Monday, January 2, 2012

An Unfortunate Judgment: India and the Law of Restitution for Unjust Enrichment

The law of restitution for unjust enrichment* is so well developed in the common law world today that it is impossible to conceive of a coherent system of private law without it. In India, a part of this area is codified in sections 68-72 of the Contract Act, 1872, and  some outstanding judgments of the High Courts, particularly before and around the 1950s (see for example Damodara Mudaliar v Secretary of State for India, Nallaya Goundar v Ramaswami Goundar and Maniagaran v Maniagaran), contain valuable accounts of how, if at all, the common law principles have been modified by the Indian legislature. It is therefore especially unfortunate that this branch of the law has subsequently not developed in India as one might have expected; and the recent judgment of the Supreme Court in Nagpur Golden Transport v Nath Traders, with respect, may not be fully correct insofar as these issues are concerned.
Perhaps the best exposition of the law of unjust enrichment is to be found in the work of the legendary Professor Peter Birks, and an interested reader may also find it helpful to refer to the comprehensive textbooks in the field (such as Burrows and Virgo). Two features sharply distinguish a claim in unjust enrichment from a claim in contract or tort – one, that it is founded neither on consent nor on wrongdoing, and secondly, that it is concerned not with compensating the loss the claimant has suffered (unlike compensation for breach of contract or damages for a tort), but with “disgorging” the gain the defendant has made “at the claimant’s expense”. It is, therefore, as Professor Birks puts it in his famous “map” of private law, an “independent causative event” that consists of four elements: (i) enrichment of the defendant; (ii) at the expense of a claimant; (iii) an unjust factor and (iv) defences, such as change of position. While the scope and correct interpretation of all of these elements are a source of considerable controversy, it is safe to say that the traditional insistence of the English and other common law courts on an “unjust factor” is what separates the common law’s approach from the civilian approach. In the common law, an “unjust factor” is a recognised reason for or basis of granting restitution to the claimant – the English courts have repeatedly emphasised that “unjust enrichment” is not just any enrichment that appears to be “unjust” or “unfair”, but enrichment that is founded on a judicially recognised unjust factor. These unjust factors are, without attempting to be exhaustive: (i) mistake (this is the archetypal unjust factor); (ii) undue influence and duress and (iii) failure of consideration. There are other unjust factors, such as ignorance/powerlessness, free acceptance, Woolwich claims, contribution/reimbursement etc., whose existence or characterisation is contested by some. It is axiomatic, therefore, that a claimant cannot obtain restitution for unjust enrichment simply by demonstrating that the defendant has been enriched and that this is “unfair” or “unjust” on the facts of the case or by “balancing the equities”. The unjust factor is as distinctly a question of law as is establishing in a negligence claim that there was a duty of care, or in a breach of contract claim that there was a valid contract. The word “unjust” should not be taken to suggest otherwise.
In Nagpur Golden Transport, the facts were that a consignor entered into a contract with a carrier (Nagpur Golden Transport, NGT) to transport and deliver monoblock pumps to the consignee. The consignee had paid the consignor the price of these pumps, Rs. 3,61,000. As a result of an accident involving the vehicle in which NGT carried these goods, the pumps were damaged and the consignees refused to take delivery. NGT accordingly returned the 198 damaged pumps to the consignor. The consignee then brought a claim, not against the consignor, but against NGT, in the Consumer Forum, Gwalior, alleging negligence. This claim succeeded and NGT was directed to pay a sum of Rs. 3,61,000 (representing the payment made by the consignee), plus damages and interest. In its appeal to the Supreme Court, the question was whether, in view of its payment of this sum to the consignees, it was entitled to demand that the consignor return the 198 pumps which NGT had delivered to it on the consignee’s rejection of the goods.
At first sight, the “justice” of NGT’s case is powerful: after all, it does not seem right that the consignor retains the 198 pumps (the goods sold) as well as the Rs. 3,61,000 (the sale proceeds) or that in effect NGT had paid the consignee what in truth was the liability of the consignor (assuming that the consignee was entitled to reject the goods as defective). Yet, on closer analysis, there are considerable difficulties: for one, even assuming that the first and second elements of a claim in unjust enrichment are satisfied (enrichment and “at the expense of”), there is no obvious unjust factor that is attracted – NGT did not return the 198 pumps to the consignor under a “mistake”; nor was there a “failure of consideration” unless it is said that the “basis” of the return of goods was that the NGT would not be liable to the consignee. It may also be that NGT had “discharged” a “debt” owed by the consignor to the consignee in respect of the defective goods and that this was sufficient for it to claim in restitution from the consignor. In both of these cases, however, the Court would have had to consider difficult questions of law; in the first case the true scope of the unjust factor of failure of consideration and in the second whether it is at all possible for X to discharge A’s debt to B without A’s consent, and even if it is, whether “free acceptance” is a recognised unjust factor. If the Court had answered either question against the claimant, it would have had to reject the claim, no matter how “unfair” or “unjust” it appears to allow NGT what appears to be a windfall.
The Supreme Court decided that the consignor was liable to either return the 198 pumps to NGT or pay its realisable value. It gave the following reasons:
If the damaged monoblock pumps are not returned by respondent No.3 to the appellant or if the value of the damaged monoblock pumps realized by respondent No.3 are not paid to the appellant, respondent No.3 would stand unjustly enriched. To quote Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [(1942) 2 ALL ER 122 (HL)]:"......Any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution.”   
It is submitted, with great respect, that this analysis is not persuasive. For one, the Supreme Court did not consider what the unjust factor (if any) might be; nor did it, with respect, apply Lord Wright’s observations accurately. Far from holding that any enrichment that appears to be unjust on the facts of the case attracts the principle of unjust enrichment, Lord Wright’s observations in Fibrosa v Fairbairn actually represent a landmark in the English law of unjust enrichment, for it was this case that discarded what has subsequently been called the “heresy” of Chandler v Webster [1904] 1 KB 493, in which Collins MR had held that “consideration” for the purposes of failure of consideration is to be understood as “consideration” in a contractual sense, with the result that there is no failure of consideration even when a contract is frustrated (because the “promise” to perform has not failed; only the performance of the promise has). In Fibrosa, Lord Wright recognised that “consideration” for the purposes of the law of unjust enrichment normally refers to failure of the performance of the promise (as opposed to the promise itself), and it is a passage from this speech that the Supreme Court has quoted above. However, in Fibrosa, there clearly was a failure of consideration since a contract had been frustrated, whereas in Nagpur Golden Transport, failure of consideration could not have been invoked unless it was shown that the “basis” or “purpose” (construed objectively) of the delivery of goods by NGT to the consignor was that the consignor would return those goods in the event NGT found itself liable to pay damages to the consignee. Since the matter has now been remanded to the Consumer Forum on a question of fact, it appears that the Supreme Court has approved a claim in unjust enrichment without finding that there is an unjust factor, which, with respect, is not correct.

We wish our readers a happy new year.

* It is necessary to use the expression “restitution for unjust enrichment” to distinguish it from “restitution for wrongs” ie cases in which the remedy is still gain-based, but founded on a wrong as opposed to unjust enrichment.


Anonymous said...

Even on the so-called "justice" of the case, how is it just for the seller to be asked to repay the amount to the carrier? Basically, the carrier was the negligent party on the facts: the consumer forum had decreed an award against the carrier. Can the carrier now turn around and effectively place all its losses on the seller??

Shri said...

Really nice write-up Niranjan. Unlike the UK, India still lacks 'settled principles' on this subject. This is an area which can have more and more clarity only through sound and well-reasoned judicial pronouncements by the higher judiciary in India.
Happy New Near to as well!

V. Niranjan said...

@Anonymous, that's right in one sense, but I think what the Supreme Court was getting at was that the seller now had the goods as well as the sale consideration. Of course, the point that no unjust factor was identified remains.

@Shri, thanks! I agree.

Anonymous said...

This is an excellent write-up. However, would the common law of restitution for unjust enrichment continue to apply in India outside the realm of sections 68-72? The Indian Contract Act differs considerably from the common law position. Going by the observations in CPAG vs. Secretary of State for Work & Pensions and Prof. Burrows's article in LQR 2012, the statutory remedy that is inconsistent with common law must be held to have displaced the latter.