Restitution Discussion Group Archives
| Sender: |
Eoin O'Dell |
| Date: |
Mon, 5 Jan 1998 15:28:31 |
| Re: |
Rescission for undue influence |
Hello all:
I would like, as threatened, the return to the above
topic. I think I need to establish two propositions. First, that there
is an important structural separation determining the validity of a contract
and determining appropriate remedial responses if the contract is invalid.
And, second, that this important structural separation, whilst more difficult
to achieve where a contract is voidable and avoided rather than where
it is void, must nonetheless be achieved in that context as well. I do
not understand the first proposition to have excited any great disagreement,
but I will nonetheless attempt clarify my thoughts on that point again
here. The second goes to the nature of rescission and to the nature of
those matters which both generate a right or equity to rescind and also
constitute unjust factors. It is here that the main disagreements with
my original email lie, and I attempt to expand upon what I said then to
meet those disagreement. Much of what I have to say is in response to
various points made both to the list and privately. I hope that I have
at least provided an answer to everyone's main points (even if I have
not expressly named the person to whom the answer is directed or provided
an answer which will satisfy the particular objection raised).
(To meet a Steve Hedley point now, there is an important
structural separation determining the validity of a contract and determining
appropriate remedial responses if the contract is invalid, there are still
two questions, whether the same body of law is applied to the two questions
or whether two separate bodies of law are applied to them. I merely here
want to insist upon that separation, and then to consider the terms of
the second question).
First, then, there is an important structural separation
determining the validity of a contract and determining appropriate remedial
responses if the contract is invalid. For example, when the doctrine of
frustration says there is no contract, and the rules on failure of consideration
say that there may consequently be restitution, it is quite clear that
there are two separate doctrines in play, the contract doctrine (frustration)
and the restitution doctrine (failure of consideration).
When the doctrine of mistake in contract says there is
no contract, and the rules on mistake in restitution say that there may
consequently be restitution, though it may not be quite so clear, it is
likewise the case that there are two separate doctrines in play, the contract
doctrine and the restitution doctrine. In the case of mistake, this separation
is at least implicitly acknowledged by the fact the two relevant tests
are stated in two separate cases (mistake in contract: Bell v Lever Bros;
mistake in restitution: Barclays' Bank v Simms).
(Two points by way of qualification require to be made.
First it was assumed in Bell v Lever Bros that if the contract was void,
Lever Bros could recover their money back, but that is so because if they
had successfully fulfilled the terms of the contract test for mistake,
the same mistake would also have fulfilled the terms of the less restrictive
restitution test for mistake. (Had they chosen to do so, they could also
have argued that the mistaken belief in the existence of a valid contract,
when it was void, was a sufficient mistake, (a la Rover v Canon); or they
could have sought to rely on failure of consideration). Second, Lord Wright's
language in Norwich Union v Price seems to have conflated the two separate
tests, which seems rather against the essential point I am trying to make
here, but this speech has been criticised for just this reason, Burrows
106-107, Burrows and McKendrick p 104, McMeel 53, and even if it was the
case in 1934 in Price that that the test in contract for mistake was fundamentality
(as established two years before in Bell v Lever Bros) and the test in
restitution for mistake was also fundamentality, the modern acceptance
of the Simms causative mistake formulation has decisively altered the
position to that stated above, viz: that there is, in the context of mistake
- as elsewhere - a separation between the question of whether a contract
is valid and whether if not there can be restitution).
That separation makes it clear that there are two separate
enquiries. Has the contract gone off? If so, is there a consequent remedy
in restitution (by the application of the four enquiries) ? This separation
is *the* pre-eminent lesson of the Westdeutche litigation and the enormous
torrent of commentary thereon. In rejecting absence of contract as an
unjust factor, the commentators have made it clear that the absence of
the contract may be the occasion for restitution, but it is not the ground
for restitution. Thus, when a contract goes off, the four enquiries must
be answered in the affirmative before there can be a remedy in restitution.
My point is simply that the doctrine of undue influence
is the doctrine which removes the contract (as did the doctrine of frustration
or of mistake in contract in the above examples). The non-consensual nature
of any transfer under the now avoided contract is that which justifies
consequent restitution. Again, there are two different doctrines at play.
Many consequences flow from this separation. First, it
becomes clear that cases like Barclays Bank v O'Brien and its progeny
are about the first question, and are thus not restitution cases. Thus,
when a contract is set aside for duress at law or for undue influence
at equity, that is the relevant contract doctrine at work. When there
is a consequential remedy in restitution, that is because the test for
the unjust factor of coercion is independently satisfied.
Second, if there are two different doctrines, considerations
relevant to one need not be relevant to the other. For example, in the
context of undue influence, cases and commentaries discern two different
strands. In one, it is said to be concerned with the prevention of wicked
exploitation (Bigwood); in another, it is said to be concerned with remedying
vitiated consent (eg Birks and Chin). A possible reconciliation of these
views is that the former states the test to be applied in determining
whether a contract has gone off for undue influence; then latter then
states the test to be applied in determining whether there ought consequently
to be a remedy in restitution.
Furthermore, if there is no contract, simply a transfer
of benefit of which restitution is now sought on the basis of undue influence,
that is simply a claim to restitution for which the (Birks and Chin) restitution
test is appropriate.
Though Andrew Tettenborn and Steve Hedley gratifyingly
agreed with my last attempt to make this point, Lionel Smith and Peter
Birks did not. Lionel agreed that the invalidity of a contract and a consequential
restitutionary remedy are two separate matters, and that there may be
a different test depending on whether one seeks to set aside a contract
or an extracontractual transaction, but he nevertheless argued that
it does not follow that setting aside a contract
is not itself a matter of unjust enrichment. and Prof Birks, with his usual stridency, asserted that
Lionel must be right. ... Since the purpose
and effect of recognizing the right to rescind is to cause the bank to
surrender a benefit which it wants very much to hang on to but which the
law evidently regards as one which ought not to be retained, it does not
seem incorrect to attribute the right to rescind the security to unjust
enrichment However, I would still insist that the removal of the
contract and the consequent remedy in restitution are two separate questions,
and that this separation can be maintained even in the context of rescission.
This, therefore, raises the second point mentioned at the outset: the
nature of rescission and the nature of those matters which both generate
a right or equity to rescind and also constitute unjust factors.
Mistake at law or frustration will render a contract
void. A right to rescind at law or an equity to rescind in equity, if
exercised and not barred, will avoid a contract and allow restitution.
However, in the context of the void contract, having so determined, we
simply pose the four enquiries mandated by the principle against unjust
enrichment. The matter is not quite so simple in the context of voidable
contracts. Take, for example, the fact that in the traditional view, if
a right or equity allowing for rescission has arisen, it may be exercised
unless the plaintiff has delayed, the contract has been affirmed, third
parties have become involved or restitutio in integrum is impossible.
If any one of those four matters is made out, rescission is said to be
barred. The first three seem to be united by the fact that they are related
to the contract, in that they seem to bar rescission because the contract
has been relied upon. The fourth seems to embody - albeit incohately -
a restitutionary enquiry.
In the context of rescission, to exercise a right or
equity to rescind, benefit must be returned both ways, and if restitutio
in integrum is impossible, rescission will not be ordered. In the law
of restitution, the party seeking an order of restitution must be able
to make counter-restitution where appropriate; if it is appropriate, and
he cannot, then his claim will be barred: that is, if counter-restitution
is impossible, a plaintiff will not get restitution. There are obvious
similarities between "counter-restitution impossible" and "restitutio
in integrum impossible", so much so that Birks treats a leading case on
the one (O'Sullivan v. Management Agency) as a leading case on the other.
Furthermore, Cheese v. Thomas, a more recent example of similar flexibility
on the issue of restitutio in integrum not only lends support to Birks
attitude to the defence of "counter-restitution impossible" but also to
the proposition that rescission is a technique to effect restitution.
Indeed, Chen-Wishart's reading of that case has it that it embodies not
restitution with counter-restitution but restitution with change of position.
Thus, we can see the incohate four enquiries: the right
or equity allowing rescission is the seems to give rise to the unjust
factor, the right to have benefit returned is the consequent right to
restitution, subject to the duty to return benefit or make allowances
for failure to be able to have it returned, which are examples - respectively
- of the defences of counter-restitution impossible and change of position.
In which case, the fourth bar speaks to the nature of the remedy, and
it says that if there is no remedy in restitution, there should be no
remedy at all, and the contract should be kept on foot between the parties.
This seems harsh, but recent case law suggests that we need not state
it quite so harshly. In Mahoney v. Purnell, May J., in the name of not
making restitutio in integrum impossible, allowed rescission with equitable
compensation. Furthermore, the courts have always been prepared to allow
rescission on terms. Which means that the fourth bar speaks to the nature
of the remedy, and it says that if there is no remedy in restitution or
compensation, there should be no remedy at all. Since, if restitution
is not appropriate, compensation almost always will be, and the contract
can in any event be set aside on terms, this seems much more rational.
If the first three bars are seen as contract-related bars, this fourth
bar may thus be seen as a remedy-related bar, though it is now probably
merely the means by which the appropriate remedy is worked out. If no
contract-related bar is made out, thereafter, the position from the perspective
of restitution is just as it would be with a void contract: simply pose
the four enquiries and determine whether restitution ought to be available.
If not, consider whether equitable compensation ought to be available.
If not, consider whether the contract may be set aside on terms.
Thus, let a doctrine (mistake in contract at law, frustration,
ultra vires) render a contract void. Let another (mistake in contract
in equity, misrepresentation, duress, undue influence, unconscionability)
generate a right or equity to rescind which is not barred for a contract-related
reason. In either case, the position is now the same: for there to be
a remedy in restitution, the four enquiries must be posed and answered.
In the context of the void contract, the same facts may both be the reason
why the contract is void and why there is an unjust factor grounding restitution
(eg the same facts fulfil the definition of mistake in both contract at
law and restitution), but the prior contract enquiry determining the contract
to be void and the subsequent restitution enquiry are separate. In the
context of the voidable contract, the same facts may generate both the
right or equity to rescind and the unjust factor grounding restitution
(eg the same facts fulfil the definition of a relevant contract doctrine
and a related restitution doctrine) but the prior contract enquiry as
to the existence and exercise of a right or equity to rescind and the
subsequent restitution enquiry are as separable as in the void contract
example.
Thus, I disagree with Prof Birks characterisation of
the purpose of recognizing the right to rescind. For him,
the purpose and effect of recognizing the right
to rescind is to cause the bank to surrender a benefit which it wants
very much to hang on to ... For me, on the above analysis, the purpose of recognising
a right or equity to rescind is simply to determine the validity of the
contract.
Of course, if I saw the purpose of a right or equity
to rescind as Prof Birks sees it, then I would have to treat it as wholly
an element of the law of restitution. In fact, it seems that rescission
is one of the many elements of equity which restitution has not properly
considered. Some commentators seem to have perceived restitution as swallowing
it whole (Birks on the above analysis, McMeel on the basis of Steve Hedley's
last email), others have analysed rescission from a restitutionary perspective
without necessarily claiming it (I think this is an accurate characterisation
of the chapter in Mason and Carter), yet others think that it does not
matter a great deal whether rescission is regarded as restitutionary or
not (I think this is Prof Burrows' view). I see many aspects of the analysis
of rescission as contract-related (the determination of the existence
of the right or equity to rescind, and of the contract-related bars, are
a matter for contract, for the they determine whether or not there is
to be a contractual obligation or not); I see the restitution analysis
in the remedy-related bar as restitutionary on the basis of the four enquiries.
In which case, I do not think that restitution has claimed too much of
rescission (pace Hedley), it does not claim it all (pace Birks), it has
simply given a structure to one part of the analysis, so that (pace Burrows)
I think it matters a great deal how it is to be regarded.
Thus, in the contexts, first of void contracts, and,
second voidable contracts to which there is no contract-related bar to
rescission, there is an important structural separation determining the
validity of a contract and determining appropriate remedial responses
if the contract is invalid. In the case of void contracts, the doctrine
determining the validity of the contract is discrete (mistake at law,
ultra vires, frustration, and so on). In the case of voidable contracts,
rather more questions have to be asked: in what does the right or equity
to rescind consist and is it barred by a contract-related bar. Having
decided that a contract is void, or that it is voidable and not barred
by a contract-related bar, analysis have now reached the same stage. It
has exhausted the prior question of validity. The subsequent question
of remedy can now be addressed; the appropriateness of a remedy in restitution
in either case can be examined on the basis of the same four enquiries.
That, I think, is the proper way to regard the role of restitution in
the context of rescission in general.
Thus, in the context of undue influence, that supplies
the equity to rescind, and thus goes to the prior question of validity
rather than to the subsequent question of remedy. To the extent that Barclays
Bank v O'Brien is simply about the unduly influenced party's equity to
rescind a contract with a third party, it therefore goes to the prior
question of validity rather than to the subsequent question of remedy.
Happy new year to all,
Eoin.
EOIN O'DELL
Barrister, Lecturer in Law
Trinity College
Dublin 2
Ireland
ph (+ 353 - 1) 608 1178
fax (+ 353 - 1) 677 0449
Live Long and Prosper !!
(All opinions are personal; no legal responsibility whatsoever is accepted.)
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