Equity and Trusts – Unjust Enrichment

by Eddy Neumann

Unjust enrichment is based on the premise that one party should not be unjustly benefitted at the other party's expense. Until 2007 it was believed this was an expanding area of the law and there was speculation that the test was unjust. Enrichment might include a subjective test as well as an objective test.

It is apparent however from the recent decision of the High Court in Farah Constructions Pty Ltd -v- Say-Dee Pty Ltd [2007] HCA 22 that the categories of unjust enrichment are not to be extended to include actions that subjectively could be considered unfair or unconscionable. The High Court decision made it clear to all lower Courts that the reasoning of the Court of Appeal of the Supreme Court of New South Wales was mistaken and not to be applied in subsequent cases.

The previous High Court authority was determined in 1987 when the High Court handed down the decision in Pavey & Matthews v Paul [1987] 162 CLR 221. This decision was groundbreaking as it acknowledged that unjust enrichment encompassed an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff.

The facts of the Pavey & Matthews case are quite simple. A licensed builder performed building work following conversations over a six month period that he would perform the work and be paid a reasonable remuneration for the work. The builder performed the work and the other party accepted the work, however there was no written contract between the parties. On completion of the work, the other party disputed the reasonableness of the amount the builder charged for the work.

The builder could not enforce the contract by the normal avenue of the Builders Licensing Act 1971 (NSW) because the Act required a written contract between the parties before the contract could be enforced.

Hence the builder made a claim for the monies owed on a quantum meruit basis meaning "for a reasonable sum."

The Court held that an action to claim a quantum meruit rested on a claim based on the principle of unjust enrichment. The principle of unjust enrichment arose from the acceptance of the benefits accrued from the performance of the builder of the unenforceable oral contract.

Generally, the remedy available under an unjust enrichment will only be available when a contract has been set aside for breach, frustration or, as was the case in Pavey & Matthews, the contract was unenforceable.

Subsequent cases since the groundbreaking decision in Pavey & Matthews have enunciated the following factors when applying the remedy of unjust enrichment:

  1. The defendant was enriched;
  2. The defendant's enrichment was at the plaintiff's expense; and
  3. The enrichment was unjust (according to defined categories developed in the cases).

Determining whether the enrichment of the defendant at the plaintiff's expense was unjust requires consideration of the defined categories of unjust enrichment recognised by previous cases. The most common form of unjust enrichment is payment by mistake or money paid for a consideration that has failed.

The recent High Court decision of Farah Constructions confirmed that whether an enrichment is unjust depends on the existence of a qualifying or vitiating factor falling into a particular category for example mistake, duress or illegality. In Farah Constructions, the High Court made it clear that unjust enrichment was not to be determined by a subjective evaluation of what was unfair or unconscionable.

The case before the High Court was an appeal of the decision of the Court of Appeal of the Supreme Court of New South Wales that applied the concept of unjust enrichment to recipient liability for a breach of a fiduciary duty. The Court of Appeal held that such a situation could lead to restitution based on the unjust enrichment of a party.

In Farah Constructions the recipient of the benefit that arose was unaware that there was a fiduciary duty owed to another party. However, the Court of Appeal held that the lack of notice of the party did not mean that the concept of unjust enrichment could not be applied.

The High Court held that the decision of the Court of Appeal was a grave error. In denouncing the decision of the Court of Appeal, the High Court stated that the areas in which the concept of unjust enrichment apply are specific and long-established. The High Court then rejected the decision of the Court of Appeal that liability for breach of a fiduciary duty was an area in which unjust enrichment applied.


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