Source: https://ebrary.net/105944/law/indirect_enrichment
Timestamp: 2019-12-14 01:59:24
Document Index: 92280661

Matched Legal Cases: ['EWCA ', 'EWCA ', 'EWCA ', 'EWCA ', 'EWCA ', 'EWCA ', 'EWCA ', 'EWCA ']

(B) INDIRECT ENRICHMENT, (i) Economic Reality - The principles of the law of restitution
(B) INDIRECT ENRICHMENT
The requirement of direct connection between the claimant’s gain and the defendant’s loss has, however, been qualified. Some of these qualifications are clear exceptions to the direct enrichment principle, but others, when analysed carefully, do not qualify that principle but are consistent with it.
(i) Economic Reality
Restricting restitution to a claim against the direct recipient of a benefit has been criticized. For example, Watterson[1] has criticized the language of ‘direct transfer’ because it has no natural or agreed meaning; he considers it to be a blunt way of constraining unjust enrichment claims and argues that it has doubtful normative foundations. Instead, he argues that the key test should simply be one of ‘but for causation’, such that the claimant can sue an indirect recipient of an enrichment if it can be shown that, but for the claimant enriching a third party, the defendant would not have been enriched. He modifies this test of causation, however, where two claimants pay a third party who then transfers the payments to the defendant. In such circumstances it is sufficient that the claimants’ payments were a sufficient cause rather than needing to be a necessary cause of the payment to the defendant.
This focus on causation alone does, however, cause difficulties. For if A has paid money to B who then pays it to C, in circumstances where A does not have a proprietary claim to the money, B’s independent and voluntary decision to pay C might be characterized as a novus actus which breaks the chain of causation between A and C. In fact, although the courts have retained the general principle of direct enrichment, they are starting to acknowledge that even an indirect enrichment can be considered to be at the claimant’s expense, but something more than but for causation needs to be established to show that B’s actions have not breached the chain of causation, which requires focus on the economic reality of the case.[2] This test is clearly influenced by the decision of the House of Lords in Banque Financiere de la Cite v Parc (Battersea) Ltd,[3] because, even though it was held that the defendant company was directly enriched at the expense of the claimant, the court reached that conclusion specifically with reference to the realities of the case.
The significance of examining the economic realities of the case was identified in the very important decision of Investment Trust Companies v HMRC,[4] where the Court of Appeal affirmed the analysis of Henderson J,[5] who had recognized that, although there is no rule which automatically excludes unjust enrichment claims against indirect recipients, there is a general requirement of direct connection to which there are limited exceptions. In determining these exceptions the following principles were identified:[6]
(1) There needs to be a close causal connection between the transfer from the claimant and the enrichment of the indirect recipient.
(2) The claimant should be required to exhaust his or her remedies against the direct recipient to avoid any risk of double recovery.
(3) Any conflict with contracts between the parties should be avoided and there should in particular be no leapfrogging over an immediate contractual counterparty so as to undermine the contract. What this means, for example, is that if there is a contractual claim between the claimant and the party who directly transferred the enrichment to the defendant, the law of unjust enrichment should not be used to subvert this contract.[7]
(4) The remedy will be confined to so-called ‘disgorgement of undue enrichment’ and will not encroach into the territory of compensatory damages.
In the Investment Trust Companies case a claim founded on unjust enrichment was recognized even though the defendant had only been indirectly benefited at the expense of the claimant. In that case VAT had been paid directly to the defendant tax authority by the suppliers of fund management services in circumstances where this tax was not due because the supply of the services was exempt from VAT. The full economic burden of the tax had been borne by the customers from whom the value of the tax had been collected by the suppliers. The suppliers had been able to recover from the defendant some of the unlawful tax which had been paid and had passed this on to their customers, but the suppliers had not been able to recover all of the tax which had been paid, partly because of a statutory limitation period of three years, which did not apply to a Common Law claim for restitution. It was held in principle that the customers should be able to recover the remaining tax from the defendant, even though the defendant had only been indirectly enriched at their expense. Crucially, the Court of Appeal considered that there was a sufficient causal connection between the payment of money by the customers and the receipt of VAT by the defendant, even though the tax liability was that of the suppliers of the services and the liability of the customers was a contractual one between them and the suppliers. But Henderson J and the Court of Appeal emphasized the economic rather than the legal realities of the transactions, since, in reality, VAT was a tax on the consumer of the services, collected by the supplier and accounted for by them to the tax authority. Consequently, the nexus between the customers and the tax authority was considered to be close and strong, albeit indirect and, in economic terms, the unlawful tax was indubitably paid at the expense of the customers.
This is an important decision which undoubtedly modifies the strict requirement of there being a direct connection between the claimant’s loss and the defendant’s gain, although that principle is still affirmed as the norm. The exceptions to it are founded on the need to establish a connection between the claimant’s loss and the defendant’s gain with reference to the economic realities of the transactions, even though a strict causal connection cannot be established.[8] This was recognized by the Court of Appeal, which noted that the suppliers’ duty to account for the VAT operated regardless of whether the VAT was contractually due as between the customers and the suppliers. On the facts of the Investment Trust Companies case the recognition that the tax authority was enriched at the expense of the customers appears correct, because the tax authority had undoubtedly been unjustly enriched at the direct expense of the suppliers, but, for a technical statutory reason, the suppliers could not obtain full restitution. By recognizing an exceptional principle of indirect connection, the customers’ claims for restitution of tax were not avoided on a technicality, especially because the tax authority should not have received the tax in the first place and restitution was required by EU law.[9] [10] [11] A remaining concern, however, is that this might be the thin end of the wedge, such that increasingly claimants will be able to seek restitution from indirect recipients. Whilst it is to be hoped that the principles identified by Henderson J, and confirmed by the Court of Appeal, will serve to confine the principle of indirect connection to the most exceptional facts, where the economic reality is that the defendant’s gain was so closely connected to the claimant’s loss that it is acceptable to conclude that the defendant was enriched at the claimant’s expense, other cases suggest that the indirect enrichment principle will be interpreted expansively.
This is exemplified by the decision of the Court of Appeal in Menelaou v Bank of Cyprus plc,26 where the defendant was considered to have been indirectly enriched at the expense of a bank, after the bank mistakenly promised to release charges on one property which enabled the defendant to purchase another property. The defendant was considered to have been enriched at the bank’s expense because, as a matter of economic reality, there was a transfer of value from the bank to the defendant through the release of the charges, since, had this not occurred, funds would not have become available to enable the defendant to purchase the other property.
Even more significantly, in Relfo Ltd v Varsani27 Arden LJ suggested that the law was moving towards the recognition of some general principle in favour of indirect enrichment, although the other two members of the Court of Appeal were reluctant to recognize such a principle in that case. It was, however, explicitly recognized that one of the exceptions to the direct enrichment rule involves having regard to substance rather than form with reference to the commercial or economic reality of the transactions. So, in that case, it was possible to look behind the corporate structures through which money had been transferred, to identify the commercial or economic reality of the case and conclude that the true nature of the transaction involved a direct payment from the claimant to the defendant, albeit via artificial corporate structures.
It remains unclear, however, what precisely is meant by looking at the economic reality of the case. Possibly this should turn on identifying the intentions of the parties, particularly the claimant and the third party. So, for example, if from the outset it is intended that money which is paid from A to B is to be paid on to C, it is appropriate to treat C as having been enriched at A’s expense. This is what happened in Relfo, where it was intended from the start that money would be transferred from the claimant to the defendant via a complex corporate structure. The Investment Trust Companies case is more complex, because the money was actually paid by the suppliers to the defendant and might only have been recouped by the suppliers from the customers subsequently by virtue of the contractual arrangements between them. But the contracts between the suppliers and customers provided for the burden of the tax liability to be borne by the customers, so the intention of the suppliers and customers was clear that the loss was to be borne by the customers such that there was a sufficient nexus with the defendant’s gain. But if the focus is to be placed on the intention behind the transfer of the enrichment from the claimant, it is clear from the Investment Trust Companies case that the intention of the defendant is irrelevant, since the defendant tax authority was not party to the contract. What if the claimant was unaware that the money paid to the third party was intended by both the third party and the defendant to be transferred by the defendant? Should that be sufficient to treat the defendant as enriched at the claimant’s expense, with regard to the economic realities of the case? Perhaps in these circumstances the third party’s act in paying the defendant should be regarded as sufficient to break the chain of causation, so that the defendant is not enriched at the claimant’s expense. It follows that, if the claimant pays money to a third party as the result of fraud of which the claimant was unaware, and the third party transfers that money to the defendant as was intended by them from the start, the defendant should not be considered to be enriched at the claimant’s expense. It does not follow that the claimant has no restitutionary claim against the defendant in such circumstances,[12] [13] it is just that there is no claim in unjust enrichment.
[1] S Watterson, ‘Direct Transfers in the Law of Unjust Enrichment’ (2013) CLP 435. See also C Mitchell,‘Liability Chains in Unjust Enrichment’ in S Degeling and J Edelman (eds), Unjust Enrichment in CommercialLaw (Sydney: Lawbook Co, 2008), ch 7.
[2] Relfo Ltd v Varsani [2014] EWCA Civ 360, [2015] 1 BCLC 14, [72] (Arden LJ).
[3] [1999] 1 AC 221. See p 106, above.
[4] [2015] EWCA Civ 82. 2 [2012] EWHC 458 (Ch), [2012] STC 1150, [67].
[5] 22 Ibid, [68].
[6] 23 See MacDonald Dickens and Macklin v Costello [2011] EWCA Civ 930, [2012] QB 244, [20] (Etherton
[7] LJ). See further p 142, below.
[8] Investment Trust Companies (in liquidation) v HMRC [2015] EWCA Civ 82, [69] (Patten LJ).
[9] See p 390, below.
[10] [2013] EWCA Civ 1960, [2014] 1 WLR 854. See also Hemming (trading as Simply Pleasure Ltd) v TheLord Mayor and Citizens of Westminster [2013] EWCA Civ 591, [129] (Beatson LJ) and TFL ManagementServices Ltd v Lloyds TSB Bank plc [2013] EWCA Civ 1415, [57] (Floyd LJ).
[11] [2014] EWCA Civ 360.
[12] There might, for example, be a claim grounded on the vindication of property rights. See Chapter 21.
[13] [1991] 2 AC 546. 3 See p 48, above.