Failed Contracts
Overview
Where a payment is made on the basis of an assumption, which later turns out to be incorrect, there may be a right of restitution or recovery, irrespective of whether there is a contract to regulate the payment. Most commonly, the failed assumption or expectation will involve a proposed contract. If monies are paid in the expectation that a contract will materialise, but this does not ultimately happen, there will generally be a right of recovery.
Where work is done or services are provided at the request of a customer or client, but no contract relating to the provision of the work is finalised, the person who has undertaken the work has a presumptive entitlement of restitution from the person who has requested the work. A deposit paid in expectation of a contract will be generally recoverable. Generally, the person seeking recovery must give credit for what he has received in return.
Although a person paying in advance is presumptively entitled to return of monies, he is not generally entitled to a proprietary remedy for the return of money. He cannot generally claim to be the owner of the monies, which is held by the payee. He is usually presumed to rely on the payee’s credit and take the risk that he may be unable to repay. Exceptionally where monies are paid for a very specific purpose, it may be possible to show a trust in favour of the payer and thereby obtain a property remedy.
Monies paid under a contract which is later “frustrated” are recoverable if there has been a total failure of consideration. In England and Northern Ireland, the law has been reformed by Frustrated Contracts Act 1943.
Intended but Failed Contract
If a person pays money towards a proposed purchase which not proceed or pays on a condition or supposition, the monies will be generally recoverable.
Where a person requests works to start even though there is no final contract, restitution will usually be available. If the work has begun it may be preparatory or part performance. If works are done as part of the performance it is likely to be recoverable as in restitution.
Where a party has received something of benefit (e.g. part delivery of goods, unfinished building), such as in a cancelled project, the proportionate part of the works must be paid for, provided that the contractor is not in default. A contractor who performs only in part cannot claim the contract price, where the partial performance constitutes a breach of contract.
Payments under failed Contracts
Generally, a contract cannot be bypassed by claiming in restitution. When a person fails to perform his obligations under a contract, the rights of the other party will be determined by contract law. Where goods or services have been provided under a contract, the provider must recover the price under the contract and not the reasonable value of what has been provided.
In a contract setting, restitution and recovery will be available only, where there has been a so-called total failure of consideration. If the person has received no part of what he was promised in return, a right of recovery applies. If anything has been received in return, the matter will be dealt with under the terms of the contract.
Typically, there has been a payment of monies in advance, followed by a complete failure by the other part to perform. The rule circumvents unjust limitations on rights of recovery when there has been total non-performance. For example, a contract may provide a clause which purports to exempt or limit the other party from liability for non-performance. The total failure of consideration allows the court to require recovery, notwithstanding the limitations in the contract.
Where a contract for the sale of goods is validly terminated, because they are substandard, the title to the goods re-vests in the seller and there is thereby a total failure of consideration. Works which are wholly or substantially defective may be regarded as non-performance. The other party may recover monies paid in full. It is deemed just that the price paid should be fully recoverable.
In the last mentioned cases, it does not matter that the claimant may also have a right to recover money for breach of contract, which would yield him less. If I pay €10,000 for a car worth €5,000, I can recover the €10,000 if you do not deliver it, even though I have lost less in monetary terms.
Quantum Meruit for Failed Contracts
Parallel to the right to recover money for the failure of consideration, the rights of quantum meruit for services and quantum valebat provides for recovery of benefits in kind rendered without a contract, most commonly where an intended contract has failed. Quantum meruit refers to a reasonable sum – the amount earned or deserved and quantum valebat – the equivalent value.
In the context of a contractual relationship, recovery on the above basis is limited to a contract whose performance is incomplete, due to the other party’s default. The contractor who gives full performance is entitled to recover for breach of contract.
If a service provider (e.g. a builder) is wrongfully prevented from completing a job, he may be entitled to a reasonable sum for the work that has been done. A right of compensation for net monetary loss, may not give sufficient remedy and the quantum meruit claim gives the innocent party further relief.
Non-Defaulting Party
A claimant cannot generally make a claim for quantum meruit for the partial performance of his own contractual obligations, if the contract was not completed, because of his breach. A builder who walks off-site, before finishing the job, forfeits his right to recovery. In contrast, a contractor who performs work fully, but badly, may be entitled to payment, net of the amount allowed to the other party by way of compensation.
If a person, knowing that he has received or will only receive part performance of another’s contractual obligation, accepts it, he may be obliged to pay. This occurs, for example, where there is short delivery of goods and they are accepted. The buyer has the right to object, but if he chooses to accept, he must pay at the contract rate.
Ineffective Contracts I
Where a contract is found void or ineffective, there is generally a right of restitution of the benefits conferred on the other party. The general principle was that money paid in a contractual setting cannot be recovered unless there has been a total failure of consideration. However, the fact that an obligation is void may render the other party’s obligations a nullity so that there is a total failure of consideration.
There is a distinction between void and voidable contracts. For example, in the case of the duress, the contract is deemed void. In the case of undue influence, it is deemed voidable. A void contract is a nullity from outset and retrospectively.
A voidable contract is not cancelled until is avoided by a party who is entitled to avoid and set it aside. In the case of assets transferred by mistake, a contract may not be avoided a property may not be recouped if it has been passed to a bona fide purchaser for value.
Ineffective Contracts II
Where a transaction has been entered without authority, the failure to obtain a valid agreement may amount to a total failure of consideration, notwithstanding that some benefits have been received. When money is paid under a void contract, it may be recoverable on the grounds of failure of consideration even if the contract has been partly or completely performed by the other side.
Where a benefit in kind has been conferred under a void contract a quantum meruit payment of a reasonable sum will generally be due. Where property is transferred under a void contract, it may be possible to recover it on the basis that title has not passed. The finding void of the contract will cause the property transferred, to re-vest back in the original vendor or transferor.
If a contract is voidable as opposed to void, restitution of benefits received is not available for so long as the contract is still in being. Until the contract is cancelled, there is nothing to stop the defendant retaining benefits received. Once this happens, then monies will be recoverable as in the case of a void contract. The same principle also applies to benefits in kind.
Counter Restitution Required
A person cannot set aside a contract and claim restitution from the other unless he is willing and able to make restitution, himself. He must generally be able to return what he has received, in its original state.
There are a number of exceptions to the above rule. Where the misrepresentation which has rendered the contract void has caused the change in the goods, the changed goods may be returned.
Where the person seeking restitution can return most of the goods, and the non-returnable part is relatively minor, restitution may be allowed on the basis that the is made up in cash. If a buyer has transformed the goods, the requirement for return the same goods in specie may be relaxed.
Expenses properly incurred prior to the supervening event, may be deductible against the repayment. If goods are not unique and may be sold to another, credit may not be required. If they are unique, then credit would be appropriate.
Contracts by Minors
Contracts entered by a person underage can be enforced against him but only to a limited extent. In Ireland, such contracts are void. Some other contracts by minors such as leases and shareholdings are valid until disaffirmed. Some contracts for necessaries and beneficial contracts are binding.
It is thought that an infant should be able to recover property transferred by him under a void contract. Some of the cases suggest otherwise.
It may be that a minor may only recover if he has got nothing in exchange or if he has if he can return it to the status quo. Arguably the better position is that even the if the minor has received something in return he should be able to restitution if he can return that benefit.
Where monies are lent to a minor they are generally irrecoverable in the absence of fraud and even then where the money is still held and could be returned the position has been modernised and rationalised by Minors Contract Act in England and Northern Ireland.
Illegal and Unlawful Contracts
Illegal contracts will not generally be enforced. Persons entering an illegal contract, usually do so at their own risk. However, in certain cases, the Court may interpret the public policy behind the law which renders the contract void, to be designed to protect a vulnerable party from exploitation. In this case, the parties are not equally at fault. The party whom the law intends to protect will be entitled to recover whereas the other party will not.
Where contracts cannot be enforced for lack of formality restitution may be available. A contract not performed within a year requires a memorandum in writing. If the services are provided reasonable payment will be a required. In other cases as with the Consumer Credit Act, the Statute specifically says provides that the obligation is invalid if the relevant forms and formalities have not been complied with.