Conscience or Unjust Enrichment?: The Emperor’s Old Clothes: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd

By Professor Graham Virgo
Downing College, University of Cambridge

Hills Industries Case Page

The central premise of C J Sansom’s excellent novel Dominion, is that Britain surrendered to Germany in 1940 and became a satellite state of the Third Reich. Sansom describes a very different world as a consequence of this surrender, but one populated by real people whose lives were put on a very different course by that single momentous event. Such counter-factual, ‘what if?’, history is fascinating. The same game can be played with the law of restitution. What if England had not recognised the law of unjust enrichment, developed from Lord Mansfield’s judgment in Moses v Macferlan (1760) 2 Burr 1005, 97 ER 676 via the misconceived implied contract theory, and retained the equitable principles which originally underpinned restitutionary claims? But that question can be answered without resort to fictional speculation. The answer is to be found in Australia. The most recent decision of the High Court of Australia in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 reveals the nature of this counter-factual (from an English perspective) anti-unjust enrichment, pro-Equity world (see also Elise Bant’s post here). But when that world is investigated rather more rigorously this law of restitution is, to mix the literary allusions, nothing more than Hans Christian Andersen’s Emperor, albeit one who thinks he is wearing old clothes, but he is actually wearing nothing at all.

The nature of Anglo-Australian judicial and academic commentary about the law of restitution over the last 20 years has not necessarily been marked by moderation of language and mutual respect. My own views about Australian developments in the law of restitution are disapproving, but before I express that criticism from the other side of the world, I must emphasise my sincere respect and admiration for the Australian judiciary and legal academy. If only more judges in England had the same engagement with law as an academic discipline as do the Australian judiciary. Australian law students, as I know from teaching so many such students the Law of Restitution in the LLM at Cambridge, are impressive in their depth of legal knowledge and critical engagement with issues of doctrine and theory. Despite that, something has gone wrong with the state of the law of restitution in Australia. As someone who writes on both Restitution and Equity I am not, I hope, somebody who is so taken in by the potential of unjust enrichment that I consider it to have extensive explanatory force, such that other long-established legal doctrines must be subsumed within it. I understand and respect Equity. It continues to have a profound importance to many aspects of private law. But reference to Equity requires precision of analysis and awareness of principle. That is what uncharacteristically appears to be lacking in the recent Australian jurisprudence concerning restitution.

The development of restitution in Australia over the last 30 years has involved significant changes of direction. In Pavey and Matthews Pty Ltd v Paul [1987] HCA 5, the High Court explicitly recognised unjust enrichment. Refinement of principle followed. But it was Gummow J in particular in Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68 who put the law on a different, perhaps original, course. In rejecting the role of unjust enrichment as a unifying principle he emphasised instead the equitable origins of restitution in Moses v Macferlan, from which he concluded that the law of restitution should be founded on unconscionability. Confirmation of this volte face followed in a number of decisions, including Farah Construction Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 and Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27. In the decision of the High Court in Equuscorp Pty Ltd v Haxton [2012] HCA 7, French CJ, Crennan and Kiefel JJ, at [30], appeared to signal a return to the recognition of unjust enrichment as having a significant taxonomical role in Australian law. But the decision of the High Court in Hills Industries, the first significant decision of the Court on restitution without Gummow J, has firmly steered the law back to Equity and unconscionability. As the plurality (Hayne, Crennan, Kiefel, Bell and Keane JJ) recognised at [78], ‘the concept of unjust enrichment is not the basis of restitutionary relief in Australian law’ and, as Gageler J said at [135], ‘unjust enrichment is not a definitive principle in Australian law’. Rather the ‘enquiry is conducted by reference to equitable principles’, at [78], namely whether the retention of monies paid to the defendant can be considered to be inequitable (French CJ at [1]) or unconscionable (the plurality at [65]).

Conscience and unconscionability are fundamental to Equity. But if conscience determines whether restitutionary remedies will be awarded, what does it mean for these purposes? Careful reading of all the judgments in Hills Industries provides very little assistance in this regard. In fact, conscience and unconscionability can be interpreted in four distinct ways:

  1. It refers to the subjective conscience of the defendant, in the sense of what the defendant actually knew or suspected.
  2. It refers to the objective conscience of the defendant, in the sense of what the defendant should have known or suspected.
  3. It refers to the conscience of the court generally, or the judge specifically, in that the court determines on the facts of the case and with reference to recognised principles whether the defendant ought, as a matter of good conscience, make restitution to the claimant.
  4. It is simply a rhetorical device behind which the judge can hide by asserting that a particular result is justified by good conscience but without needing to go further by explaining what that might mean.

The first two definitions of conscience seem inappropriate to the law of restitution, even in Australia. Notions of knowledge and suspicion, actual or constructive, embody fault terms and liability to make restitution does not require proof of fault on the part of the defendant. Of course, it does not follow that such notions of fault are irrelevant to the assessment of whether making restitution is a matter of good conscience. So the choice appears to be between the third and fourth interpretations of conscience. The plurality recognised that ‘conscience’ does not involve subjective evaluation of the justice of the case, presumably referring to the judge’s own perception of justice, rather than the defendant’s: [76]. The plurality purported to identify equitable principles and doctrines to assess conscience, which suggests that the third interpretation of conscience applies. But the only indication as to what these principles and doctrines are involves reference to ‘a construct of standards and values’ ([76]) or, as French CJ recognised at [16], a legal standard ‘informing guiding criteria for particular classes of case’. But there was no attempt to identify what these standards, values or criteria might be, save when considering the defence of change of position. Since the High Court appears unwilling to identify such principles to establish liability, it might actually be the fourth interpretation of conscience which applies. The judge determines what he or she considers to be conscionable by reference to those standards and values which he or she considers to be relevant. But will this do? Whilst the role of judicial discretion is essential to ensure that justice is achieved, if the resort to justice is to be defensible and predictable, there need to be identifiable principles to guide that discretion and to ensure that like cases are treated alike, for the benefit of the parties, the advisers and, if the case goes to trial, the judge.

Might unjust enrichment as a principle have an appropriate role in determining what conscience demands? Following the decision of the High Court in Hills Industries, the continued significance of unjust enrichment in Australia remains unclear. On the same day as the High Court handed down judgment in Hills Industries, Edelman J handed down judgment in Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd [No 3] [2014] WASC 162. He bravely, but ultimately unconvincingly, sought to carve out a role for unjust enrichment in the light of what was said in Hills Industries. He considered, at [51], that unjust enrichment is not a direct source of liability in Australia, but has a useful function as a taxonomic category in assisting understanding, in the same way as ‘torts’ is a useful descriptive category but does not identify the underlying cause of action of a particular tort. Nevertheless, he went on to identify the core features of the unjust enrichment formula, involving enrichment which is unjust and at the plaintiff’s expense, which provides the reason for restitution to be awarded. But does this not constitute the essence of an underlying cause of action, albeit with the additional need to identify recognised factors which render the enrichment unjust? Without the elements of this cause of action, what is it which triggers the restitutionary response? If it is unconscionability in the fourth sense then we are left with a claim without definition, save for the judge being given carte blanche to determine the just result by reference to standards and values which he or she is allowed to determine. If it is unconscionability in the principled third sense, we are still left with the need to identify what those principles are. The principle of unjust enrichment would serve that purpose, but then that is elevating unjust enrichment beyond a mere ‘label’, ‘concept’ or ‘notion’ to something else which gives meaning to the notion of unconscionability. That still preserves the equitable foundation of the claim, but makes sense of it by incorporating principled unjust enrichment.

In fact, this is not very different to the interpretation of unjust enrichment in England. Before the point when the law of restitution in England and Australia diverged (and it is unclear precisely when that was, perhaps when England recognised unjust enrichment for the first time in 1991 or Australia returned to conscience in 2001 or much earlier in the nineteenth century) there was a common equitable understanding of that law, specifically through the action for money had and received. Both jurisdictions can trace their law of restitution back to Moses v Macferlan where Lord Mansfield specifically founded the action for money had and received on the principle that the payee’s retention of the money would be against conscience: (1760) 2 Burr 1005, 1011. Subsequently in England conscience was emphasised as being a key justification for the claim. For example, in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4, 61 Lord Wright described unjust enrichment as preventing ‘a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep.’ It is true that since Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 English law has focused explicitly on the unjust enrichment, identification of the elements of which has become a matter of ritual incantation. But even so the role of Equity remains relevant. This is especially true of the defence of change of position, which was the matter in dispute in Hills Industries. In England that defence was recognised and defined in general terms in Lipkin Gorman. Lord Goff said, at 579:

[W]here an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution.

Although Lord Goff used the language of injustice this could easily be substituted with unconscionability without changing the meaning, and this formulation reflects the approach of Lord Mansfield in Moses v Macferlan to the identification and definition of defences. In Lipkin Gorman justice or conscience was used in the third sense, since Lord Goff purported to identify some principles to determine what justice meant, principles which have been clarified subsequently. So the change of position must be causatively linked to the receipt of the enrichment and the defendant’s change of position must have been in good faith: see Derby v Scottish Equitable plc [2001] 3 All ER 818. Subsequently Birks argued that the change of position defence should be confined to quantitative disenrichment, such that the defence could only succeed to the extent that the change of position reduces the defendant’s gain: Peter Birks, Unjust Enrichment (Oxford University Press, 2nd ed, 2005) 208. This disenrichment interpretation of change of position, which has not been clearly recognised in England, was rejected by the High Court in Hills Industries. The Court actually did attempt to identify some principles to assess in the interpretation of the defence by reference to conscience, notably by considering whether the defendant relied on the receipt and thereby suffered an irreversible detriment: French CJ at [24], relying on Elise Bant, The Change of Position Defence (Hart Publishing, 2009). It followed in that case that the defendants’ decisions not to pursue claims against the claimant and consenting to set aside judgments against the claimant, following the receipt of a payment which proved to be mistaken, did constitute a complete defence to the restitutionary claim even though the value of that change of position could not be quantified precisely to constitute a disenrichment, because this was considered to constitute an irreversible detriment to the defendants. There is no reason to think that an English court would reach a different result on the same facts. Of course, in England the elements of the unjust enrichment claim would need to be established first, but they were clearly satisfied on the facts since the defendant had been enriched by the receipt of money paid as a result of the claimant’s mistake. In Australia it was first necessary to show that the defendant’s receipt of the money was against conscience. But surely that could only be established by proving that the defendant had received money paid by the claimant as a result of a mistake. In both jurisdictions change of position would be established as a complete defence and in both cases this would render an obligation to make restitution unjust or, to put it another way, against conscience.

As a matter of form the divide between English and Australian restitution law seems more significant than ever following the decision of the High Court in Hills Industries, with England relying on unjust enrichment and Australia on conscience. But as a matter of substance the difference is vanishingly small. In England, unjust enrichment operates to establish whether the receipt of the enrichment is unconscionable in a principled sense, whereas in Australia, unconscionability can only be interpreted in a principled way with reference to the principle of unjust enrichment. As French CJ rightly said at [16], ‘legal principles of restitution or unjust enrichment can be equated with seminal equitable notions of good conscience’. But if that is not accepted and unconscionability is to be interpreted in the fourth rhetorical sense then, like the boy in the crowd pointing at the naked emperor, I point at the Australian law of restitution purportedly cloaked in the old language of conscience and whisper from the other side of the globe that there is nothing there.

AGLC3 Citation: Graham Virgo, ‘Conscience or Unjust Enrichment?: The Emperor’s Old Clothes: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd’ on Opinions on High (19 May 2014) <http://blogs.unimelb.edu.au/opinionsonhigh/2014/05/19/virgo-hills-industries/>.

Professor Graham Virgo is Professorial Fellow in English Private Law at the University of Cambridge and a Fellow and Senior Tutor at Downing College. His research focuses on the law of restitution, contract, equity and trusts and criminal law and his recent publications includes The Principles of Equity and Trusts (Oxford University Press, 2012). In 2014 he will be a Miegunyah Distinguished Visiting Fellow at Melbourne Law School.

1 thought on “Conscience or Unjust Enrichment?: The Emperor’s Old Clothes: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd

  1. Pingback: Graham Virgo, ‘Conscience of Unjust Enrichment?: The Emperor’s Old Clothes: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd‘ | Private Law Theory - Obligations, property, legal theory

Comments are closed.