Restitution in Case of Undue Transfer

From Max-EuP 2012

by Sonja Meier

1. Performance on a non-existing obligation (condictio indebiti)

The laws of all European countries allow performances made to fulfil a perceived obligation to be reclaimed if there was no actual obligation. The same rule applies where there is a permanent defence to the obligation, or where there is in fact a valid obligation, but the transferor is not the party bound or the recipient is not the creditor. On the continent, restitution is in these cases granted by way of the condictio indebiti, carried over from the ius commune, while English law allows an ‘action for money had and received’. Following in the footsteps of the Roman legal tradition, both the English and the continental laws used to attribute these claims to the (rather non-descript) category of ‘quasi-contract’ for hundreds of years. Nowadays, however, restitution in case of undue transfer is often seen as an essential part of the law of unjustified enrichment, eg in Germany, Switzerland, Greece and Portugal. The same now also applies to England, where the law of restitution or unjust enrichment only developed into a distinct area of law in the second half of the 20th century. In contrast, French, Italian, Spanish and Dutch law distinguish between restitution of undue transfers on the one hand and the general action of unjustified enrichment on the other; both are subject to different rules.

In principle, recovery has to be barred if the transferor knew that the obligation did not exist. The condictio indebiti of the ius commune required that the claimant be excusably mistaken as to the existence of his obligation. A distinction was traditionally made between mistakes of fact and mistakes of law: while a mistake of fact was reason enough for recovery, performances made on the basis of a mistake of law could not be reclaimed. The same rule was applied in England from 1802 to 1998. This ‘mistake of law rule’, however, cannot be justified by the idea that everyone is presumed to know the law. There were rather various practical considerations that led to the barring of recovery in a number of individual situations. For instance, not every change of the law by the judiciary (which is traditionally seen as merely ‘declaring’ the law as it has always been) was supposed to lead to a flood of restitutionary claims arising from closed transactions. In other cases, the claimant had paid on the basis of an existing obligation that justified the transfer but, for special reasons, was not enforceable in court. Recovery should be barred even when the claimant mistakenly believed the obligation to be legally enforceable. For this reason, the continental legal systems have special rules to bar recovery when performance was made on the basis of a statute-barred liability (prescription), a contract unenforceable for lack of form (formal requirements), a gambling debt, or similar unenforceable liabilities. The underlying idea is the concept of a ‘natural obligation’, which, while unenforceable, can justify a transfer. It was known even in England before 1802, and new life was breathed into it after the House of Lords abolished the mistake of law rule in 1998 (Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349).

Today’s continental legal systems no longer distinguish between mistakes of fact and mistakes of law. The concept of mistake, however, plays different roles in the individual legal systems. Some of them continue to consider a mistake as a requirement of the condictio indebiti, which is similar to the English approach. German law, on the other hand, has done away with this, but will grant the defendant a defence if he can prove that the claimant knew that there was no underlying liability. In Italy and France, mistake is only necessary when the claimant was paying a debt of a third party. The underlying idea is that in those instances where the claimant has consciously paid another’s existing debts, the failure of a basis (which would justify recovery from the recipient) is lacking. In the modern Dutch code, there is neither a requirement of mistake nor a defence of knowledge. In the rare cases where the claimant voluntarily performs despite knowing that there is no liability, recovery can be barred by other instruments, eg by considering the performance a gift or by recourse to the venire contra factum proprium principle. Finally, both in England and on the Continent, restitution is barred where—even though there was a mistake or at least a state of doubt on the claimant’s side—the defendant was entitled to assume that the claimant intended to perform in any event, ie to close the transaction, regardless of whether the liability existed or not.

2. Failure of purpose/consideration (condictio ob rem)

Roman law only recognized certain types of agreements as binding contracts. In cases which did not fall under any of those types, the party who had performed but not received the counter-performance agreed upon originally had no contractual claim for that counter-performance. In this situation, the condictio ob rem (or condictio causa data causa non secuta) at least allowed him to reclaim his own performance. The causa that was, according to the parties’ agreement, underlying the claimant’s performance but had failed to realize, was the defendant’s counter-performance. After the binding effect of all forms of agreements had been accepted in the ius commune (freedom of contract), the condictio ob rem lost much of its importance. While it is still part of most continental European legal systems, and even appears in some codifications, it only applies in the rare cases where there is no underlying contract, eg where the defendant’s consideration is not capable of forming the subject matter of a contract (eg services in exchange for being designated as an heir) or where (a case already discussed in Roman law) the basis of the claimant’s transfer is an event, rather than a counter-performance (eg a dowry given in expectation of a marriage that does not take place).

The equivalent English remedy is a restitutionary claim for ‘failure of consideration’, which also requires that performance has been made in the expectation of a consideration or of some other event that did not materialize, and where this was known to the recipient. However, in contrast to civil law, the claim even applies in cases concerning initially valid contracts. Restitution in cases of breach of contract or frustration rests on the fact that the receipt of the defendant’s consideration, which formed the basis of the claimant’s performance, failed. Thus, according to the English view, the basis of a contractual performance is the receipt of the counter-performance, whereas for civilian systems the basis is merely the fulfilment of the claimant’s own contractual obligation.

Where receipt of the performance is in itself illegal or immoral, recovery is granted regardless of whether the purpose has failed. If the claimant gave something to the defendant in order that he would not commit a crime or would fulfil some obligation that was already incumbent upon him, the ius commune granted the condictio ob turpem vel iniustam causam. However, today this condictio has a very limited field of application, as the parties’ agreement on the purpose of the performance usually constitutes a contract, which makes it a case of performance on the basis of a contract that is immoral or illegal and hence void (illegality of contracts). Under English law, restitution in these cases is based on special unjust factors, such as illegality, duress, inequality or unconscionability.

3. Absence of legal basis vs unjust factors

Apart from the condictiones referred to above, the ius commune also incorporated a condictio ob causam finitam for cases where the obligation forming the basis of the performance only fell away afterwards, as well as a condictio sine causa, which had already been used as a general action in Roman law. The ius commune’s condictio sine causa generalis served as an umbrella term for all the other condictiones, expressing their underlying principle: the lack of a causa which could justify the defendant in retaining what he had received. All condictiones used to recover a performance were based on the concept of failure of purpose: the underlying causa did not exist, did not materialize, or fell away afterwards, or the parties did not agree on what the underlying causa was. Today, the condictio indebiti under French, Italian, Spanish or Austrian law and the condictio sine causa under German, Swiss or Dutch law are based on the idea that the claimant transferred a benefit to the defendant in respect of a legal basis that does not exist. The legal basis is normally an enforceable obligation, but it can also be a natural obligation or the parties’ mere agreement about the purpose of the performance. Where a legal system has a requirement of mistake (or a defence of knowledge), it is not applied when the claimant performed under duress, was a minor or reserved his right to recover. The lack of a legal basis is the decisive element of the claim, not the claimant’s mistake.

In England, the old restitutionary claims known as ‘actions for money had and received’ for mistake, duress and failure of consideration may originally have been equivalents to the Roman condictiones indebiti, ob turpem causam and ob rem. However, English law eventually went its own way. The English equivalent of the condictio indebiti originally required the claimant to have been mistaken as to the existence of an enforceable obligation. As that requirement has been shown to be too narrow, it is now argued that any mistake is sufficient, regardless of its character. While continental law has put its emphasis on the lack of a legal basis for the claimant’s performance, reducing the importance of the mistake requirement, English law has been doing exactly the opposite, ie concentrating on the claimant’s mistake. The legal basis is only relevant insofar as there is a defence against a restitutionary claim for mistake when the claimant performed on the basis of a valid obligation. Since the 1970s, English legal literature, led by Peter Birks, has extended this idea into a system of so-called ‘unjust factors’. A claimant’s performance can only be reclaimed if it is unjust for a particular special reason, be it because it has not been made according to his unimpaired will (unjust factors: mistake, duress, compulsion, minority, exploitation), be it because his will was conditional (unjust factor: failure of consideration), or be it for special policy reasons (‘policy-motivated unjust factors’).

In cases concerning contractual performances, continental laws ask whether there is a legal basis in the form of a valid contract. This is a matter for the law of contract to decide. If there is no valid contractual basis for the performance, restitution is effected either through the condictio indebiti or the condictio sine causa, or through special rules for the unwinding of void contracts, or through contract law itself, like in Germany in cases of termination (unwinding of contracts). Under English law, on the other hand, contractual performances can be recovered by way of various unjust factors: if the defendant did not perform, the claimant can bring a claim for failure of consideration, regardless of the initial validity of the contract. If the contract is void, avoided or rescinded, the grounds for the invalidity (mistake, fraud, duress, minority, illegality) may sometimes also serve as an unjust factor on which a restitutionary claim can be based. Furthermore, the claimant may mistakenly believe the contract to be valid, in which case he can base his restitutionary claim on mistake as well. The unsystematic coexistence of various unjust factors caused the courts in the so-called ‘swaps litigation’ of the 1990s to recognize an unjust factor called ‘no consideration’, which is established whenever the underlying contract is void. This turn towards an approach focusing on the legal basis caused Peter Birks to abandon his system of unjust factors in 2003 and henceforth to ground restitutionary claims on an ‘absence of basis’, similar to the civil law tradition.

4. The benefit received

Initially, the Roman condictio was only concerned with the recovery of money or specific property. Normally, ownership had to have been transferred to the defendant, as otherwise the vindicatio would be available. Today’s European legal systems also employ the vindicatio (or a functionally similar claim in tort under English law) where the claimant has remained the owner (‘at law’ in England) of the object in the hands of the defendant. However, some legal systems also provide a condictio for the claimant-owner, directed towards the simple return of the possession. Where contractual performances of specific property are concerned, the decisive factor for determining whether the vindicatio or the condictio/restitution claim is applicable is whether the national law of property follows the causal or the abstract system with regard to transfer of title.

The Roman condictio also applied to other objects, such as an acknowledgment of liability, or a release. In case of services, we know that the condictio ob rem applied, but it is doubtful whether the other condictiones could be used. This tradition is followed by French law, where benefits in the form of services or of the use of a thing cannot be reclaimed through the condictio indebiti, but only by way of the general enrichment action, which includes the condictio ob rem. Under English law, the type of restitutionary claim was originally dependent on the kind of benefit received. An ‘action for money had and received’ was only applicable when the claimant had made a payment to the defendant. If the claimant had paid the defendant’s debt, an ‘action for money paid’ was granted. Where the claimant had provided specific property or services, the claims were called quantum valebat and quantum meruit, respectively. These last three claims required that the defendant had made a request to the claimant, so as to prevent restitutionary claims where the claimant had forced his performance upon the defendant. Today’s writers call for all types of benefits to be treated alike within the law of restitution. They argue that the problem of performances forced upon the defendant should be discussed as part of the question whether he is enriched at all. This is also the position of the majority of the European legal systems, where the condictio is applicable regardless of the character of the benefit received.

5. The parties

The creditor (claimant) of a condictio is the person performing, ie the party to whom the performance can be attributed. The majority of the European legal systems do not require him to have suffered any actual loss. The debtor (defendant) is the recipient. If a third party benefited from the performance, he will not be exposed to a condictio, but to a claim in the general law of unjustified enrichment. The creditor and debtor are not always the parties between whom the immediate transaction took place. The continental legal systems follow the rules of the Roman delegatio, whereby, when A orders B to make a payment to C, A (and not B) is the creditor of the condictio against C. In a similar way, English law attributes payments made or received by agents to their principals. There is, however, no uniform approach to the question as to who is merely an agent/delegate. Under English law, banks transmitting or receiving money for their clients can themselves be a claimant or a defendant in a restitutionary action, whereas under German law they are considered as mere delegates and are not, therefore, parties to the claim for recovery.

6. The content of the restitutionary claim

In the continental European legal systems, restitutionary claims are aimed at reversing the transfer in natura. If ownership was transferred, there has to be a reconveyance; if a release was granted, the defendant has to undertake a new liability. Restitution by way of a monetary payment, which is the usual remedy under English law, only exists on the Continent where the transfer itself can no longer be reversed. Under English law, there are also restitutionary claims in rem: if ownership at law is transferred to the defendant, the claimant’s mistake or the failure of consideration may in special cases prevent ownership in equity from passing to the defendant. The claimant then has an equitable title to the object received by the defendant and can not only extend his title to valuable surrogates (tracing), but can also bring a proprietary claim in case of the defendant’s insolvency.

A loss of enrichment was, in principle, irrelevant for the ius commune’s condictio. The claim was directed at what the defendant had received, not at what he still retained. Only where specific property had been transferred was the liability of a bonae fidei defendant mitigated through the general rules of impossibility: if the object was lost without the defendant being at fault, then he was free; if he had sold the object in good faith, he was only liable for the value of the sales price. This tradition has been followed by the French, Italian, Austrian and Dutch codes, which do not allow a defence of loss of enrichment in general but have special rules for restitution of specific property. Similarly, in England, restitutionary liability was, until 1991, strict. Any dispositions by the defendant after the receipt were disregarded unless he could, in exceptional circumstances, rely on the defence of estoppel. In all these legal systems where the condictio/restitution claim is strict, special remedies against minors have been developed, which are merely directed at the remaining enrichment.

A general defence of loss of enrichment was favoured in particular by German legal doctrine of the 19th century and then codified in both Germany and Switzerland. The underlying idea is that the claim is based on the defendant’s unjustified enrichment and must therefore cease to exist where he is no longer enriched and cannot be accused of having acted in bad faith. To prevent the defendant from suffering a loss as a result of the restitution claim, he is to be protected when he lost the object received or when he made dispositions to his detriment in reliance on the receipt. A similar defence of ‘change of position’ for cases of detrimental dispositions in reliance on the receipt was introduced into English law by the House of Lords in 1991 (Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548). However, the justification for a defence of loss of enrichment is doubtful in cases where the parties, under a contract, make reciprocal performances. It can be argued that the defendant consciously exchanged the benefit he received from the claimant for some consideration of his own, and that it would be inequitable if he were freed from his obligation to restitution but could, in turn, reclaim or retain his own performance (unwinding of contracts).

7. Unification projects

Unified laws and model rules usually contain special rules for the restitution of contractual performances. Articles 81–84 Convention on Contracts for the International Sale of Goods, Arts 9:305–309 Principles of European Contract Law (PECL) and Art 7.3.6 UNIDROIT Principles of International Commercial Contracts (PICC) deal with restitution after termination for breach of contract, Art 4:115 PECL and Art 3.17 UNIDROIT PICC with the avoidance of contracts for defects of consent, and Art 15:104 PECL with illegal contracts. The Code Européen des Contrats (Avant-projet) brings all these cases together under a single article (Art 160). The Draft Common Frame of Reference (DCFR) contains not only rules for the unwinding of contracts in case of termination and withdrawal (Arts III.-3:510-514 in conjunction with Arts II.-5:105, III.-1:108-109), but also a separate book on unjustified enrichment (Book VII), which is also applicable in case of performances made under void and avoided contracts, and revocations of gifts (Arts II.-7:212, II.-7:303, IV.H.-4:103). Conflict of law rules can be found in Art 12 of the Rome I Regulation (Reg 593/2008) and Art 10 of the Rome II Regulation (Reg 864/ 2007).

Literature

Izhak Englard, ‘Restitution of Benefits Conferred Without Obligation’ (1991) in IECL X (2007) ch 5; Reinhard Zimmermann, The Law of Obligations (1996) 834 ff; Tony Weir (tr), Konrad Zweigert and Hein Kötz, Introduction to Comparative Law (3rd edn, 1998) 566 ff; Sonja Meier, Irrtum und Zweckverfehlung (1999); Peter Schlechtriem, Restitution und Bereicherungsausgleich in Europa, vol I (2000); Thomas Krebs, Restitution at the Crossroads (2001); Peter Birks, Unjust Enrichment (2nd edn, 2005); Christiane Wendehorst, ‘Die Leistungskondiktion und ihre Binnenstruktur in rechtsvergleichender Perspektive’ in Reinhard Zimmermann (ed), Grundstrukturen eines Europäischen Bereicherungsrechts (2005) 47.

Retrieved from Restitution in Case of Undue Transfer – Max-EuP 2012 on 22 May 2022.

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