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Absence of Basis: Challenges for the Malaysian Law of Unjust Enrichment

9 March 2015

Federal Court adopts Civilian "absence of basis" approach to determine whether enrichment "unjust".


In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, Lord Wright in a famous passage observed that:

It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognised to fall within a third category of the common law which has been called quasi-contract or restitution.

As a matter of policy, the law of restitution and unjust enrichment is based on the brocard ‘nemo debet locupletari jactura aliena’: a man is not to enrich himself at the cost of another. Unjust enrichment is like an elephant. It is difficult to describe, but you know it when you see it. In the landmark decision of the Federal Court in Dream Property Sdn Bhd v Atlas Housing Sdn Bhd (Civil Appeal No. 02(f)-13-02/2014(J), 12 February 2015), the Federal Court authoritatively recognised the principle of unjust enrichment under Malaysian law. However, as a result, the law of restitution and unjust enrichment in Malaysia arguably now finds itself in uncharted waters and a state of uncertainty.

In Dream Property, the defendant entered into a sale and purchase agreement with the plaintiff to purchase a piece of land on which the defendant intended to construct a shopping mall known as the ‘Batu Pahat Mall’. A dispute arose between the parties as to the date vacant possession was delivered and the completion date by which payment of the balance purchase price was to be made under the sale and purchase agreement. Throughout the period of litigation between the parties from 2006 to 2011, the plaintiff did not apply for any injunction restraining the defendant from continuing the construction of the shopping mall. The plaintiff merely requested the defendant to cease all construction works on the land. In the absence of any injunction, the defendant continued with and completed the construction of the shopping mall.

After full trial, the High Court dismissed the defendant’s claim and ordered vacant possession of the land together with the mall to be returned to the plaintiff. However, the High Court also ordered the plaintiff to pay the defendant the costs of construction for the shopping mall pursuant to section 71 of the Contracts Act 1950. The decision of the High Court was upheld by a majority of the Court of Appeal. Certain aspects of the decision of the Court of Appeal were commented upon in our previous article titled "Whose Mall is it Anyway?" (22 May 2013).

On appeal to the Federal Court, the issue of the restitutionary liability of the plaintiff landowner came into sharp focus. The decision of the Court of Appeal to award the defendant the costs of construction for the shopping mall, pursuant to section 71 of the Contracts Act, was reversed by the Federal Court. Instead, the Federal Court applied the common law principle of unjust enrichment to award the defendant restitution based on the market value of the shopping mall. In doing so, the Federal Court authoritatively recognised under Malaysian law the existence of the principle of unjust enrichment, which comprises of the following elements:

  1. The defendant must have been enriched by the receipt of a benefit or advantage;
  2. The enrichment must have been gained at the plaintiff’s expense;
  3. The retention of the enrichment by the defendant must be unjust; and
  4. There must be no defence available to extinguish or reduce the defendant’s liability to make restitution to the plaintiff.

However, the Federal Court, in a completely surprising and unexpected move, held that it would adopt what Civilian systems describe as the “absence of basis” approach, as opposed to the English “unjust factors” approach, in determining whether an enrichment is ‘unjust’. The Federal Court observed:

The most important question which we must now asked is whether it is unjust for the Plaintiff to retain to the benefit (the unjust question). The English approach to the unjust question is to ascertain an unjust factor such as, for example, mistake or failure of consideration. This differs with the civilian approach to the unjust question which consider whether there is a lack of juristic basis. …

We would adopt “the absence of basis” … approach of the civilian and mixed law systems for the reason that, in our view, it would produce a fairer outcome. Applying this approach, the Plaintiff can escape restitutionary liability by showing that there was a legal ground for receiving an enormously enhanced and improved asset in the form of the business of a shopping Mall. The important point to note here is that the Defendant was not required to benefit the Plaintiff by legislations or by contract. In our judgment the reason why there is liability in these circumstances is that the Plaintiff’s enrichment is unjustified and that there is no legal ground for the Plaintiff to claim and enjoy the full commercial value of the Mall. Therefore, the Defendant has a prima facie right to restitution.


In order to appreciate the significance of the Federal Court’s decision to adopt the “absence of basis” approach to determine whether an enrichment is “unjust”, it is necessary to first understand the fundamental differences between the approaches of the Civilian systems and that of English law to the question of unjust enrichment.

The fundamental difference between the two approaches may be summarised as follows. The starting point of the English “unjust factors” approach is that there is “no restitution unless” the plaintiff can demonstrate a positive reason for allowing restitution. The plaintiff must establish an “unjust factor” or “ground of restitution” based on existing case law in order to reverse the enrichment received by the defendant. These include well-known categories such as “mistake”, “failure of consideration”, “duress”, “legal compulsion” etc. On the other hand, the starting point of the “absence of basis” approach is that there “is restitution unless” the defendant can demonstrate a legal basis or ground for retaining the enrichment. The defendant must establish a “legal basis” or “legal ground” to justify retaining the enrichment in question.

At first sight, the “absence of basis” test appears to be simple, elegant and easy to apply. Instead of trying to analyse whether the facts of the case come within any recognised “unjust factor” or “ground of restitution”, the enquiry will simply focus on whether there is any legal or juristic basis for a defendant to retain an enrichment. Indeed, the Federal Court in Dream Property preferred the “absence of basis” approach as it would “produce a fairer outcome”,  although the Federal Court did explain why or how this was so.

However, it should be noted that the Federal Court did not provide any further or detailed guidance on how the “absence of basis” test was to be applied in future cases. The application of the “absence of basis” test may not necessarily be  straightforward or easy to apply in practice. In particular, the new “absence of basis” test brings with it certain challenges and uncertainties which the Malaysian courts will have to work out and resolve on a case-by-case basis in the future. Some of the challenges are as follows:

What constitutes a “legal ground” or “juristic basis” to retain an enrichment? In determining whether there is a “legal ground” or “juristic basis” for the defendant to retain an enrichment, the words “legal ground” and “juristic basis” are very general in nature and somewhat vague. It is not clear what the scope, width and limits of these words may be. The judgment of the Federal Court suggests, at the very least, a defendant may demonstrate a “legal ground” or “juristic reason” to retain an enrichment if the plaintiff was required to confer the benefit on the defendant “by legislation or by contract”. Apart from the equally general and vague words “by legislation or by contract”, judges and lawyers are arguably left none the wiser.

How should the courts develop the “absence of basis” approach in the future? The adoption of the “absence of basis” approach also raises a difficult question: in developing and clarifying the “absence of basis” test, what are the sources of law or persuasive authority which the Malaysian courts may properly take into consideration? English law does not recognise the “absence of basis” approach, and therefore provides very limited guidance. Further, although the “absence of basis” approach informs the law of unjustified enrichment in Civilian and mixed-law systems, the laws of each jurisdiction are very different, and it is not possible to identify or pinpoint the laws of any particular jurisdiction which the Malaysian courts may safely refer to or adopt in developing the “absence of basis” test.

What is the status of earlier Malaysian case law? What is the status of previous Malaysian case law which were decided prior to Dream Property, viz precedent and authorities at all levels of the judicial hierarchy which dealt with common law restitutionary claims for money had and received or unjust enrichment? The entire corpus of earlier Malaysian case law on restitution of unjust enrichment, dealing with well-known grounds of restitution such as failure of consideration, mistake, legal compulsion, duress, undue influence, frustration, quantum meruit were all decided based on principles of English law, and which can readily be explained and categorised based on the “unjust factors” approach under English law. The earlier case law does not neatly fit into the framework of the “absence of basis” approach. Does this mean that the earlier Malaysian case law are now to be regarded as obsolete, irrelevant or even overruled and consigned to legal history? If this were the case, it would certainly be a radical and extreme upheaval of Malaysian law. It would mean that Malaysian law of unjust enrichment would effectively be starting from scratch.

Who bears the burden of proof under the “absence of basis” approach? As mentioned above, under the “unjust factors” approach, there is “no restitution unless” the plaintiff can demonstrate a positive reason for allowing restitution. On the other hand, under the “absence of basis” approach, there “is restitution unless” the defendant can demonstrate a legal basis or ground for retaining the enrichment. This gives rise to the question: in determining whether an enrichment is “unjust”, is it for the plaintiff to establish that there is an “absence of basis” for the defendant to retain an enrichment, or is it for the defendant to establish that there is a “legal ground” or “juristic basis” for him to retain the enrichment?

These are but a few important questions that arise from the decision of the Federal Court in Dream Property. The implications of the adoption of the “absence of basis” approach will have to be addressed and worked out by the Malaysian courts in the future on a case-by-case basis. In the meanwhile, it would appear that lawyers may find it difficult to advise their clients with any degree of certainty as to their rights or liabilities in cases which involve issues of unjust enrichment, in particular whether an enrichment is “unjust” under the new “absence of basis” approach. The cynic may be forgiven for saying that the decision in Dream Property has not only recognised a principle of unjust enrichment, but has also paved the way for an enormous and substantial amount of litigation on the issue in the future.



 
 


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