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Sender:
Duncan Sheehan
Date:
Mon, 18 Aug 2003 09:51:03 +0100
Re:
Illegality as a defence to restitutionary claims

 

Dear all,

My initial thought is that the answer is no. The benefit is not conferred under the contract. A confers a benefit on B of £X + VAT. If we stop there B is enriched at the expense of A (fairly obviously). That's B's VAT liability which he pays. If we stop there, I wonder whether that is a disenriching change of position. B is no longer enriched by the VAT money because he has paid it over to Customs in pursuance of his liability. It is not that B was not enriched. He was. We are concerned here with value received, subject to defences. At that point therefore B can only be liable in unjust enrichment to the tune of £x. A recovers the VAT. As Simon McDonald says the payment loops round in a big circle and ends back at A. Whether B is enriched or not ceases to be an issue, because any enrichment is not at the expense of A.

A is required to repay the VAT to customs. That in essence puts us back in the position where A never reclaimed the VAT. But at that point I do not see how A can reclaim the VAT money from B. Certainly he may (or may not) have a claim against B for the £x, but B can claim he has changed his position by accounting for the VAT liability to Customs & Excise.

Customs sets off the VAT against B's other VAT liabilities. I agree that B is now enriched at the expense of A because A has effectively paid B's VAT liability, or some of it. I don't think that can be an enrichment conferred under the contract. Initially yes it was. That enrichment was "rubbed out" if you will and now a separate enrichment has arisen. We could then say that A has effectively paid another's debt, and deal with the matter accordingly. I am not, however, as sanguine as Simon McDonald that A must be able to recover. If the demand for the repayment of the VAT reclaim by A is linked to the illegality (and punishment therefor) could we not argue that it defeats the point of the Customs claim against A to allow A to get the money back from B? If the Customs claim is wholly unrelated to the illegality then yes I can see no reason not to allow recovery.

 

Dr Duncan Sheehan
Postgraduate Admissions Officer
Norwich Law School
University of East Anglia
Norwich NR4 7TJ
United Kingdom

-----Original Message-----

On Behalf Of Simon Macdonald
Sent: Friday, August 15, 2003 5:28 PM
Subject: [RDG:] Illegality as a defence to restitutionary claims

Dear Colleagues

I believe the present state of the law (in spite of law comm. recommendations) to be that illegality stands as a defence to a restitutionary claim except where the parties are non in pari delicto.

This would seem to bite in relation to benefits conferred under the illegal contract. I wonder whether the benefit in the following scenario has been so conferred, or whether the unjust enrichment, though causally linked to the illegal contract, is remote enough to allow restitution?

1. A confers a benefit on B under an illegal contract of £x plus VAT. B accounts to customs for the VAT. A reclaims the VAT.

2. Following official discovery of the illegality, A is required by customs, for whatever reason, to repay to customs the VAT reclaimed by it.

3. customs then offsets that VAT against entirely separate VAT liabilities owed by B. B is, surely, unjustly enriched at the expense of A, since A has effectively paid part of B's VAT bill.

So, the VAT element of A's initial payment doesn't represent a benefit for B (as the payment simply goes round in a circle back to A). The benefit only arises when customs intervenes as if to reverse the cyclic transfer, but stops halfway.

So was the benefit which unjustly enriches B transferred under the illegal contract? Presumably if the answer is no, there is nothing to stop A seeking restitution against B. Alternatively and even if the answer is yes, what public policy objective is achieved by not allowing restitution. Say in the above scenario both A and B have paid heavy fines vis a vis the illegality. Public policy would be better served by a status quo re the VAT and both with their fingers burnt re the illegal purpose surely? As it stands, B is not only enriched to A's detriment, but the hardship intended by the fines he pays to the state is undermined.

I would be very interested in any thoughts.

A fine weekend to you all

Simon MacDonald


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