At the Expense of the Claimant: Direct and Indirect Enrichment in English Law

by Peter Birks

(2000) Oxford U Comparative L Forum 1 at ouclf.iuscomp.org | How to cite this article

Introduction

Some time ago a study by Jack Dawson compared the German and American positions on the requirement of ‘directness’ in the law of unjust enrichment.1 It is not at all easy to come up with a satisfactory short statement of that requirement, but, broadly speaking, its effect is to restrict liability to the first or immediate enrichee and to forbid leapfrogging that proper defendant in order to sue remoter recipients who, on one argument or another, might also be said to have been enriched at the claimant’s expense. Dawson’s study concluded that German law had chosen to insist rather strictly on directness, while American law, although agreeing with German law in a number of important and recurrent situations, had never committed itself to the same dogma. Proceeding in a characteristically pragmatic manner, it had allowed a variety of claims which could not have satisfied any requirement that the enrichment must have come directly from the claimant.

This subject has preoccupied German jurists but has been very little visited by English lawyers. Neil Whitty’s recent study of the Scots law, heavily influenced by German and other civilian writing, has served to draw English attention to the deficiency.2 More recently still, Sonja Meier, who has made a speciality of comparison between the German and English law of unjust enrichment,3 has written an important and helpful article in the Cambridge Law Journal, which once again reminds us of the need to take this subject much more seriously.4

This is not a subject in which it is easy to draw comparisons with civilian systems. Their law of unjust enrichment turns of the absence of legal ground for the enrichment (sine causa / ohne rechtlichen Grund) and hence on the science of nullity which has to underpin that approach. The science of nullity is heavily in evidence in the discussion of indirect enrichment. We by contrast look for down-to-earth reasons for restitution which are intelligible on the Clapham omnibus. This hum-drum search for unjust factors can claim the merit of having coped unobtrusively and interstitially with the problems in which civilian jurists have found themselves inextricably entangled. An unkind observer might say that we have simply failed to notice the difficulties. Our leading textbook, reflecting the pragmatism which is shared with American law, devotes only three pages exclusively to this matter, under the heading of the sub-principle that the enrichment must be obtained at the claimant’s expense.5 Two other influential books both accept that, subject to exceptions, English law is committed to the requirement of directness, though neither finds it necessary to spin a conceptual web to catch every case.6 As it happens both invoke the word ‘privity’.7 This is an unwanted echo of the old implied contract theory of unjust enrichment, which both authors quite rightly regard as once and for all repudiated. Though the word can barely be given meaning outside contract, both agree that in some sense the English law of unjust enrichment is and ought to be hemmed in by a notion of privity.8 There is no doubt that the common law needs to tidy up its thinking on this subject, though it cannot do it in the structurally alien language of sufficient and insufficient cause.

This paper takes the view that the exceptions are arguably stronger than the rule. If that is right, the Burrows-Virgo position is not wrong, but its emphasis is misleading. Furthermore, the supposed rule, especially when dressed up in its borrowed contractual clothing, proves difficult to tie in to any convincing rationale. Rule and exceptions must swap places. English law is not in principle averse to leapfrogging, though there is a recurrent situation, as Dawson’s study recognized, in which it is outlawed. It is relatively easy to explain the rationale behind that prohibition. Almost more important than working out what the rule is, and how many exceptions it might admit, is the need for a stable technique for handling the relevant fact situations. The method proposed and used in this paper involves the rigid separation of two inquiries.

The first inquiry is directed to discovering what the English law of unjust enrichment might understand by the requirement of ‘privity’ or ‘directness’ to which it is supposed to subscribe. Who counts as a direct recipient or, in the contractual language, who satisfies the requirement of privity? This inquiry will identify the immediate enrichee. No leapfrogging question can arise till that job is done. The second inquiry then asks when, if ever, English law allows a claimant to leapfrog the immediate enrichee in order to sue someone who received from or through him – a remoter recipient at his expense.

Professor Burrows rightly says that the requirement of directness cannot be treated as a logical implication of the requirement that the defendant must have been enriched at the expense of the claimant.9 The claimant and defendant in an action in unjust enrichment must necessarily be linked by that phrase. It is by bringing himself within that phrase that the claimant connects himself to the enrichment in question and identifies himself as having a prima facie title to sue.10 Hence the phrase must be satisfied in every case. Directness is superadded. The defendant may have been immediately enriched at the claimant’s expense, or he may have been remotely enriched at his expense, where ‘remotely’ means ‘after and through the immediate enrichee’.

It follows that this entire discussion turns on scope of ‘at the expense of’. The first inquiry is directed to identifying the party immediately enriched at the expense of the claimant and the second inquiry is directed to the question whether it is possible to sue a party remotely enriched at his expense. It requires to be emphasized that the ground for restitution – the unjust factor – is not in question. The questions whether the defendant was enriched and, if so, whether he was enriched at the expense of the plaintiff are essential but preliminary. Before and liability can be imposed it must be shown that the enrichment was unjust. Even then the defendant may not be liable: he may be able to establish some defence. This paper is concerned only with immediate and remote enrichment at the plaintiff’s expense. Nevertheless, it needs to also to be said that the ground for recovery of remote enrichment is unlike any other, in being parasitic on the ground for recovery from the immediate enrichee.11

The organizing role of ‘at the expense of’ might be said to have been dissolved in German law. Superficially, it has been. The reason is to be found in the tantalizing wording of paragraph 812 BGB: ‘Wer durch die Leistung eines anderen oder in sonstiger Weise auf dessen Kosten etwas ohne rechtlichen Grund erlangt, is ihm zur Herausgabe verpflichtet. (Anyone who receives a thing without legal ground through a performance made by another or in some other way at that other’s expense incurs an obligation to that other to make restitution).’ This wording has led to a very strong differentiation between the Leistungskondiktion (the claim in unjust enrichment where the enrichment is conferred on the defendant by a performance by the claimant) and the Nichtleistungskondiktionen (claims in unjust enrichment where the enrichment arises at the expense of the claimant in some way other than through a performance by the claimant). Although the words ‘at the expense of another (auf Kosten )’ do expressly appear in relation to the latter and by implication carry back to the former, the learning on the meaning of this phrase has tended to be mediated through discussion of the nature of a Leistung and of other modes of enrichment. Thus where there is a Leistung the connection between claimant and defendant is automatically established, and the phrase ‘at the expense of’ has no further role.12

It is a difficult question, and one of great importance to the common law, whether rationality ultimately requires this distinction between enrichment by performance and enrichment in other modes. Suffice it to say here that, without any equivalent text on which to hang it, English law has not so far found it necessary to draw any such line. If and so long as it is not insisted upon, the discussion of the essential link between the claimant and the defendant must focus immediately on ‘at the expense of’. It is certainly true, however, that in that discussion a line similar but not identical to that between performance and other modes may increasingly assert itself in English law, namely the line between ordinary and interceptive subtractions.

I. Eliminating the ‘Wrong’ Sense of ‘at the expense of’

An unjust enrichment is an enrichment at the expense of another which has to be given up to that other for a reason, that reason being neither a contract nor a wrong. Obligations to give up a gain received can arise from a contract13 or from a wrong.14 Such obligations are indeed restitutionary and belong in the law of restitution, but they do not arise from unjust enrichment.15 This is a study of unjust enrichment. It is not concerned with any other grounds for restitution. One particular sense of ‘at the expense of’ blurs this distinction. A preliminary task is therefore to ensure that it is not used.

If C pays D, the money is received by D at C’s expense in the sense that it comes from C. This is simple illustration of the subtractive sense of the phrase or the ‘from’ sense. A mistaken payment from C to D is sometimes described as ‘a subtractive enrichment’ merely to emphasize that it falls within the ‘from’ sense of the crucial phrase. However, ‘at the expense of’ can be used to mean that the enrichment has been obtained by a wrong to the person wronged. C is beaten up by D. D was paid £5000 by X to do it. Here D is enriched at C’s expense in the sense that he has obtained the money by doing a wrong to C. This is the ‘wrong’ sense of ‘at the expense of’. It is the ‘wrong’ sense in that P relies on a wrong to connect him to D’s enrichment. And it is the wrong sense in that it cannot be admitted to the law of unjust enrichment. Where a plaintiff identifies himself as the victim of a wrong by invoking the phrase ‘at the expense of’ in this ‘wrong’ sense, he is relying on the wrong and, albeit in the language of unjust enrichment, asking the court to decide that the wrong is one which yields an entitlement to a gain-based award. The law of unjust enrichment cannot answer that question. A claimant who does rely on that sense, whether because the facts allow him no other or because he chooses to analyse the facts in such a way as to make that sense available to him, defines himself out the law of unjust enrichment. His is talking about a wrongful enrichment and his claim is made in the law of wrongs.

Where the facts amount to a wrong, the law of unjust enrichment will have nothing to say unless the wrongful enrichment is susceptible of alternative analysis as an unjust enrichment. That is, the claimant may be able to dispense with the wrong and present the facts as an unjust enrichment without placing any reliance on them in their character as a wrong. Whether this can be done often or rather rarely depends in large measure on the breadth of the interpretation which the courts will give the subtractive sense of ‘at the expense of’. The subtractive sense is amenable to broader or narrower interpretation. A very broad at interpretation will bring a large number of cases restitution for wrongs within the range of alternative analysis as cases of unjust enrichment.

Some scholars do not believe that the common law ever gives gain-based awards for wrongs.16 That is, they think that restitution for wrongs is an illusion. Every case which looks like restitution for a wrong as such is really a re-analysis of the facts as an unjust enrichment. On this view it is never qua wrong that the story yields restitution but only qua unjust enrichment. There is no need to go so far. The law of wrongs is not confined to compensating loss. Every jurisdiction which awards exemplary damages proves as much.17 For example, Edwards v Lee’s Administrator,18 is perfectly satisfactorily analysed as an example of restitution – that is, gain-based recovery – for trespass. The finder of a scenic cave made a fortune through tourism. A third of the cave lay under his neighbour’s land. Deep down under the surface, doing no harm, every party of tourists trespassed. The victim of the wrong, who had no access to the cave from his land, was awarded one third of the profits.

The great case of Moses v Macferlan itself is only explicable as a case of restitution for the wrong of breach of contract.19 Every other explanation leads to the conclusion that the court ignored and contradicted a judgment which had not been quashed. Macferlan had promised Moses not to sue him to enforce the endorser’s liability on certain promissory notes. Macferlan did sue. Moses paid up. Lord Mansfield did not doubt that Moses could have brought an action for breach of contract (general assumpsit). The only question was whether he could bring the restitutionary action for money had and received instead. It was held that he could.20

Although it is impossible and unnecessary to deny the existence of restitutionary awards for wrongs qua wrongs, it is none the less true that if a broad interpretation of ‘at the expense of’ is adopted a great many of the cases which seem to exemplify restitution of wrongful enrichment — restitution for wrongs as such — become susceptible of alternative analysis as cases of unjust enrichment. Moreover, as we shall see, the law does increasingly appear to be adopting a broad interpretation.

Having eliminated the wrong sense of ‘at the expense of’, we are left with the ‘subtractive’ or ‘from’ sense. A claimant in unjust enrichment must identify himself as the person from whom the defendant was enriched. The case law on the interpretation of this sense of the phrase provides the answer to the first of our two principal inquiries.

II. The First Inquiry: Identifying the Immediate Enrichee

The central model is very simple. It consists of a performance made by one person to another. For example, C pays D by mistake. In practice nearly every case is like that. However, to find the limits we have move out from that simple model, to see what is minimally required. English law certainly agrees with German law that there is no actual requirement of a performance. Those who take and find are subjected to the same liability as those who are mistakenly paid. If I drop my money in the street, the finder who pockets it has always been exposed to the same action for money had and received as a mistaken payee.21 Here there is a shift of wealth from P to D in which P plays no active role. If there is a difference from the German approach, it is, as we have already noticed, that no fuss whatever is made, as it is German law, about the line between performance (Leistung) and acquisition in other ways. It is possible to formulate a tentative proposition which identifies the immediate enrichee and covers both Leistung and Nichtleistung: the immediate enrichee is the first recipient from the claimant. This notion of a first recipient seems at first sight clear enough, but there are some complications.

(1) Corresponding Loss

Shorn of complications, the question is whether there must be a plus and minus relationship, a minus to the would-be claimant corresponding with the plus which is the enrichment of the defendant. In ninety-nine out of a hundred cases there will have been a correspondence of that kind. In Canada it is now constantly said that a claim in unjust enrichment requires a corresponding impoverishment on the part of the plaintiff. That seems to commit the law to the view taken in some civilian jurisdictions that the arithmetic sense of subtraction must be satisfied. There must be a minus to the plaintiff.22 German law takes the other view. German authors remind their readers that this is enrichment law, not impoverishment law.23

Recent cases in Australia in England have opted for the German position. The context of these holdings to the effect that an impoverishment of the claimant is not required has been the rejection of any defence of passing on. Defendants have tried to resist claims by showing that a plaintiff in unjust enrichment who did indeed suffer a loss corresponding to their enrichment, has since made good that loss by passing the burden on to others. An ultra vires tax is imposed on sellers of certain goods. Sellers then raise their prices. Can they still recover? Statute apart, the answer in Australia was negative.24 Claims in unjust enrichment are not about recouping loss. So long as the plaintiff can be identified, it is not necessary for him to prove impoverishment.

This was followed in England. A bank engaged in an interest swap. It turned out that the swap was void. The bank therefore had a prima facie right to restitution of the money it had paid out. But it had hedged. It had made a back to back swap with another counter-party, reversing out the risk. Overall it had lost nothing. However, the Court of Appeal held that the defendant had no defence: it could not rely on the claimant bank’s hedge. The action was not about the claimant’s impoverishment but the defendant’s unjust enrichment.25 The Court of Appeal has thus accepted that the reason there is no defence of passing on is that corresponding loss is, as the German jurists hold, beside the point.

These utterances are somewhat weakened by their context. The defence of passing on could have been rejected on a number of grounds. Nevertheless, they are strengthened by support from a quite different quarter. 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 user. Yet you have suffered no loss. I have taken three weeks’ riding ‘from’ you, but I have inflicted no corresponding impoverishment on you.26

There is another substantial piece of evidence against the requirement of a corresponding impoverishment. You have my money. You invest it and roll the investment over ten times. You produce a five-fold increase. We will recur to this below. At this point we need only note that it is hard to turn a blind eye to the fact that if, as is the case, I can claim the yield of your successful investment, my recovery will give me five times the amount of the value which I lost at the beginning of the story.27 In short, I recover without showing any corresponding loss.

(2) Externalities of Performance not Conclusive

This second complication arises in some cases in which the claimant wishes to say that he conferred the benefit in question on the defendant and where the physical externalities might seem to support that contention. The externalities are not conclusive. In particular, they are not conclusive where the would-be claimant in unjust enrichment, C, confers the benefit on D under a contract made with X for its conferment. This is a not uncommon configuration. A contractor building on the land of D will, for example, often sub-contract aspects of the work. The externalities will then suggest that a sub-contractor’s carpentry is a benefit conferred by the carpenter on the owner of the site and that the owner might therefore be said to be enriched at the carpenter’s expense. However, at least in the common case in which the subcontracting carpenter does indeed have a good contract with the head contractor, the owner is only a remote recipient of that benefit; the immediate recipient is the head contractor. It is for him that the carpenter has worked. In such circumstances an action in unjust enrichment, if any there be, will lie to the head contractor, for it is at that party’s expense that the recipient owner has been directly, or immediately, enriched. The carpenter could only reach the owner as a remote recipient. And, as we shall see, on these facts he will not be allowed to leapfrog the head contractor.28

Two situations need to be considered. There is first the common case in which person in the position of the sub-contractor, the would be claimant C, does indeed have a valid contract with the person in the situation of the head contractor. Secondly there is the rarer case in which that contract is merely putative: in eye of the law there is no contract between C and X.

(a) D benefits from performance of a valid contract between C and X

Suppose a garage, C, does work on a car which has been damaged in a crash. The car’s owner, D, is the ultimate beneficiary of the work. However, in almost all cases the garage will be doing the work under a contract with an insurance company. It has been held that if after the work is done and the customer has taken the car back into his possession, the insurance company becomes insolvent, the unpaid garage has no claim against the owner. The work is done for the insurance company. The garage has to take the risk of the insolvency of the insurance company with which it validly contracted. It cannot say to the customer that the customer was directly enriched at its expense. And it cannot leapfrog the insurance company.29

In Lloyds Bank Plc v Independent Insurance Co Ltd30 the bank paid its customer’s creditor a large sum with its customer’s authority but by reason of a grave mistake as to the funds available to the customer. The case reaffirms that a bank, C, cannot recover from the payee, D, in those circumstances, despite its indubitably causative mistake. The dominant reason given by the Court of Appeal is that on these facts the bank gets what it paid for. It gets good consideration in the form of the discharge of a debt owed to D by the bank’s customer, X.

That cannot be the right reason. On the one hand it is very doubtful that the receipt of good consideration is really a bar to such a claim and, on the other, it is inconceivable that the result would have been any different if the payee had been a donee. A father, for instance, will often enough ask his bank to send money to his son. Suppose that he sets up a standing order for £500 per month. If the bank inadvertently allows the father’s account to slide into overdraft, it cannot look to the son for repayment, even though the son be a mere donee. The true reason is that in these circumstances the payment is not the bank’s payment. It is the customer’s payment, and the immediate enrichee is the customer. Where the customer has insufficient funds, the authority to pay is simultaneously a request to lend. In most cases it might indeed be said that the payee gives good consideration to the customer, in the form of the discharge of the customer’s debt. But that is superfluous. A bank which pays to the order of a customer is paying the customer who is paying the payee.31 If the customer is out of funds the payment is a loan to the customer. The payment is not received immediately at the expense of the bank.32 The payee is at most a remote recipient at its expense.

These cases show that if C makes a valid contract with X, and C’s performance of that contract enures to the benefit of D, C cannot say that D has been immediately enriched at his expense. It is X who has been enriched at C’s expense, while D has received his benefit from X. Later we will have to revisit this configuration of facts. We will see below that there is a doctrine which allows leapfrogging: where a first recipient is unjustly enriched at another’s expense and a second recipient is then enriched because of the first enrichment, it is possible, under certain restrictions, to leapfrog the first recipient and attack the second recipient instead. When we have introduced that doctrine we will need to say exactly why it does not apply to this kind of case. These defendants can be attacked neither as first recipients nor, through the first recipient, as remote recipients.33

(b) D benefits from a putative contact between C and X

The law as considered so far turns on the validity of the transaction between C and X: D appears to be enriched immediately from C but is actually enriched from X. In English law the picture changes dramatically in the case in which C thinks he has a contract with X but in truth has none. If C is a bank which mistakenly pays a stopped cheque, the payee D receives directly at the bank’s expense. The mistake then provides the unjust factor, and C can therefore recover from D. That is Barclays Bank Ltd v WJ Simms & Son Ltd.34 In such a case the bank intends to pay on the credit of its customer, just as in the case discussed above, but the putative contract with the customer cannot turn the payment into the customer’s payment. Again, in the very common but more complex O’Brien situation,35 in which C, being in a domestic or confidential relationship with X, gives security to D for X’s business indebtedness, there is either no contract all between C and X or the contract to provide security will be voidable for undue influence or misrepresentation. For that reason, if for no other, it cannot be said that the security is obtained by D from X. Hence here D’s security is taken directly at P’s expense.

In German law, and indeed in American law,36 different results are reached. The German law agrees with the English law on the common case discussed above,37 but it treats the putative case in exactly the same way: it would deny Barclays any claim in unjust enrichment against Simms. The position which it takes derives from its commitment to assessing the matter from the standpoint of a reasonable person in the shoes of D, the defendant recipient of the enrichment. If it would appear to such a person that the Leistung (performance) was in substance made by X, C can have no claim in unjust enrichment.38 In one case hot water tanks and kitchen equipment were supplied to a building site by a supplier, C, which believed its contract was with the site-owner, when in fact the order had been placed by the head contractor, X. That equipment was then installed in the new building. The supplier had no claim no claim in unjust enrichment against the site-owner, D. A reasonable person in D’s position would have regarded the performance – the supply of equipment – as procured by X through a contract with C. The result would have been different if it could have been shown that D knew that C had no such contract and a person with that knowledge would have known that the Leistung was C’s own.39

Again, in a case substantially identical to Barclays Bank Ltd v WJ Simms & Son Ltd,40 the claimant bank, C, had neglected a stop put on a standing order in respect of rent due from its customer, X, to the defendants, D.41X was a brewery in dispute with D, the landlords of one of its taverns. It had indicated to the landlords that it would stop its payments of rent and it had told its bank not to pay. The bank went on paying for many months. The tenant brewery failed to notice. The bank had no right to restitution from the landlords. Even taking the notice issued by the tenants into account, a reasonable person in the position of the landlords would have thought that the performance was that of the tenants. It therefore had to be treated as their performance, not the bank’s.

It is extremely difficult for an English lawyer, no doubt because of a series of different presuppositions, to come to terms with the notion that in this context the honest and reasonable belief of the recipient should be decisive. In a simple two-party case such as Kelly v Solari,42 where a widow had to make restitution when it turned out that her husband had after all not been insured, the innocence of the recipient is irrelevant until the receipt has generated some change of position. It then becomes relevant, since recipients in bad faith are disqualified from pleading that defence. However, if we were to apply the German or American approach to Barclays Bank Ltd v WJ Simms & Son Ltd we would have to deny the bank’s claim unless the builders knew that it had no mandate to pay. It is not clear how or why, in this context, liability might be confined to the knowing recipient. American law, but not German, appears to dress the matter up in terms of a defence and the limits placed upon it. There is said to be a defence of ‘discharge for value’,43 but that ‘defence’ does no more than restate the proposition that a claimant in this Barclays situation cannot recover from the defendant payee. In short the defence still needs to be explained. It is not an example of, or even a cousin of, bona fide purchase from a third party. There is no acquisition from a third party in such a case. The only possible third party, X, has either never dealt with or has cancelled its dealing with the would be claimant, C.

(3) Interceptive Subtraction

The idea of interception appears to have a role, at least in Canada, in determining the response to wrongful enrichment. It is important not to be distracted by that.44 Our question is whether in the law of unjust enrichment it is possible to say that value has been obtained from another when the asset in question had never been reduced into that other’s ownership or possession. The answer is yes, but it is complicated by the fact that the law often ensures that the property passes before the interception actually happens. The subtraction then ceases to be interceptive.

Suppose that, intending a loan to C, I throw down a bundle of notes from an upper window, expecting C to catch them. D physically intercepts them, jumping up before C can get them. The property at law will not have passed to C, since C never took possession. But equity raises a perfectionary beneficial interest in C at the moment at which I have done all that lies in me to do to transfer the legal title.45 The physical interception comes a second or two later, C already has a proprietary interest in the notes, and the subtraction from him is not interceptive. Again, suppose that I give D £100 to give to C. We might say that that money is now on its way to C. However, if D absconds with it, the question whether D is enriched at my expense or, interceptively, from C admits of no natural answer. The law therefore adopts an inevitably artificial criterion. The claim stays with me until you have attorned to C, which means until you have informed him that you are holding for him. Thereafter, the claim against you goes round to him. But your attornment passes the property in the £100 to C, with the result that when you pocket the money the subtraction is no longer interceptive. You are taking what is already his.

The problem is not always short-circuited in this way. In Shamia v Joory 46 there was no identified fund, so that no property could pass. The defendant owed money to a third party, was told to pay the claimant, and attorned. The plaintiff, though not owner, was able to claim the sum. It is sometimes said that the case was wrongly decided for the very reason that no property could pass. But it is defensible as an instance of interceptive subtraction. The attornment, though it could not pass the property in any specific thing, nevertheless served as an indication that the sum in question had been finally destined to go to the plaintiff. Accordingly, in withholding it the defendant had enriched himself by subtraction from the plaintiff.

There are quite a few cases of this kind, where money destined to C is intercepted by D. One large group has become obsolete. If D usurped an office which ought to have been occupied by P and received money due to the office-holder, C could bring money had and received against D.47 Similarly, and not obsolete, a self-appointed executor or administrator who receives what was due to the estate is liable to make restitution to the incoming rightful personal representative.48 Similarly, if D receives rent which was due to C, he will have to account to C.49 Of the same kind but rather more difficult are the cases, which are discussed by Dr Chambers, of land intended to be conveyed to C being mistakenly conveyed to D. In such a case P has been allowed to claim against D.50

Dr Smith has argued that it is a condition for the recognition of an interceptive subtraction that the plaintiff must have lost his right to sue the person who paid the interceptor.51 Accordingly, if an executor pays the wrong people, those who ought to have been paid cannot be said to have suffered an interceptive subtraction, because they are no less entitled to be paid by the executors after the misdirection than they were before. In Ministry of Health v Simpson52 the executors of Caleb Diplock had paid to charities sums which ought to have gone to the next of kin. The next of kin recovered directly from the charities. Dr Smith’s view is that this could not be justified in terms of interceptive subtraction, unless by understanding the Court to have complied with the requirement that the next of kin’s continuing claim against the executors be discharged by insisting on prior exhaustion of all possible remedies against them. Dr Smith’s argument is powerful. However, it might be said to overlook the regularity with which the law allows an election between inconsistent rights.

It was inexcusable to leave the Diplock executors bearing the loss. Even now when restitution for mistake of law has finally become possible, it would be pointlessly wasteful to insist on two actions rather than one. The next of kin’s action against the mistakenly paid charities should have been allowed, without a requirement of exhaustion of remedies against the executors, on the basis of interceptive subtraction: the charities had taken money which was destined to the next of kin. That analysis is factually attractive, even if it is inconsistent with the view that the plaintiffs had an undiminished right against the executors. It makes good sense to give the next of kin an election. We will discuss yet another explanation immediately below.

With the possible exception of the Diplock saga, all the cases of interceptive subtraction which we have discussed are cases in which there is no doubt that the plaintiff has suffered a loss by virtue of the interception. The only question is whether it is possible for the plaintiff to connect that loss with the defendant’s gain without relying on the ‘wrong’ sense of ‘at the expense of’. In other words, can we say that the gain which caused the loss came ‘from’ the plaintiff rather than ‘by doing the plaintiff wrong’? We have already noticed that the courts seem to be inclining to the German view that a loss is not necessary. If we take that seriously, the scope of interceptive subtraction enlarges quite considerably, and we can also explain something that was formerly inexplicable. The next task is therefore to contemplate interceptive subtraction freed from a requirement of loss.

It seems to be perfectly clear that if D invests C’s money and doubles it, C is entitled to the doubled proceeds. This is the case we encountered above.53 D invests £10k and gets £20k. That £20k was not C’s before D received it, but C can trace from the £10k to the £20k, and C can claim the £20k. There is no need to spend time here on the exact nature of the entitlement, in rem or in personam or both. C has suffered no ‘corresponding loss’. The outcome does not depend on the commission of a wrong. There is no doubt about any of these propositions. They underlie the operation of the presumption which produces the trust which operates when one party buys an asset with resources provided by another. And they have recently been seen in action in a case which was decided entirely at law, namely FC Jones (Trustee in Bankruptcy) v Jones.54

Only very contrived arguments can conclude that C’s suffered a loss of $20k. The loss was $10k, plus the value of money over time. Further, there is no avoiding the necessity of accepting that the £20k earned from C’s £10k cannot be said to be obtained from C unless we accept the notion of an interceptive subtraction. That money came to D when D sold out the investment. It was never in C’s ownership or possession. The only way to explain these results is (a) to accept that loss is not necessary, and (b) to say that C’s ownership of the £10k carries with it the wealth-creating opportunities inherent in that £10k, so that when the potential is realized all that is actually earned through the £10k is regarded as having been destined to C all along. The earning opportunity is C’s. Anyone who takes the opportunity intercepts what is already attributed in law to C.

This step requires us to revisit the Kentucky Cave case.55 That case is a paradigm of restitution in the law of wrongs: restitution for the wrong as such. it could easily be re-analysed in unjust enrichment if what was at issue were the value of the user itself. Far below the ground the taking of that user caused no loss, but it was nonetheless taken from Mr Lee in the simple sense: it was user of land that was his.56 The question now is whether an unjust enrichment analysis can reach even the money paid by the tourists. The answer must be that it can. If investment of the whole value of another’s asset – selling it – can later give that other the traceable substitute, exactly the same must apply to the investment of the user of another’s asset – hiring it out. Mr Edwards exploited the user of Mr Lee’s land and turned it into money. If the right of ownership attributes the earning opportunities of an asset to its owner, the same must be true of the earning opportunities inherent in the user of the land. Hence, it must be true that Mr Lee could have secured his award without relying on the facts in their character as a trespass but analysing them instead as an unjust enrichment at his expense in the subtractive sense. The law attributes the earning opportunities inherent in a thing to that thing’s owner, and their realization by a non-owner is an interception of money destined for the owner. There is no need for the connection between such a claimant and such an enrichment to be established by reliance on a wrong.

The logic seems irresistible: if without relying on wrongdoing one can have the proceeds of the sale and the assets thereby obtained, one must be similarly entitled to the gains made by hiring it out. Whether the law has really come so far is open to debate. It has travelled blind and may not care for the destination. It may turn back. Strong renewed insistence on ‘corresponding impoverishment’ would immediately narrow the law of unjust enrichment. However, the Jones case will be an obstacle to any turning back. It seems to show that the English law is committed to the broad notion of ‘at the expense of’ which includes the relatively weak form of interceptive subtraction which has just been outlined.

German law gives rather uncertain guidance in this matter. Some preliminary propositions are secure. First, since German law gives no gain-based awards for wrongs as such,57 the species of restitution seen in the Kentucky Cave case has to be explained within the law of unjust enrichment or not at all. It is not a question of alternative analyses, one in the law of wrongs and one in the law of unjust enrichment. Secondly, among the Nichtleistungskondiktionen (claims arising other than from a performance by the claimant) the Eingriffskondiktion (the claim arising from an encroachment on or intrusion into the rights of another) would be appropriate in principle for this case.58 The idea that some rights to, and some do not, attribute wealth to the holder of the right is familiar German jurists under the label “Zuweisungstheorie” or “Zuweisungsgehalt eines Rechts” – the doctrine of allocation, or the allocation-potential of a right.59 It is used to discriminate between gainful encroachments upon rights which do, and which do not, give rise to a claim in unjust enrichment. On the other hand, it seems that majority opinion among German jurists does not take the attribution doctrine to the point of attributing to the owner the earning opportunities inherent in the thing owned. In the Kentucky Cave case the German law of unjust enrichment would apparently give only reasonable rental, not the profits actually made, a view which seems to belong to a strictly subtractive interpretation.60

It is no doubt only an outsider’s want of understanding that suggests that this is not a logical sticking-point in a system which insists that enrichment law is not impoverishment law. And it is all the more illogical in the light the acceptance of the principle that the defendant must surrender that which he obtains in substitution for the plaintiff’s thing: Para 816 (1) I says, ‘If a person who is not entitled makes a disposition of a thing, and that disposition binds the person entitled, he comes under a duty to make restitution that person of that which he received by virtue of the disposition.’ That does not go to the lengths of the Jones case but it does make it difficult to account for reluctance to do the same in the case which we are compendiously calling ‘hire’, where a person not entitled makes an irredeemable disposition of time and user. Logical or not, the German position may possibly offer some comfort to those reluctant to admit that facts of the Kentucky Cave kind do admit of dual analysis, not only as a wrongful enrichment, but also as an unjust enrichment at the expense of the plaintiff and, in particular, that the profits received from the tourists can be analysed as interceptively subtracted from the plaintiff landowner.

(4) Summary

The immediate enrichee is in general easily identified as the person who was the first recipient from the claimant. That first recipient may have received by virtue of a performance by the claimant or without any performance as where he was a finder or taker. The word ‘from’ generally does, but need not, connote a corresponding loss to the claimant. The subtraction need not be arithmetic. There are two cases in which the reasonable observer might be deceived. First, where the would-be claimant confers the benefit on D under a contract with a third party, that benefit is received by D immediately at the expense of the third party, so that, if D can be attacked at all, it must be as one who received through the immediate enrichee. Secondly, a benefit which D receives directionally from a third party may nevertheless be immediately received at the expense of C if D can be said to have intercepted it on its way to C. In particular the law takes the view that earning opportunities inherent in assets are attributed to the owner of the asset, so that earnings from the asset are interceptively subtracted from its owner.

This first inquiry into ‘at the expense of’ has allowed us to identify the necessary connection between the plaintiff and the defendant and, more particularly, to say who counts as the immediate enrichee. If there were a strict requirement of ‘directness’ or ‘privity’, we would have identified the only possible defendant in an action to recover unjust enrichment.

III. The Second Inquiry: Leapfrogging the Immediate Enrichee

It will often happen that the first recipient passes the enrichment on to a second recipient. He may do this specifically, by handing over the very res received, or he may do it abstractly, by handing over some other res in reliance on his receipt. The second inquiry is directed to discovering whether a claimant can leapfrog the first recipient and sue the second recipient, and so on down the chain of remoter recipients thereafter? It is a very important question, because the first recipient may be immune from suit or not worth suing, and the remote recipient may have the longer purse.

(1) Fears

The draftsmen of the BGB were alive to the dangers of allowing leapfrogging claims. They feared that third parties would be drawn into liabilities engendered by transactions with which they had nothing to do. Precisely because they saw it as an instrument to that end, they expressly rejected the actio de in rem verso (the claim arising from wealth turned to the advantage of the defendant) which had been developed by civilian scholars from very slight Roman beginnings. The early years of the BGB then reinforced the requirement of ‘directness’.61

To some extent the responsibility for these fears may lie with the French Cour de Cassation in its notorious Boudier decision in 1892.62 The claimant there supplied manure to a tenant farmer. Before the next crop was harvested the tenant fell into financial problems and lost his lease. The claimant, not having been paid by the tenant to whom he had sold the manure, successfully leapfrogged the tenant and recovered from the landlord, the advantage having accrued to him. This application of the actio de in rem verso was crucial in supplementing the exiguous provisions of the French code civil in relation to unjust enrichment. However, it is not the first or last leading case to be roundly condemned on the facts. It exemplifies one kind of leapfrogging which cannot be allowed.63 Provided such specific restrictions are maintained, the dangers of allowing leapfrogging claims are rather less than has often been supposed.

We must start by putting agency on one side. Agency causes many very difficult problems in the law of unjust enrichment, but agents can for the purpose of this particular discussion be identified with their principals. If P makes a mistaken payment to D’s agent, and then sues D for restitution, that is not a case of leapfrogging. 64

Agency aside, there are two arguments which make a prima facie case for reaching a second or more remote recipient. One is based on property and the other on causation. The proprietary argument says to the remote recipient, “You received my property!’ And the causation argument says, “You would not have received your enrichment from X but for X’s having been enriched from me!” Neither stands any chance of success against a second or more remote recipient who is in a position to plead the defence of bona fide purchase for value without notice or who took through such a person. A defendant who cannot use that defence may be able to fall back on change of position. This is not the place to investigate the range of those defences, but it is important to notice that, because of them, these leapfrogging arguments do not threaten any general disruption. If and so far as these arguments can succeed, they will generally prevail only against remote recipients who are either not innocent or are mere donees who have not changed their position. Thus only a rather narrow band of remote recipients is vulnerable.

(2) The Proprietary Argument

There is no doubt that a proprietary connection does support leapfrogging of a kind. In Lipkin Gorman v Karpnale Ltd65 a partner in a firm of solicitors who was addicted to gambling fed his addiction from the firm’s client account. He gambled the money away at the defendant’s casino. There was no point in suing the gambler. He was penniless and in prison. The firm leaped over him and succeeded in recovering from the casino. Although, as we shall see, the facts were more complex, the model from which the House of Lords worked was this. If X steals C’s money or finds it and then gives it gratuitously to D, D becomes indebted to C in the sum that he receives. D has received C’s money, albeit from a third party.

In the Lipkin Gorman case, the casino was treated as a donee, because the gambling contracts of a licensed casino are all void, though not illegal. The payments made by the gambler were received innocently, but not for value. Had the gambler been addicted to champagne and caviar at the Ritz, the Ritz would have been perfectly safe, having given value bona fide within valid contracts. As an innocent donee, the casino, a second recipient, was allowed to plead change of position. Its liability was thereby somewhat reduced.

(a) What interests suffice?

Ownership clearly suffices to make the connection between plaintiff and defendant. However, it is clear that lesser interests are also sufficient. There is no doubt that a power to rescind and revest suffices, for such a power can indubitably be exercised against third parties who are not bona fide purchasers. If C transfers a res to X under undue influence or misrepresentation, and X makes a gift of it to D, C can exercise the power in respect of the res in D’s hands.66 There are some indications that even an unexercised power will suffice. In El Ajou v Dollar Land Holdings Plc67the plaintiff was the victim of fraud with a power to rescind. It is tolerably clear that Millett J regarded that power as sufficient in itself to make the proprietary connection, even though it had not been exercised against any specific property. In the Lipkin Gorman case itself, which was ultimately contested only at law, close analysis shows that the general property in the money was in the gambler, not in the firm, and that the most that could be said was that the plaintiff firm held a power to revest in itself the money which went to the Casino. And the power was never exercised.68 If these indications are correct, weak or inchoate interests can satisfy the requirement of a proprietary connection.

It is an inference from Boulter v Barclays Bank69 that the House of Lords thinks that the power held by a person who has parted with an asset voidably is not a proprietary right of any kind: ‘In such a case the defrauded owner retains no proprietary interest in the chattel, and it is therefore not for the purchaser to establish a defence which would defeat it.’70 Lord Hoffmann, with whom the whole House agreed, appeared to imply that the fact that the power is good against third party holders of the res is not because it is a right in rem good against any recipient other than a bona fide purchaser for value but for some other reason, as for instance because of misbehaviour proved against the third party, although a volunteer cannot be brought within that notion simply because he gave no value. However, this is highly contentious and was not necessary for the decision. Clearly, if Lord Hoffmann’s view were accepted, it would not be possible to place this power among proprietary interests which create a sufficient connection between a plaintiff in unjust enrichment and a remote recipient.

Equally problematic is Ministry of Health v Simpson.71 We have already seen that the next of kin successfully brought a restitutionary action against charities who ought never to have received any Diplock money. The charities had received from a third hand. We explained this case as an interceptive subtraction: the money was destined as a matter of law to go to the next of kin, the charities, through no fault of their own, came between the executors and the next of kin. We noted, without accepting, Dr Smith’s objection that the executors remained as liable to pay the next of kin after the event as before it. Another explanation is based on the proprietary connection between the next of kin and the charities: the charities received money in which the next of kin held a proprietary interest.

Against this Dr Smith has pointed out that, unlike the beneficiaries under a trust, legatees have no proprietary interest in the estate but only a personal entitlement against the executors to have the estate administered according to the terms of the will.72 However, it is not clear that the courts took that point. One indicator that they did not is that they upheld not only the personal claims of the next of kin but also their proprietary claims. It is not obvious that the next of kin could have rights rem in the assets received by the legatees if they were not thought to have some proprietary right in the estate itself. It remains to be seen whether this puzzle can be solved. It may be that rightful legatees do after all have an inchoate but sufficient property in the estate itself, in that they can protect the integrity of the estate and control misdirections of the assets by injunction.

(b) Is this genuine leapfrogging?

Supposing that there is a sufficient proprietary connection, is the leapfrogging apparent or real? Even those who believe strongly in a requirement of privity or directness are content to accept that the long reach of the proprietary argument.73 Underlying this consensus is the fact that, like agency, this is not a genuine example of leapfrogging. A remote recipient of another’s money is as direct a recipient from that other as the first recipient. Thus, if I find your wallet it makes no difference whether I am the first recipient or the second or the twenty-second. Suppose a pickpocket took it and, in alarm, threw it down, and then I found it. My position in that case would be the same as in the case in which your wallet fell from your pocket into the road without your noticing its loss. The mechanism does not matter: a receipt of your money is a receipt directly from you. Similarly, if I use your bicycle for a month, it does not matter whether you were or were not in possession immediately before me. My user is taken from you, because the bicycle is yours. The model from which their Lordships worked in Lipkin Gorman cannot be used to support the proposition that true leapfrogging is permissible. The property argument looks as though it supports leapfrogging the first direct recipient but it actually only establishes what might be called sequential directness.

These conclusions can be confirmed from German law, where benefits acquired by the use or consumption of property belonging to another provide the central case for the Eingriffskondiktion, the claim in respect of enrichment obtained by encroachment on the rights of another. This claim is likewise indifferent to the number of hands between claimant and defendant. In one case cattle were stolen from their owner. They were later sold to the defendant. No exception to nemo dat operated. The cattle remained the property of the claimant until the buyer slaughtered and processed them, at which point, by specificatio, he became the owner of the resulting manufactured products. The owner was allowed to leapfrog the thief and recover their value from the innocent buyer. For the reasons just given, this was a factual leapfrog but in the eye of the law the buyer was immediately enriched from the owner, by his Eingriff upon the latter’s property rights.74 Again, on facts essentially identical to those of Lipkin Gorman v Karpnale Ltd, the Federal Court held that a casino which had bona fide received money which had been misappropriated from the claimants was bound to make restitution to the claimants. In that case the facts were such that the casino did acquire title to the claimants’ money but, because it could not be regarded as having given value for the money and therefore had to be regarded as having received gratuitous, it was bound to make restitution.75

(3) The Causation Argument

The causation argument, if it works, does support genuine leapfrogging. There is genuine leapfrogging when the plaintiff can make out his case in unjust enrichment against a first recipient but wants to leap over that first recipient to attack a second or subsequent recipient. The causal argument cuts in at that point: but for the unjust enrichment of the first recipient, the second would not have received. Professor Tettenborn puts this case:

“C inadvertently overpays his creditor A by £1000; A, pleasantly surprised on reading his next bank statement but entirely unsuspicious…, proceeds to give £1000 from his other account to his son B. … A can almost certainly plead change of position as a defence. Hence the potential significance of a direct claim by C against B; can C say(in effect): ‘I have paid money by mistake; but for this B would not have been enriched; therefore B has been unjustifiably enriched at my expense and ought to refund’?”76

His answer is no. In German law it is certainly yes, at least in this very case, which is provided for in second sentence of paragraph 816(1) BGB. It would be somewhat shocking if the answer were not yes in English law too and, with great respect to Professor Tettenborn, I think it is yes.

The validity of the proposition that a second or subsequent recipient can be reached on the basis of the causal argument rests partly on the real state of things in Lipkin Gorman v Karpnale Ltd, which differed from the model on which their Lordships relied. We have noticed that the House of Lords tried to bring the facts within the model of a proprietary connection between the firm and the casino. A proprietary connection satisfies and does not infringe the requirement of directness. However, the real situation in that case was quite different.

(a) The true situation in Lipkin Gorman v Karpnale Ltd

The money which the gambling solicitor gave to the casino was his own, not the firm’s. He was an authorized signatory to draw on the client account and it was expressly decided that the money which he drew out became his. The property had passed to him. The firm was indeed contemplated as having a power to revest it, and such a power may, as we have seen, suffice to create a proprietary connection. However, unless the title in the gambler was from the beginning voidable, which was not said but may have been assumed, it is difficult to explain how they acquired that power

Traceability does not in itself confer rights.77 Suppose I give you a gold coin which you sell for £500, with which you buy a painting. Through these substitutions I can trace the value of the gold coin into the painting. But if, at the moment you received the gold coin, I had no proprietary interest in it whatever, the successful tracing exercise will give me no rights in the painting. Let it be that I gave you the coin for your birthday. I can trace to satisfy my curiosity, but successful tracing will give me no rights. It would be utterly absurd to assert that the mere fact of substitution could create property rights in the substitute greater than and unrelated to property rights in the original. So here, to explain the firm’s power to revest the money which traceably went into the coffers of the casino, we have to know that it had a proprietary interest in the money at the moment at which the gambler received it. And that is not said.

It may therefore be that this case will ultimately be seen as explicable only on the basis that it is possible to reach a secondary recipient on a purely causal basis: the casino would not have received the money but for the enrichment by subtraction from the firm of the primary recipient, the gambling solicitor.

(b) Supporting case law

A reinterpretation of one major case would not suffice if the causal argument were not rooted in other decisions too. It has a good root, though somewhat overgrown with weeds. There is a group of cases, lucidly explained by Dr Charles Mitchell, 78 in which mistaken payments have been recovered from subsequent recipients on proof that the enrichment did come through to them. Where these cases are difficult, it is usually not because the doctrine is itself suspect but because of doubts as to whether the second recipient has indeed been enriched. The particular problem is generally the question whether money employed by the first recipient to discharge the obligations of the second recipient has indeed effected a legal discharge, for without that discharge it cannot be said that the money has been, in the Latin phrase, in rem versum, turned to his advantage. A more general difficulty has been the want of understanding of the law of unjust enrichment. As Dr Mitchell shows, some cases have taken wrong turnings, for want of any map.

In Bannatyne v D&C MacIver the London agents of the defendant firm borrowed money for them without authority. The plaintiff lenders mistakenly believed that they did have authority. The Court of Appeal upheld the claim against the firm to the extent that the money had been turned to their advantage. Romer LJ said:

“Where money is borrowed on behalf of a principal by an agent, the lender believing that the agent has authority, though it turns out that his act has not been authorised, or ratified, or adopted by the principal, then, although the principal, cannot be sued at law, yet in equity, to the extent to which the money borrowed has in fact been applied in paying legal debts and obligations of the principal, the lender is entitled to stand in the same position as if the money had originallly been borrowed by the principal.”79

This is the same doctrine as underlies B Liggett (Liverpool) Ltd v Barclays Bank Ltd,80 a decision of Wright J which was interpreted by the Court of Appeal in Re Cleadon Trust Ltd.81 In that case a bank had laid out money believing that it had the authority of a company which was its customer, when in fact it had only the authority of one director of the company. It was allowed to debit the company’s account. The explanation of the case, in the reinterpreted version later offered by the majority of the Court of Appeal, was that the money must be regarded as a mistaken advance to that one director applied by him to the discharge of the company’s debts, which were indeed discharged because, though the director had no authority to draw on the company’s account, yet he did have authority to discharge the company’s debts.82

Butler v Rice,83 though in some respects confusing, is factually more straightforward. Butler, who had been misled by Mr Rice, mistakenly thought that Mr Rice owned a a house subject to a charge and made a loan to him thinking he was lending to discharge a that charge. Mr Rice had no such interest and in fact used the money to discharge a mortgage on property belonging to his wife. Mrs Rice, who had not known of her husband’s doings, regarded herself as entitled to a windfall, leaving Butler to his remedy against her husband. But Warrington J held that Butler was entitled to be subrogated to the claim and security which had been paid off. In other words Mrs Rice, as second recipient, had to surrender the enrichment which she would not have received but for the unjust enrichment of the first recipient.

In Agip (Africa) Ltd v Jackson84 the plaintiff company’s account with a bank in Tunisia was debited with large sums on the basis of forged payment warrants. The defendants were accountants who were ultimately made liable for the wrong of assisting the fraud. Another claim against the remote recipients as recipients rather than wrongdoers ultimately fell foul of a defence, but it was held in principle to lie. It is difficult to see why Agip was allowed to maintain this restitutionary claim.85 The bank would appear to have lost its own money. However, if we treat the bank as having enriched itself without Agip’s consent by insisting on debiting Agip’s account, the rest follows: because of that enrichment of the first recipient, Agip was able to go after those who, but for that receipt, would not themselves have been enriched. Just possibly Ministry of Health v Simpson (Re Diplock in the courts below)86 might also be explained in this way.

(c) Restrictions

Bearing in mind the operation of defences, one should not jump to the conclusion that the causal argument needs to be heavily restricted. However, the largely illusory requirement of ‘privity’ inevitably encourages a suspicious or at best restrictive attitude to it. Professor Tettenborn’s example from which this discussion began turned on a situation in which the claimant’s rights against the first recipient had been extinguished as a matter of law, for to the extent that the immediate enrichee had in turn enriched the remoter payee he himself had an indubitable defence of change of position. Identical in this respect is the case covered in the German code.87 A requirement of extinction of the immediate enrichee’s liability would be extreme. A milder requirement would be that remedies against the first recipient must have been exhausted. In Agip (Africa) Ltd v Jackson it appears that Agip had tried and failed to get its bank to reinstate its account.88

It is impossible at the moment to say whether some such restrictive precondition will be insisted upon. A different and very severe precondition would be traceability. This can be ruled out, except in an evidential role. Successful tracing can certainly sometimes support the difficult factual finding that the remoter recipient would not have received but for the earlier receipt by the first recipient. The fact that the gambler traceably gave the casino the money which he obtained from the firm can be seen as helping to show that there was no other way that he could have indulged his habit.89 However, traceability cannot be a necessary precondition of leapfrogging on the basis of the causation argument. Professor Tettenborn’s example is carefully constructed to exclude it. The father’s gift to his son came from a separate account; the money that went to the son was definitely not traceably the money which the father mistakenly received.

(d) Where leapfrogging is not allowed, and why

It is necessary at the end to revisit the cases which we looked at earlier where C validly contracts with X to confer a benefit on D.90 For example, C, a bank, contracts with its customer to lend the customer money and to send that money to D; or C, a garage, agrees with an insurance company to repair a D’s car at the insurance company’s expense. We saw that in those cases C cannot leapfrog its contractual counter-party in order to bring a claim in unjust enrichment against D. The valid contract between C and X makes the crucial difference.

It will be observed that in these cases C has a cause of action against the contractual counterparty X not only on contract but also in unjust enrichment. The reason why C wants to leapfrog X is precisely that he has suffered a repudiatory breach and a failure of consideration. It might at first be supposed that C must therefore be within the doctrine which allows him to show that the remote D would not have received but for the unjust enrichment of the immediate enrichee. The doctrine says that one who has a cause of action in unjust enrichment against first recipient is, subject to unsettled restrictions as to exhaustion of remedies against that first recipient, entitled to proceed in unjust enrichment against such subsequent recipients as (a) would not have received but for the enrichment and (b) are not protected by the defences of bona fide purchasers or change of position.

However, there is no question of allowing C to leapfrog his contractual counterparty. C, having dealt validly with X, has to take the risk of X’s bad behaviour or insolvency. Our earlier point was that C cannot say that D is a direct or first recipient because in these cases it is not at C’s immediate expense that D receives. C is the means chosen by X, and D receives immediately at the expense of X. At this point we are concerned with the different question whether D can nonetheless be attacked as a subsequent recipient. He cannot. D is, remotely, enriched at C’s expense, but he cannot on these facts be reached by C.

The policy reason still stands in the background: C must accept the risks of dealing with his chosen contractual counter-party. The insolvency regime would be subverted if C could find ways of leapfrogging an insolvent X. However, it might also be argued that C is anyhow not strictly within the causal doctrine which reaches remote recipients. That argument requires that the second or subsequent recipient would not have been enriched but for the unjust enrichment of the first recipient. In these cases that causal requirement might be said not to be satisfied. For here D, as second or remoter recipient, would have received anyway. The contract between C and X envisaged a benefit conferred on D. It is only by reason of a later breakdown in the relationship between C and X that D appears ex post in the guise of a subsequent recipient of an unjust enrichment. If this is right, there is no second avenue of attack. D is not a first recipient, and he is not a second recipient either. That is, he is not a person who would not have been enriched but for the unjust enrichment of the first recipient.

Professor Watts says that the best explanation of the denial of the leapfrogging claim against D in these cases is that, vis-à-vis D, C can point to no unjust factor. In performing the contract with X he voluntarily – neither mistakenly nor conditionally – confers the benefit on D.91 Although that is true, it misses the point of the causation argument. The causation argument does not require the claimant to establish an unjust factor in relation to the remote recipient. It merely asserts that, subject to bona fide purchase and change of position, an unjust enrichment in the immediate recipient is an unjust enrichment in one who received through the immediate recipient and because of his receipt. That being the ground rule allowing recovery from the remote recipient, one needs a different kind of reason to explain why a claimant sometimes cannot rely on it. He cannot rely on it to leapfrog an initially valid contract. Why?

If we put aside the technical causal deficiency just noticed, Professor Burrows comes nearer to the mark when he says that the law of unjust enrichment must not be allowed to undermine contracts.92 That has to be filled out by repetition of the points on which German writers always insist, namely that nobody should be allowed to evade either defences arising in relation to a contract or the consequences of the insolvency of the chosen contractual counter-party.93 It is for these reasons that there can be no leapfrogging over contractual counter-parties. The remote recipient in such cases is enriched, and he is enriched at the expense of the claimant, but he is beyond reach.

IV. Conclusion

This has been an exploration of the range of the law of unjust enrichment, as controlled by the phrase ‘at the expense of the plaintiff’. In English law this means pushing out on almost unknown seas. In summary, what we have said about ‘at the expense of the plaintiff’ is essentially this. In the law of unjust enrichment it cannot be used in the sense of ‘by doing a wrong to’. It has to be used in the subtractive sense — the ‘from’ sense. ‘From’ might be understood narrowly or broadly. It looks as though our law is moving to a broad interpretation. That means not insisting on a minus to the plaintiff and, broader still, accepting the possibility of interceptive subtraction freed from that restrictive requirement. Interceptive subtraction shorn of a requirement of loss and based on a logical extension of the attribution-theory used in German law gives the law of unjust enrichment a range which the common law has not fully explored but to which it appears to have committed.

Finally, it is not true to say that the defendant’s enrichment must be directly from the plaintiff, whether interceptively or otherwise. In different and more unsuitable language, it is not true that there is a strict requirement of privity between the parties. On the contrary, it is possible to reach over an immediate enrichee to others who would not have received if the immediate enrichee had not been unjustly enriched at the expense of the claimant. It cannot yet be said whether the courts will encourage leapfrogging claims, nor can it be foreseen what restrictions which they will place on them if they do. But the foundations are in place, and the anxieties which inhibit the development are less substantial than has at times been thought.

The remoter recipients who are vulnerable are, however, rather few. They will not be bona fide purchasers or claimants through bona fide purchasers, and they will not have disenriched themselves because of their receipt. Furthermore, one kind of leapfrogging which will never be allowed is the attempt jump over a party to a valid contract with a view to attacking someone who received a benefit from the performance of that contract. The valid contract makes all the difference. One who makes a contract with another has to take the risk of that other’s insolvency. Otherwise the statutory insolvency regime would be seriously eroded, and its impact would become open to the charge of needless arbitrariness.

Endnotes

1 JP Dawson, ‘Indirect Enrichment’ in E von Cämmerer, S. Mentschikoff, K Zweigert (eds) Ius Privatum Gentium: Festschrift für Max Rheinstein zum 70 Geburtstag, Band II (Nationales und Vergleichendes Recht) (JCB Mohr, Paul Siebeck, Tübingen 1969) 789-818.

2 NR Whitty, ‘Indirect Enrichment in Scots Law’ [1994] Juridical Review 200 (Part I) and 239 (Part II).

3 Sonja Meier, Irrtum und Zweckverfehlung [Mistake and Failure of Purpose] ( (JCB Mohr, Paul Siebeck, Tübingen 1999) reviewed by Thomas Krebs [1999] Restitution L Rev 271-282; cf her ‘Restitution after Void Contracts’ in P Birks and F Rose (eds) Lessons of the Swaps Litigation (LLP Mansfield, London, 2000) 168-213.

4 Sonja Meier, ‘Mistaken Payments in Three-Party Situations: A German View of English Law’ [1999] CLJ 567-603.

5 GH Jones (ed) Lord Goff of Chieveley and GH Jones, The Law of Restitution 5th edition (Sweet and Maxwell, London, 1998) 37-40.

6 A Burrows, The Law of Restitution (Butterworths, London, 1993) 45-54; G Virgo, The Principles of the Law of Restitution (OUP, Oxford, 1999) 106-113.

7 ‘[A] clumsy way of expressing a requirement of directness … rejected almost everywhere’ Dawson (n 1 above) 801.

8 Professor Tettenborn has attempted a more principled explanation of this restriction: A Tettenborn, ‘Lawful Receipt – a Justifying Factor’ [1997] Restitution L Rev 1.

9 Burrows (n 6 above) 47.

10 Re Byfield [1992] 1 All ER 249, 256.

11 Briefly touched on at the end, in text to n 90 below.

12 The useful discussion in in BS Markesinis, W Lorenz, G Dannemann, The German Law of Obligations vol 1, The Law of Contracts and Restitution (OUP, Oxford, 1997) 722-724 appears to assume, as was previously thought, that in English law ‘at the expense of’ required a ‘corresponding loss’. This now appears to be incorrect. See text to n 24 below.

13 Sebel Products Ltd v Customs and Excise Commissioners [1949] Ch 409; Nurdin & Peacock Plc v DB Ramsden & Co Ltd [1999] 1 WLR 1249, 000. Contractual restitution displaces the law of unjust enrichment: Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 WLR 161 (HL).

14 United Australia Ltd v Barclays Bank Ltd [1941] AC 1 (HL).

15 P Birks, ‘Misnomer’ in WR Cornish et al (eds) Restitution, Past, Present and Future (Oxford, Hart, 1998) 1. Virgo (n 6 above) is the first textbook not to assume that unjust enrichment and restitution are one and the same.

16 J Beatson, ‘The Nature of Waiver of Tort’ in The Use and Abuse of Unjust Enrichment (OUP Oxford 1991) 206-243; D Friedmann, ‘Restitution for Wrongs’ in WR Cornish et al, edd, Restitution, Past, Present, and Future (Hart Oxford 1998) 87-126.

17 This was the foundation of the school of thought which successfully restricted punitive damages in English law: Rookes v Barnard [1964] AC 1129 (HL); Cassell & Co v Broome [1972] AC 1027. Note, however, the non-doctrinaire position of Lord Wilberforce in the latter case, which has now prevailed in Law Commission, Aggravated, Exemplary, and Restitutionary Damages Law Com No 247 (Stationery Office 1997) 98-138.

18 96 Sw 2d 1028 (1936).

19 (1760) 2 Burr 1005.

20 It is only by bringing to bear the analysis used in relation to waiver of tort in United Australia Ltd v Barclays Bank Ltd [1941] AC 1 (HL) that it becomes apparent that Moses v Macferlan was indeed an action for breach of contract brought to recover the contract breakers gains. Prior to that decision of the House of Lords the line between restitution of unjust enrichment and restitution for wrongs was never clearly drawn.

21 Holiday v Sigil (1826) 2 C.& P. 176, 172 ER 81; Neate v Harding (1851) 6 Ex. 349, 155 ER 577; Moffatt v Kazana [1969] 2 Q.B. 152.

22 This position is defended in Mitchell McInnes, “The Canadian Principle of Unjust Enrichment: Comparative Insights into the Law of Restitution” (1999) 37 Alberta L Rev 1, 22; also “At the Plaintiff’s Expense: Quantifying Restitutionary Relief” [1998] CLJ 471.

23 H-G Koppensteiner and EA Kramer, Ungerechtfertigte Bereicherung, 2nd edition (1988) 84, 85, citing a famous dictum of Esser: ‘Our business is with enrichment law, not impoverishment law (Wir haben es mit Bereicherungs- und nicht mit Entreicherungsrecht zu tun.’ Cf ‘[H]ier kommt es nur auf die Bereicherung des Schuldners an; ob der Glaübiger entreichert ist, is von keinerlei Bedeutung. … Es wäre also ein schwerer Fehler, einen Bereicherungsanspruch mit der Begründung zu verneinen, der Glaübiger habe keinen Nachteil erlitten (In this area of law only the enrichment of the person liable is relevant. Whether the enrichment-creditor has been impoverished is of no significance. … It would therefore be a serious mistake to withhold a claim founded on unjust enrichment on the ground that the enrichment-creditor had suffered no detriment). HJ Wieling, Bereicherungsrecht (Springer Berlin 1993) 1-2.

24 Commissioner of State Revenue v Royal Insurance Australia Ltd (1994) 182 CLR 51 (HCA), where Mason ACJ adopted the view of Windeyer J in Mason v NSW (1959) 102 CLR 108, 146.

25Kleinwort Benson v Birmingham City Council [1996] 4 All E R 733 (CA).

26 Hambly v Trott (1776) 1 Cowp 371; 98 ER 1136. Lord Mansfield’s example used horses, not bicycles.

27 FC Jones (Trustee in Bankruptcy) v Jones [1997] Ch. 159 (CA), discussed in text to nn 53-54 below.

28 Text to nn 29 and 90 below.

29 Brown and Davis v Galbraith [1972] 1 WLR 997 (CA); Gray’s Truck Centre Ltd v Olaf L Johnson Ltd (CA 25 January 1990); Kirklands Garage (Kinross) Ltd v Clark 1967 SLT (Sh Ct) 60; Express Coach Finishers v Caulfield 1968 SLT (Sh Ct) 11. Cf Whitty (n 2 above) 211-217. Though superficially similar, Pan Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR 161 (HL) is not of this kind. Pan Ocean were obliged to pay the owners of the Trident Beauty freight in advance under a charter which included its own regime for restitution in the event of the freight not being earned. They had contracted out of the law of unjust enrichment. The right to receive the advance freight was assigned to Creditcorp. Pan Ocean paid the assignees, and the freight was never earned. The claim based on failure of consideration failed because of the contracting out, not because it was not received at Pan Ocean’s expense. There was no unjust factor, no more than there would have been if the right has not been assigned. Cf G J Tolhurst, ‘Assignment, Equities, The Trident Beauty and Restitution’ [1999] CLJ 546, 561, 564. Professor Burrows prefers an explanation closer to that given above, namely that Pan Ocean could not be allowed to succeed without undermining the contract of assignment between the shipowners and Creditcorp, but that argument depends on the prior determination of the exact nature of the right assigned: AS Burrows, ‘Restitution from Assignees’ [1994] Restitution L Rev 52, 55-56. Cf text to nn 91-92 below.

30 [1999] 2 WLR 986 (CA).

31 Cf Coutts & Co v Stock [2000] Lloyd’s Rep Bank 14, 17 (Lightman J).

32 This explanation also applies to the leading case of Aiken v Short (1856) 1 H & N 210, 156 ER 1180, the facts of which were materially identical. The “good consideration” explanation derives from the necessity of upholding the result in that case despite the liberalization of the test for restitution-yielding mistake: Barclays Bank Ltd v WJ Simms & Son Ltd [1980] QB 677.

33 Text to n 76 below.

34 [1980] QB 677.

35 Barclays Bank plc v. O’Brien [1994] 1 AC 180; CIBC Mortgages plc v. Pitt [1994] 1 AC 200.

36 American law is substantially the same as the German law as described below in relation to the brewery case: American Law Institute Restatement of Restitution (St Paul 1937) 14(1); Bank Worms v Bankamerica International 77 NY 2d 362, 570 NE 2d 189 (1991); cf Shield Benefit Administrators v University of Michigan 225 Mich App 467, 571 NW 2d 556 (1997). Very useful discussion, critical of the English position, in A Kull, ‘Rationalising Restitution’ 83 Calif L Rev 1191, 1228-1232. It is important to notice that C (the bank) is entitled to be subrogated to the claims of D against X: cf Kull at 1229.

37 BGHZ 27, 317 (1958) discussed by Dawson (n 1 above) 805: hirer contracts for repair of locomotive but does not pay; owner recovers the locomotive after repair. No claim by repairer against owner. Cf n 29 above, and n 90 below.

38 Meier (n 4 above) 579-580 astutely identified the Court of Appeal’s decision in RE Jones Ltd v Waring & Gillow Ltd [1925] 2 KB 612 as an English application of this approach, rejected in the House of Lords [1926] AC 670. With the HL decision, she compares Thomas v Houston Corbett & Co 1969] NZLR 151 (NZCA).

39 BGHZ 40, 272 (1963) English translation Markesinis et al (n 13 above) 789; cf BGHZ 36, 30 (1961), Dawson (n1 above) 806.

40 [1980] QB 677.

41 BGHZ 89, 376 (1984), Markesinis et al (n 13 above) 794. In this case the court refuses to deal with the case in which the bank’s authority was, not terminated, but absent ab initio. As to that case the German law remains unclear, although Zimmermann and du Plessis say that ‘most writers’ would now allow the bank in that situation to recover from its immediate payee – the same result as in Barclays Bank Ltd v WJ Simms & Son (n 35 above): R Zimmermann and J du Plessis, ‘Basic Features of the German Law of Unjustified Enrichment’ [1994] Restitution L Rev 14, 34. Meier (n 4 above) 572-573 clearly takes the view that the case where there never was a valid order is to be treated as different from that in which a valid order is given and subsequently revoked, as by stopping a cheque.

42 (1841) 9 M&W 54.

43 American Law Institute Restatement of Restitution (St Paul 1937) 14(1).

44 LAC Minerals Ltd v Corona Resources Ltd [1989] 2 S.C.R. 574, 61 D.L.R. (4th) 14 shows that one who abuses confidential information to acquire an asset may be turned into a trustee if the court finds, as a matter of fact, that it was his intervention that prevented the benefit going through to the plaintiff.

45 Re Rose [1952] Ch 78 (CA). The word “perfectionary” indicates that the goal at which the right aims is the perfection of the intent of the transferor. See the diagram at the end of the second lecture.

46 [1958] 1 QB 448.

47 Arris v Stukely (1677) 2 Mod. 260, 86 ER 1060; Howard v Wood (1679) 2 Lev 245, 83 ER 530. Although these provide a root for waiver of tort, they do not need to be analysed as instances of wrongful enrichment.

48 Jacob v Allen (1703) 1 Salk 27; 91 ER 26; Yardley v Arnold (1842) C & M 434; 174 ER 577.

49 Official Custodian for Charities v Mackey (No 2) [1985] 1 WLR 1308, where Nourse J acknowledged the principle but found it not to apply on the particular facts.

50 Leuty v Hillas (1858) 2 De G & J 110; Craddock Bothers v Hunt [1923] 2 Ch D 136 (CA); R Chambers, Resulting Trusts (OUP Oxford 1997) 127. Cf Dawson (n 1 above) 801, citing inter alia a case in which a reward was paid to the wrong person and the person to whom it should have gone sued, to achieve what D calls ‘a short-circuit of liabilities that are ultimately interconnected’: Claxton v Kay 101 Ark 350, 142 SW 517 (1912).

51 LD Smith, “Three-Party Restitution: A Critique of Birks’s Theory of Interceptive Subtraction’ (1991) 11 OJLS 481.

52 [1951] AC 251 (HL).

53 Test to n 27 above.

54 [1997] Ch. 159 (CA).

55 Text to n 19 above.

56 Cf Olwell v Nye & Nissen Co 26 Wash 2d 282. 173 P 2d 652 (1946) where this difference was centrally in issue and the court preferred profits to rental. The defendant had wrongfully used the plaintiff’s egg-washing machine.

57 There is an exception in intellectual property: Markesinis et all (n 13 above) 742 (Dannemann).

58 Markesinis et al (n 13 above) 743-749 (Dannemann); Zimmermann and du Plessis (n 41) above 26-29.

59 Werner Lorenz, J von Staudingers Kommentar zum BGB Book 2: Paragraphs 812-822 (Sellier-De Gruyter Berlin 1999) 99-100. Professor Lorenz there admits that the courts have had to proceed pragmatically. It is not easy to say in advance what will be attributed by which right.

60 Dannemann in Markesinis et al (n 13 above) 747 points out that German law would nonetheless award the profits on a not-wrong analysis, treating the matter, not as an unjust enrichment, but as an abnormal or aggravated form of negotiorum gestio under para 687 (2) BGB, which contemplates the case of a person who manages another’s business as his own, in full knowledge that it is not his own. Cf Whitty (n 2 above) 274-281.

61 Dawson (n 1 above) 790-796; Zimmermann and du Plessis (n 41 above) 31.

62 Req 15 June 1892, DP 1892.I.596. This case and subsequent attempts to restrict it are discussed in K Zweigert and H Kötz, An Introduction to Comparative Law 3rd ed (OUP, Oxford, 1998) 545-548.

63 Text to n 29 above and n 91 below.

64 Portman Building Society v Hamlyn, Taylor, Neck [1998] 4 All ER 202, 207 (Millett LJ). Cf H Dörner, ‘Change of Position and Wegfall der Bereicherung’ in WJ Swadling, ed, The Limits of Restitutionary Claims, A Comparative Analysis (British Institute of International and Comparative Law, London) 64, 66.

65 [1991] 2 AC 548 (HL).

66 Bridgeman v Green (1757) Wilm 58, 65; Bainbrigge v Browne (1881) 18 Ch D 188, 197 (CA). Compare the right to rectify and reclaim: Blacklocks v JB Developments (Godalming) Ltd [1982] Ch 183. Whitty (n 2 above) 252-253 creates a special exceptional category ‘Defender’s Indirect Enrichment Procured at Pursuer’s Expense by Fraud or Comparable Act of Third Party’ and has real difficulty in explaining it. A system which can extend the property argument as in the text above does not encounter that difficulty.

67 [1993] 3 All ER 717 (Millett J) rev’d on one point as to attribution of knowledge [1994] 2 All ER 685 (CA).

68 The firm never identified a fund in the hands of the casino, being content to stop at the moment of the receipt. Contrast Banque Belge pour l’Étranger v Hambrouck [1921] 1 KB 321 (CA) where a fund was identified in the hands of the remote donee, and no attempt was made to claim the full sum she had received.

69 [1994] 4 All ER 513 (HL)

70 [1999] 4 All ER 513, 519 (Lord Hoffmann).

71 [1951] AC 251 (HL).

72 So held in Commissioner for Stamp Duties v Livingston [1965] AC 694 (PC), discussed in LD Smith, “Three-Party Restitution: A Critique of Birks’s Theory of Interceptive Subtraction” (1991) 11 OJLS 481.

73 Burrows (n 6 above) 48-49; A Tettenborn (n 8 above) [1997] RLR 1, 5; G Virgo, (n 6 above) 108, where, true to the structure produced by his analysis, says this is vindication of property, not unjust enrichment, and therefore not a true exception to the privity rule which applies in the law of unjust enrichment.

74 BGHZ 55, 176 (1971), English translation in Markesinis et al (n 13 above) 786. It is noteworthy that in holding the buyer liable in unjust enrichment for their value, the Federal Court declined to take into account his outlay in acquiring the cattle, which the court said was recoverable by the buyer only from the thief. Cf Dawson (n 1 above) 815: ‘This is not usually thought to infringe the requirement of directness.’

75 BGH 37, 363, 366. Here the contract between the dishonest gambler and the casino was illegal and void because the law debarred local residents from gambling in the casino. Contrast the otherwise identical BGHZ 47, 393, where the gambling contract was valid and the claim against the casino was defeated. For a full discussion of these cases, see Carsten Zülch, ‘Bona Fide Purchase, Property and Restitution: Lipkin Gorman v Karpnale in German Law’ in Swadling (n 64 above) 106-140.

76 Tettenborn (n 8 above) 1.

77 LD Smith, The Law of Tracing (OUP, Oxford, 1997)10-14, 299-300.

78 Charles Mitchell, The Law of Subrogation (OUP Oxford 1994) chapter 9, especially 124-129, 133-135. Cf Whitty (n 2 above) 215, 251-252.

79 [1906] 1 KB 103 (CA) 109. In Reid v Rigby & Co[1894] 2 QB 40 recovery was allowed at law, the facts being materially identical.

80 [1928] 1 KB 48.

81 [1939] Ch 286 (CA), discussed by Mitchell (n 78 above) 127-128, 162-165.

82 [1939] Ch 286, 318 (Scott LJ) 326 (Clauson LJ).

83 [1910] 2 Ch 277.

84 [1990] Ch 265, aff’d [1991] Ch 547 (CA).

85 E McKendrick, ‘Tracing Misdirected Funds” (1991) LMCLQ 378-390 observes that no adequate explanation was given, the courts having accepted, somewhat mysteriously, that, the bank being Agip’s agent, Agip could avail itself its mistake.

86 [1948] Ch 465 (CA), [1951] AC 251 (HL).

87 Text from n 76 above.

88 Text to n 84 above.

89 The invocation of tracing in Baroness Wenlock v River Dee Co (1887) 19 QBD 155 should be explained in the same way.

90 Text to nn 29-30above.

91 P Watts, ‘Does a subcontractor have restitutionary rights against the employer?’ [1995] LMCLQ 398, 401.

92 A S Burrows, ‘Restitution from Assignees’ [1994] Restitution L Rev 52, 55-56.

93 Meier (n 4 above) 571. The last paragraph of her article appears to suggest that leapfrogging in this situation might after all be possible, as though Re Diplock [1948] Ch 465 provided a springboard. Whatever else it might support, that case cannot dent the absolute bar against leapfrogging contractual counter-parties.

© 2000 P. Birks. This HTML edition © 2000 University of Oxford.
This research has been supported by the network ‘Common Principles of European Private Law’, within the Training and Mobility of Researchers project (TMR) funded by the European Commission (Contract No ERB FMRX-CT97-0118), administered from Münster by Professor Dr Reinhard Schulze. The partner universities are: The University of Oxford (UK), Universidad de Barcelona (Spain), Humboldt-Universität zu Berlin (Germany), Université Jean Moulin Lyon III (France), Westfälische Wilhelms-Universität Münster (Germany), Katholieke Universiteit Nijmegen (Holland) and Università di Torino (Italy).
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