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Foreseeing the future or a hostage to fortune? Unjust enrichment and quantum meruit claims arising from contractual agreement terms

Posted: 07/02/2020


The facts of Barton v Gwyn-Jones [2019] appear straightforward. When Mr Barton verbally contracted with Foxpace Ltd to be paid a £1.2 million fee if Foxpace’s property sold for £6.5 million to a purchaser introduced by him, both parties regrettably lacked any premonition of the financial fallout if the property was sold for less. In the event, the property, Nash House, sold for £6 million (the reduction in price agreed to reflect the risk it might be compulsorily purchased for HS2).

Foxpace subsequently argued that Mr Barton was entitled to nothing, because a £6.5 million purchase price had not been achieved, and instead offered the sum of £400,000 as a ‘goodwill gesture’. Rejecting that offer and no doubt mindful that fortune favours the bold, Mr Barton cast the runes and sought his destiny in the courts.

Destiny’s child

The first instance judge, His Honour Judge Pearce, foresaw Mr Barton’s future rather differently to Mr Barton. Divining from the (tea leaves) evidence that an oral agreement had been concluded between the star-crossed parties for Foxpace to pay Mr Barton £1.2 million if Nash House sold for £6.5 million to a purchaser introduced by him, the judge held that as Nash House had in fact sold for only £6 million, the claim in contract necessarily failed. (He did not address the possibility of an implied term, something that would later loom large in Mr Barton’s fortunes).

Mr Barton also pleaded an alternative case for compensation for unjust enrichment. Turning to this and applying four questions identified in the case of Benedetti v Sawiris [2014], HHJ Pearce accepted that Foxpace had indeed been enriched at Mr Barton’s expense: the issue at the heart of the dispute was whether that enrichment was unjust. In addressing that question, he applied the principle in Costello v MacDonald Dickens & Macklin [2011], being that a claim in unjust enrichment should not be allowed to undermine the contractual arrangements between the parties. In Costello, Etherton LJ had said:

“The general rule should be to uphold contractual arrangements by which parties have defined and allocated and, to that extent, restricted their mutual obligations, and in so doing, have similarly allocated and circumscribed the consequences of non-performance. That general rule reflects a sound legal policy which acknowledges the parties' autonomy to configure the legal relations between them and provide certainty, and so limits disputes and litigation.” [23]

In Barton, the parties had not defined an obligation within the contract for Foxpace to pay a fee where Nash House sold for less than £6.5 million, when they could have done so. Describing the granting of relief in such circumstances as, in his view, amounting to ‘an obvious interference with the freedom of the parties to define and allocate their obligations’, HHJ Pearce held it ‘incumbent on the Appellant to show why the court should in effect interfere with the allocation of risk by imposing an obligation on the Respondent to pay money in circumstances other than those contemplated by and defined in the contract.’

The judge then considered factors in favour of the argument that the court should find that Mr Barton was not in fact taking on the risk of not being paid for introducing the buyer. However, he declined to determine what would have been on the (tarot) cards had the parties specifically turned their minds to the question of an introduction fee for a reduced sale price (something which he found, as a fact, they had not considered): to do so, he felt, would be ‘speculating about what parties in a commercial relationship might have been willing to agree to and would have been substituting assumptions as to how they would have behaved in place of their freedom to negotiate.’ [198] He therefore also rejected the claim in unjust enrichment.

On the subject of the evidence however, the judge expressly rejected Foxpace’s solicitor’s testimony that Mr Barton would receive the £1.2 million ‘if, and only if’ Nash House sold for £6.5 million, and that nothing was payable to him if it sold for less. Having found that the parties had not given any thought to circumstances other than a sale at £6.5 million, he commented that it would be ‘bizarre’ for Mr Barton to enter into a contract on such terms: that would mean leaving himself open to the possibility of receiving nothing at all in the event of only a small reduction in the purchase price. Regardless of this, he still considered that on a true construction of what was agreed, and despite having found that it would be bizarre for the parties to have agreed it expressly, nothing was payable to Mr Barton if the property sold to his purchaser for under £6.5 million. The judge’s reasoning was that the parties had, through their agreement, allocated the risk of a sale for less to Mr Barton, which, applying the principle in Costello, consequently excluded a claim in unjust enrichment.

Finally, although he had rejected the claims, for the sake of completeness the judge also addressed the value of the benefit conferred on Foxpace by Mr Barton’s services. The judge gave little weight to the fee agreed between the parties because it was based not on the actual value of the services, but on other factors such as Mr Barton recovering fees lost in previous failed property transactions. Consequently, and in the absence of expert evidence on the point, he determined the proper value by reference to other introduction fees that Foxpace had agreed on related failed transactions. The midpoint of those was held to be 7.25% of the sale price, equating to £435,000.

Destined for greater things?

Unable to resign himself to this fate, Mr Barton again spun the wheel of fortune and took the case to the Court of Appeal. Permission to appeal was granted on four grounds:

  • that the judge was wrong to conclude that the terms of the agreement excluded a claim to a reasonable sum for the benefit conferred on Foxpace if the property sold for less than £6.5 million;
  • that he was wrong to hold that the unjust enrichment claim was barred by the general principle in Costello;
  • in the event, however, that the claim was barred by the general principle in Costello, that the principle should not apply on the facts of this case; and
  • that the judge erred in valuing the benefit of Mr Barton’s services provided to Foxpace at £435,000: rather, the correct value was £1.2 million or at least £800,000, or at any rate more than 7.25% of the purchase price.

Lady Justice Asplin, who gave the leading judgment, began by construing the terms of the agreement in order to determine whether those terms defined and allocated, and to that extent also restricted, the mutual obligations of the parties. Referencing Wood v Capita Insurance Services Ltd [2017], the landmark authority on contractual construction and interpretation, she asked, what would a reasonable person, with all the background knowledge which would have reasonably been available to the parties (but without a crystal ball) have understood the parties to have meant by the terms of the agreement as found by the judge?

In answering that question she weighed up the submissions, agreeing with Mr Barton’s counsel that the case of Firth v Hylane Ltd [1959] (involving a buyer introduced by an estate agent, who purchased the property in question for less than the asking price) was generally supportive of the argument that the agreement ‘should not, without more, be construed to mean that Mr Barton should receive nothing unless the £6.5 million purchase price was achieved and as a result to have allocated the risk of a sale at a lesser sum to Mr Barton.’ [26]

In Firth, it was found that an obligation to pay arose because if a service is rendered and a specific charge has not been agreed, then a reasonable sum becomes payable.

However, both Asplin LJ and Davis LJ (in a concurring judgment) rejected the submission that Firth was binding upon the present court. Indeed, it was noted that such cases generally turn on their facts, as they depend on the precise terms of the particular contract in question.

On the other hand, the Court of Appeal found Foxpace’s arguments on the construction of the contract problematic. Relying on Luxor (Eastbourne) Ltd v Cooper [1941], the thrust of the argument was that Mr Barton’s entitlement to payment was only triggered on the happening of a specific event (a sale at over £6.5 million to a purchaser introduced by him), this being a term of the contract, and Mr Barton had taken the risk of non-payment if a lesser purchase price was achieved, thereby excluding a claim for reasonable remuneration.

The difficulty with this was that HHJ Pearce had already rejected Foxpace’s solicitor’s evidence that Mr Barton was to be paid ‘if, and only if’ a £6.5 million purchase price was achieved, and Foxpace’s argument here effectively required the agreement to be construed as if that defence had not been rejected. Asplin LJ gave this short shrift, finding decisively on the first ground of appeal that there was nothing in the terms of the agreement, objectively construed, which meant that Mr Barton should receive nothing at all unless the £6.5 million purchase price was achieved. The contract did not restrict payment to ‘the happening of a specific event’. [32]

An inauspicious path

Notwithstanding this construction of the contract, could the claim nonetheless be excluded by the principle in Costello? Costello concerned claimant builders who had entered into an agreement for the construction of houses with a company, the shareholders and directors of which owned the land. When the company failed to pay a judgment against it, the builders sought to go behind the company and pursued the shareholder directors for unjust enrichment. Although they succeeded at first instance, the decision was overturned by the Court of Appeal; the contract was between the builders and the company, and the parties had chosen to restrict their obligations and allocate the risk of non-performance in that way.

Asplin LJ observed that the circumstances of Costello were completely different to the present case. That case concerned builders who were not allowed to circumvent the contractual arrangements they had entered into. To allow their claim would have been to bypass the contract completely, ignore the separate legal identity of the company, and in effect, render the shareholder directors as guarantors where no guarantee existed. In contrast, here, the agreement was silent as to what would happen if Nash House was sold for under £6.5 million, and HHJ Pearce had determined that it was not an ‘if, and only if’ agreement and that the parties simply had not given any thought to the circumstances of a sale at any other price. Objectively construed, the agreement did not restrict payment to only the happening of a specific event.

Accordingly, although Asplin LJ agreed with the judge that: ‘there can be no doubt that a claim in unjust enrichment should not be allowed to alter or undermine the express allocation of risk and obligations arising from a contract and the autonomy of the parties to configure their contractual relations...’ [31], it was found that the principle was not applicable in this case, for the reason that the parties had not expressly allocated the risk to Mr Barton.

Nothing therefore precluded Mr Barton from a claim in unjust enrichment, because in awarding such a remedy, the court would not be undermining a contractual allocation of risk negotiated by the parties (as would have been the case in Costello), as the contract simply did not address the situation that arose at all. Had it included express terms excluding payment if a sale at a lesser sum was agreed, then the principle in Costello would clearly have applied in order to prevent a claim in unjust enrichment undermining the parties’ contractual freedom. But that was not was happened. As Asplin LJ summarised, ‘The contractual arrangements did not extend to the circumstances which arose and, accordingly, there was no contractual allocation of risk.’ [37]

Thus, on the second appeal ground, the judge had been wrong to apply the principle in Costello, and as such, there was no need for the third appeal ground to be considered.

Channelling a different spirit

Might the same result have been achieved by means of an implied term rather than a claim in unjust enrichment? With the benefit of hindsight, the answer is a resounding yes. As Asplin LJ put it, such a term: ‘would not contradict the express terms of the Agreement, is capable of clear expression, is so obvious that it goes without saying and is necessary to give the Agreement business efficacy and it lacks commercial coherence without it.’ [41]

In his concurring judgment, (mystic) Males LJ agreed that the contract did not stand in the way of a remedy in unjust enrichment, and indicated that the claim could also have been framed in quantum meruit, ie for a reasonable sum in respect of the services supplied. In his view it made no difference, on the facts of this case, which approach was taken.

Davis LJ went further however, opining that on a correct legal analysis, the case should not have been regarded as one of unjust enrichment, but as one of reasonable remuneration being payable as a matter of quantum meruit pursuant to an implied term. He explained:

“…in terms of conceptual approach, and even though both kinds of claim ultimately form part of the law of obligations, there is a real difference. For claims of unjust enrichment ordinarily operate outside any subsisting contract and focus on the benefit said to have been received by the defendant; whereas claims for payment by way of quantum meruit pursuant to an implied term operate within a contractual setting and focus on a sum claimed to be due to the claimant. I consider that the present case is to be analysed as a quantum meruit case just because I consider that it was inherent in - that is to say, an implied term of – the introductory agreement which was concluded that the appellant would be reasonably remunerated for successfully introducing a purchaser (even if at a price less than £6.5 million).” [75]

Numerology

The final ground of appeal concerned the value of the benefit conferred by Mr Barton upon Foxpace. Although, having rejected both claims at first instance, HHJ Pearce did not need to decide the value of the benefit, he did indicate how he would have determined it in a parallel universe where Mr Barton succeeded, arriving at a value of £435,000.

One does not have to be psychic to predict that on appeal, Mr Barton would argue that the fee should be higher. Unfortunately though, Lady Luck was not on his side. The Court of Appeal agreed with HHJ Pearce that there was good reason not to place any weight on the figure of £1.2 million, as it was not reliable evidence of the objective value of Mr Barton’s services. Endorsing the judge’s approach on this point, Asplin LJ noted that he had based his conclusion on the only reliable evidence as to market value available ie the fees that Foxpace had agreed with introducing agents on similar transactions. She also added that it was likely that the same conclusion would have been reached had the claim been framed by way of an implied term for reasonable remuneration. Davis LJ also noted that his conclusion here would not have been any different had the claim been formulated as a quantum meruit claim.

Twist of fate

Thus, although the Court of Appeal unanimously allowed Mr Barton’s appeal, the value of the fee awarded to him (only £35,000 more than that already offered to him by Foxpace) did not make his venture a fortuitous one. This was arguably an ill-fated endeavour for all concerned…hindsight is a wonderful thing.

The complexity in the case arose out of the fact that, as the first instance judge found, the parties simply had not turned their minds to the set of circumstances that actually arose, ie a sale at a sum other than the sum contemplated. There had been no allocation of risk, as required to engage the Costello principle; merely an absence of allocation because the contract failed to address the circumstances in question. The Court of Appeal was mindful of the distinction between interfering where the parties have contractually allocated risk, and where there has simply been no such allocation because the circumstances that have arisen are ones to which the contractual arrangements did not extend.

The case therefore serves to emphasise the importance of parties having the foresight to consider and address alternative possible outcomes at the time of negotiating an agreement. While 20/20 vision of all possible outcomes might not be feasible, the parties should at least seek to contractually address the consequences should certain foreseeable situations arise. Relying on telepathy to assume that the parties are on the same page is ill-advised…

The case also emphasises the importance of terms being written (in the stars) down on paper, in order to minimise the chances of an unforeseen outcome. This is especially important because such cases are likely to be fact-specific – Asplin LJ emphasised that: ‘contracts of this kind do not follow a single pattern and it is important in each case to ascertain the meaning of the express terms.’ [20]

As for practitioners advising on such claims, our sixth sense prophesises an increase in implied term/quantum meruit claims pleaded in the alternative to arguments based on unjust enrichment.

Cases cited:

Barton v Gwyn-Jones & ors [2018] EWHC 2426 (ch); [2019] EWCA Civ 1999

Benedetti v Sawiris & ors [2013] UKSC 50

Costello & anor v MacDonald Dickens & Macklin (a firm) [2011] EWCA Civ 930

Firth v Hylane Ltd [1959] EGD 212

Luxor (Eastbourne) Ltd v Cooper [1941] AC 108

Wood v Capita Insurance Services Ltd [2017] UKSC 24

A version of this article was published in The Commercial Litigation Journal in January 2020.


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