Unjust enrichment: High Court finds claimant entitled to restitution of the value of services provided in anticipation of a contract

The High Court has held that a supplier of soft toys was entitled to restitution of the value of the services it had provided to a toy designer, in anticipation of a contract to mass produce the developed toy. The judge further found that a claim in restitution for services provided in anticipation of a contract, unless such services are provided gratuitously or in such a way that indicates they were provided speculatively and at the provider’s risk, may still succeed “even if the idea of an enduring benefit to the defendant is essentially a fictional one”: Dowman Imports Ltd v 2 Toobz Ltd [2020] EWHC 291 (Comm).

Given the amount of work undertaken by the claimant in the development of the toy, the defendant’s encouragement and acceptance of the development services to advance the toy concept, and the defendant’s behaviour towards the claimant, the court held that the claimant had made out its claim in restitution. The defendant’s counterclaim, in respect of an initial sample order of the toys which the defendant alleged were defective, was dismissed.

Although the decision does not establish new legal principles, it illustrates that the absence of a concluded contract will not necessarily preclude a remedy where a party has performed services for the defendant – in particular where the defendant requested the services or accepted them when offered, knowing that such services were not intended to be given freely.

Background

The claimant, Dowman Imports Ltd, is a supplier of soft toys. The claimant’s business also extended to procuring the manufacture of these toys through a factory in Shanghai, run by Shanghai Jin Wei Gifts Co Ltd (“SJWG”). The claimant owns a 30% stake in the factory and the claimant’s sole director is also a director of SJWG.

The defendant, 2 Toobz Ltd, is a designer of soft toys. The defendant was incorporated in 2008, after successfully patenting a concept for a new toy in the UK and US. The defendant sought to create a range of these toys known as “Bush Babies”.

The claimant’s case was that, for a period of 20 months from 2014 to 2016, it had worked on the development of these toys, under the instruction of the defendant, in order to take the toy design from handmade samples to market-ready products. This was on the understanding that in return for such development services the claimant would be appointed as manufacturer of the Bush Babies. However, from September 2016, the defendant entered into merchandising deals with another company, Golden Bear Products Ltd (“Golden Bears”), and did not appoint the claimant as the product manufacturer. The claimant therefore sought restitution of the value of the development services provided to the defendant.

The defendant counterclaimed in relation to the supply of around 2000 allegedly defective Bush Babies by the claimant in December 2015.

Decision

The court (HHJ Russen QC sitting as a High Court judge) held that the claimant was entitled to restitution of the value of the services it had provided to the defendant. The defendant’s counterclaim was dismissed.

The legal principles

The court followed Benedetti v Sawiris [2013] UKSC 50 in considering the following four questions relevant to a claim in unjust enrichment:

1. Has the defendant been enriched?
2. Was the enrichment at the claimant’s expense?
3. Was such enrichment unjust?
4. Are there any defences available to the defendant?

It further applied the following five propositions relevant to a restitutionary claim based on the provision of services, as set out in MSM Consulting Ltd v Tanzania [2009] EWHC 121 (QB):

1. The modern approach is to determine whether the circumstances are such that the law should, as a matter of justice, impose upon the defendant an obligation to make payment of an amount which the claimant deserved to be paid (quantum meruit);
2. In general, a person seeking to enter into a contract cannot claim to be paid the cost of estimating what it would cost to do so, nor for bidding for the contract, nor for the cost of demonstrating their skills or capability to the other party;
3. However, the court is likely to impose such an obligation where the defendant has received an incontrovertible benefit as a result of the claimant’s service, or where the defendant has requested the claimant to provide services or accepted them when offered, knowing that such services were not intended to be given freely;
4. The court may not regard it as just to impose such an obligation on the defendant if the claimant knowingly took the risk that they would only be reimbursed for the expenditure if there was a concluded contract; and
5. The court may regard it as just to impose such an obligation if the defendant who received the benefit had behaved unconscionably in declining to pay for it.

The defendant argued that the development work undertaken by the claimant had no intrinsic financial value, nor did it benefit the claimant. However, the judge found that a claim in restitution for services provided in anticipation of a contract, unless such services are provided gratuitously or in such a way that indicates they were provided speculatively and at the provider’s risk, “may still succeed even if the idea of an enduring benefit to the defendant is essentially a fictional one”. The judge rejected the defendant’s submission that the service provided by the claimant needs to be an end in itself, not merely a means to an end.

The judge noted that that this type of restitutionary claim necessarily involves an acceptance that the parties were proceeding in a position of uncertainty and a situation where a contract was anticipated but not yet concluded. As such, if a claimant’s involvement in the inevitable uncertainty (or degree of speculation) over the contract’s conclusion was enough to defeat a claim in restitution, without considering the extent of the claimant’s appetite in a gamble that may not pay off, then this category of unjust enrichment claim would probably not exist. The question was whether or not all of the claimant’s efforts should be treated as being part of that gamble, which required careful consideration of the circumstances.

Application to the facts

The judge found that the claimant had made out its claim in restitution.

The defendant had had significant input in the development of the toy, samples of which were eventually shown to Golden Bears. The judge found that the defendant had encouraged and accepted the claimant’s development services to advance the toy concept, and had been demanding on the claimant’s, and the factory’s, time and resources. The judge therefore found that the claimant clearly fell within the third proposition set out in MSM Consulting (above), and that the claimant should not be treated as having taken the risk of going largely unrewarded for its efforts, simply because no production contract was agreed. The defendant was also found to have behaved unconscionably in seeking to deny the claimant’s claim simply because no contract had been concluded between them.

The defendant also advanced a claim that, as part of the work undertaken by the claimant had in fact been done by the factory run by SJWG, it was not for the claimant to claim such restitution on its behalf. However, given the circumstances, the judge held that the claimant and the factory were to be treated as one entity (and that the defendant had believed them to be, and treated them as, such), and that the claimant was the intended contracting party. As the claim was for recovery in respect of the defendant’s enrichment from the services requested by it, rather than for compensation for loss suffered through the diversion of business resources that the claimant and SJWG (separately) might otherwise have respectively directed elsewhere, the judge was satisfied that the recovery should be in favour of the claimant (including for the work undertaken by the factory).

The defendant’s counterclaim was dismissed. The judge held that it had been clearly understood that the claimant’s fulfilment of the initial order (of around 2000 sample Bush Babies) was part of the ongoing design process with a view to making the toy suitable for mass production, rather than the samples being intended for re-sale.