Thursday, June 7, 2012

The Supreme Court of India and the law of unjust enrichment


These are troubled times for the law of unjust enrichment in India, so much so that one is forced to ask whether such an area of law at all exists in this country. That is regrettable especially because the High Courts (especially those in Bombay, Madras and Calcutta) gave many powerful and important judgments on this area of the law, particularly between 1900 and perhaps the late 1960s. We began the year with a discussion of the Supreme Court’s judgment in Nagpur Golden Transport, in which the Court approved a claim for restitution for unjust enrichment without considering what, if any, the unjust factor was. The purpose of this post is to comment on another important judgment, Indian Council for Enviro-Legal Action v Union of India, in which the Court has considered certain principles of the law of unjust enrichment in some detail.

As we noted in our discussion of Nagpur Golden Transport, it is crucial to a coherent understanding of private law to distinguish a cause of action founded on consent (for example, contract) from those founded on a wrong (for example, tort) and those founded on neither. Unjust enrichment is a prominent member of the third category, although it was thought at one time that it was a form of (implied) contract. Today it is recognised across the common law world that a claim for restitution founded on unjust enrichment is founded neither on consent nor on wrongdoing (see for example Lipkin Gorman v Karpnale and Kleinwort Benson v Birmingham City Council). It is also generally recognised in English law that a claim for unjust enrichment has four elements: (a) enrichment of the defendant; (b)at the expense” of the claimant; (c) an unjust factor and (d) defences, if any, such as change of position. The judgments of the High Courts in India, especially before the 1960s, also accept that the juridical basis of unjust enrichment is neither consent nor wrongdoing, and have considered such important issues as the ability of a claimant who confers a gratuitous benefit to bring a claim for restitution (see for example Nallaya Goundar and Damodarasamy Mudaliar). However, in recent years, the Supreme Court has held on more than one occasion that unjust enrichment is any enrichment that appears to the court to have been “unjustly” gained and has occasionally referred to it as “implied contract”, creating doubt as to the state of the law of unjust enrichment in India.

In ICELA, as the name suggest, the Court was concerned with issues of environmental law. For the purposes of our discussion, it suffices to note that the Supreme Court passed an order in 1996 giving certain directions to industries to the Government to take remedial action to clean a village badly affected by pollution caused by chemical industries. In this order, the Court found that the industries in question were liable to pay the costs, which were later quantified as Rs. 37.385 crores. This amount was not paid by the industries for more than fifteen years, and the litigation, the Court records, was kept alive by filing a number of interlocutory applications. In these circumstances, the question arose whether the Supreme Court could direct the industries to not only pay Rs. 37.385 crores, but also to pay compound interest on it for the period of non-payment (14 years). It may be that the Court could have made this order as a punitive measure, but it chose to analyse the law of unjust enrichment for an answer.

What is of more interest than the eventual conclusion of the Court that the industries were liable to pay compound interest is a number of observations that it makes on the meaning of “enrichment” and the nature of the law of unjust enrichment. It is impossible to summarise these, and the following is a selection of some of the observations of the court, with comments.
  1. Unjust enrichment is the unjust receipt of any benefit (Paras 152, 153, 159)
152. “Unjust enrichment” has been defined by the court as the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience. A person is enriched if he has received a benefit, and he is unjustly enriched if retention of the benefit would be unjust.
159. A person is enriched if he has received a benefit, and he is unjustly enriched if retention of the benefit would be unjust
Comments: With respect, it is submitted that these observations require reconsideration. The observation in para 152 that unjust enrichment is the retention of a benefit that is unjust comes close to holding that this is a matter of discretion, which is far from what the law of unjust enrichment is. Perhaps the best explanation of this is Lord Goff’s oft-cited observations in Lipkin Gorman:
… it does not, in my opinion, follow that the court has carte blanche to reject the solicitors' claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle [emphasis added].

  1. Unjust enrichment is (i) the receipt of a benefit that causes loss to the claimant, or (ii) the wrongful receipt of a benefit by the defendant, or (iii) the receipt of a benefit that “belongs” to the claimant (Paras 152, 154, 161)
154. Unjust enrichment occurs when the defendant wrongfully secures a benefit or passively receives a benefit which would be unconscionable to retain

Comments: It is widely accepted that a claim for restitution for unjust enrichment is not founded on wrongdoing. Indeed, that is precisely the reason the law distinguishes restitution for unjust enrichment from restitution for wrongs. The cause of action for unjust enrichment is a distinct one; and as distinct as contract or tort. Whether the claimant must prove not only that the defendant was enriched but also that he suffered loss is somewhat controversial, though the prevailing view is that he does not (see for example Sempra Metals; BP v Hunt). With respect, it is submitted therefore that the above observations require reconsideration.

  1. The relationship between restitution and unjust enrichment
159. Unjust enrichment is basic to the subject of restitution, and is indeed approached as a fundamental principle thereof. They are usually linked together, and restitution is frequently based upon the theory of unjust enrichment. However, although unjust enrichment is often referred to or regarded as a ground for restitution, it is perhaps more accurate to regard it as a prerequisite, for usually there can be no restitution without unjust enrichment
161. The terms “unjust enrichment” and “restitution” are like the two shades of green—one leaning towards yellow and the other towards blue. With restitution, so long as the deprivation of the other has not been fully compensated for, injustice to that extent remains. Which label is appropriate under which circumstances would depend on the facts of the particular case before the court. The courts have wide powers to grant restitution, and more so where it relates to misuse or non-compliance with court orders.
Comments: Para 161 again appears to suggest that unjust enrichment is a matter of discretion, which it is submitted it is not. Para 159, to the extent it notes that restitution is “frequently based upon the theory of unjust enrichment”, is undoubtedly correct, but it may not be accurate to suggest that there “can be no restitution without unjust enrichment”, for the law does recognise restitution for wrongs (Attorney General v Blake). This observation also obscures the distinction between a cause of action founded on wrongdoing and a cause of action founded on unjust enrichment.

  1. There is a distinction between “pre-suit” and “post-suit” unjust enrichment (Paras 162, 164)
162. We may add that restitution and unjust enrichment, along with an overlap, have to be viewed with reference to the two stages i.e. pre-suit and post-suit. In the former case, it becomes a substantive law (or common law) right that the court will consider; but in the latter case, when the parties are before the court and any act/omission, or simply passage of time, results in deprivation of one, or unjust enrichment of the other, the jurisdiction of the court to levelise and do justice is independent and must be readily wielded, otherwise it will be allowing the court’s own process, along with time delay, to do injustice.
164. This view of law as propounded by author Graham Virgo in his celebrated book The Principles of the Law of Restitution has been accepted by a later decision of the House of Lords (now the UK Supreme Court) in Sempra Metals Ltd. v. IRC
Comment: It is submitted, with respect, that there is no distinction between “pre-suit” and “post-suit” enrichment claims. In Sempra Metals, the House of Lords was in fact concerned with whether a claimant who mistakenly pays taxes can recover compound interest on it. Four of the five Law Lords held that he can, but on different grounds. Lords Nicholls and Hope accepted a claim in unjust enrichment, of which the best explanation is that the Government was enriched by the “inevitable expense” of borrowing the funds it unlawfully collected as taxes, and that enrichment was measured by the compound interest the Government would have to pay in the market (which is lower than what a commercial party pays). It is submitted, with respect, that the Court’s reliance on Sempra is misplaced, because there was an unjust factor in that case (mistake), but apparently none in this case. The basis of the Court’s order – that a party “saves” the interest it would have paid a nationalised bank to borrow the money it did not pay – is correct only if it is first shown that it was inevitable that the party would have borrowed money (see Lord Nicholls’ example at paras 118 and 119). The Court does not make this finding. Nor does it find that there is an unjust factor, which there was in Sempra.

Unfortunately, these developments mean that the law of unjust enrichment in India is close to being reduced to one sentence: the receipt of enrichment that the court finds is unjust in the circumstances of the case. It is hoped that the Supreme Court will revisit these issues.


Hat-tip: Aditya Swarup

4 comments:

Anonymous said...

Excellent analysis. Two doubts.

"The observation in para 152 that unjust enrichment is the retention of a benefit that is unjust comes close to holding that this is a matter of discretion, which is far from what the law of unjust enrichment is." Could u pl elucidate why this para implies holding it a matter of discretion?

"Whether the claimant must prove not only that the defendant was enriched but also that he suffered loss is somewhat controversial, though the prevailing view is that he does not". But `at the expense of claimant' prong of the Unjust Enrichment test seems to suggests otherwise.

V. Niranjan said...

Thank you. In para 152, the court has observed that a person is "unjustly" enriched if the "retention of the benefit would be unjust". This suggests (as do paragraphs 159, 161 etc.) that the court will examine, on a case-by-case basis, whether it would be unjust in the circumstances of the case to allow the defendant to retain the benefit. That, with respect, is the antithesis of the "unjust factors" approach. The result in the case is an example - relying on Sempra, where an unjust factor was shown to exist (mistake), without finding an unjust factor in this case.

Some authors are of the view that "at the expense of" requires correspondence of loss (to the claimant) and gain (to the defendant) but there are numerous examples of successful claims where there is no such correspondence. Sempra is one - the claimant there may have suffered no loss (see Lord Hope at para 28). In Yeoman's Row Management v Cobbe, Lord Scott gives an illuminating example at para 41 - if a man who has lost his key to a treasure-chest employs a locksmith to make one, his enrichment at the expense of the locksmith is not the value of the treasure-chest thereby opened, but the value of the locksmith's services (usually market value). Similarly, if I am an unemployed carpenter, but mistakenly repair the defendant's house, I suffer no loss (my state of unemployment would have continued) but I can still bring a claim to reverse the defendant's enrichment, with mistake as the unjust factor. So it has been said that "at the expense of" means that the benefit must come "from" the claimant, not that it must equal his loss.

Anonymous said...

Thanks for the clarification.

Anonymous said...

so this case is related to the envio case?