Victims of breaches of contract frequently seek to recover their losses from third parties associated with the parties in breach, usually because the parties in breach are not worth pursuing. The Court of Appeal has recently reiterated the law’s hostility to such claims. In Costello v MacDonald [2011] EWCA Civ 930, the Costellos approached MacDonald to do building work on the Costellos’ land. They informed MacDonald that for tax reasons, MacDonald would be paid by the Costellos’ company, Oakwood. Oakwood and MacDonald therefore entered into a contract for the work. Later, the parties fell out and MacDonald sued the Costellos for the value of services performed for Oakwood. The Court of Appeal declined MacDonald’s claim.

Delivering the Court’s judgment, Etherton LJ’s starting point was that the contract in question was between MacDonald and Oakwood, not between MacDonald and the Costellos. While the Court accepted that in causative terms, the Costellos had derived a benefit from MacDonald’s provision of services to Oakwood, the Court also said that those services were provided solely because of and pursuant to MacDonald’s contract with Oakwood. The Court said that a claim by MacDonald against the Costellos in unjust enrichment (i.e. in respect of gains accruing to the Costellos as a result of MacDonald’s services) would “undermine the contractual arrangements between the parties”, subverting their chosen allocation of risk and potentially having the effect of transforming MacDonald into a secured creditor in Oakwood’s insolvency (given the leap-frog claim against the Costellos would allow MacDonald to bypass Oakwood’s other creditors). The Court also cautioned that if MacDonald’s claim were allowed, MacDonald could elect between contractual damages against Oakwood (calculated by reference to the amounts due to MacDonald under the contract) and restitutionary damages against the Costellos (calculated by reference to the market value of MacDonald’s services – i.e. the amount the Costellos would hypothetically owe MacDonald had they contracted with MacDonald). This meant that compensation in restitution could be more favourable than compensation in contract, thereby allowing MacDonald to possibly improve upon a bad bargain.

The decision entails an orthodox application of principle, and reminds commercial parties that the Court will not generally allow recovery of benefits conferred under a contract from a non-party to the contract, even where the contracting and non-contracting parties are closely affiliated. The Courts will not allow a claim in restitution against an enriched third party even where the claimant’s rights under the contract have been weakened by, say, their counterparty’s unavailability or insolvency, or by a rising market for the contractual promise.