9.  Restitution following termination for non-performance

Following the termination of a contract for non-performance, A may wish, as an alternative (or perhaps in addition) to raising a claim for damages for any losses it has suffered, to seek the restitution of any performance it has tendered to B under the contract.291 Though such a claim, if it is allowed, evidently protects the restitution interest of the party concerned, rather than the performance interest, to the extent that such right to restitution is held to be a species of contractual claim (rather than a type of unjustified enrichment) it can at least be said to be promissory in nature, given that its justification (from A’s point of view) lies in the fact that, because B did not do what it promised to do, A ought to be able to get back what it gave to to B. Such a contractual restitutionary claim can be seen (as with the right to terminate itself) as a further remedial manifestation of the principle of mutuality of contract. As will be seen, however, in some jurisdictions the right to such restitution following breach of contract may be controversial or very restricted, or may be classifiable not as contractual in nature but as a type of enrichment claim.292 Such an enrichment classification fails to recognise the promissory nature of the circumstances out of which the restitutionary remedy arises. Termination, after all, has only ex nunc effect; it is not, as with void contracts, as if the contract never existed at all.

(a)  English law

English law stands apart from civilian and most mixed systems in not generally allowing some form of restitution following termination for breach. In the Common law, restitution is available to a party which has given consideration under a contract only in cases of total failure of consideration, those being where the party has received no part of the reciprocal performance identified in the contract. This entitlement was established in Fibrosa v. Fairbairn,293 and has been applied in a line of cases following it. The reason why failure of consideration must be total is that such consideration is conceived of as having been pledged as an indivisible whole for the other party’s reciprocal consideration (unless

291See Fried, Contract as Promise, Ch. 8.

292Fried argues that the right to the return of what has been paid should be seen as noncontractual restitution: ibid., pp. 117–18.

293Fibrosa Spolka Akcynjna v. Fairbairn Lawson Combe Barbour Ltd [1943] AC 32.

the parties stipulate otherwise), so that the receipt of any portion of the consideration precludes the restitution of what was given for it. The remedy, where claimable, is not seen as contractual in nature, but as an equitable measure to prevent the recipient’s unjustified enrichment. The result is that the party who is the victim of the breach has the choice of using whichever of restitution or damages is more favourable in the circumstances, and therefore of potentially avoiding a bad bargain294 (precisely the possibility denied to the pursuer in the Scottish case of Connolly v. Simpson, discussed below). As an equitable restitutionary remedy it is, of course, subject to the usual restitutionary defences, such as change of position, which would be inapplicable were the restoration seen as contractual in nature.

While partial failure of consideration can now also ground restitution by virtue of the provisions of the Law Reform (Frustrated Contracts) Act 1943, this only applies to frustrated contracts, not those terminated for breach, a distinction which can be productive of arguably unfair results. The hirer of a car destroyed in a storm one day into a fortnight’s hire can seek restitution for partial failure of consideration, but the hirer whose vehicle irreparably breaks down after the same period of time because the vehicle has been inadequately maintained by the lessor cannot so recover and is restricted to a remedy in damages.295 Such discrepancies of result are also obvious if one compares circumstances of breach with those where a contract is avoided for misrepresentation: although the facts of the case may be very similar, the treatment of those facts as giving rise to a case of misrepresentation will allow restitutio in integrum to be effected, even if consideration has only been reciprocated in part at the time the contract is avoided, but no restitution will be available if the facts are classified­ as breach of a contract term unless the failure of consideration has been total.

The extent of the availability of restitution for total failure of consideration is obviously very limited in practice, and such a limited remedy does not detract from the position of damages as the primary remedy for breach in the Common law. It is though a remedy which is at least undoubtedly available, unlike restitution following breach in Scots law.

294See further Peel, Chitty on Contracts, para. 29–059.

295The Law Commission however recommended keeping the rule as to total failure of consideration: see Law Commission Report, Law of Contract: Pecuniary Restitution on Breach of Contract.

(b)  Mixed legal systems

In South African law, quite apart from any claim to damages which a plaintiff may have following termination for breach of contract, the plaintiff is also entitled to restitution of any sum or any thing transferred under the terminated contract.296 This right to restitution following termination has traditionally been viewed as a contractual remedy, not one based in unjustified enrichment, though this view has been challenged by some commentators.297 The challenge rests on the view that the effect produced by a remedy ought to be determinative of its classification, restitution therefore being argued to be an enrichment remedy. But this alternative view fails to take account of the fact that restitution is a remedy which is capable of operating in a number of spheres of law, including property law, where the vindicatory claim of an owner is an example of a restitutionary claim. It would seem odd to classify such a vindicatory claim stemming from ownership as concerning unjustified enrichment, but that is a conclusion whose adoption this alternative theory concerning restitution following breach would seem to compel. For that reason, it seems better to continue to classify remedies flowing from the enforcement of a valid contract, or one which, though valid, is terminated for breach, as contractual in nature, and reserve an enrichment classification only for cases where a contract is held never to have existed at all.

The operation of restitution following breach in South African law may be seen in the case of Hall Thermotank Natal (Pty) Ltd v. Hardman.298

In that case, the plaintiff had supplied and fitted refrigeration facilities aboard a ship owned by the defendant. The defendant had made a part payment towards the total contract price before the ship sailed. Unfortunately, when an attempt was made to put the refrigeration facilities to use, they proved wholly defective. Before they could be repaired, the ship sank during a storm. When the plaintiff sued for the balance of the contract price, the defendant terminated the contract, claimed damages, and argued that it was entitled to set off the part payment it had made against any amount it might be found to owe the plaintiff. In the Supreme Court, it was held that: (i) the defendant was entitled to terminate the contract on account of the defect in the unit supplied, (ii) because

296Van der Merwe et al., Contract, p. 422.

297Visser, ‘Rethinking Unjustified Enrichment’, pp. 225–9; Hutton, ‘Remedies after Breach of Contract’.

2981968 (4) SA 818 (D).

the defendant had received no benefit from what had been supplied, he was not obliged to compensate the plaintiff in money or kind for what had been lost in the storm, and (iii) given the valid termination of the contract, the defendant was entitled to restitution of the part payment he had made to the plaintiff. In this case, restitution only operated in one direction, though had the goods supplied not been lost in the storm, the defendant would have had to return them to the plaintiff following termination of the contract.

The question of restoration following termination for breach is one of the fields where Scots law manifests the weakness of being a non-­codified system with a small body of case law. The law on this issue is muddled. Late nineteenthand early twentieth-century academic views299 and judgments300 appeared to support the view that it was an established rule of Scots law that where an advance payment was made by one contracting party for a performance which was never received from the other, and the contract was then terminated for breach, the payment might be claimed back, albeit that the claim was seen as ‘quasi-contractual’ (or lying in unjustified enrichment, as we would now say) rather than contractual. Lord President Inglis famously characterised such a claim as a ‘rule of the civil law, as adopted in all modern codes and systems’, applying it in the case before him.301

Unfortunately, the general applicability of the rule in all cases of termination for breach was doubted in Connelly v. Simpson.302 In Connelly the pursuer had paid £16,000 in advance for shares which were never transferred to him, initially because he asked for the transfer to be delayed and then latterly because the company was put into liquidation. At the time of liquidation, the shares were worth only £400. It seems that the pursuer attempted to rescind the contract for breach (though the judgments of the court are unclear whether this had occurred). It evidently made a great difference to the pursuer whether he was entitled to claim restoration to the pre-contractual position, when he would get his £16,000 back, or whether he had only a damages claim, in which case he would only get £400. The nineteenth-century authorities appeared to suggest that (assuming he had validly terminated the contract for breach) he was entitled to his money back. A majority of the appeal court held, however, that he was not, though their reasoning is somewhat confused. One judge

299Gloag, Contract, pp. 59–60.

300Watson v. Shankland (1871) 10 M 142; affirmed (1873) 11 M (HL) 51.

301See judgment of Lord President Inglis in Watson v. Shankland (1871) 10 M 142, 152.

3021993 SC 391; 1994 SLT 1096.

argued that the pursuer got what he paid for: he paid for the right to have the shares transferred to him, he got such a right, and therefore he could not claim restitution on the ground that he paid in advance for what he did not get.303 The other majority judge took the different view that ‘in a breach of contract case, especially one where a long time has elapsed without performance ever having been demanded, [there is no room] for a remedy in the form of restitution of the price as such.’304 The underlying concern of this judge appears to have been that, the pursuer having delayed for a long time to ask for the transfer to be effected, he had taken the risk of a decrease in the value of the shares. This view might suggest that, more generally, termination for breach ought not to give rise to a right to restitution of advance performance, but only to damages. If that is so, then it would put Scots law out of step with the other mixed systems and with civilian systems.

The law is in need of further clarification. It would be helpful for a clear judicial statement to be given to the effect that restitution following termination for breach is available in Scots law, such a remedy being seen (as in South African law) as contractual in nature. The denial of such a claim – if that is now the law following the unclear Connelly decision – puts the victim of a breach of contract in a disadvantageous position in relation to the contract breaker, which seems the reverse of the position suggested by the equities of the case. Moreover, the majority academic view is in favour of seeing the right to restitution in such a case as contractual, rather than enrichment, in nature.305

In Louisiana, the codal title on sale provides for a right on the buyer’s part to restitution of the price if the contract is rescinded.306 More generally, Article 2018 provides that: (a) where a contract is dissolved, the ­parties are to be be restored to the situation that existed before the contract was made; and (b) if such restoration in kind is impossible or impracticable, then a court is entitled to award damages.307 This preference for restitution over damages is a feature shared with German law, as will be seen below. In cases where a partial performance has been rendered which is of

303See judgment of Lord Sutherland, 1993 SC at 414G–H; 1994 SLT at 1110G.

304Lord McCluskey 1993 SC at 407D–408A; 1994 SLT at 1106C–G.

305See Hogg, Obligations, paras. 4.164–9; R. Evans-Jones, Unjustified Enrichment (vol. 1), paras. 6.119–23.

306CC Art. 2497. See also Art. 2507 (restitution despite deterioration).

307An alternative approach would have been (as in German law) to have awarded the monetary equivalent of the thing which cannot be restored in kind, though in any event it might be argued that the loss to be compensated under a damages award includes the value of the non-returnable thing.