Restitution where an Anticipated Contract Fails to Materialise

Restitution where an Anticipated Contract Fails to Materialise The problem Justin Mannolini Following a tendering process, two parties enter into negotiations for a contract which they both confidently expect will materialise. One undertakes preparatory work or incurs expenses at the request of the other. But negotiations, through no fault of either party, break down, and a binding contract is never formed. The expenses, or remuneration for the work, clearly cannot be recovered as a matter of contract law. Even if there was mala fides, English law does not formally recognise a principle of culpa in contrahendo, or a duty of good faith owed by parties to pre-contractual negotiations. The common law courts have afforded parties substantial freedom in this respect. The request for the work to be done or the expense to be incurred might ground an equitable promissory estoppel,* were it not for English law s reluctance to allow that doctrine to be used as a sword, not merely a ~hield.~ Neither party is guilty of tortious conduct. Must the party performing the work or incurring the expenses therefore bear the loss, or can the law of restitution be called in aid of recovery? This was the question which confronted Rattee J of the Chancery Division in the recent case of Regalian Properties plc & Another v London Docklands Development C~rporation.~ The facts In 1986, Regalian commenced negotiations with the London Docklands Development Corporation ( LDDC ) for the development of land owned by LDDC. Regalian tendered and LDDC accepted a proposal under which Regalian would pay 518.5 million for a licence to build on the land as and when LDDC obtained vacant possession. The agreement was at all times expressed and understood by both parties to be subject to contract. Long delays subsequently ensued, mostly owing to LDDC s insistence on particular design standards, and to its difficulties in obtaining vacant possession. During this time, Regalian incurred considerable expenses in formulating proposals for the development, despite the fact that (as it conceded at trial) it was aware that either party was at liberty to * Barrister and Solicitor of the Supreme Court of Western Australia. The author wishes to thank Graham Virgo and Michael Skene for their comments on an earlier draft of this note. 1 Farnsworth, he-contractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations (1987) 87 Colum.L.Rev 217, 217-221. 2 cf Attorney-General for Hong Kong v Humphreys Estate (Queens Gardens) Ltd [ 19871 AC 114 (Privy Council). 3 Combe v Combe [I9511 2 KB 215. Chitry on Contracts (27th edn, 1994) at 3467, 3-075. Cf Walton Stores (Interstate) Ltd v Maher (1988) 76 ALR 513. 4 [I9951 1 WLR 212. 0 The Modern Law Review Limited 1996 (MLR 591. January). Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF and 238 Main Smer. Cambridge. MA 02142. USA. 111

The Modern Law Review [Vol. 59 withdraw from project. Eventually, property prices had fallen to such an extent as to render the project unviable, and Regalian was forced to withdraw. No contract was ever formed, the site never developed. But Regalian sought reimbursement of some E3m which it had incurred by way of professional fees in relation to proposals for the development. The judgment The primary basis of Regalian s claim was the law of restitution, which is concerned with the reversal of unjust enrichment obtained by a defendant at the plaintiff s expense. Regalian submitted that one could derive from this body of law the principle that where parties to a proposed contract have a mutual understanding that there will be a contract between them and pursuant to that understanding one party incurs expense which benefits the other party, then if the intended contract fails to materialise through no fault of the party who has incurred expense, that party can recover the wasted costs from the other.5 It claimed support for such a principle both from the key text writers in the field6 and from authorities stemming from the oft-discussed judgment of Barry J in William Lacey (Hounslow) Ltd v Davk7 In a second-string argument, Regalian also relied upon the decision of Sheppard J of the Supreme Court of New South Wales in Sabemo Ltd v North Sydney Municipal Council.g Since the landmark decision in Lipkin Goman Ltd v Karpnale? the law of restitution has proceeded on a somewhat firmer conceptual footing, although, given the youth of the subject, much remains to be done in formulating the constituent elements of a restitutionary cause of action. At least two requirements seem crucial and both, it is submitted, were problematic for Regalian. First, restitution fastens upon the enrichment of the defendant and not merely loss suffered by the plaintiff; the latter must therefore prove that the former has received some benefit. Second, English law, unlike some of its civil counterparts, recognises no general jurisdiction to award restitution wherever it appears just and equitable to do so. The plaintiff must be able to point to some factor, such as a mistake of fact or a total failure of consideration, which is recognised, as a matter of legal principle, as sufficient to render the defendant s enrichment unjust, and thus to ground a restitutionary claim.lo Regalian s first hurdle lay in proving that LDDC had been benefited by virtue of the expenses incurred. This was no easy task; the various plans and specifications prepared were rendered practically useless when the development was scrapped. Common sense, of course, would appear to dictate that the notion of benefit connotes some accretion of wealth in the hands of the defendant, or at least a saving of necessary expenses. But theorists have seized upon some cases, most notably Phnche v Colburn, * which seem to provide authority for a more sophisticated understanding of the concept of enrichment, broad enough to include 5 Id, at 212-3. 6 Goff and Jones, The Law of Resrirurion (4th edn) (London; Sweet & Maxwell, 1993), Chapter 25. 7 [1957] I WLR932. 8 (1977) 2 NSWLR 880. 9 [I9921 4 All ER 512. 10 Id, at 532. I1 Beatson, Benefit, Reliance and the Structure of Unjust Enrichment (1987) 40 CLP 71. 12 (1831) 8 Bing 14; 131 ER 305. 112 0 The Modem Law Review Limited 1996

January 19961 Regalian Properties plc v LDDC any services performed at the request of the defendant, at least so far as they are required by the (actual or anticipated) contract. l3 Surprisingly, Pianche v Colburn did not appear to feature in Regalian s argument. It is less surprising, therefore, that Rattee J chose to apply the common sense approach, concluding that the expenses incurred by Regalian were merely preparatory to its own performance and conferred no benefit on LDDC.14 This finding alone, of course, should have been sufficient to defeat Regalian s restitutionary claim; without a benefit being conferred on the defendant, there is no unjust enrichment which the law of restitution could be concerned to reverse. Nonetheless, Rattee J went on to examine the cases relied upon by Regalian in support of the claim. In a cautious judgment, Rattee J held that, because it was expressly agreed that either party was free to withdraw from the transaction at any time, each must have accepted that, should no contract materialise, any losses were to lie where they fell.1s Rattee J distinguished the facts from those in William Lacey. In that case, the work for which the plaintiff claimed recompense was not work done for the purposes of the expected contract, but was rather for... some extraneous purpose. 16 That purpose comprised the facilitation of a claim before the War Damage Commission, which was established to provide assistance to redevelopment programmes after the Second World War. In contrast, Regalian incurred the relevant expenses for the purpose of enabling it to obtain and perform the expected contract. With respect, this distinction is not compelling for the purposes of restitutionary analysis. The more pertinent grounds for distinguishing the cases seems to be that in William hcey the defendant was benefited by the plaintiffs work, albeit not in the manner envisaged under the anticipated contract,ig whereas this was not the case in Regalian. Rattee J also concluded that Regalian could draw no support from Marston v Kigass,I9 nor from British Steel Corporation v Cleveland Bridge and Engineering Co Ltd.20 The former was distinguishable on two grounds; first, had the contract in that case been formed, the defendant would have been obliged to reimburse the plaintiff for its expenditure, whereas the LDDC would have been under no such obligation; and second, a benefit had clearly accrued to the defendant in that case. His Honour treated British Steel Corporation v Cleveland Bridge and Engineering Co Ltd as a case involving the accelerated performance of the anticipated contract, whereas the relevant expenditure was incurred by Regalian for the purpose of putting [the plaintiff] in a position to obtain and then perform the contract.21 Again, however factual conclusions on the existence of benefit aside, none of the grounds of distinction relied upon by Rattee J were relevant to the restitutionary claim. The kind of work done by the plaintiff - whether it was preparatory to contract, or amounted to partial performance of the contract - and the manner in which any benefit accrued in the defendant s hands, may well be 13 14 15 16 17 18 19 20 21 ~ ~ ~ ~ ~ ~ ~~ ~~ Birks, In Defence of Free Acceptance, in Burrows (ed.) Essays on rhe Law of Resriturion (Oxford: Oxford University Press, 1991), at 139-141. See Earheart v William Low 25 Cal 3d 503 (1979) at 510 (Supreme Court of California). Supra, n4 at 225. Id, at 231. Id, at 224. Id. cf Goff and Jones. supra, n 6 at 557-8. (1989) 15 Con LR 116. [ 19841 I All ER 504. At 230. 8 The Modern Law Review Limited 1996 1 I3

The Modern Law Review [Vol. 59 central to a claim in contract. But for restitution, the only question facing his Honour at the relevant stage of analysis was simply: Has the defendant been enriched? Having answered that question in the negative, Regalian s (purely) restitutionary claim must have been doomed from the outset. The unjust factor? Assuming that the LDDC had been enriched, would Regalian have been entitled to restitution? Its second obstacle lay in identifying a factor which could be said to render the defendant s (here presumed) benefit unjust. Unfortunately, it is not clear from Rattee J s judgment what that unjust factor might have been. On the facts, only two factors seemed to be contenders for this honour; total failure of consideration, and free acceptance. Most lawyers will be familiar, if not comfortable, with the doctrine of total failure of consideration. Where the consideration for a payment can be said to have totally failed, the payer will be entitled to restitution.22 Consideration is here used in the sense of expected performance by the recipient of the payment, rather than that which is required to render a contract legally binding. Free acceptance, on the other hand, may be a somewhat alien notion. According to standard form~lations,2~ a party will be held to have freely accepted a benefit if he, as a reasonable man, should have known that the plaintiff who conferred the benefit expected to be compensated for it, and yet failed to take advantage of a reasonable opportunity to reject that benefit. Goff and Jones take the view that free acceptance might provide a suitable basis for restitution in cases where expenses are incurred in anticipation of a contract which fails to materiali~e.~~ Birks, too, seems to reach the same concl~sion.*~ But free acceptance is not uniformly accepted as a legitimate unjust factor. Burrows, for example, claims that the cases relied upon in support of the principle are more appropriately analysed in terms of failure of consideration.26 In his later works, Birks seems to have conceded the force of Burrows arguments with respect to quantum meruit claims for unfinished work.27 This being so, Birks may now be willing to consider a failure of consideration, rather than free acceptance analysis in the context of anticipated contracts. The most obvious difficulty with the failure of consideration analysis is, as Goff and Jones point out, its historical inaccuracy. The common law has never entertained quantum meruit claims on the basis of a total failure of consideration. That concept has generally been confined to claims for the recovery of contractual payments. Burrows and other critics of free acceptance retort by emphasising that that concept, too, is without explicit judicial support. However, Reguliun v LDDC demonstrates that this is more than a sterile, academic debate. It is submitted that if, as Burrows contends, cases of free acceptance are swallowed up by a broad notion of failure of consideration, Regalian would have been denied a remedy even on the assumption that the LDDC had been enriched. 22 Fibrosa Spolka Akcyjna v Fairbairn, Lawson, Combe, Barbour Ltd [1943] AC 32. 23 Goff and Jones, supra, n6 at 19. 24 Id. Chapter 25. 25 An Introduction to the Low of Restitution (Oxford: Clarendon Press, 1989) at 271-275. 26 Burrows, Free Acceptance and the Law of Restitution (1988) 104 LQR 576. 27 Birks, In Defence of Free Acceptance in A. Burrows (ed.), Essays on the Law of Restitution (1991). 114 0 The Modem Law Review Limited 1996

January 19961 Regalian Properties plc v LDDC As Regalian conceded, it was always aware that either party was free to walk away from the negotiations. The consideration for which those expenses were incurred was not, therefore, the formation of a legally binding contract; it was the chance of securing such a contract. Thus Regalian could not be heard to complain if, as was admittedly within its contemplation, that chance was lost. This provides an important distinction from the William Lacey case, in which Barry J found that the mutual belief and understanding upon which the work was done by the plaintiff was that this building would be reconstructed and that the plaintiff company was obtaining the contract.** This was more than a mere hope that a contract would be concluded. On the other hand, if one were to accept the legitimacy of free acceptance as an unjust factor, it is submitted that LDDC would be obliged to pay a quantum meruit in respect of any enrichment which it had an opportunity to reject, but instead elected to accept. Presumably the normal rules of valuation in quantum meruit claims would apply, and Regalian would be entitled to the market value of the benefit at the time it was rendered. Of course, this may or may not have corresponded with the precise amount of the expenses incurred. Saberno One final point of interest from the judgment of Rattee J was his rejection of the principle said to emerge from Saberno, in which Sheppard J stated:29 Where two parties proceed upon the joint assumption that a contract will be entered into between them, and one does work beneficial for the project, and thus in the interests of the two parties, which work he would not be expected, in other circumstances, to do gratuitously, he will be entitled to compensation or restitution, if the other party unilaterally decides to abandon the project, not for any reason associated with bona fide disagreement concerning the terms of the contract to be entered into, but for reasons which, however valid, pertain only to his own position and do not relate at all to that of the other party. Although Rattee J was able to distinguish Subemo on the facts, he went on to suggest that the principle enunciated by Sheppard J... is not established by any English authority.3o It is submitted that, so far as that principle would support recovery of pre-contractual expenses outside restitution or estoppel, this is clearly ~orrect.~ It is difficult to ascertain whether Sheppard J conceived of his judgment as an extension of existing contractual or equitable principles, or as laying down a new and sui generis principle. Certainly His Honour disclaimed any suggestion that the principle was restitutionary. It is submitted that the most plausible explanation, given Sheppard J s reference to bona fide disagreement, is that he contemplated some limited form of culpa in contrahendo doctrine, or duty of good faith between parties to precontractual negotiations. As noted above, both notions are largely alien to the common law, particularly in England. Problems of proof aside, the concept of mala fides is a notoriously imprecise and ambiguous one, especially in the context of arms-length pre-contractual negotiations between sophisticated parties. In this respect Rattee J s disapproval of Subemo should be welcomed. 28 Supra, n 7 at 939. See Goff and Jones, supra, n6 at 556, fn 18. 29 Supra, n 8 at 902-3. 30 At 230-1. 31 But see Davies, What s in a Name? (1981) 1 OJLS 300 at 305. 0 The Modern Law Review Limited 1996 115

The Modern Law Review [Vol. 59 Conclusion Regalian v LDDC demonstrates the kind of new and novel applications to which the law of restitution is likely to be put as it takes its place as a legitimate branch of the common law of obligations. It also demonstrates the practical importance of continued conceptual clarification in the, law of restitution. In the field of pre-contractual liability, the law of restitution will only be of assistance to a plaintiff who has benefited the defendant, and who is able to point to circumstances which render that benefit unjust. These limitations, it is submitted, properly balance what Farnsworth has called the common law's commendably 'aleatory' view of pre-contractual negotiation^,^^ with the need to ensure that justice is done between the parties. Certainly, restitution is more likely to yield consistent and just results than vague notions of good faith in precontractual negotiations. Defective Premises - the Empire Strikes Back 8 Robyn Martin" In a recent edition of the Review,' Laura Hoyano discussed the Supreme Court of Canada's rejection of English law on defective premises in Winnipeg Condominium Corporation No 36 v Bird Construction Co Ltd.2 Since then the High Court of Australia in Bryan v Maloney3 has also declined to follow the House of Lords in D & F Estate$ and Murphy v BrentwoodS and returned us to a nostalgic era of pragmatic, policy based decision making. The facts of Bryan v Maloney, unlike those in Winnipeg Condominium, are simple. A small time builder built a house for his sister-in-law in 1979. She sold it, and that purchaser sold it on in 1986 to the plaintiff, Mrs Maloney. Six months after taking possession of the house the plaintiff noticed cracks which were found to be the result of inadequate foundations. By this time damage to the fabric of the house was extensive. The story is familiar and commonplace. The person in the street might well think the solution simple. The negligent builder of the foundations should pay for the damage to the house, in the same way that the negligent manufacturer of any other good is required by law to compensate for damage caused. Yet the answer to the question whether a negligent builder should be liable to a subsequent purchaser has occupied the attention of the highest courts of Commonwealth jurisdictions,, 32 Supra, n 1 at 421. * University of Bristol 1 (1995) 58 MLR 887., 2 3 [(1995) 121 DLR (4th) 193. (1995) 1.28 ALR 163: Mason CJ, Deane J, Toohey J and Gaudron J agreed that a builder owed to a subsequent purchaser a duty of care, Brennan J dissenting. Toohey J delivered a separate judgment departing from the majority on the dangeroudnon-dangerous defects distinction. 4 [1989] AC 177. 5 [I9911 I AC 398. 116 0 The Modern Law Review Limited 1996