Costello & Anor v MacDonald & Ors

A claimant who supplies services under a contract with one party cannot ordinarily recover in unjust enrichment from a third party who receives the benefit. The court should uphold the parties’ allocation of obligations and risks, including the risk of non-payment or insolvency.

A direct restitutionary claim would improperly circumvent the contractual counterparty, alter the position of unsecured creditors and potentially permit recovery exceeding the agreed contract price. The rule applies with particular force where the claimant knowingly selected the contractual counterparty and could have obtained guarantees from the beneficiary.

Builders contracted orally with a development company to construct houses on land owned by the company’s shareholders and directors. The owners financed the project and retained the completed houses, but the company failed to pay the full amount due under the contract.

The Bournemouth County Court held the company contractually liable and also ordered the owners to make restitution for unjust enrichment. The owners appealed that restitutionary award. The builders sought permission to cross-appeal earlier decisions that the company had not contracted as the owners’ agent and that the owners had not induced the company’s breach.

The central issue was whether a person benefiting from services could be liable in unjust enrichment when those services were supplied pursuant to the claimant’s contract with a third party.

1. The appeal was allowed. Although the owners were enriched by the building work, a restitutionary award against them would undermine the contractual arrangements. The builders had agreed that the development company alone would be contractually obliged to pay. That arrangement allocated the risk of non-payment, including insolvency, to the builders: per Etherton LJ, with whom Patten and Pill LJJ agreed.

2. The general rule is that courts should uphold contractual arrangements by which parties define, allocate and restrict their obligations and the consequences of non-performance. Party autonomy and commercial certainty require restitutionary relief ordinarily to be refused where a defendant benefits from services rendered under the claimant’s contract with another person. Hampton v Glamorgan, Brown & Davis Ltd v Galbraith, PanOcean Shipping Co Ltd v Creditcorp Ltd and Lumbers v W Cook Builders Pty Ltd supported that policy.

3. The builders knew that the company was their contractual counterparty and that the arrangement had been adopted for tax reasons. The contractual documents, invoices, payments, correspondence and structural drawings all identified the company. The builders could have protected themselves against default by obtaining guarantees from the owners but did not do so.

4. Permitting concurrent contractual and restitutionary remedies could also produce anomalous results. Contract damages reflect the agreed price and terms, whereas restitution generally measures the value of services when received. A claimant might therefore escape a poor bargain and recover more than the contract allowed.

5. The court left undecided whether the claim also failed because the enrichment came directly from the company and only indirectly from the builders. That issue had not been adequately argued.

6. Permission to cross-appeal was refused. The agency decision was long out of time and the later trial had proceeded in reliance upon it. The proposed inducing-breach appeal had no prospect of success because genuine disputes existed about the work, and the Recorder was entitled to find good faith and no intention to procure a breach.

1. Court of Appeal (Civil Division): In [2011] EWCA Civ 930, allowed the owners’ appeal against the restitutionary award and refused the builders permission to cross-appeal.

2. Bournemouth County Court: Recorder Abbott held after preliminary issues that the contract was between the builders and the development company, rather than the landowners. Following trial, he entered judgment against the company under the contract and against the owners in unjust enrichment, while rejecting the claim that the owners had procured or induced the company’s breach.