DIRECT AND INDIRECT ENRICHMENT

(A) DIRECT ENRICHMENT

If the requirement that an enrichment was obtained at the expense of the claimant is interpreted strictly, the claimant can only establish that the defendant has been unjustly enriched where the defendant has obtained a benefit directly from the claimant.^[1] It follows that, where the defendant obtains a benefit indirectly via a third party, the defendant will not have been enriched at the claimant’s expense. So, for example, if the claimant pays ?1,000 to X intending that X will pay that money to Y, but the money is mistakenly paid by X to the defendant, the defendant would be enriched at the expense of X rather than at the expense of the claimant, even though the defendant’s gain is mirrored by an equivalent loss suffered by the claimant.

This strict interpretation of the ‘at the claimant’s expense’ requirement appears to be generally recognized as a fundamental principle of unjust enrichment claims.^[2] It follows that the claimant can only bring an unjust enrichment claim against the direct recipient of a benefit, although restitutionary claims founded on other principles might be available against the indirect recipient. This principle of direct enrichment was recognized by Etherton LJ in MacDonald Dickens and Macklin v Costello,^[3] who held that the defendants, who were directors and shareholders of a company, could not be considered to have been enriched at the claimant’s expense where the claimant had provided a service to the company, because the enrichment to the defendant would only have been provided indirectly by the claimant. The principle which prevents the claimant from suing the defendant who has been indirectly enriched can be called the ‘rule against leapfrogging’.

The reason for the imposition of this requirement of direct connection between the defendant’s gain and the claimant’s loss is fundamental to our understanding of the action to reverse the defendant’s unjust enrichment. Crucially, where the claimant seeks to obtain restitution for unjust enrichment the action depends on the claimant showing that he or she has a stronger claim to the value received by the defendant than the defendant has to retain that value. But where, for example, the claimant pays money to a third party who pays the same amount to the defendant, the claim for restitution is much weaker. The enrichment obtained by the defendant would then have been obtained directly from the third party, and so the defendant will have been enriched at that party’s expense rather than the claimant.^[4] Consequently, as a general rule, the claimant will not be able to establish standing to sue the defendant because the defendant’s enrichment can be characterized as being too remote from the claimant.

In an important contribution to the understanding of this need for direct connection, Tettenborn has provided a further explanation of why a defendant who has received a benefit from a third party should not generally be required to make restitution to the claimant,^[5] namely that the defendant will have lawfully received the benefit from the third party when the benefit was the unencumbered property of that person.⁹ It follows that, where the defendant has lawfully received a benefit, he or she cannot be considered to be unjustly enriched. The recognition of this principle of lawful receipt is to be welcomed, both because it explains why a requirement of direct connection should generally be recognized and also because it is consistent with a policy of general application in English law, namely that it is important to encourage transactional security by protecting those who are involved in permissible activities.^[6] Ultimately, where the defendant has lawfully obtained a benefit from a third party, albeit that it was derived indirectly from the claimant, it is not for the law of restitution to unsettle the defendant’s security in the lawful receipt of the benefit. Further, Tettenborn’s thesis is consistent with the fundamental principle that, where there is a legal basis for the defendant’s receipt, a claim in unjust enrichment will be barred.^[7] If no ground of restitution can be established as regards the transfer between third party and defendant, it follows that the defendant will not be unjustly enriched. If such a ground of restitution can be identified, such as where the third party paid the money to the defendant by mistake, the defendant will be unjustly enriched but at the expense of the third party and not the claimant.

Whether the defendant has directly received a benefit from the claimant may require careful analysis of the facts, especially where the enrichment is a non-money benefit. This is illustrated by the facts of Rowland v Divall,^[8] where the vendor purported to sell a car to the purchaser, when the car actually belonged to a third party. After the purchaser had used the car for a few months, he discovered that the vendor had not been able to transfer title to him and he successfully recovered the purchase price from the vendor. At first sight it seems that the vendor might have had a restitutionary claim against the purchaser, who had clearly benefited from the use of the car, and this benefit appears to have been obtained directly at the vendor’s expense, simply because the car had been obtained directly from the vendor. But that is not strictly correct. The benefit had in fact been obtained at the expense of the true owner, since it was the true owner of the car who suffered the real loss through the purchaser’s use of the car.

Sometimes the defendant may be considered to have received a non-money benefit directly from the claimant even though the claimant only dealt with a third party. The best example of this is where the claimant has discharged the defendant’s liability to a third party by paying off a debt owed by the defendant to that party. As long as this payment was effective to discharge the debt,^[9] the defendant can be considered to have been enriched directly at the claimant’s expense, even though the defendant had not received any money from the claimant. This is because the relevant enrichment is the discharge of liability rather than the receipt of payment, such that the discharge of the defendant’s liability can be considered to be a direct result of the claimant’s payment.

The question whether an enrichment was received directly or indirectly at the expense of the claimant when a debt is discharged is particularly well illustrated by the decision of the House of Lords in Banque Financiere de la Cite v Parc (Battersea) Ltd.^[10] The claimant had entered into a refinancing transaction involving the payment of a sum of money to the chief financial officer of a holding company, which was transmitted to a subsidiary of that company to discharge a debt owed by the subsidiary. It was conceded that the discharge of this debt enriched the defendant, another subsidiary of the holding company which was also owed money by the first subsidiary, because the discharge of the first debt meant that the defendant’s debt was more likely to be repaid.¹⁵ One of the questions for the House of

Lords was whether this enrichment could be considered to have been at the claimant’s expense, when the money paid by the claimant had been paid to the chief financial officer rather than to the first subsidiary directly. The reason the transaction had been structured in this way was to avoid the need to report the transaction to the Swiss financial authorities. Consequently, the court was prepared to consider the realities of the case and the role of the financial officer was ignored, so that the benefit obtained by the defendant, namely the reduction of the other subsidiary’s liabilities, was considered to have been obtained directly at the claimant’s expense.^[11]

• [1] Re Byfield [1982] 1 All ER 249, 256 (Goulding J); Kleinwort Benson Ltd v Birmingham CC [1997] QB 380,394 (Saville LJ), 400 (Morritt LJ); Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch),[2013] Ch 156, [97] (Stephen Morris QC).
• [2] See, in particular, The Colonial Bank v The Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App Cas84, 85 (Lord Hobhouse).
• [3] [2011] EWCA Civ 930, [2012] QB 244, [20].
• [4] See P Millett, ‘Tracing the Proceeds of Fraud’ (1991) 107 LQR 71, 79.
• [5] A Tettenborn, ‘Lawful Receipt—A Justifying Factor?’ (1997) 5 RLR 1. 9 Ibid, 12.
• [6] Ibid, 7. 2 See Chapter 7, below. 3 [1923] 2 KB 500. See further p 319, below.
• [7] 13 This is discussed at p 235, below. 5 [1999] 1 AC 221.
• [8] 15 The first debt was secured by a first legal charge over the subsidiary’s property and the defendant’s debt was
• [9] secured by a second legal charge over the same property. Consequently, the discharge of the first debt meant that
• [10] the defendant’s charge became the first legal charge so that the defendant’s position was much more secure.
• [11] See also Filby v Mortgage Express (No 2) Ltd [2004] EWCA Civ 759, [62] (May LJ).