(iii) The Basis Must Have Failed Totally

Regardless of the nature of the basis which forms the condition for the transfer of a benefit to the defendant, restitution of the benefit will depend on whether the basis has failed totally, save where one of the other recognized grounds of restitution is applicable.

(1) Determining Whether the Basis Has Failed

The proper test for determining whether the basis has failed was authoritatively determined by the House of Lords in Stocznia Gdanska SA v Latvian Shipping Co,^[1] where Lord Goff recognized that: ‘the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.’^[2]

Although this dictum related to a case involving performance of a contractual obligation, it is of relevance to all types of basis. The key point is that the basis will not have failed totally if any part of the condition by reference to which the claimant has transferred a benefit to the defendant has been satisfied.^[3] There is no de minimis exception to this bar.^[4] Typically the condition will be satisfied by the receipt of any benefit by the claimant, but, as Lord Goff acknowledged, this will not always be the case.^[5] If the basis was only fulfilled where the claimant had received a benefit, there would be many cases where the basis for the transfer of the enrichment could never be satisfied. For example, if the claimant paid the defendant to paint the house of the claimant’s daughter, the claimant would never receive a benefit personally. The importance of Lord Goff’s dictum is that, in the contractual context at least, whether the basis has failed totally will depend on the terms of the contract, objectively construed.^[6]

But Lord Goff’s dictum cannot be regarded as an exclusive definition of the notion of basis for the purposes of determining whether it has totally failed. This is because the basis need not involve the performance of a promise by the defendant, but may simply involve the occurrence of an event or the existence of a state of affairs.^[7] Consequently, although Lord Goff’s dictum expands the notion of basis for the purposes of the law of restitution, it cannot be treated as a complete definition of that concept. The definition of basis which is appropriate in each case will ultimately depend on what it is that the claimant had bargained for under the transaction^[8] or what condition had been accepted and, in a contractual context at least, whether the basis has failed will depend on whether the defendant had performed any part of his or her ‘essential obligation’ under the contract.^[9] Consequently, the nature of the bargain between the parties is of decisive importance when determining whether or not the basis has failed totally.

The significance of the transaction to the interpretation of total failure of basis is illustrated by those contracts consisting of obligations which are characterized as entire. These are contracts where the obligation of one party to perform does not arise until the other party has fully performed their contractual obligations. So, for example, if the claimant paid the defendant in advance under a contract where the defendant’s obligation is entire, if that defendant has not fully performed the obligation as promised the basis for the payment will have failed completely, because the condition for the defendant’s retention of the money paid is full performance of the obligation under the contract, regardless of the fact that the claimant may have received some benefit from the defendant under the contract.^[10] Although this might appear unjust, it is consistent with the fundamental principle that, where the contract has allocated the risk of non-performance to one party, here the defendant, it is not for the law of restitution to subvert that allocation. In the context of an entire contract the notion of basis is therefore defined to mean only full performance of the defendant’s contractual obligation.

(2) Distinguishing Between Contracts to Sell and Contracts to Build and Sell Since the effect of Lord Goff’s dictum in Stocznia is that the determination of whether the basis has failed totally depends on the terms of the contract, some difficult questions of contractual construction can arise. This has been particularly significant in the context of contracts in which the defendant agrees to sell goods to the claimant which the defendant has made. It was recognized in Stocznia that, if the contract is construed simply as an agreement where the defendant promises to sell goods to the claimant, the claimant will be able to rely on the ground of total failure of basis only if he or she has not received any goods from the defendant, since the defendant had only promised to supply goods. Where, however, the contract is construed as one where the defendant agrees both to manufacture and supply the goods, the claimant will not be able to rely on the ground of total failure of basis once the defendant has started to manufacture the goods, because this is part of what the defendant had promised to do. It is irrelevant in this type of case that the claimant has not actually received a specific benefit from the defendant.^[11] Lord Lloyd in Stocznia did recognize that the distinction between these two types of contracts is fine, but it is decisive to the success or failure of the restitutionary claim.^{[12] [13]} This distinction between contracts of sale and contracts of service and sale can be illustrated by analysing two decisions of the House of Lords.

In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd⁶³ the claimant had entered into a contract with the defendant to purchase machinery, which the defendant manufactured. The claimant made an advance payment to the defendant. The contract was frustrated by the outbreak of the Second World War before the defendant was able to deliver the machines to the claimant, but after the defendant had incurred expenditure in manufacturing them. The House of Lords held that the claimant could recover the advance payments on the ground of total failure of basis, because it had not received any of the machinery which had been promised by the defendant. It was irrelevant that the defendant had incurred expenditure under the contract, simply because it was construed as an ordinary contract for the sale of goods. The manufacture of the machinery was not considered to form part of the basis for the claimant’s payment.^{[14] [15]}

This case can be compared with Hyundai Heavy Industries Co Ltd v Papadopoulos.⁶⁵ The claimant had contracted to build and sell a ship to the purchaser, who agreed to pay for the ship in instalments, with these payments being guaranteed by the defendant. The purchaser paid the first instalment, but defaulted on the second and consequently the claimant treated the contract as discharged. The claimant then sued the defendant on the guarantee for payment of the second instalment. It was unanimously held that the defendant was liable under the terms of the guarantee, but three of the judges recognized that the defendant’s liability as surety could also be founded on the fact that, despite the discharge of the contract, the purchaser remained liable to pay the second instalment because this liability had already accrued before the contract was discharged. In reaching this decision the judges assumed that the purchaser could not have claimed repayment of the instalments on the ground of total failure of basis. This was relevant because, if the purchaser had a right to obtain restitution of the payments had the instalments been paid, it would not have been liable to pay the instalments once the contract had been discharged. Whilst the majority recognized that, had this simply been a contract of sale rather than a contract to build and sell, the purchaser could have obtained restitution of the instalments which had already been paid on the ground of total failure of basis, it was accepted that, because this was a contract to build and sell, the basis would not have failed totally once the claimant had incurred expenditure in building the ship before the contract was discharged, even though the purchaser had not received any benefit from this expenditure. The result ofthis case can be justified on the ground that, since the purchaser was required to pay instalments to the claimant before receiving any specific benefit, this effectively meant that the purchaser was expected to bear the risk of any default, so that if the contract was discharged he or she should suffer the loss. If the contract allocates the risks in this way, it is not for the law of restitution to reallocate the risks.

(3) Contracts to Provide Services

Where the contract involves the provision of a service by the defendant the claimant will not be able to rely on the ground of total failure of basis if the claimant has benefited from this service in any way. The application of this principle is illustrated by the decision of the High Court of Australia in Baltic Shipping Co v Dillon,^[16] where the claimant had paid in advance for a 14-day cruise. On the eighth day the ship capsized and, although the defendant had repaid the fare in respect of the remaining six-day period, the claimant sought restitution of the whole fare which she had paid on the ground of total failure of basis. Her claim failed because the basis had not failed totally, since she had received the benefit of the cruise for eight days.

• [1] 52 Ibid, 588. Cf Taylor v Motability Finance Ltd [2004] EWHC (Comm) where Cooke J, [25], assumed thatwhere the claim arises from the supply of goods or services by the claimant, a restitutionary claim grounded on
• [2] total failure of basis will fail if the claimant has substantially performed the contract. This is inconsistent withthe essence of failure of basis, which is concerned with satisfaction of the basis by reference to which theclaimant’s performance is conditional, which will typically, but not invariably, involve performance by thedefendant.
• [3] Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB), [288](Stadlen J).
• [4] Ibid, save if the benefit received can be characterized as collateral or incidental. See p 319, below.
• [5] Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574, 588. In Giedo van der Garde BV v ForceIndia Formula One Team Ltd [2010] EWHC 2373 (QB), [264], Stadlen J said that it would be sufficient that thedefendant’s performance is ‘advantageous’ to the claimant in some way.
• [6] Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB), [268] (Stadlen J).
• [7] See p 310, above. Goodwin, ‘Failure of Basis in the Contractual Context’, 28, has argued that the total failurerequirement is unnecessary because the court identifies the objective basis for which a benefit was transferred,and, in the light of this construction, the basis will either fail or it will not. This does not reflect the analysis in thecases, but it does emphasize how many ofthe difficulties in this area can be resolved through careful constructionof the bargain between the parties. 57 See p 310, above.
• [8] Rover International Ltd v Cannon Film Sales Ltd (No 3) [1989] 1 WLR 912, 923 (Kerr LJ).
• [9] Guinness Mahon Co Ltd v Chelsea and Kensington LBC [1999] QB 215, 240 (Robert Walker LJ).
• [10] Giles v Edwards (1797) 7 Term Rep 181, 101 ER 920.
• [11] Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574, 589 (Lord Goff), 600 (Lord Lloyd).
• [12] See also Kerr LJ in Rover International Ltd v Cannon Film Sales Ltd (No 3) [1989] 1 WLR 912, 931.
• [13] [1943] AC 32. Today, the defendant’s loss could be apportioned under the Law Reform (FrustratedContracts) Act 1943. See p 358, below.
• [14] Ibid, 56 (Lord Russell), 64 (Lord Wright), and 83 (Lord Porter).
• [15] [1980] 1 WLR 1129. This case was affirmed in Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR574 which also concerned a contract to build and sell ships.
• [16] (1993) 176 CLR 344.