to defend itself by relying on all matters that it raised in the adjudication, what it will not be able to do is to counterclaim in respect of any of its own claims if they have become time-barred on the basis of the application of the normal rules;

• It may be that a losing party in adjudication who has been required to pay out monies to the successful party will seek to “do an Aspect” by deliberately holding off from taking any steps to recover an over-payment; however, this would only make any sense where the successful party has its own claims which might become time-barred by the time the final determination proceedings have to be commenced; such cases are going to be relatively rare;

• We may well see a number of cases where successful parties in adjudication do take pre-emptive action to prevent themselves from falling into the same position in which Higgins has ultimately found itself but I think those cases are also going to be rare; I suspect it is more likely that in such cases a deal will be done to achieve finality, but successful parties would be well-advised to consider the limitation position in any cases where they have been paid monies on the back of an adjudicator’s decision;

• It would be prudent for professional advisers who have assisted parties in such cases also to address the potential implications of the Decision in the context of the matters with which they were involved.

[1] Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2015] UKSC 38 (17 June 2015) http://www.bailii.org/uk/cases/UKSC/2015/38.html

[2] Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWHC 1322 (TCC) (23 May 2013) http://www.bailii.org/ew/cases/EWHC/TCC/2013/1322.html

[3] Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWCA Civ 1541 (29 November 2013)  http://www.bailii.org/ew/cases/EWCA/Civ/2013/1541.html