Fool's gold: when you have to pay for pre-contractual services

H&P, an investment bank, provided services allegedly worth USD 18 million to Randgold, who H&P had assumed was a client. However, terms of their engagement were never formalised or even written down. After the transaction, Randgold refused to pay H&P for its services. The court rejected H&P’s claim that there had been an oral contract for services but, unusually, did order Randgold to pay for the value of the services rendered on the basis that it would otherwise be unjustly enriched. 

No oral contract

The court noted there was a “19th-century feel to this action. There [was] no documentary record of the negotiations between the parties or of the agreement which is alleged to have been reached, and the only witness to one of the two relevant conversations was not called”. Having reviewed what evidence was provided, including oral evidence about an alleged handshake agreement on fees, the court found that an offer had been made by H&P but that there was no acceptance by Randgold. Accordingly, there was no contract.

H&P alternatively claimed that it should be compensated for the value of the service rendered on the basis that Randgold had been unjustly enriched by them. The main dispute fell on whether there was a recognised unjust factor and if Randgold had any defence. H&P relied on two possible unjust factors termed “free acceptance” and “failure of basis”. [Note from the Editor: much of the language around the law of unjust enrichment and the remedy of restitution is arcane and, frankly, borders on the incomprehensible.]

Free acceptance

Free acceptance here means the voluntary acceptance of goods or services when the person offering them has an expectation of payment. The court held that this is not an accepted freestanding unjust factor. “[T]he idea that mere receipt of a benefit creates a restitutionary liability unless there is a positive act of rejection by the recipient … is incompatible with English law”.

The court provided three key reasons for this proposition:

1. the question in this type of case should first be the basis for supplying services. Free acceptance would assume the expectation of payment without necessarily “examining the circumstances in which [one] came to form the expectation of payment in the first place”;
2. freedom of contract also means that there is a freedom not to contract. One party cannot unilaterally force another party to accept a liability simply by providing a benefit. There must be something more than receipt of a benefit; and
3. the historical origins of unjust enrichment lie in the action of assumpsit which arose from a non-contractual promise to pay. There must, therefore, have been some form of non-contractual promise to pay and/or assumption of liability.

[Note from the Editor: apologies again, with assumpsit we are going back to the 14th century, before contract law as we know it existed.]

Failure of basis

Failure of basis is when the state of affairs constituting the basis for which the enricher had bargained has failed to materialise. It is an accepted unjust factor. The court held that ”free acceptance formed an “ingredient” for failure of basis”. 

In the “rather unusual market” of investment banking, investment bankers and clients often hold a mutual belief that, as long as the retainer is agreed at some point, the timing of when this is agreed will not affect payment for work already undertaken. The basis in this case was the retainer, and the failure was that the retainer was never agreed.

The court affirmed that, in this unusual context, a claim for failure of basis can “rely on value transferred before the basis was established”. In other words, if you can demonstrate that a basis has been established at any stage, that basis includes a commitment to pay for services already received, as well as services to be provided. In the court's mind, this aligned with the practices of the investment banking industry.

Repercussions for professional services

The court acknowledged that the outcome of the case could have a “chilling effect” on the professional services industry, given that professionals may provide a certain amount of free advice with the hope of eventually being retained. However, the court felt that clear communication between the parties was the solution.  

[Final note from the Editor: You have been warned!] 

Judgment: H&P Advisory v Barrick Gold