Subrogation
Overview
Subrogation is an equitable principle (and remedy) which arises where a person has conferred a benefit on another in circumstances where that person has received an unjust enrichment. It most commonly creates an entitlement by operation of law, for a party who discharges another’s debt or obligations, to enforce the rights and interests held by a third person in respect of that obligation against that other.
There must be some element of unjust enrichment in relation to the discharge. In broad terms, where a liability is discharged in circumstances where unjust enrichment arises, subrogation may be available.
Subrogation has a wider application than in debtor-creditor relationships. In its broadest sense, it is a general equitable remedy, which may be deployed by the courts.
It extends beyond the field of unjust enrichment. It may be provided for or regulated by the terms of a contract. It may apply by statute.
Scope of Subrogation
Subrogation does not extend to enforcing unlawful contracts. For example, where a loan is invalid under Consumer Credit Act legislation, it is unlikely to be enforceable by restitution. However, where the invalidity arises from a mistake or the technical failure of contract, restitution is likely to be available.
Subrogation is available only to the extent necessary to remedy unjust enrichment. It does not permit a windfall. Therefore, where the subrogated rights are sufficient to pay off the debt, they are exhausted.
A similar equivalent principle applies for the benefit of a bank, which credits a customer who pays off another creditor. The debt concerned may be set off by way of a principle analogous to subrogation.
In the Place of the Other
It is often said that the person receiving the benefit of subrogation, stands in the shoes of the third-party, whose debt or rights have been discharged. It is akin to an equitable assignment of both personal and proprietary rights.
However, subrogation does not operate as a complete assignment of rights. It operates only to the extent necessary to undo the unjust enrichment. It is not to provide a windfall.
The claim remains in the name of the third party, but the first party at his own expense has the right to direct the claim and is entitled to the recovery of the amounts concerned.
Some Instances
A guarantor/surety who pays off a guaranteed debt stands in the shoes of the creditor. The Mercantile Law Amendment Act assigns the benefit of the creditor’s rights to him together with security. The guarantor takes the benefit of securities, even if he is not aware of them or did not require them, for example in the facility for such a loan.
Where funds were lent to pay down a secured creditor on the understanding/pretext that another lender was to subordinate its claim, but failed to do so, it was held that the lender who was believed to have subordinated his claim had been unjustly enriched due to the lender’s mistake. Subrogation was applied to the extent required to rectify the injustice.
In some cases, where a co-owner of property pays off a mortgage on behalf of all, he is subrogated to the third-party security holder’s rights in regards to his other co-owners.
The principle of subrogation applies in the context of insurance. (See the separate section on insurance). The insured person is disallowed recovery, where the insurer indemnifies him in respect of the loss. The insurer is subrogated to the insured’s rights against third-party rights arising from the claim.
Incapacity
Subrogation may occur in cases where monies have been lent to a company under a contract, which is outside its powers and which it uses to pay-off a secured or unsecured creditor.
Subrogation will cause the first party to stand in the shoes of the third party. The subrogation may be in respect of the personal rights of the creditor whose debt has been discharged and by way of succession to his proprietary security rights. An unsecured creditor, may succeed to a security.
The lender may be subrogated to the rights of the seller of the property (under his unpaid vendor’s lien) or to the previous mortgagee which was discharged. If a new loan is valid but a new security is not valid, the lender is subrogated to the previous valid mortgage which is paid off.
The principle applies in the case of monies borrowed by a minor. The minor’s obligations are unenforceable, but the lender may be subrogated to the rights of others whose debts are paid down or redeemed with the loaned money. For example, where the minor uses the loan monies to buy necessaries, the lender may recover monies to the extent used to buy those necessaries, if the claimant was the party who provided the necessaries.
Similarly, where a child borrows money to pay for the purchase or discharge of a mortgage on a property, the loan would be invalid under Infant Relief Act. The lender takes over the rights of the secured creditor who has been paid off.
Guarantee and Mortgage Scenarios
The first party may discharge the obligations of the other to the third party in full. This may happen on payment in full of the sum due on a guarantee by the first party (guarantor) to the third party (lender/bank) , in respect of the other’s obligations (loan) owed to the third party.
In this case, the guarantor succeeds to and revives the rights. He succeeds to the security. Otherwise, the debtor is unjustly enriched.
Subrogation may also be available where monies are used, unjustly taken or unjustly received by another and are used to buy another asset or to pay off a mortgage. There is a line of cases which have held that where a corporate body borrows monies outside of its power and uses the monies to pay down its loans, the putative lender is subrogated to the personal and security rights of the secured creditors whose loans were discharged.
It is not necessary that the money be used specifically for the purpose of redemption or remortgage. It is sufficient that the money is used to pay down the third party mortgage. The principle may give allow the first party to succeed to a proportionate part of the right to the third party against the other party. However, this will not operate to the prejudice of the third party creditor/mortgagee.
Substitute Asset Scenarios
Where a surety or guarantor pays off another ’s debt, he is subrogated to the rights of the creditor against the principal debtor. He succeeds to the securities. He need not necessarily have had knowledge of them, when in paying off the debt. The right applies to secondary parties to bills of exchange who are liable where the primary party defaults.
The principle of subrogation applies where a new mortgage is invalid, in circumstances where the proceeds of the new loan are used to pay off the loan secured by the older valid mortgage. The new lender may be subrogated to, and thereby enabled to exercise the rights under the new loan with the benefit of the older valid mortgage.
There must be some element of unjust enrichment involved. The mere lending of monies which are used to pay off a third-party secured creditor. does not create the right of subrogation. A failure of the new mortgage which has been required will suffice. It may be enough that the new monies are lent, specifically for the purpose of paying off the existing mortgage monies.
There is authority for the proposition that a lender who advances money for the express purpose of being applied in payment of the purchase price of a property, is entitled to the unpaid vendor’s lien, which the vendor would have been entitled to, if the purchase price had not been paid. This is at least provided that there is no contract between the lender and borrower which is inconsistent with the intention that such right should be acquired.
Insurance
Subrogation arises in the context of the insurance. The insurer is subrogated to the rights of the insured. See generally the sections on insurance.
The application of the equitable principle of subrogation follows from the indemnity given by the insurer to the insured. The subrogation is necessarily restitutionary in itself, although, in the broadest sense, it prevents the unjust enrichment of double recovery.
Subrogation in the insurance context arises largely from the expressed or implied terms of the contract.Some types of insurance policy are interpreted as not having rights of subrogation, including, in particular, life insurance policy and investment type policies.