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of ‘received enrichment’ and not ‘surviving enrichment’. Once the defence

of change of position is recognised, this explanation of model III will no

longerdo.

(j) The loss lies where it falls

Some apply the maxim ‘the loss lies where it falls’ and argue that in the

current example the loss fell on A and he should not be able to shift it

on to B without good reason. But the argument is flawed. Under model II

loss of the horse falls on B. It will lie there unless B has a good reason to

shift it on to A. With model III the loss of the horse falls on A. It will lie

on A unless there is some justification for shifting it on to B. These two

models start from opposite ends. The maxim ‘the loss lies where it falls’

is of no argumentative value when deciding whether to follow model II

ormodel III.

(k) He who seeks equity must do equity

In English and Scots law, this principle is mentioned as being at the

root of model III.98 It seems to mean that a person seeking to unwind a

contract should himself be in a position to give back what he received.

The reference to equity is helpful as long as both the horse and the cow

are in existence. However, equity is not of much help once the horse has

ceased to exist.

(l) Summary

In England, Scotland and Germany, but also in America and among

Romanists, there are a number of arguments that seem to suggest that

model III is preferable. But none of these arguments were compelling

enough to justify the conclusion that model III is the right choice for

unwinding mutual contracts.

2. Are there internal arguments for a particular model?

The question I am concerned to answer in this subsection is whether or

not any of these models achieve equitable results and provide the tools to

deal with different possible fact patterns.

(a) Model I

I will not spend any time on total failure of consideration. It is now

accepted in English law that total failure of consideration should be

98 Aguilar v. Aguilar (1820) 5 Madd 414 at 416 n. 1; Scotland North British and Mercantile

Insurance Co. v. Stewart (1871) 9 M 534 at 537.

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interpreted in such a way that all that is needed is counter-restitution.

The case law is starting to follow the lead of legal academics. Model I is

slowly being replaced by model III.99

(b) Model II

Model II is that of the Zweikondiktionentheorie. A can claim back the cow.

It does not affect A’s claim against B that he himself is not able to give

back the horse. B cannot claim anything from A, since A can rely on the

defence of change of position: he has lost the horse. Thus, the risk of loss

of the horse is usually on B. If that were the end of the story, the results

would be in many, though not in all, cases unjust. However, German law

offers a number of tools whereby B can shift the loss on to A.

(i) If A rescinds the contract for mistake, he has to make good B’s reliance

damage: § 122 I BGB. In reliance on the validity of the contract, B has

transferred the horse to A. A has to make good B’s reliance damage

either by transferring back the horse or by making good its value. It is

no defence to the claim fordamages that A has lost the horse.

(ii) If the contract is void for impossibility (§ 306 BGB) and one party knew

orought to have known that, then the otherparty can claim back his

or her reliance expenditures (§ 307 BGB). Thus, if A was to give two

cows in exchange for B’s horse and A has so far transferred only one,

while the other was already dead when the contract was formed, then

the contract is void. A can claim back the one cow that he has already

delivered to B for impossibility. It does not affect his claim that he

cannot offerthe horse back. However, if he knew orought to have

known that the cow was dead, he is liable to make good B’s reliance

damage.

(iii) If the contract is void for illegality (§ 134 BGB) and A knew orought

to have known of the illegality, B can claim his reliance damages from

A (§§ 309, 307 BGB).

(iv) Similarresults may be achieved with culpa in contrahendo, with § 826

BGB, and with §§ 823 II BGB, 263 StGB. Therefore, although in principle

the risk of loss of the horse is on B, B can shift it on to A in all cases

in which A is eitherresponsible forthe unwinding factororin which

he knew orought to have known of the unwinding factorbefore B

transferred the horse to A.

(v) Furthermore, B can always shift the loss on to A where A knew or ought

to have known that he was not entitled to the horse and was at fault

in dealing with the horse in such a way that it ceased to exist: §§ 989,

990 BGB; §§ 989, 292, 818 IV, 819 I BGB; §§ 989, 347, first sentence, BGB.

99 See the references in n. 36, above.

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The results achieved with model II are therefore acceptable, but only

if backed up by legal tools with which B can shift the loss on to A.

German law offers these tools, as shown. English law does not have com￾parable actions to claim reliance damage, such as on grounds of culpa in

contrahendo. Forthis reason, model II is not open to English law.100

(c) Model III

As already seen, model III may be achieved by a number of means, of

which counter-restitution, restitutio in integrum and the Saldotheorie are

the most important. All of these aim to unwind the contract in toto.

A’s claim against B and B’s claim against A are not looked upon as dis￾tinct, but as just two steps in the same story: unwinding the proprietary

and factual consequences of the contract. The conclusion which model

III draws from this is that A is within his rights to have the contract

unwound only if he offers counter-restitution to B either in specie or in

value. As a consequence, the risk of the loss of the horse is on A not

on B.

There are, however, exceptions to this rule:

(i) If to allow A to unwind the contract only on offering counter-restitution

would subvert the policy consideration that renders the contract void,

then A need not make counter-restitution.101

(ii) If loss of the horse is attributable to B, A is again able to claim back

the cow without making counter-restitution. The most important case

is where A wants to have the contract unwound because the horse is

defective, but the horse ceased to exist owing to this same defect.102

(iii) Furthermore, the Saldotheorie does not apply where B has fraudulently

induced A to enterinto the contract.103 English and Scots law do not

know this exception. A even has to offer restitutio in integrum to B if he

wants to rescind the contract for fraudulent misrepresentation.104

The results achieved by model III are acceptable.

100 Model II might be open to Australian law which has claims for reliance damages

comparable to those of German law: Waltons Stores (Interstate) Ltd v. Maher (1988) 164

CLR 387; Commonwealth of Australia v. Verwayen (1990) 170 CLR 394; Justine Munro, ‘The

New Law of Estoppel’, (1993) 23 Victoria University of Wellington Law Review 271; Michael

Spence, ‘Australian Estoppel and the Protection of Reliance’, (1997) 11 Journal of

Contract Law 203; Michael Spence, Protecting Reliance: The Emergent Doctrine of Equitable

Estoppel (1999). 101 See, e.g., Guinness plc v. Saunders [1990] 2 AC 663; Erskine, Institute, Book I, Title VII, 41. 102 Kinnear v. Brodie (1901) 3 F 540; Head v. Tattersall (1871) LR 7 Ex 7; RGZ 94, 253. 103 BGHZ 53, 144. See Dernburg, Pandekten, § 143.5; Vering, Geschichte und Pandekten,

§ 134 VII; von Wening-Ingenheim, Lehrbuch, Book VI, § 11. 104 Forexample Spence v. Crawford 1939 SC (HL) 52.

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(d) Model IV

Undermodel IV the loss is split between the parties. This is the most

flexible approach. It can take into account the special circumstances of

each case. Prima facie it is the most attractive model. However, there are

a numberof problems with it.

(i) First, there needs to be a catalogue of factors that can be taken into

consideration when apportioning the loss. Some might tend to argue that

this should be left to the judge.105 He will best be able to work out which

factors should influence the loss apportionment in a given case. However,

one should be able to agree on a catalogue of factors which should and

those which should neverinfluence the result of a given case. If this cannot

be done in principle, how is the judge expected to do so? In German, Scots

and English legal literature as well as in the case law a number of factors

have been suggested: responsibility for the unwinding factor; responsibil￾ity for the loss; policy considerations of the unwinding factor; which party

can betterbearthe loss; forwhose benefit the contract was made.106

(ii) It is not enough just to enumerate the different factors. One has to

decide how these factors come into play.107 The law faces a similarproblem

with contributory negligence: if the loss of the plaintiff has been caused

not only by the defendant but also by his own negligence, his claim for

damages may be reduced.108 In the case of contributory negligence both

the acts of the plaintiff and the acts of the defendant have caused the loss.

However, the problem here is slightly more complicated. If B induced A to

enter into the contract by fraudulent misrepresentation and A killed the

horse, then A is responsible for the loss of the horse; B is responsible for

the unwinding factor. Each is responsible for a different fact. How should

these two responsibilities be weighed against one another? If B had not

fraudulently induced A to enter into the contract, A would never have re￾ceived the horse, and would never have been in a position to kill it. Should

the loss therefore be on B? One possible answer is that B’s misrepresenta￾tion only influences the loss apportionment, if the fact misrepresented to

A caused the loss.109 B fraudulently tells A that the horse is fit for work

and in fact it is not. If A kills the horse, the loss will be on him. If the

horse only dies because it was not fit for work, the loss will be on B. If A

105 Haggarty v. Scottish Transport and General Workers Union 1955 SC 109 at 114–15 per Lord

Sorn; Gamerco SAv. ICM/Fair Warning Ltd [1995] 1 WLR 1226 at 1236–7 per Garland J;

Axel Flessner, Wegfall der Bereicherung. Rechtsvergleichung und Kritik (1970), 156 ff.; Edgar

Deplewski, Die Risikoverteilung im nichtigen Synallagma (1976), 164 ff. 106 Flessner, Wegfall, 115 ff.; Deplewski, Die Risikoverteilung, 85 ff. 107 Kohler, Die gestorte R ¨ uckabwicklung ¨ , 249; Rengier, ‘Wegfall der Bereicherung’, 428. 108 Law Reform (Contributory Negligence) Act 1945; § 254(1) BGB. 109 See Canaris, ‘Die Gegenleistungkondiktion’.

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by using the horse breaches his diligentia quam in suis and the horse dies,

but a horse which was fit for work would have been able to manage this

situation, the loss may be split.

It is therefore already difficult to explain how only two factors may in￾fluence the loss apportionment.

(iii) It is not yet clearwhich loss is to be apportioned. Let me again

modify the hypothetical case. B transferred his horse to A. The value of the

horse at the time of performance was £400. The value of the cow that B was

to get in exchange was £300. B has made a bad bargain. Before A performs

his side of the bargain the horse declined in value. It is now worth only

£200. Finally, the contract is frustrated and the frustrating event also kills

the horse. Since neither party is responsible for the frustrating event and

since neither party is responsible for the death of the horse, it can be

assumed that the loss is best split equally between the parties. But is it

the loss of £200, £300 or £400 which is to be split?

In conclusion, model IV is unattractive for English and Scots law,

because it is not at all clearhow it functions. Leaving all these questions

to the discretion of the judge would be capitulation to the problems of

principle.

3. Summary

In English and Scots law, the unwinding of mutual contracts should be

further developed on the basis of model III. This should apply regardless

of the unwinding factor, how the claim is categorised, and which method

is adopted to unwind the contract.

V. The meaning of restitutio in integrum

Model III needs a name. ForEnglish and Scots law, counter-restitution

or restitutio in integrum seem to be suitable candidates. I would suggest

that restitutio in integrum is the most appropriate.110 But what is meant by

restitutio in integrum needs to be carefully defined. The term has been used

at different times in Scottish and English legal history in different senses:

(i) to denote an action;111 (ii) to describe the plaintiff’s aim in bringing the

110 Virgo, Principles, 32 ff. apparently prefers counter-restitution. 111 See the old cases of unwinding contracts for minority. See also Percival Gane’s

‘Translator’s note’, in: The Selective Voet: Being the Commentary on the Pandects by Johannes

Voet (1989), IV, 1. This was also the pandectist sense of the term: see, e.g., Mackeldey,

Lehrbuch, § 207.c.1; Puchta, Pandekten, § 100; Friedrich Carl von Savigny, System des

heutigen Romischen Rechts ¨ (1848), vol. VII, 93–4, 98 ff.; Alois Brinz, Lehrbuch der Pandekten

(2nd edn, 1873), § 115.

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action (to be put in integrum);112 (iii) to refer to a requirement of rescis￾sion (the defendant needs to be put in integrum);113 (iv) as a synonym for

‘total restitution’ or that both parties have to be put into their status quo

ante contractum.

114 This last sense is to be preferred because it describes

the unwinding of a mutual contract in its totality: A asks for restitutio in

integrum and in order to be successful has to offer restitutio in integrum.

Restitutio in integrum means that someone is put back into his status

quo ante. Is it everpossible that both parties are put back into their

status quo ante? If restitutio in integrum or status quo ante is understood too

literally, then this will rarely be so.

First, if one party has incurred any expenditure in reliance on the con￾tract, one of the two parties will have to bear this loss. This party will be

worse off than he was before the contract so not returned exactly to his

status quo. But restitutio in integrum has always disregarded reliance expen￾diture. Restitutio in integrum only means that both parties have to give back

benefits received under the contract.

Secondly, if one party has lost what he received, exact restitutio in inte￾grum will be impossible. But the preferable view is that restitutio in integrum

need not be exact. In the example used in this chapterit is sufficient that

A makes good the value of the horse if he wants to claim back the cow.

Literally, neitherA norB is put back into his status quo ante. B only gets the

value of the horse and not the horse in specie. A is financially worse off.

Thirdly, if the contract is terminated or frustrated, it will stay in force

for some purposes; to that extent the parties are not put back into their

status quo ante contractum. This must be disregarded as well.

All that restitutio in integrum means is that both parties have to give back

what they received underthe contract eitherin specie orin value.

VI. Restitutio in integrum v. the defence of change of position

Having now determined how a mutual contract is unwound, I can properly

discuss the question how the defence of change of position can be applied

in this context. There are two questions: (i) is restitutio in integrum merely an

application of the defence of change of position? (ii) are the two distinct?

112 See the Scottish cases on minority and, e.g., Burnes v. Pennell (1849) 2 HLC 497 at 515

per Lord Campbell. 113 See, e.g., Houldsworth v. City of Glasgow Bank (1879) 6 R 1164 at 1173 per Lord Deas. 114 See, e.g., Stuarts v. Whiteford and the Duke of Hamilton (1677) Mor16489 at 16493; Boyd &

Forrest v. Glasgow and South Western Railway Co. 1914 SC 472 at 496 per Lord Dundas;

Graham v. Western Bank of Scotland (1864) 2 M 559 at 564 per Lord Ordinary Kinloch.

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Can they be applied in the same case, oris the defence only applicable

where restitutio in integrum does not apply?

I have already observed that there are two possible applications of the

defence in the example. First, B could rely on the defence of change of

position. He could say to A: ‘In reliance on the contract I have given you

my horse. I have thereby changed my position. Give it back, before you

get yourcow back.’ On the otherhand, A could rely on the defence. He

could argue: ‘I have received your horse, but now it has ceased to exist.

I have therefore changed my position.’ It would be nonsensical to allow

both parties to rely on the defence in this way. In each case only the fate

of the horse is in question. If A and B are both allowed to rely on the

defence, no policy decision has been taken as to who should bearthe loss.

If A is the plaintiff, the loss would be on him, because the defence is open

to B. If B is the plaintiff, the loss would be on him, because the defence

is open to A.115 There would also be a cumulative risk on the plaintiff.116

If A can claim that the contract should be unwound, the loss of the cow

will be on him, because B can rely on the defence of change of position;

equally the loss of the horse will be on him, because B can rely on the

defence of change of position.

1. Should B be able to rely on the defence?

B has given the horse to A. That could count as a change of position.

The question is whether restitutio in integrum is nothing but this defence

of change of position. Fora numberof reasons the answerhas to be a

clear‘No’:

(a) It is thought that the defence of position only applies to parties who

change theirposition in the honest belief of theirentitlement to the

enrichment. Thus, if B were fraudulent, he would not be able to rely

on the defence. But the case law is very clear that restitutio in integrum

works in favour even of a party who is fraudulent.117

(b) The problem of anticipatory reliance comes into play: B might have

given his horse before he received the cow from A. B therefore relied not

115 Bremecker, Die Bereicherungsbeschrankung ¨ , 69–70; Oertmann, ‘Bereicherungs￾angspruche’, 1065; Oertmann, ‘Noch einmal’, 335; Pawlowski, ¨ Rechtsgeschaftliche Folgen ¨ ,

41–2; Schneider, ‘Zur Bestimmung’, 179–80. 116 Bremecker, Die Bereicherungsbeschrankung ¨ , 66–7; Deplewski, Die Risikoverteilung, 13, 23;

Kohler, Die gestorte R ¨ uckabwicklung ¨ , 168–9; Leser, Saldotheorie, 14–15. 117 Peter Birks, ‘Change of Position and Surviving Enrichment’, in: William Swadling

(ed.), The Limits to Restitutionary Claims: AComparative Analysis (1997), 36, 55 ff.; Peter

Birks, ‘Change of Position: The Nature of the Defence and its Relationship to other

Restitutionary Defences’, in: McInnes (ed.), Structure and Challenges, 49, 66; McKendrick,

‘Total Failure’, 239.

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on his enrichment but on the expectation of A’s performance. The case

law indicates that anticipatory reliance might not be sufficient for a

successful defence of change of position.118 However, for the application

of restitutio in integrum it is totally irrelevant who performed first.119

(c) In addition, the following arguments have been put forward in German

legal literature. Take the following modification of the example: B has

given the horse to A, but A has not yet transferred the cow to B. The

defence of change of position fails in this situation because B never

received an enrichment from which he could deduct his own perfor￾mance. However, the principle of restitutio in integrum is capable of deal￾ing with this case. A has to render restitutio in integrum if he wants to

rescind the contract, not just if he wants to claim his cow back.

(d) Finally, A does not have to offer restitutio in integrum to B if the horse

ceases to exist due to B’s fault. This exception cannot be explained on

the basis of the defence of change of position.

2. Should A be able to rely on the defence?

Should A be able to rely on the defence in a claim by B? He has lost the

horse. Again, the answer needs to be ‘No’.

(a) With restitutio in integrum the parties either have to restore what they re￾ceived in specie or they have to make up its value regardless of whether

they are still enriched. Hence, with restitutio in integrum it is of no con￾cern whetherA changed his position ornot.

(b) Suppose that the contract in our example is void. The contract is fully

performed. The loss of the horse is on A. He can only claim back the

cow if he makes good the value of the horse. However, if only B has

performed the contract, then the loss of the horse would be on B, if

A were able to rely on the defence of change of position. Yet whether

the contract has been fully performed or not should not influence the

allocation of risk. It is most consistent with restitutio in integrum that in

this case, too, A should make good the value.

VII. Summary

1. In the unwinding of mutual contracts, our particular concern was

with the question of what effect it should have on A’s claim against B

that A is himself unable to give back what he received under the con￾tract. In English, German and Scots law the answer to this question

depends on a numberof factors: (i) the unwinding factor; (ii) cate￾gorisation of the unwinding factor; (iii) the method for unwinding

118 South Tyneside Metropolitan Borough Council v. Svenska International plc [1995] 1 All ER 545. 119 Burrows, Law of Restitution, 429.