Guide to a Comparison of Australian and United States Contract Law

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Ralph James Mooney*

A decade ago Mr Justice Priestley favoured readers of this journal with his insightful “Guide to a Comparison of Australian and United States Contract Law”.1 Following a brief institutional comparison,2 His Honour reviewed recent Australian and American developments in unconscionability, good faith, and estoppel to illustrate the “numerous similarities” between the two contract regimes. A central theme of his Guide was that because English precedent is now merely persuasive rather than binding in Australia, that nation’s contract lawyers and judges likely would make “increased use” of recent American experience in the field.3

Much has happened the past decade to confirm Justice Priestley’s observations and predictions. Generally speaking, American and Australian contract law have indeed continued to converge, in part because Australian courts have used their new finality powers to rethink much traditional doctrine and to look beyond their own shores and England for alternative ideas and models.4

Last academic year I had the great good fortune to teach Contracts at the University of New South Wales. As the year ended, all too quickly, I thought it might be appropriate to leave behind a footprint or two by updating and extending somewhat Justice Priestley’s Guide. To do so, I shall examine briefly three areas of contract law that have received considerable recent attention in Australia and were, in any event, especially interesting to this visitor. Each of the three – restitution, promissory estoppel, and unconscionability5 – demonstrates both the innovative power of today’s Australian High Court and the soundness of Justice Priestley’s prediction a decade ago that American and Australian contract law gradually would converge.6

Within each area I first shall describe certain fundamental features of American law, including a quite recent development or two, primarily for Australian readers. I then shall review and comment briefly on corresponding recent Australian developments, principally for an American audience. A central theme of this modest paper, which I hope will be evident throughout, is that my own view of recent Australian contract law is highly favourable.7


A. United States

As every reader surely knows, classical contract law8 featured a determined resistance to implied contracts and contract terms. One example of that resistance was the difficulty of recovering “off the contract” in restitution.9 Modern American courts, however, gradually became more receptive to restitution claims, recognising that the fairness typically achieved through them tends to outweigh any reduction, real or imagined, in legal certainty or symmetry. Thus, in American law today, restitution is a quite well established theory of recovery to prevent unjust enrichment,10 as the following few examples will suggest.

A leading Arkansas decision, Cotnam v Wisdom,11 granted a restitution recovery to two physicians who had rendered medical aid to an unconscious accident victim. The court explained that “implied” or “quasi” contracts in such cases are “almost as old as the English system of jurisprudence”. They are, of course, a “legal fiction”, but the “sensible and humane” considerations that support them serve to create a “plain legal obligation”.12

In a second leading example, Matarese v Moore-McCormick Lines Inc,13 the Second Circuit Court of Appeals ordered an employer to pay restitution to a stevedore whose valuable inventions the employer had appropriated. The stevedore’s supervisor had promised him one-third of the company’s savings from use of his inventions, but the company later denied the supervisor’s authority and refused to pay. The court concluded that the doctrine of “unjust enrichment” or “quasi-contract” applies in cases where the “product of an inventor’s brain” is “knowingly received and used by another to his own great benefit without compensating the inventor”.14

A recurring area of difficulty in restitution is the extent to which it may be appropriate in a marital context.15 Recently, for example, in Pyeatte v Pyeatte, an Arizona court considered the case of a former wife who had worked to put her husband through law school on the understanding that he then would work while she attended graduate school.16 When the husband left the marriage shortly after his own graduation, the principal issue in dissolution proceedings became whether the wife was entitled to compensation for her efforts, either in contract or in restitution. The court concluded that the agreement itself was “not sufficiently definite” to enforce, so denied recovery on the express contract theory. However, it granted the former wife $23 000 in restitution. She had conferred a “benefit” on her husband, with an “expectation of payment”, and he should “in good conscience” compensate her for it. To avoid “unjust enrichment”, the court ordered him to do so.17

Notice, not incidentally, how beneficial an expansive restitution landscape seems in the last two cases. In both Matarese and Pyeatte, the plaintiffs’ contract claims foundered on irksome technical defences essentially unrelated to the merits, that is, nonagency and indefiniteness. Only the restitution alternative prevented unjust ultimate results in those (and many other) cases.

Restitution has long been available, of course, in many situations where a doctrine like mistake, impossibility, frustration, or illegality precludes recovery on a contract.18 For example, in a well known Massachusetts case, Young v City of Chicopee,19 the Court granted restitution to a bridge repair contractor for work it had completed before fire destroyed the bridge altogether. However, the court did not permit a “reliance” recovery for the value of materials the contractor had delivered to the job site but not yet “wrought into” the bridge.20

Another recurring, contentious restitution issue is its availability to a “defaulting plaintiff”, that is, to a party who committed the first material breach of contract. American authority divides on this issue, but surely the better result is to grant relief in most such cases if unjust enrichment otherwise would result. The landmark American decision is Britton v Turner,21 in which the New Hampshire Supreme Court awarded restitution to a worker who had breached a one year employment contract by departing after 10 months. Despite his breach, the plaintiff recovered the value of the benefit he had conferred on the employer, subject, of course, to an offset for any breach related damage.22

A more recent example, from Oregon, is Appalachian Regional Hospitals Inc v Henry.23 The plaintiff hospital had lent an employee $20 000 for further education, and also agreed that if he later returned to work it would forgive the loan $400 per month. The employee did return, but a dispute developed, and the court ultimately ruled that the hospital could not enforce the loan agreement because it had breached it by failing to furnish the employee a “suitable position”. However, the court did grant the hospital restitution of the money lent: the loan had “conferred a substantial benefit” on the employee, and to allow him to retain it would be analogous to enforcing a “penalty or forfeiture” following a breach.

Finally, there is the sometimes difficult matter of determining the appropriate measure of restitution recovery. The well worn fundamental rule is the ‘value of the benefit conferred’, but like most legal rules this one is often easier to state than to apply. At times a literal application makes perfect sense,24 but just as often the literal ‘value’ would be difficult either to calculate or to justify.

In Hershiser v US Fidelity & Gty Co,25 for example, a personal injury trial had resulted in a $207 000 judgment against an insurer. The insurer’s trial attorney hired a colleague to pursue an appeal, but the two neglected to agree on a fee. When the appeal succeeded, the literal ‘value of the benefit conferred’ on the insurer was the full $207 000, but the court sensibly awarded the appellate attorney restitution of only $1 635, the $45 per hour market value of his services.26

Occasionally a court must decide whether a restitution recovery may exceed the corresponding expectation measure. In instances where the claimant itself has committed the first material breach, like Britton v Turner,27 the virtually uniform rule is no – expectation serves appropriately as a ceiling in such cases.

However, where a nonbreaching party seeks restitution, the answer occasionally is different. United States v Algernon Blair Inc28 was a typical losing contract case, in which a steel erection subcontractor sought $37 000 allegedly due for its partial performance before the general contractor breached. The defence asserted that the subcontractor’s expectation interest was zero because it ultimately would have lost more than $37 000 had both sides performed fully. The Fourth Circuit Court of Appeals declined to limit the subcontractor’s recovery to expectation, awarding it restitution instead. Citing Aristotle alongside Fuller and Perdue,29 and noting that restitution serves to prevent both “unjust gain” and “unjust impoverishment”, it remanded the case for inquiry into the “amount for which such services could have been purchased from one in the plaintiff’s position”.30

Finally, many American courts the past two decades seem to have reacquired various measures of their earlier, ‘classical’ hostility toward restitution claims. For example, appellate courts in the far west states of Alaska, Washington, and Idaho, all recently have denied restitution recoveries to claimants who likely would have succeeded during the more expansionist decades of the 1960s and 70s.31 This renewed resistance to recoveries ‘off the contract’ is an important feature of the ‘New Conceptualism’ in American contract law I have described elsewhere.32 Those of us who disapprove of such regression hope that American courts contributing to it will instead learn from the recent Australian experience and begin again to award appropriate restitution recoveries to deserving claimants.

B. Australia

Until the last decade or so, restitution was an unpromising theory of recovery in Australian courts. Limited in scope by its close association with implied contracts, and by a legal tradition that emphasised bright-line boundaries between distinct legal categories, restitution languished in the shadows of its more celebrated civil liability cousins, contract and tort.33

In 1987, however, restitution emerged dramatically from those shadows when the Australian High Court decided Pavey & Matthews Pty v Paul.34 The majority judgments in Pavey, especially that of Deane J, significantly recast Australian restitution law by substituting ‘unjust enrichment’ for ‘implied contract’ as its central organising principle. The Court thus swept away the dust of ages, liberated restitution claimants from centuries old implied contract impediments, and signalled the emergence of an important third branch of civil obligation in Australia.35

Pavey involved a restitution claim by a builder unable to recover on an oral contract because a New South Wales statute declared oral building contracts “not enforceable”.36 The builder and owner had agreed that (1) the builder would do the requested work, and (2) the owner would pay a “reasonable remuneration” for it, calculated by reference to “prevailing rates”. When the owner refused to pay the final $27 000 allegedly due, the builder sued in assumpsit, claiming that sum under a “quantum meruit”. The builder prevailed at trial, but the New South Wales Court of Appeal reversed the result, concluding that the assumpsit action was necessarily one to “enforce the contract” and hence barred by the statute.37

The High Court majority, however, took a broader view, concluding ultimately that in disputes like Pavey the requirements of justice substantially outweigh the historical restrictions on restitution recoveries. It reasoned that the statutory prohibition applied merely to judicial enforcement of the contract itself, not to an action for the reasonable value of a benefit conferred. In the words of Deane J, there was “no apparent reason in justice” why a builder precluded from enforcing a contract also should be deprived of the “ordinary common law right” to recover “fair and reasonable remuneration” for work actually done and accepted. In both theory and practice, it is unjust enrichment, not implied contract, that serves as the “unifying legal concept” of restitution and explains why in a variety of contexts the law recognises an obligation to make “fair and just restitution” for a benefit conferred.38

Nor did this result conflict with any discernible legislative policy. The Builders Licensing Act 1971 (NSW) was unlike, for example, money-lending legislation, which expressly barred even a post-loan recovery by a noncomplying lender; the Builders Licensing Act was silent as to post-performance claims, merely barring a builder’s recovery on the oral contract itself. Moreover, even as interpreted in Pavey, the Act still provided significant protection against builder fraud by precluding recovery on any unexecuted portion of such a contract.

Deane J in Pavey also foreshadowed use of the new unjust enrichment principle in determining the restitution amount recoverable. Ordinarily that amount will equal the “fair value of the benefit provided”, calculated at a “reasonable rate for work actually done” plus the “fair market value of materials supplied”. Any agreed price likely would “limit the amount recoverable”, as would the actual “enhanced value” in a case of unsolicited but accepted work.39

Less than a year after Pavey, the New South Wales Court of Appeal applied the new “unifying legal concept” of unjust enrichment to a restitution claim involving contract ‘illegality’. In Hurst v Vestcorp Ltd,40 several stockbrokers had invested certain loan proceeds in a tax avoidance scheme (the Court’s word) designed to encourage funding of Australian films. When their investments curdled, the stockbrokers sued for a declaration that the loan contracts were “illegal” and hence unenforceable: the lender, which had masterminded the scheme, allegedly had breached section 83(1) of the Companies Act 1961 (NSW) prohibiting investment offers to the “public” without certain required disclosures by an “approved deed”.

The Court agreed that the loan contracts violated the Companies Act and therefore were unenforceable. Doing so, it rejected the lender’s contentions that (1) solicitation of a relatively small number of investors did not constitute an offering to the “public” and that (2) in any event, the Act’s criminal sanction was the only one the legislature had intended. To the contrary, explained McHugh JA, the plain legislative purpose had been to protect even a few investors, exactly like those before the Court, and violation of the Act should result in civil as well as criminal consequences.41

However, it did not necessarily follow that restitution was unavailable to the transgressing lender. Invoking Pavey & Matthews, the Court noted that that further question also depended on legislative intent. And nothing in the Companies Act indicated that the legislature had intended to deny recovery of such a loan “as a matter of restitution”. After all, the stockbroker borrowers had received both the money and the extraordinary tax deductions. If they escaped repayment altogether, they would receive an “unmerited benefit”. True, such a benefit sometimes does result from judicial application of the illegality doctrine, but the “modern doctrine of restitution” enables a court in “appropriate cases” to “overcome these injustices”.42

Two months later, in ANZ Banking Group v Westpac,43 the High Court itself elaborated (1) the principles relevant to restitution following a mistake of fact and (2) the availability of various defences to a prima facie restitution claim. That unusual public dispute between two of Australia’s ‘four pillars’ arose from a $100 000 clerical error in a telegraphic transfer from ANZ to Westpac, for the overdrawn account of a Westpac customer. Following its receipt of the $114 000 transfer, which should have been $14 000, Westpac extinguished the overdraft and honored several large checks the customer had drawn. By the time ANZ notified Westpac of the error, only $17 000 remained in the account.

In retrospect at least, the case seems easy. And perhaps it was once the Court sorted through the maze of credit and debit entries to the insolvent customer’s account. ANZ initially had a clear prima facie right to restitution of the $100 000 paid by “mistake of fact”.44 However, that right could be, and ultimately was, defeated to the extent of $83 000 by Westpac’s “adverse change of position” in “good faith… reliance on the payment” before receiving notice of the mistake. Thus, ANZ recovered only $17 000, and at least some readers of Chief Justice Mason’s sensible judgment must still wonder why skilled bank counsel could not reach that conclusion without litigating the matter all the way to Canberra.45

The ANZ Court also addressed briefly the question of possible defences to an otherwise valid (‘prima facie’) restitution claim. Its point was that if avoiding unjust enrichment is the fundamental principle of restitution, then there must be some circumstances in which a restitution order itself would be unjust. The Court mentioned as examples of such possible defences (1) that the payment made was for “good consideration” such as discharge of an existing debt; (2) that the recipient changed its position in good faith reliance on the payment; and (3) that a payment was made to an agent who, without notice of any mistake or irregularity, paid the money to his or her principal. As one leading commentator on the ANZ decision has suggested, the Court’s approach to these potential defences suggests a commendable degree of flexibility in contrast to earlier, more ‘mechanical’ applications.46

In 1992 the High Court extended its new unjust enrichment principle to cases involving mistakes of law as well as of fact. In David Securities Pty Ltd v Commonwealth Bank,47 a real estate development firm had obtained from a bank a “foreign currency loan”, which carried a lower interest rate than that for domestic currency loans. Soon, however, adverse exchange rate fluctuations resulted in losses to the borrower who, with its principals, then sued the bank for alleged contract breaches, torts, and violations of the Trade Practices Act 1974 (Cth). Naturally, the bank counter-claimed for repayment of its loan.

The principal issue became whether the borrower should receive a credit against the bank’s counter-claim, for money it had repaid under a mistake of law. Specifically, the loan agreement required the borrower to “repay” not only interest due but also the bank’s tax obligation on that interest. Because the Income Tax Assessment Act 1936 (Cth) declared such a requirement “void”, the borrower contended that it should recover the sums paid thereunder because its “mistake of law” had “unjustly enriched” the bank.

The full Federal Court concluded that the borrower had indeed made a mistake of law, but that, traditionally, restitution was unavailable for such mistakes.48 A High Court majority, however, continued its expansion and modernisation of restitution doctrine by effectively abandoning that broad traditional rule. It distinguished earlier precedents as instances largely of a payer’s “voluntariness or election” to compromise a dispute.49 Henceforth, a “narrower principle” would apply to mistake of law cases, namely, that restitution of sums paid under such a mistake would be denied only where a payer knowingly enters into a bargain or compromise while under a legal misapprehension.

Mason CJ explained that the “difficulty and illogicality” of drawing a “rigid distinction” between mistakes of law and mistakes of fact “strongly supports” such a narrower principle. Moreover, many courts in the United States and Canada had criticised such an illogical distinction; both New Zealand and Western Australia had abolished the distinction by statute; many academics also condemned it; and, most convincingly, because the fundamental basis of restitution is preventing unjust enrichment, there exists “no justification” for distinguishing among ways in which such enrichment occurs.

So, following David Securities, once a party establishes that it paid money in the “mistaken belief that he or she was under a legal obligation” to do so, the burden shifts to the other party to demonstrate why its retaining the payment would not be unjust. In David Securities itself, the lender had not yet done so, despite its assertion that it had ‘changed its position’ in reliance on the mistaken payments. The High Court remanded for further evidence on that issue, among others.50

Another especially interesting recent restitution decision is Baltic Shipping Co v Dillon,51 which re-examined (or at least cited frequently) the traditional “total failure of consideration” requirement. A cruise ship sank after eight of 14 scheduled days, and a passenger sued for restitution of the full $2 205 fare she had prepaid plus damages for personal injury, property loss, and “disappointment and distress”. In both the trial court and the New South Wales Court of Appeal,52 the passenger prevailed on her restitution claim and on approximately $50 000 of her damages claim.

The High Court, however, reversed the restitution recovery. The cruise line already had refunded a pro rata share of the fare, and the High Court was unpersuaded by the argument that it should refund the remainder because the line’s consideration failure had been “total”. It distinguished the lower courts’ “entire contract” analysis as applicable principally to an enforcement action by a breaching party, rather than to a restitution action by an injured party. Regrettably, perhaps, the Court declined its opportunity to abandon altogether the outdated all or nothing approach by, for example, suggesting in dictum that partial restitution would have been appropriate had the cruise line not already made it. Such a dictum would have allowed the Court to relate its decision more closely to unjust enrichment, its new “unifying legal concept” for restitution.53

In Australia as in the United States, determining the appropriate measure of restitution is occasionally difficult. A recent decision by the New South Wales Court of Appeal, Renard Constructions (ME) Pty Ltd v Minister for Public Works,54 addresses this issue; it also demonstrates once again the continuing convergence of American and Australian restitution law.

The Public Works Minister had wrongfully terminated a contract with Renard for construction of two pumping stations. Renard sued for “quantum meruit” under the Commercial Arbitration Act 1984 (NSW), and the arbitrator awarded it $285 000. The trial court reversed that decision, granting judgment to the Minister, but the Court of Appeal reinstated the arbitrator’s award.

Once past the inevitable question of who committed the first material breach,55 the principal issues became (1) how to measure a restitution recovery and (2) whether the contractor was entitled to such a recovery if it would exceed the amount remaining due under the contract. Regarding measurement, the Minister contended that the arbitrator had erred by awarding the contractor a “reasonable remuneration”; instead, he should have calculated the “value to the [government] of the work performed”. The Court of Appeal was not persuaded, however, answering simply that the arbitrator was “justified” in applying the “reasonable remuneration” standard.

More fundamentally, the Court of Appeal also rejected the Minister’s contention that a party’s hypothetical expectation recovery serves as an appropriate ‘ceiling’ on restitution. Citing authorities from the United States, England, and New Zealand,56 the Court explained that a breach victim like Renard has an “election” whether to sue for “breach of contract” or for “quantum meruit for work done”. There is “nothing anomalous” in the circumstance that the two alternative remedies, “proceeding on entirely different principles”, frequently yield different results.57

In sum, Australian courts the past decade or so have taken several large steps forward in the restitution field. Beginning in Pavey & Matthews, they have freed restitution from the unduly conceptualist restraints of implied contract and grounded it explicitly on the more functional, justice regarding principle of preventing unjust enrichment. More generally, they have made available a modern, coherent theory of recovery to a great many parties who need and deserve legal protection – for example, the builder in Pavey, the contractor in Renard, even the banks in ANZ and David Securities. Along the way, they also have increased substantially the similarities between Australian and American contract law.

Certainly one cannot yet say that Australian restitution principles are fully developed, or completely tidy, or entirely without critics. Courts and commentators alike continue to ponder such questions as (1) when, if ever, a party who committed the first material breach may recover in restitution for a benefit conferred;58 (2) when, if ever, a recipient’s change of position should defeat a restitution claim;59 (3) whether profits derived from a contract breach should be recoverable by the breach victim, either as contract damages or in restitution;60 (4) whether unconscionability principles contribute meaningfully to restitution analysis;61 and (5) whether restitution principles assist third party beneficiary contract analysis.62

However, one certainly can hope and believe that into the new millennium Australian courts will answer most such questions as they continue to modernise restitution law in order to prevent unjust enrichment. And further, that American courts will follow in a field where once they led.

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