Making “The Law of Unjust Enrichment” Easier to Understand

Public Relations Office        May 30, 2017

Sorting out the global discussion and exploring its precise structure

Hisanori Taki, Associate Professor, School of Law and Politics

Hisanori Taki, Associate Professor, School of Law and Politics

Born in 1978. Graduated from the Faculty of Law of Kyoto University in 2001. Completed the Master’s Program of the Kyoto University Graduate School of Law in 2003. Obtained all credits for the Doctoral Program in 2008. Worked as a lecturer in the Faculty of Law at Himeji Dokkyo University and as Associate Professor in the Faculty of Law at Kagawa University, before taking up his current position in 2016. Specializes in civil law, particularly the law of unjust enrichment.

The law of unjust enrichment is used when there is a change in a person’s proprietary benefit without legal ground, and is a rule that obliges that person to return the property to its proper state. It applies to all positions associated with property, including private individuals, corporations, and government bodies, and is deeply connected to our daily lives. In this article, we will look at the research being conducted by Associate Professor Taki, an expert in this area of the law.

The law of unjust enrichment applies to a variety of cases that could occur in our daily lives, such as overpayment of interest, bank transfer fraud, and tax over-payments or payments in error.

Although generally referred to as “the law of unjust enrichment,” there is actually no piece of legislation with that title in existence. Instead, it is an area of law for which provisions exist in the Civil Code (From Article 703 (*1)). Because the law of unjust enrichment covers all changes in proprietary benefit that lack a legal ground, it deals with issues not only under the Civil Code and private law, such as the Commercial Code and the Consumer Contract Act, but also issues in public law, such as the Act on General Rules for National Taxes and the Public Assistance Act.

Associate Professor Taki commented, ‘This area of the law deals with a diverse range of issues and is very difficult to interpret, but on the other hand, clarifying it is of enormous benefit and very rewarding.’

The particular area that Associate Professor Taki is focusing his efforts on is the rules for “unwinding failed contracts”. He has been researching the area of unwinding between multiple parties, such as bank transfers, since he was in graduate school, and lately, he has been seeking an appropriate interpretation of Article 708 of the Civil Code (*2) concerning performance under illegal contracts. This article has been described as being the other side of the same coin with Article 90 (*3). As research into Article 90 progressed, many different types of contracts were found to be invalid under Article 90, but if Article 708 were to be applied according to the letter of the law, there would be cases in which inconvenient outcomes would occur. Efforts have been made to find a reasonable solution according to the interpretation of the wording of each article, but this is making the rules more complex, and it has become difficult to see the way forward.

For example, take the case of a company that has set up a Ponzi (pyramid) scheme, in which investment is canvassed from large numbers of members, but dividends are paid to only certain members at the top of the pyramid. When this company later collapses,
would the trustee in bankruptcy be able to seek the return of those funds from the members who received the dividend? As setting up a Ponzi scheme is a crime, the contracts between the bankrupt company and each member would be against public policy and would thus be void, and the dividends paid by the bankrupt company would constitute performance under illegal contracts.

If Article 708 were to be applied literally, the bankrupt company itself would not be entitled to recover the dividends from the members, so the trustee in bankruptcy, which would exercise the rights of the bankrupt company on its behalf, should also not be able to recover them. However, to protect the bankruptcy creditors, which includes the many members lower down the pyramid who were unable to receive dividends, the Supreme Court has applied principle of good faith, which is a rule that allows ad hoc solutions, and allows the trustee to recover those devidends.

Why does something like this occur ? Associate Professor Taki says, ‘Quite frankly, you could say that Article 708 is not able to cope with the demands of contemporary society.’ He analyzes, ‘In order to come up with a reasonable solution in a variety of cases, very daring interpretations are needed. To do that, comparisons with the legal systems of various countries will give us some beneficial hints.’

His research has led him to undertake exhaustive research into the laws of various countries, including those of Germany and France, on which Japan’s corpus of civil law was based, as well as international model doctrines such as the Principles of European Contract Law (PECL) and UNIDROIT’s Principles of International Commercial Contracts (PICC). Many of the national laws are similar to Japan’s in that the general rule is to disallow claimes for recovery of performances under illegal contracts, while allowing claimes for recovery in exceptional cases (in the case of Ponzi schemes, the money would not return to the bankrupted company), in what is called a “disallow in principle approach.”

From this standpoint, the mainstream approach is a “requirements approach,” in which interpretation of the requirements of each article is used to allow demands for return on an exceptional basis. In contrast, PECL and PICC take a “disallow on an exceptional basis” approach, in which claimes for recovery would be allowed under the principle of the law of unjust enrichment in cases of performance for illegal contracts as well. The judgement of whether or not to disallow a demand for return on an exceptional basis is left to the discretion of the arbiter (“discretionary approach”). In such cases, the arbiter is not given “unrestricted discretion.” Instead, these Principles stipulate judgment factors that the arbiter must take into consideration, based on which the arbiter is asked to make that judgment (“structured discretion”) (Fig. 1).

Professor Taki posits, ‘With “unrestricted discretion,” similarly to the “requirements approach,” judgments would be on a case-by-case basis, making it difficult to predict outcomes. On the other hand, it could not be said that PECL and the other principles that adopt “structured discretion” have given sufficient deliberation of the judgment factors, and further deliberation is needed. Nevertheless, we can said that this “disallow on an exceptional basis” has become a worldwide trend, and there is a good chance that rulings in Japan will start to change as well.’

He will continue with his research, which revolves around the organization of massive volumes of literature. In particular, he is currently focusing on common law, an area in which analysis has been lacking to date. Together with researchers at nearby universities, he has launched a study group to analyze the “Restatement (Third) of Restitution and Unjust Enrichment” that was published in the United States in 2011, and hopes to leverage the outcomes of that analysis in his own research.

He is enthusiastic about the task ahead, saying, ‘According to the letter of the law, performance for illegal contracts is being treated with the special provision that is Article 708, but if we were take the “disallow on an exceptional basis,” we could open up a path in which the issue of performance for illegal contracts could be incorporated into the general issues of unwinding failed contracts (for reason of error or fraud). My immediate goal is to establish appropriate rules regarding performance for illegal contracts, but in future, I would like to formulate uniform rules for unwinding failed contracts.’

(Fig. 1)

A person who has benefited (hereinafter in this Chapter referred to as "beneficiary") from the property or labor of others without legal cause and has thereby caused loss to others shall assume an obligation to return that benefit, to the extent the benefit exists.

A person who has tendered performance of an obligation for an illegal cause may not demand the return of the thing tendered; provided, however, that this shall not apply if the illegal cause existed solely in relation to the Beneficiary.

A juristic act with any purpose which is against public policy is void.