Court of Appeal finds no claim for unjust enrichment where it contradicts parties allocation of risk
Dargamo Holdings Ltd and another v Avonwick Holdings Ltd and others  EWCA Civ 1149
What is the interplay between unjust enrichment and contract, and when can an unjust enrichment claim succeed?
The key takeaway
Unjust enrichment has a limited role to play where there is a valid, performed contract. Parties will rarely be able to circumvent clear contractual terms by claiming they have not received all of the consideration expected.
Avonwick agreed to sell to Dargamo and another purchaser (the Third Party) its 34% interest in a Ukrainian company, by transferring its shares in an English holding company (Holdco) to them. Dargamo and the Third Party sought to acquire additional assets (the Other Assets) from Avonwick, including its interest in two additional companies (the Other Shares).
The share purchase agreement (SPA) provided that Dargamo and the Third Party would each receive 50% of the shares in Holdco for $950m. The SPA expressly provided for the consideration of the shares but did not mention any other assets. By the time the SPA was signed, the parties had also exchanged drafts of a Memorandum of Understanding and a side letter providing for the sale of the Other Assets (including the Other Shares) by Avonwick to Dargamo and the Third Party, but neither document was executed. However, the parties accepted that $200m of the $950m purchase price under the SPA was attributable to the Other Assets, with $165m of that sum relating to the Other Shares.
The Third Party later acquired 50% of the Other Shares, after paying a further $13m to Avonwick as “technical consideration” (said to be required under Ukrainian law). Dargamo refused to pay additional “technical consideration” without assurances that Avonwick would reimburse the payment, and also made no attempt (so Avonwick claimed) to sign a separate SPA for the sale of some of the Other Assets. As a result, Dargamo did not receive its portion of the Other Shares.
Amongst various other claims between the parties, Dargamo brought a claim in unjust enrichment for restitution of the portion of the purchase price that it claimed was attributable to the Other Shares ($82.5m), on the basis that there had been a total failure of consideration. The claims, including the unjust enrichment claim were dismissed at first instance. However, Dargamo was given permission to appeal the unjust enrichment claim.
Following a review of the law of unjust enrichment, the Court of Appeal dismissed the appeal and found that there was no failure of basis amounting to an unjust factor. The parties were merely being held to express terms of a contract that they chose to enter into and comply with.
The interplay between contract law and unjust enrichment was problematic but the two played distinct but complementary roles. Unjust enrichment (and an unjust factor) could not be relied upon to override valid and subsisting legal obligations for one party to confer a benefit on the other, particularly where to do so would contradict express terms of a contract (the so-called “Obligation Rule”). Only in rare cases will an unjust enrichment claim succeed and a failure of consideration be made out, despite the performance of a valid contract.
Why is this important?
This case is likely to be a leading authority for this complex area of law, given its detailed consideration of unjust enrichment principles, its interplay with contract and the concept of “failure of basis”. It is also a reminder that an unjust enrichment claim does not provide a means of subverting an agreement. Commercial contracts should expressly set out all agreed terms, including any common expectations or understandings about what the contract provides for, in an executed written document.
Any practical tips?
Make sure the written contract covers all the key issues! In particular:
- cover all assets - If any assets are left unaccounted for, it may be difficult to recover monies paid. Where there is good reason not to include all assets within a specific contract, those assets should be dealt with in another agreement and the reasons for doing so expressly explained in the contract.
- include clear price apportionment where multiple assets are involved – especially where the sale of a business is structured as the transfer of assets and goodwill, rather than shares in a company.
- Clarify what happens if the purchase price is paid but assets are not transferred – for example, an express contractual right to be repaid part of the purchase price (or better still for payment to be linked to transfer).