Dargamo Holdings Ltd & Anor v. Avonwick Holdings Ltd & Ors: Reinforcing the Obligation Rule in Unjust Enrichment Claims

Introduction

The case of Dargamo Holdings Ltd & Anor v. Avonwick Holdings Ltd & Ors ([2021] EWCA Civ 1149) presents a pivotal examination of the principle of unjust enrichment within the context of contractual obligations. This appellate decision from the England and Wales Court of Appeal (Civil Division) delves into whether a claim in unjust enrichment can succeed when there exists a valid and binding contract that allocates risk between the parties. The dispute revolves around complex financial transactions among prominent Ukrainian businessmen, namely Sergiy Taruta, Vitali Gaiduk, and Oleg Mkrtchan, concerning their shared business interests in the metallurgical sector and other investments.

Summary of the Judgment

The central issue in this appeal was the dismissal of the Taruta Parties' claim for unjust enrichment. The Taruta Parties contended that a significant portion of a US$950 million payment made under the Castlerose Share Purchase Agreement (SPA) amounted to an unjust enrichment based on the complete failure of consideration, as additional assets, including interests in PJSC New Engineering Technologies (NET) and CJSC Bakhmutsky Agrarian Union (Agro Holding), were never transferred as initially understood.

Judge Picken, in the original judgment, held that the unjust enrichment claim failed because the payment was made under the terms of the Castlerose SPA, which clearly stipulated that the consideration was solely for the transfer of shares in Castlerose. There was no contractual obligation concerning the additional assets, and thus, no basis existed for the claim of failure of consideration. On appeal, the Court of Appeal upheld the original decision, reinforcing that the existence of a valid and subsisting contract precludes a claim in unjust enrichment unless specific narrow exceptions apply.

Analysis

Precedents Cited

The judgment extensively references key cases and authoritative texts to frame the legal context. Notably, it cites Goff & Jones's Unjust Enrichment and foundational cases like Kleinwort Benson Ltd v Lincoln City Council [1999] 1 AC 349 and Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68. These precedents collectively establish the boundaries within which unjust enrichment claims operate, particularly emphasizing the necessity of identifying an "unjust factor" and the overarching influence of existing contractual terms.

The judgment also discusses the controversial decision in Roxborough and distinguishes it from the present case, underscoring that Roxborough involved a distinct and externally imposed factor, namely a statutory tax, which was fundamentally different from the contractual allocation of risk at issue here. Additionally, the dissenting opinion in Roxborough highlights the complexities in apportioning considerations, further delineating the boundaries of unjust enrichment claims.

Legal Reasoning

The court's legal reasoning centers on the "Obligation Rule," which posits that a valid and subsisting contract allocates risk between the parties, thereby preventing unjust enrichment claims that seek to override these contractual allocations. In this case, the Castlerose SPA explicitly defined the consideration as US$950 million for the sale of shares in Castlerose, with no mention of additional assets. The court held that any non-contractual understandings or expectations outside the SPA had no legal bearing, as they were not incorporated into the binding agreement.

The Taruta Parties argued for a "failure of basis," contending that part of the payment was intended for assets that were never transferred, thus justifying a claim in unjust enrichment. However, the court found that since the SPA did not encompass these additional assets, there was no basis within the contract for such an enrichment. The payment was made in accordance with the contractually agreed terms, and the expectation of additional asset transfers was extraneous and non-binding.

Furthermore, the court addressed the doctrine of apportionment, distinguishing it from the present case. While apportionment allows for recovering parts of a payment related to distinct benefits when there is a total failure of basis for those parts, it requires that the basis for each part be within or related to the contractual terms. Here, the alleged basis for the additional assets was outside the SPA, rendering apportionment inapplicable.

Impact

This judgment reinforces the principle that contractual terms take precedence over extrinsic understandings in unjust enrichment claims. It clarifies that the existence of a valid contract allocating risk and defining consideration limits the scope for unjust enrichment, thereby providing certainty and predictability in commercial transactions. Future cases will likely reference this decision to assert that unjust enrichment cannot be used to circumvent explicit contractual agreements unless very narrow exceptions apply.

Additionally, the judgment underscores the necessity for parties to meticulously incorporate all essential terms and understandings into their contracts. Reliance on separate, non-binding discussions or understandings will not suffice to support claims outside the contractual framework.

Complex Concepts Simplified

Unjust Enrichment

Unjust enrichment occurs when one party benefits at the expense of another in circumstances deemed unjust by law. To claim unjust enrichment, the claimant must demonstrate that:

The defendant has been enriched.
The enrichment was at the claimant’s expense.
The enrichment is considered unjust.
No valid defenses negate the claim.

Failure of Basis

Also known as "failure of consideration," this occurs when a payment is made based on an expectation that is not fulfilled. For example, if Party A pays Party B with the understanding that Party B will deliver additional assets, and Party B fails to do so, Party A may claim a failure of basis.

Obligation Rule

The Obligation Rule dictates that if there is a valid and existing contract between parties that defines the terms and allocations of risk, a claim in unjust enrichment cannot override these contractual terms. Essentially, the contract governs the relationship, and unjust enrichment claims cannot contradict or undermine its provisions.

Doctrine of Apportionment

Apportionment allows for the allocation of parts of a payment to distinct elements of a benefit. If only certain parts of the expected benefit fail to materialize, the claimant can recover those specific portions. However, this is only possible if the failing parts are within the contractual framework.

Conclusion

The Court of Appeal's decision in Dargamo Holdings Ltd & Anor v. Avonwick Holdings Ltd & Ors firmly upholds the precedence of contractual terms over unjust enrichment claims. By dismissing the Taruta Parties' claim, the court underscored that unjust enrichment cannot serve as a mechanism to override or subvert explicit and binding contractual agreements. This judgment serves as a crucial reference point for future disputes involving the interplay between contract law and unjust enrichment, reinforcing the need for clear and comprehensive contractual drafting to avoid unintended legal consequences.

Ultimately, the decision promotes legal certainty and respects the autonomy of parties to define their commercial relationships through contracts, ensuring that unjust enrichment claims cannot be weaponized to disrupt negotiated agreements without substantial and narrowly defined exceptions.