Subrogation
Cases
Lord Napier & Ettrick v. Hunte
[1993] AC 713
Lord Templeman: … The second question is whether the stop loss insurers have an interest in the moneys held by Richards Butler. For this purpose it may be assumed by way of exam ple that the moneys held by Richards Butler include £130,000 paid by Outhwaite as damages for negligence which inflicted a loss of £160,000 on a name in respect of the 1982 year of account; can the stop loss insurers assert an interest in that sum of £130,000 to the extent of the £95,000 which, as I have indicated, is due to them by way of subrogation?
Outhwaite, the stop loss insurers were bound to pay and did pay £100,000 under the policy. The stop loss insurers immediately became entitled to be subrogated to the right of the name to sue and recover damages in an action against Outhwaite, albeit that the amount payable to the stop loss insurers by way of subrogation could not be quantified until the action had been concluded and the damages paid. Nevertheless in my opinion the stop loss insurers had an interest in the right of action possessed by the name against Outhwaite. That action, if brought by the name, would be an action for the benefit of the name and for the benefit of the stop loss insurers. Where an insurer has paid on the policy, the courts have recognised the interests of the insurer in any right of action possessed by the insured person which will enable the insurer to claim back the whole or part of the sum which he has paid under the policy. The courts recognise the interests of the insurer by allowing him to sue in the name of the insured person against the wrongdoer if the insured person refuses to pursue the action.
It may be that the common law invented and implied in contracts of insurance a promise by the insured person to take proceedings to reduce his loss, a promise by the insured person to account to the insurer for moneys recovered from a third party in respect of the insured loss and a promise by the insured person to allow the insurer to exercise in the name of the insured person rights of action vested in the insured person against third parties for the recovery of the insured loss if the insured person refuses or neglects to enforce those rights of action. There must also be implied a promise by the insured person that in exercising his rights of action against third parties he will act in good faith for the benefit of the insured person so far as he has borne the loss and for the benefit of the insurer so far as he has indemnified the insured per son against the insured loss. My Lords, contractual promises may create equitable interests. An express promise by a vendor to convey land on payment of the purchase price confers on the purchaser an equitable interest in the land. In my opinion promises implied in a contract of insurance with regard to rights of action vested in the insured person for the recovery of an insured loss from a third party responsible for the loss confer on the insurer an equitable inter est in those rights of action to the extent necessary to recoup the insurer who has indemnified the insured person against the insured loss.
lf the stop loss insurers have no equitable remedy in connection with their rights and if a name becomes bankrupt then subrogation is a mockery. Suppose, for example, that a name receives £100,000 from an insurer under a policy, recovers judgment for £130,000 damages from the wrongdoer and the name goes bankrupt before he receives the damages owing £Im. and possessing no assets other than assets representing the £100,000 he has received from the insurer and the asset of £130,000 payable by the wrongdoer. In that case, if the argument on behalf of the names is correct, the unsecured creditors of the insured name will benefit by double payment. The stop loss insurers will be in a worse _position than an unsecured creditor because the insurers could not resist payment under the policy whereas an unsecured creditor may choose whether to advance moneys or not. In the case of the bankruptcy of the name, the right of the insurer to subrogation will be useless unless equity protects that right.
Saville J and the Court of Appeal held that the stop loss insurers were confined to their remedy for money had and received. The damages must first be distributed to the names. The stop loss insurers must then agree or determine by application to the court the amount due to them respectively and must then bring proceedings for money had and received against each of the names. All the authorities which indicated that an insurer who pays on the policy and is enti tled to recoupment by way of subrogation has an equitable interest in the right of action of the insured person against a wrongdoer and an equitable interest in the damages payable by the wrongdoer were said not to be binding on the courts. Those authorities which I have cited, and there are others, included Randal v. Cockran, I Ves.Sen. 98 decided in 1748, While v. Dobinso11, 14 Sim. 273; 116 LTOS 233 decided in 1844, Commercial Union Assur11nct Co. v. Lister, LR 9
Ch.App. 483 decided in 1874, and In re Miller, Gibb £5 Co. Ltd (1957] I WLR 703 decided in 1957.I am not prepared to treat authorities which span over two centuries in a cavalier fashion. The principles which dictated the decisions of our ancestors and inspired their references to the equitable obligations of an insured person towards an insurer entitled to subrogation are dis cernible and immutable. They establish that such an insurer has an enforceable equitable inter est in the damages payable by the wrongdoer. The insured person is guilty of unconscionable• conduct if he does not provide for the insurer to be recouped out of the damages awarded against the wrongdoer. Equity will not allow the insured person to insist on his legal rights to all the damages awarded against the wrongdoer and will restrain the insured person from receiving or dealing with those damages so far as they are required to recoup the insurer under the doctrine of subrogation.
Where the insured person has been paid policy moneys by the insurer for a loss in respect of which the insured person recovers damages from a wrongdoer the insured person is guilty of unconscionable conduct if he does not procure and direct that the sum due to the insurer shall by way of subrogation be paid out of the damages.
It is next necessary to consider how equity copes with such unconscionable conduct. Saville J and the Court of Appeal appear to have thought that equity can only interfere by creatinga trust fund held in trust by trustees for d\fferent beneficiaries in different shares, the trustees being burdened with administrative and investment duties, the trustees being liable for all the duties imposed on trustees but being free from liability if the trust fund is lost without negli
gence.I agree that if this were the only method of protecting the rights of an insurer the prac tical disadvantages would be fearsome. Fortunately, equity is not so inflexible or powerless. In order to protect the rights of the insurer under the doctrine of subrogation equity considers that the damages payable by the wrongdoer to the insured person are subject to an equitable lien or charge in favour of the insurer. The charge is imposed by equity because the insurer, once he
has paid under the policy, has an interest in the right of action against the wrongdoer and an interest in the establishment, quantification, recovery and distribution of the damages awarded against the wrongdoer. It would be unconscionable for the insured person, who has received £100,000 from the insurer, to put damages of £130,000 into his own pocket without providing for the recoupment of the insurer who only contracted to indemnify the insured person.
The insurer can give notice to the wrongdoer of his equitable charge. When the wrongdoer is ordered or agrees to pay £ I 30,000 and has notice of the rights of the insurer to subrogation, the wrongdoer can either pay the damages into court or decline to pay without the consent nf both the insured person and the insurer. It would be the duty of the insured person to direct the wrongdoer to pay £95,000 of the damages to the insurer in recoupment and to pay the bal ance of £35,000 to himself. The equitable charge in favour of the insurer is enforceable against the damages ordered to be paid; that charge can be enforced so long as the damages form an identifiable separate fund. If, in the present case, Richards Butler had distributed the damages to the names before the stop loss insurers issued proceedings or notified Richards Butler of their equitable charge, the stop loss insurers would have been reduced to exercising their rights to sue the names for money had and received.
In the present case damages of £116m are in a separate fund held by Richards Butler on behalf of the names albeit that the damages in the fund also include moneys held on behalf of other names and other insurers. For the reasons I have indicated it would be unconscionable for the names to take their shares of the damages without providing for the sums due to the stop loss insurers to be paid out of those damages. The equitable charge still affects the damages and affects Richards Butler who hold the damages with notice of the charge.
Since drafting this speech I have read in draft the speech to be delivered by my noble and learned friend, Lord Goff of Chieveley. He agrees that the doctrine of subrogation confers on the insurer an equitable proprietary lien or charge on the moneys recovered by the insured per son from a third party in respect of the insured loss. I agree that in the circumstances it is not
now necessary to decide whether the equitable lien or charge attaches also to the righlB ofICdon vested in the insured person to recover from a third party. I have expressed the view that the doctrine of subrogation does apply in those circumstances but in any future case, if the point becomes material, that view may require reconsideration in the light of further research ….
Lord Goff of Chieveley: … I start with the common law. In Yorkshire Insurance Co. Ltd v. Nisbtl Shipping Co. Ltd [1962] 2 ® 330, a case concerned with marine insurance, Lord Diplock (then Diplock J) analysed the principle of subrogation in purely contractual terms. He said, at 339-40:
‘The expression “subrogation” in relation to a contract of marine insurance is thus no more than a convenient way of referring to those terms which are to be implied in the con tract between the assured and the insurer to give business efficacy to an agreement whereby the assured in the case of a loss against which the policy has been made shall be fully indemnified, and never more than fully indemnified.’
He went on to say, at 340, that subrogation is concerned solely with the mutual rights and liabilities of the parties to the contract of insurance. The remedies of the insurer were, he said, essentially common law remedies; in particular, if the assured has, after payment of the loss by the insurer, received a sum from a third party in reduction of the loss, the insurer can recover the amount of the reduction as money had and received (for which Lord Diplock referred, at 341, to Bullen and Leake, Precedents of Pleadings, 3rd edn. (1868), 187). The only role which Lord Diplock assigned to equity was to come to the aid of the common law by compelling the assured to allow his name to be used in proceedings against the third party: see also his judg ment in Hobbs v. Marlowe [1978] AC 16, 39 …. there is no reason why, subject to the one maner to which Lord Diplock refers, the
principle of subrogation in the field of insurance should not have developed as a purely com mon law principle. But as a matter of history it did not do so. It is true that our law of marine insurance was very largely established by Lord Mansfield, in a remarkable series of decisions during his tenure of office as Chief Justice at the Court of King’s Bench, so much so that Park J dedicated the first edition of his treatise on the law of marine insurance (Park, A System of tht
Law of Marine Insurances (1786)) to Lord Mansfield, describing the subject in the dedication as one which ‘must be admined to be the exclusive property of your Lordship.’ But in the early editions of the book there is linle trace of the principle of subrogation, though there is much learning on the subject of abandonment. Lord Mansfield’s decision in the leading case of Mason v. Sainsbury, 3 Doug. 61 established that payment of a claim by an insurer did not preclude him from thereafter proceeding in the name of the assured against the wrongdoer who had caused the relevant damage, and recovering damages in full from him. The payment of the loss by the insurer to the assured did not affect the liability of the wrongdoer; the action against him was to be considered ‘as if the insurers had not paid a farthing:’ see at 64. However the [insurer] could not proceed against the third party in his own name; he had to proceed in the name of the assured: see London Assurance Co. v. Sainsbury (1873) 3 Doug. 245.
It is of some interest that, in Mason v. Sainsbury, the action against the wrongdoer was brought in the name of the assured with his consent, for the benefit of the insurer. Herc we can see an early example of the fact that the insurer, upon payment to the assured of his loa, receives from him as a matter of course not merely a receipt for the money, but also what hu for many years been called a letter of subrogation signed by the assured which authorises the insurer to proceed in this way, and indeed nowadays may assign the relevant rights of action to the insurer. It is very difficult to imagine an insurer paying a claim without taking this elemen• tary precaution, especially as the assured can have little or no incentive to refuse to sign 1uch 1 document. I strongly suspect that letters of subrogation have been a commonplace of inaunnce claims for a very long time; and that it is their regular use which explains what appean to be a dearth of authority on such matters as proceedings to compel the assured to allow the insurer to commence proceedings in his name, and actions for money had and received by insured against assureds, because third parties would have settled direct with the insurer as expressly authorised by the assured (hence, pace Lord Diplock, the absence of any reference to such an action in Bullen f5 Leake, 3rd edn.). On the other hand, there is a substantial body of case law on the subject of the respective rights of insurer and assured in the institution, control and set tlement of proceedings against wrongdoers who have caused the relevant loss (as to which see MacGillivray and Parkington on Insurance Law, 8th edn. (1988), paras. 1191 ff.).
At all events, what appears to have happened is not simply that equity came to the aid of the common law by compelling an assured whose loss has been paid to allow the insurer to proceed in his name against a third party wrongdoer responsible for the loss, but that a principle of sub rogation was the subject of separate development by courts of equity in a line of authority dat ing from Randal v. Cockran, 1 Yes.Sen. 98, which was decided before Lord Mansfield was appointed Chief Justice of the Court of King’s Bench. This line of authority is traced in the speech of my noble and learned friend, Lord Templeman, and I am therefore spared the bur den of setting it out in this opinion. Spasmodic but consistent, the cases assert that recoveries by the assured which reduce the loss paid by the insurer are held in trust for the insurer, so much so that by 1881 Sir George Jessel MT regarded this proposition as indisputable: see Commercial Union Assurance Co. v. Lister, LR 9 Ch.App. 483, 484n. This principle was more over recognised not only in courts of equit}j, but also in courts of common law: see the decision of the Court of Common Pleas in Yates v. •White, I Arn. 85; sub nom. Yates v. Whyte, 4 Bing. (NC) 272, subsequently approved by this House in Simpson (5 Co. v. Thomson (1877) 3 App.Cas. 279, in which Lord Cairns LC, af 285-6, cited in extenso passages from the judgment in Yates v. Whyte, 4 Bing. (NC) 272 in which reliance was placed on Randal v. Cockran, and Lord Blackburn, at 293, relied on Randal v. Cockran itself in a passage to which I shall refer later in this opinion. It is perhaps also relevant that in 1783 Lord Mansfield had justified his conclusion that the insurer could not proceed in his own name but must proceed in the name of the assured on the ground that ‘trusttt and cestui que trust cannot both have a right of action:’ see London Assurance CQ. v. Sainsbury, 3 Doug. 245, 253.
I agree with my noble and learned friend, Lord Browne-Wilkinson, that the decisive case in the line of equity cases is White v. Dobinson, 14 Sim. 273; 116 LTOS 233. The case was concerned with a collision at sea. The owner of one of the ships, after payment by his underwriter of £205, was awarded £600 damages in arbitration proceedings against the other shipowner. Sir Lancelot Shadwell V-C, relying upon Randal v. Cockran and Bfaauwpot v. Da Costa, 1 Ed. 130, granted an interlocutory injunction which had the effect of retaining the fund, and not letting it pass into the hands of the assured. The injunction appears to have restrained both the assured from receiving, and the other shipowner from paying, the money without first paying or providing for the sum of £205 paid by the insurer: see the report at 116 LTOS 233. Lord Lyndhurst LC discharged the injunction as against the other shipowner, but otherwise maintained it in force. The case is important for a number of reasons. First, the insurer’s case was advanced on the basis that he had a lien on the sum awarded, and was resisted on the ground that the insurer’s right, if it existed at all, was a right to proceed at law in an action for money had and received, and was not an equi table right. That argument was rejected. Second, the Lord Chancellor also rejected a claim by a bank as assignee from the assured, on the ground that the bank’s security was taken subject to all the equities which would have affected the money received in the hands of the assured himself. Third, the Lord Chancellor held that the insurers had a claim upon the fund awarded, and were ‘entitled in some shape or other to recover back the money they have paid.’
Now it is true that the case was concerned with an interlocutory injunction, a point which evidently concerned the Lord Chancellor himself. But he nevertheless upheld the injunction on the basis of the authority cited to him, in which, as he said:
‘we have the clearly expressed opinions of Lord Hardwicke and Lord Northington, recog nised by parke B., and more recently by Lord Abinger CB (Brooks v. MacDonnell (1835) 1 Y. & C. 500), who at that time possessed considerable experience of the practice in equity, from having presided for several years on the equity side of the Court of Exchequer ‘
Subsequent authorities to the same effect are King v. Victoria Insurance Co. Ltd [1896] AC 250,255-6, per Lord Hobhouse who (in a passage in which he appears to have placed no reliance upon the existence of an assignment by the assured of its rights and causes of action against the third party) expressed the opinion that the assured would have held any damages recovered from the third party as trustee for the insurer; and In re Miller, Gibb (5 Co. Ltd [1957]
1 WLR 703. The only case in equity which appears at first sight to be inconsistent with this line of authority is Stearns v. Village Main Reef Gold Mining Co. Ltd, 10 Com.Cas. 89. However, as my noble and learned friend, Lord Browne-Wilkinson, has pointed out, that case was con cerned with the recovery of an overpayment; indeed, it was upon that basis that it was distin guished by Wynn-Parry Jin In re Miller, Gibb (5 Co. Ltd [1957] l WLR 703, 710-11.
Despite Saville J’s reservations on this point, I can discern no inconsistency between the
equitable proprietary right recognised by courts of equity in these cases and the personal rights and obligations embodied in the contract of insurance itself. No doubt our task nowadays is to see the two strands of authority, at law and in equity, moulded into a coherent whole; but for my partI cannot see why this amalgamation should lead to the rejection of the equitable pro prietary right recognised in the line of cases to which I have referred. Of course, it is proper to start with the contract of insurance, and to see how the common law courts have worked out the mutual rights and obligations of the parties in contractual terms with recourse to implied terms where appropriate. But, with all respect, I am unable to agree with Lord Diplock that subrogation is in this context concerned solely with the mutual rights and obligations of the parties under the contract. In this connection, I observe from the report of Yorkshire Insurance Co. Ltd v. Nisbet Shipping Co. Ltd [1962) 2 Q!3 330 that the important case of White v. Dobinson, 14 Sim. 273; 116L TOS 233 was not cited in argument, and indeed the existence of an equi table proprietary right was not in issue in that case. In these circumstancesI cannot derive from Lord Diplock’s judgment any justification for sweeping the line of equity cases under the car pet as though it did not exist. ln my opinion, this line of authority must be recognised, and appropriate weight should be given to the views expressed in the cases by the distinguished judges who decided them. I wish to add that I do not read section 79 of the Marine Insurance Act 1906 (concerned with the right of subrogation) as in any way detracting from this conclusion.
Even so, an important feature of these cases is that the principle of subrogation in the law of insurance arises in a contractual context. It is true that in some cases at common law it has been described as arising as a matter of equity. Thus in Burnand v. Rodocanachi Sons (5 Co.,7 App.Cas. 333, 339, Lord Blackburn described it simply as ‘an equity.’ Furthermore, it has not been usual to express the principle of subrogation as arising from an implied term in the con tract. Even so it has been regarded, both at law and in equity, as giving effect to the underly ing nature ofa contract of insurance, which is that it is intended to provide an indemnity but no more than anindemnity. Not only does this principle inform the judgments of the Court of Appeal in the leading case of Castellain v. Preston, 11 Q!3D 380, but it underlies Lord Lyndhurst LC’s judgment in White v. Dobimon, ll6 LTOS 233. In so far as the principle requires the payment of money, it could no doubt be formulated as an implied term, to which effect could have been given by the old action for money had and received. ButI do not sec why the mere fact that the purpose of subrogation in this context is to give effect to the principle of indemnity embodied in the contract should preclude recognition of the equitable proprietary right, if justice so requires. If I search for a parallel, the closest analogy is perhaps to be found in the law of agency in which, although the relationship between principal and agent is gov• erned bya contract, nevertheless the agent may be held in certain circumstances to hold money, which he has received from a third party in his capacity as agent, as trustee for his principal. It is by no means easy to ascertain the circumstances in which a trusteeship exists; but, ina valuable discussion in Bowstead on Agency, 15th edn. ( I985), 162-3, Professor Francis Reynolds suggests that it is right to inquire
‘whether the trust relationship is appropriate to the commercial relationship in which the parties find themselves; whether it was appropriate that money or property should be, and whether it was held separately, or whether it was contemplated that the agent should use the money, property or proceeds of the property as part of his normal cash flow in sucha way that the relationship of debtor and creditor is more appropriate.’
He also suggests that
‘a central question, perhaps too often overlooked (because not directly an issue), is whether the rights of the principal arc sufficiently strong, and differentiable from other claims, for him to be entitled to a prior position in respect of them on the agent’s bankruptcy.’
I have little doubt that the distinguished judges who decided the cases in the line of equity authority to which I have referred must have considered that money received by an assured froma third party in reduction of a loss paid by an insurer should not be treated as available for the assured’s normal cash flow, and further that the rights of the insurer to such money were
sufficiently strong to entitle the insurer to,priority in the event of the assured’s bankruptcy, as was indeed held by Wynn-Parry J in In r Miller, Gibb (5 Co. Ltd [I957) l WLR 703.I for my part can see no good reason to depart from this line of authority. However, since the constitution of the assured as trustee of such money may impose upon him obligations of too onerous a character (a point which troubled Saville J in the present case), I am very content that the equitable proprietary right of the insurer should be classified as a lien, as proposed by my noble and learned friend, Lord Templeman, and indeed as claimed by the insurer in White v Dobinson, 14 Sim. 273 itself. Indeed a lien is the more appropriate form of proprietary right in circumstances where, as here, its function is to protect the interest of the insurer in an asset only to the extent that its retention by the assured will have the effect that he is more than indem nified under the policy of insurance.
There is one particular problem to which I wish to refer, although, as I understand it, it does not fall to be decided in the present case. Does the equitable proprietary interest of the insurer attach only to a fund consisting of sums which come into the hands of the assured in reduction of the loss paid by the insurer? Or does it attach also to a right of action vested in the assured which, if enforced, would yield such a fund? The point is not altogether easy.I can see no reason in principle why such an interest should not be capable of attaching to property in the nature oaf chose in action. Moreover that it should do so in the present context appears to have been the opinion of Lord Blackburn in Simpson (5 Co. v. Thomson, 3 App.Cas. 279,292-3. On the other hand, cases such as Morley v. Moore [1936] 2 KB 359 appear to point in the opposite direction, as perhaps does the decision ofLord Lyndhurst LC in While v. Dobinson, 116 LTOS 233 to discharge the injunction as against the owner of the ship at fault in that case.However, since the point was not directly addressed in the argument before your Lordships,I am reluctant to reach any conclusion upon it without a full examination of the authorities relating to the respective rights and obligations of insurer and assured, especially with regard to the conduct and disposal of litigation relating to causes of action of the re.levant kind. I therefore wish to reserve my opinion upon this question, the answer to which I do not regard as necessary for the resolution of the issue which has arisen in the present case.
Lord Browne-Wilkinson: … What, then, was the basis on which equity enforced rights of subrogation? Was it merely a personal obligation of the assured to account to the insurers for benefits received from third party wrongdoers in diminution of the insured loss, or was iat proproprietary interest in moneys subsequently recovered by an assured from a third party wrong doer. Although many of the authorities refer to that right as arising under a trust, in my judg ment the imposition of a trust is neither necessary nor desirable: to impose fiduciary liabilities on the assured is commercially undesirable and unnecessary to protect the insurers’ interests. In my judgment, the correct analysis is as follows. The contract of insurance contains an implied term that the assured will pay to the insurer out of the moneys received in reduction of the loss the amount to which the insurer is entitled by way of subrogation. That contractual obligation is specifically enforceable in equity against the defined fund (i.e., the damages) in just the same way as are other contracts to assign or charge specific property e.g. equitable assign ments and equitable charges. Since equity regards as done that which ought to be done under a contract, this specifically enforceable right gives rise to an immediate proprietary interest in the moneys recovered from the third party. In my judgment, this proprietary interest is ade quately satisfied in the circumstances of subrogation under an insurance contract by granting the insurer a lien over the moneys recovered by the assured from the third party. This lien will be enforceable against the fund so long as it is traceable and has not been acquired by a bona fide purchaser for value without native. In addition to the equitable lien, the insurer will have a personal right of action at law to recover the amount received by the assured as moneys had and received to the use of the insurer.
As to the question whether the insurers have a proprietary interest in the assured’s cause of action against the third party (as contrasted with the damages actually recovered) I prefer to express no concluded view. I do not think that the proprietary interest in the damages neces sarily posrulates a pre-existing proprietary interest in the cause of action. The contrary view could be reached by an argument along the following lines. Any equitable proprietary right must be based on the contract between the insurers and the assured. The implied terms of such contract are established by the decided authorities. Some of those implied terms may be incon sistent with the insurers having any right of property in the cause of action as opposed to the damages recovered. Thus, the third party can compromise the claim with the assured alone, without requiring the concurrence of the insurers. Again, the third party will obtain a good dis charge for a judgment only ifhe pays the assured as opposed to the insurers. If the insurers have a proprietary interest in the cause of action it could be argued that the assured alone could nei ther effect a valid compromise nor give a good discharge: the insurers also would have to be parties. Accordingly, it could be said that the implied terms of the contract between the insur ers and the assured are such that equity would not be specifically enforcing the parties’ bargain if it treated the insurers as having proprietary rights in the cause of action inconsistent with the rights of the assured and that accordingly the rights of the insurers are purely personal rights to require the assured either to pursue the cause of action against the third party or to permit the insurers to do so in his name. But there are plainly factors pointing the other way and since the question was not fully argued I prefer to express no view on the point.
Lord Jauncey and Lord Steyn concurred.
Boscawen v. Bajwa
[1996] 1 WLR 328, Court of Appeal
Millett LJ: …
Tracing and subrogation
The submission that the deputy judge illegitimately conflated two different causes of action, the equitable tracing claim and the claim to a right of subrogation, betrays a confusion of thought which arises from the admittedly misleading terminology which is traditionally used in the context of equitable claims for restitution. Equity lawyers habitually use the expressions ‘the tracing claim’ and ‘the tracing remedy’ to describe the proprietary claim and the proprietary remedy which equity makes available to the beneficial owner who seeks to recover his property in specie from those into whose hands it has come. Tracing properly so-called, however, is nei ther a claim nor a remedy but a process. Moreover, it is not am fined to the case where the plain tiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and jus tifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. Unless he can prove this he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant’s unjust enrichment was at his expense.
In such a case the defendant will either challenge the plaintiff’s claim that the property in question represents his property (i.e., he will challenge the validity of the tracing exercise) or he will raise a priority dispute (e.g., by claiming to be a bona fide purchaser without notice). If all else fails he will raise the defence of innocent change of position. This was not a defence which was recognised in England before 1991 but it was widely accepted throughout the com mon law world. In Lipkin Gorman v. Karpnale Ltd[l991] 2 AC 548 the House of Lords acknow ledge it to be part of English law also. The introduction of this defence not only provides the court with a means of doing justice in future, but allows a re-examination of many decisions of the past in which the absence of the defence may have led judges to distort basic principles in order to avoid injustice to the defendant.
If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant’s behalf, he is entitled to a remedy. The remedy will be fashioned to the cir cumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a propri etary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant’s land has been enhanced by the use of the plaintiff’s money. And if the plaintiff’s money has been used to discharge a mortgage on the defendant’s land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff.
Subrogation, therefore, is a remedy, not a cause of action … it is available in a wide variety of different factual situations in which it is required in order to reverse the defendant’s unjust enrichment. Equity lawyers speak of a right of subrogation, or of an equity of subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other.
Accordingly, there was nothing illegitimate in the deputy judge’s invocation of the two doc trines of tracing and subrogation in th same case. They arose at different stages of the pro ceedings. Tracing was the process by which the Abbey National sought to establish that its money was applied in the discharge ofihe Halifax’s charge; subrogation was the remedy which it sought in order to deprive Mr Bajwa (through whom the appellants claim) of the unjust enrichment which he would thereby otherwise obtain at the Abbey National’s expense.
Tracing
It is still a prerequisite of the right to trace in equity that there must be a fiduciary relation ship which calls the equitable jurisdiction into being: see AtiP (Africa) Ltd v. Jackson [1991) Ch. 547,566, per Fox LJ. That requirement is satisfied in the present case by the fact that from the first moment of its receipt by Dave in their general client account the £140,000 was trust money held in trust for the Abbey Nationa_l.The appellants do not dispute that the Abbey National can successfully trace £137,405 of its money into Hill Lawson’s client account. But they do dispute the judge’s finding that it can trace the sum further into the payment to the Halifax.
The £137,405 was paid into Hill Lawson’s general client account at the bank because it was only intended to be kept for a short time. Funds which were held for clients for any length of time were held in separate designated accounts. Hill Lawson’s ledger cards showed Mr Bajwa as the relevant client. According to Mr Duckney [of Hill Lawson], Hill Lawson also hold other funds for Mr Bajwa which were the result of an inheritance which he had received. These were the source from which Hill Lawson made good the shortfall of £2,595 which arose when Dave’s cheque was dishonoured. The amount of these other funds is unknown, though it was certainly nothing like £14-0,000. The evidence does not show whether they were held in Hill Lawson’s general client account or whether they were held in a separate designated account. If they were held in the general client account the £137,405 received from Dave was (quite properly) mixed not only with moneys belonging to other clients but also with money belonging to Mr Bajwa. Hill Lawson can be presumed not to have committed a breach of trust by resorting to moneys belonging to other clients but they were perfectly entitled to use Mr Bajwa’s own money to dis charge the Halifax’s charge on his property. Whether they did so or not cannot be determined in the absence of any evidence of the amount involved. Accordingly, it is submitted, the Abbey National has failed to establish how much of its money was applied in the discharge of the Halifax’s charge and how much of the money which was applied for this purpose was Mr Bajwa’s own mone
The Abbey National answers this submission in two ways. First, it submits that Hill Lawson’s ledger cards show that Hill Lawson appropriated the £137,405, which they had received from Dave, towards the payment of the sum of£ 14,000 to the Halifax, and resorted to Mr Bajwa’s other funds only when Dave’s cheque for the balance was dishonoured. The ledger cards were, of course, made up after the event, though long before any litigation ensued, so they are not primary evidence of actual appropriation; but they are reliabJe evidence of the appropriation which Hill Lawson believed that they had made.
I accept this submission. It is not necessary to apply artificial tracing rules where there has been an actual appropriation. A trustee will not be allowed to defeat the claim of his beneficiary by saying that he has resorted to trust money when he could have made use of his own; but if the beneficiary asserts that the trustee has made use of the trust money there is no reason why he should not be allowed to prove it.
The second way in which the Abbey National answers the appellants’ submission is by reliance on equity’s ability to follow money through a bank account where it has been mixed with other moneys by treating the money in the account as charged with the repayment of his money. As against a wrongdoer the claimant is not obliged to appropriate debits to credits in order to ascertain where his money has gone. Equity’s power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour: see In re Hal/tit’s Estate; Knatchhu/1 v. Hallett (1880) 13 Ch.D 696; In re OatT1Jay; Hertslet v. Oatway [I 903) 2 Ch. 356 and El Ajou v. Dollar Land Holdings Pie [1993] 3 All ER 717.
[Having considered the different tracing rules applicable to where the money was mixed by an innocent volunteer, citing In re Diplock (set above, 676), …
But the present case is very different. Neither Mr Bajwa nor his solicitors acted dishonestly, but nor were they innocent volunteers. Hill Lawson knew that the money was trust money held to Dave’s order pending completion and that it would become available for use on behalf of their client only on completion. They were manifestly fiduciaries. Mr Bajwa, who was plainly intending to redeem the Halifax’s mortgage out of the proceeds of sale of the property, must be taken to have known that any money which his solicitors might receive from the purchasers or their mortgagees would represent the balance of the proceeds of sale due on completion and that, since he had made no arrangement with the purchasers to be advanced any part of that amount before completion, it would be available to him only on completion. He cannot possi bly have thought that he could keep both the property and the proceeds of sale. Had he thought about the matter at all, he would have realised that the money was not his to mix with his own and dispose of as he saw fit. The only reason that he and his solicitors can be acquitted of dis honesty is that he relied on his solicitors and they acted in the mistaken belief that, save for the tidying up of some loose ends, they were on the point of completing.
It follows that Mr Bajwa cannot avail himself of the more favourable tracing rules which are available to the innocent volunteer who unconsciously mixes trust money with his own.
Subrogation
The appellants submit that the mere fact that the claimant’s money is used to discharge someone else’s debt does not entitle him to be subrogated to the creditor whose debt is paid. There must be ‘something more:’ Paul v. Speimay Ltd [1976) Ch. 220, 230, per Oliver J; and see Orakpo v. Manson lnvtstments Ltd [1978) AC 95, 105, where Lord Diplock said:
‘The mere fact that money lent has been expended upon discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose: Wylit v. Carlyon [1922) 1 Ch. 51.’
From this the appellants derive the proposition that in order to be subrogated to the creditor’s security the claimant must prove (i) that the claimant intended that his money should be used to discharge the security in question (that being the ‘something more’ required by Oliver J) and (ii) that he intended to obtain the benefit of the security by subrogation.
I cannot accept that formulation as a rule of general application, regardless of the circum stances in which the remedy of subrogation is sought. The cases relied on were all cases where the claimant intended to make an unsecured loan to a borrower who used the money to discharge a secured debt. In such a case the claimant is not entitled to be subrogated to the cred itor’s security since this would put him in a better position than he had bargained for. OliverJ
in Paul v. Speirway ltd [1976] Ch. 220,232 was not prepared to say more than that:
‘It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say this: that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose insti gation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation. That really, as it seems to me, is to say no more than that the question of subrogation or no subrogation cannot be divorced froma review of the rights proved or presumed to be intended to be created between the payer of the money and the person requiring its payment.’
In that passage Oliver J was plainly limiting his observations to a claim to be subrogated to the creditor’s security. The mere fact that ):he payer of the money intended to make an unsecured loan will not preclude his claim to be subrogated to the personal rights of the creditor whose debt is discharged if the contractual liability of the original borrower proves to be unenforce able: see, for example, In re Wrexham, Mold a1td Connah’s Qµay Railway Co. [1899]I Ch. 440 (where the borrowing was ultra vires) and B. Liggett (Liverpool) Ltd v. Barclays Bank Ltd [1928]I KB 48 . In Orakpo v. Manson Investments Ltd Lord Diplock pointed out, at 104, that the remedy of subrogation was available in a whole variety of widely different circumstances, and that this made ‘particularly perilous any attempt to rely upon analogy to justify applying to one set of cir cumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances.’
The converse is equally true. It is perilous to extrapolate from one set of circumstances where the court has requireda particular precondition to be satisfied before the remedy of subroga tion can be granteda general rule which makes that requirement a precondition which must be satisfied in other and different circumstances. In the present case there was no relevant transaction between Abbey National (‘the payer of the money’) and Mr Bajwa (‘the person at whose instigation it waspaid’). This does not mean that the test laid down by OliverJ in Paul v. Speirway Ltd has not been satisfied; it means that the test is not applicable. In Butlerv. Rice [I 910]2 Ch. 277 the fact that the debtor had not requested the claimant to make the payment and did not know of the transaction was held to be immaterial. This is not to say that intention is necessarily irrelevant in a case of the present kind; it is to say only that where the payment was made bya third party and the claimant had no intention to make any payment to or for the benefit of the recipient the relevant intention must be that of the third party.
In cases such as Butlerv. Rice and Ghana Commercial Bank v. Chandiram [1960] AC 732, where the claimant paid the creditor direct and intended to discharge his security, the court took the claimant’s intention to have been to keep the original security alive for his own bene fit save in so far as it was replaced by an effective security in favour of himself. In the present case the Abbey National did not intend to discharge the Halifax’s charge in the events which happened, that is to say, in the event that completion did not proceed. But it did not intend its money to be used at all in that event. If Butler v. Rice and similar cases arc relied upon to sup port the proposition that there can be no subrogation unless the claimant intended to keep theoriginal security alive for its own benefit save in so far as it was replaced by a new and effective security, with the result that the remedy is not available where the claimant had no direct deal ings with the creditor and did not intend his money to be used at all, then I respectfully dissent from that proposition. I prefer the view of Slade LJ in In re T. H. Knitwear (Wholesale) Ltd ( 1988] Ch. 275 that in some situations the doctrine of subrogation is capable of applying even though it is impossible to infer a mutual intention to this effect on the part of the creditor and the person claiming to be subrogated to the creditor’s security. In the present case the payment was made by Hill Lawson, and it is their intention which matters. As fiduciaries, they could not be heard to say that they had paid out their principal’s money otherwise than for the benefit of their principal. Accordingly, their intention must be taken to have been to keep the Halifax’s charge alive for the benefit of the Abbey National pending completion. In my judgment this is sufficient to bring the doctrine of subrogation into play.
The application of the doctrine in the present case does not create the problem which con
fronted Oliver Jin Paul v. Speirway Ltd [1976] Ch. 220. The Abbey National did not intend to be an unsecured creditor of anyone. It intended to retain the beneficial interest in its money unless and until that interest was replaced by a first legal mortgage on the property. The fac tual context in which the claim to subrogation arises is a novel one which does not appear to have arisen before but the justice of its claim cannot be denied. The Abbey National’s benefi cial interest in the money can no longer be restored to it. If it is subrogated to the Halifax’s charge its position will not be improved, nor will Mr Bajwa’s position be adversely affected. Both parties will be restored as nearly as may be to the positions which they were respectively intended to occupy.
The appellants place much reliance on a passage in In re Diploclt [1948] Ch. 465, 549-50,
where the court was dealing with the claim against the Leaf Homoeopathic Hospital. The hos pital received a grant for the specific purpose of enabling it to pay off a secured bank loan. The passage in question reads:
Here, too, we think that the effect of the payment to the bank was to extinguish the debt and the charge held by the bank ceased to exist. The case cannot, we think, be regarded as one of subrogation, and if the appellants were entitled to a charge it would have to be a new charge created by the court. The position in this respect does not appear to us to be affected by the fact that the payment off of this debt was one of the objects for which the grant was made. The effect of the payment off was that the char ity, which had previously held only an equity of redemption, became the owners of unincumbered property. That unincumbered property derived from a combination of two things, the equity of redemption contributed by the charity and the effect of the Diplock money in getting rid of the incumbrance. If equity is now to create a charge (and we say ‘create’ because there is no survival of the original charge) in favour of the judicial trustee, it will be placing him in a position to insist upon a sale of what was contributed by the charity. The case, as it appears to us, is in effect analogous to the cases where Oiplock money is expended on improvements on charity land. The money was in this case used to remove a blot on the title; to give the judicial trustee a charge in respect of the money so used would, we think, be equally unjust to the char ity who, as the result of such a charge, would have to submit to a sale of the interest in the property which it brought in. We may point out that if the relief claimed were
to be accepted as a correct application of the equitable principle, insoluble problems might arise in a case where in the meanwhile fresh charges on the property had been created or money had been expended upon it.’
The passage is not without its difficulties and is in need of reappraisal in the light of the significant developments in the law of restitution which have taken place in the last 50 years. The second sentence is puzzling. The discharge of the creditor’s security at law is certainly not a bar to subrogation in equity; it is rather a precondition. But the court was probably doing no more than equate the remedy to the creation of a new charge for the purpose of considering whether this was justified.
It is also unclear what conclusion was thought to follow from the observation that the unincumbered property derived from two sources, the equity of redemption contributed by the charity and the money belonging to the next of kin which was used to redeem the mortgage. If the money had been used to buy the property without any contribution from the charity, the next of kin would have sought a declaration that they were solely and bene ficially entitled to the property under a constructive trust. Their claim to be subrogated to the security which had been discharged with their money reflected the respective contributions which they and the charity had made, and did not encroach upon the charity’s equity of redemption at all.
Nor is it clear to me why insoluble problems would arise in a case where there had been fresh charges created on the property in the meantime. The next of kin would obtain a charge by subrogation with the same priority as the charge which had been redeemed except that it would not enjoy the paramountcy of the legal estate. A subsequent incumbrancer who obtained a legal estate for value without notice of the interest of the next of kin would take free from it. It is not necessary to decide whether a subsequent incum brancer who took an equitable charge,only would take free from the interest of the next of kin; the question has not yet arisen fot decision, but it is not insoluble.
Taken as a whole, however, the passage cited is an explanation of the reasons why, in the particular circumstances of that case,1t was considered unjust to grant the remedy of subrogation. The hospital had changed cits position to its detriment. It had in all innocence used the money to redeem a mortgage held by its bank, which, no doubt, was willing to allow its advance to remain outstanding indefinitely so long as it was well secured and the interest was paid punctually. The ne,xt of kin were seeking to be subrogated to the bank’s security in order to enforce it and enable a proper distribution of the estate to be made. This would have been unjust to the hospital. It may be doubted whether in its anxiety to avoid injustice to the hospital the court may not have done an even greater injustice to the next of kin, who were denied even the interest on their money. Justice did not require the withholding of any remedy, but only that the charge by subrogation should not be enforce able until the hospital had had a reasonable opportunity to obtain a fresh advance on suit able terms from a willing lender, perhaps from the bank which had held the original security.
Today, considerations of this kind would be regarded as relevant to a chang,e of position defence rather than as going to liability. They do not call for further consideration in the present case.
Nor, in my judgment, is there any justification for the propos1t10n that the Abbey National’s right to be subrogated to the Halifax’s charge did not arise until the court made the necessary order. The order merely satisfied a pre-existing equity. The Abbey National’s equity arose from the conduct of the parties. It arose at the very moment that the Halifax’s charge was discharged, in whole or in part, with the Abbey National’s money. It arose because, having regard to the circumstances in which the Halifax’s charge was dis charged, it would have been unconscionable for Mr Bajwa to assert that it had been dis charged for his benefit. At law, Mr Bajwa became the owne.r of an unincumbered freehold interest in the property; but he never did, even for an instant, in equity.
Bank of Cyprus UK Ltd v Menelaou
[2015] UKSC 66 (4 November 2015)
LORD CLARKE:
Introduction
1. This appeal is concerned with the law of unjust enrichment and subrogation. The original parties to the action were Melissa Menelaou as claimant (“Melissa”), the Bank of Cyprus UK Ltd as defendant (“the Bank”) and a firm of solicitors, Boulter & Co, as third party (“Boulters”). The trial of the action came before David Donaldson QC, sitting as an additional judge of the Chancery Division (“the judge”): [2012] EWHC 1991 (Ch). The trial began on 16 May 2012 and lasted three days. By the end of the trial only the Bank’s counterclaim against Melissa was live. On 19 July 2012 the judge handed down a judgment dismissing the counterclaim. The Bank appealed to the Court of Appeal (Moses, Tomlinson and Floyd LJJ), which allowed the appeal on 4 July 2013: [2013] EWCA Civ 1960, [2014] 1 WLR 854. Melissa appeals to this court.
The background facts
2. The facts can largely be taken from the agreed statement of facts and issues. Melissa, who was born on 27 January 1990, is the second of the four children of Mr Parris and Mrs Donna Menelaou (“the Menelaou parents”). The other children were Danielle, born on 9 August 1986, Max, born on 24 June 1991 and Ella-Mae, born on 6 February 2002. In mid-2008, the Menelaou parents and their three youngest children lived at Rush Green Hall, Great Amwell, Hertfordshire (“Rush Green Hall”), which was a property owned by the Menelaou parents jointly. Melissa was 18 and a student at a nearby college. Rush Green Hall was subject to two charges in favour of the Bank. The Menelaou parents directly owed the Bank about £2.2m, and had personally guaranteed loans made by the Bank to their companies.
3. The Menelaou parents decided to sell Rush Green Hall, to apply some of the proceeds to buy a smaller property as the family home, to provide funds for Danielle to pay the deposit on a house which she wanted to buy with her future husband and to free up capital to invest in a further development project. The Menelaou parents instructed Boulters to act for them in the conveyancing transaction. The senior partner of Boulters was Mr Menelaou’s sister. They used Mr Paul Cacciatore, who was employed by Boulters as a legal executive and who was also one of Mr Menelaou’s brothers-in-law. On 15 July 2008 contracts were exchanged for the sale of Rush Green Hall for the price of £1.9m. The contractual purchasers of Rush Green Hall paid a deposit of £190,000 to Boulters for the account of the Menelaou parents.
4. About a week later, Mr Menelaou informed Mr Cacciatore that he had found a new property to serve as the family home at 2 Great Oak Court, Hunsdon, Hertfordshire (“Great Oak Court”). On 24 July 2008 contracts were exchanged for the purchase of Great Oak Court for the price of £875,000. On Mr Menelaou’s instructions, the purchaser of Great Oak Court was to be Melissa. The deposit payable was £87,500. This deposit was paid from the £190,000 held by Boulters as the deposit for the sale of Rush Green Hall. Mr Menelaou told Melissa that Great Oak Court was being bought in her name as a gift to her, on the basis that she would hold the property for the benefit of herself and her two younger siblings. She agreed to the arrangement.
5. The Bank was not approached about the proposed arrangement prior to the exchanges of contracts. The Bank sanctioned the proposed arrangements with some reluctance given the overall indebtedness of the Menelaou parents and their companies. On 5 September 2008 Boulters wrote to the Bank saying that it understood that the Bank was to take a charge over Great Oak Court from Melissa, which Boulters understood would be a third party charge. Completion was to be on 12 September. On 9 September 2008 the Bank wrote to Boulters in these terms:
“Thank you for your letter dated 5 September 2008. We confirm that upon receipt of £750,000 we will release our charges over [Rush Green Hall] subject to a third party legal charge over [Great Oak Court] which is registered in the name of Melissa Menelaou.”
Melissa was not aware of the Bank’s intention to take any charge over Great Oak Court.
6. The Bank also instructed Boulters to act as its solicitors to deal with the discharge of its charges over Rush Green Hall and to obtain a charge in favour of the Bank over Great Oak Court. On 10 September 2008 Boulters replied to the Bank’s letter of 9 September enclosing a certificate of title undertaking to obtain an executed mortgage in Melissa’s name over Great Oak Court and to confirm that they had complied or would comply with the Bank’s instructions. On 11 September 2008 Boulters sent the Bank a form of legal charge over Great Oak Court, purportedly signed by Melissa and identifying her as “the customer”. It was (and is) Melissa’s case, supported by her brother and by handwriting evidence, that the signature on the charge was not hers. Indeed, she was unaware of the existence of the charge until 2010. On the same day, 11 September 2008, the Bank telephoned Boulters and pointed out that the identity of the customer in the charge should be the Menelaou parents and not Melissa. Boulters did not contact Melissa. Instead, an employee of Boulters simply changed the name of the customer in manuscript on the charge from that of Melissa to those of the Menelaou parents.
7. On 12 September 2008 completion of the sale of Rush Green Hall by the Menelaou parents and the purchase of Great Oak Court by Melissa both took place. As part of the completion process, Boulters received the balance of the price of Rush Green Hall from its purchasers. They remitted £750,000 to the Bank and sent a further £785,000 to the vendors of Great Oak Court to meet the remaining 90% of the purchase price for Great Oak Court. Boulters also sent the Bank two deeds to be sealed by the Bank authorising the cancellation of the entries in respect of the two registered charges over Rush Green Hall. The discharge of mortgage forms were not returned by the Bank until 13 October 2008. After a considerable delay, Melissa was registered as the proprietor of Great Oak Court. The Bank was also registered as the purported chargee. Following completion, the Menelaou parents, Melissa, and her two younger siblings moved into Great Oak Court and occupied it as their family home.
8. In the spring of 2010 Melissa was told by her parents that their business was experiencing difficulties. It was proposed that Great Oak Court would be sold and a smaller property purchased. It was at this point that Melissa discovered the existence of the charge dated 12 September 2008 over Great Oak Court. Melissa’s conveyancing solicitors then corresponded with Boulters. The Bank was made aware of the challenge to the validity of its charge and, through its solicitors, intimated a claim against Boulters. Many allegations of breach of duty (fiduciary and otherwise) were made by the Bank against Boulters.
The procedural history
9. On 2 November 2010 Melissa issued a Part 7 claim in the Chancery Division seeking orders that all references to the charge, as appearing in the Charges Register for Great Oak Court, be removed. The main basis for this claim was that, not having been signed by Melissa, the Bank’s charge was void. The Bank defended the claim but also counterclaimed for a declaration that the Bank was entitled to be subrogated to an unpaid vendor’s lien over Great Oak Court.
10. On 14 January 2011 the Bank issued a Part 20 claim against Boulters for damages for breach of trust and/or fiduciary duty, and an indemnity against all costs and expenses that it might incur in the main claim. After the exchange of witness statements, it became clear to Melissa and her advisers that Boulters had altered the charge without consulting her. By consent of the parties, pursuant to Melissa’s application dated 13 April 2012, the particulars of claim were amended to rely upon this alteration as a further ground for rendering the charge void. The Bank’s response was to continue to challenge the invalidity of the charge.
11. As stated above, the trial of the case began on 16 May 2012. At the commencement of the trial all issues were live. Melissa was called to give evidence and was duly cross-examined. Thereafter, following an interchange between counsel and the judge, Boulters conceded in the Part 20 claim that the charge was void and that Melissa was entitled to the relief sought in her claim and, as it is put in the statement of facts and issues, reflexively, the Bank conceded the same in the main claim. The issue of liability in the Bank’s claims against Boulters was then compromised and a written agreement was entered into between the Bank and Boulters whereby Boulters accepted that it was in breach of its duties in both contract and tort and was liable to indemnify the Bank for its losses as a result of an invalid charge being entered against Great Oak Court. As a result of that agreement, the only remaining live issue for determination at the trial was the Bank’s counterclaim against Melissa.
12. Judgment was reserved and (as stated above) was handed down on 19 July 2012 dismissing the counterclaim. No formal order was made on that day but a further hearing took place on 23 October 2012, when the judge made an order that the Bank’s charge be removed from the Register (reflecting the Bank’s and Boulters’ concession that the Bank’s charge was void) and formally dismissed the Bank’s counterclaim with costs. The judge granted the Bank permission to appeal against the dismissal of its counterclaim.
The judgment
13. The judge made these findings in the course of his judgment. Whether by operation of law or as a result of any agreement or understanding between the parties, there was nothing to qualify the straightforward position that, in receiving the sale proceeds of Rush Green Hall, Boulters was acting as agent for Mr and Mrs Menelaou and held all the moneys for them alone (para 17). As regards the totality of the purchase price of Great Oak Court, it was not discharged by the use of moneys belonging to the Bank (para 19).
14. The judge approached the matter on two bases, which he described as the narrow or traditional approach to the doctrine of subrogation to the unpaid vendor’s lien and the wider approach based on the law of unjust enrichment (para 14). He held that the fact that the moneys provided for the purchase were not paid by, and did not belong to, the Bank was fatal to the counterclaim on the narrow or traditional approach (para 19). As to the wider approach, he concluded that there was both benefit to Melissa, namely the gratuitous acquisition of Great Oak Court (albeit to be held on trust for her two younger siblings), and detriment to the Bank, namely the release of its two charges (para 22). He held that “The existence of both detriment and benefit does not however establish the further element that the latter should have been at the expense of the Bank (para 22 – original emphasis)”.
15. He added, also in para 22:
“It is sufficient for me to say that there must in my view be something in the nature of, to use the formula proposed in Burrows, The Law of Restitution, 3rd ed (2010) p 66, a transfer of value from the Bank to the claimant. But here the claimant’s benefit enured and was complete on 12 September 2008, while the Bank’s detriment through the mistaken release of its charges over Rush Green Hall occurred a month later. Whether or not time’s arrow must always and with full rigour be respected in the law of unjust enrichment, I am clear that this is not a case in which economic or any other kind of reality calls for its wholesale rejection.”
16. The judge concluded that, although this left Melissa without any charge over her property, it did not leave the Bank without all recourse. This was because the Bank had an indemnity for its losses from Boulters (in reality with that firm’s indemnity insurers), which indemnity was agreed during the course of the trial (para 11).
The Court of Appeal
17. In a judgment handed down on 2 July 2013 the Court of Appeal unanimously allowed the Bank’s appeal. The question in this appeal is whether it was correct to do so. I will consider its reasoning in the course of my discussion of the issues argued before us. On 4 July 2003 the Court of Appeal handed down a further judgment dealing with a number of consequential issues. It declared that the Bank was entitled to be subrogated to an equitable charge by way of an unpaid vendor’s lien over Great Oak Court for £875,000 plus interest. The result of the Court of Appeal’s decision is that Melissa’s property, Great Oak Court, has been subjected to an equitable charge for £875,000 plus interest. The Bank’s application to a Master in the Chancery Division seeking to enforce the equitable charge has been stayed by agreement pending the outcome of this appeal.
Discussion
18. In the course of the argument, there was much discussion of the relevant legal principles. However, in my opinion it is not necessary to resolve all the possible issues which were discussed. It appears to me that this is a case of unjust enrichment. In Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938 the Supreme Court recognised that it is now well established that the court must ask itself four questions when faced with a claim for unjust enrichment. They are these: (1) Has the defendant been enriched? (2) Was the enrichment at the claimant’s expense? (3) Was the enrichment unjust? (4) Are there any defences available to the defendant? See, for example, Benedetti at para 10, following Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 per Lord Steyn at 227 (and per Lord Hoffmann to much the same effect at 234) and Investment Trust Companies v Revenue and Customs Comrs [2012] EWCH 458 (Ch), [2012] STC 1150 per Henderson J at para 38 (ITC).
19. In that paragraph Henderson J noted that Professor Andrew Burrows QC said in The Law of Restitution, 3rd ed (2011) p 27 that, if the first three questions are answered affirmatively and the fourth negatively, the claimant will be entitled to restitution and that those four elements “constitute the fundamental conceptual structure of an unjust enrichment claim”. In para 39, Henderson J accepted that approach, although he said that the four questions were no more than broad headings for ease of exposition, that they did not have statutory force and that there may be a considerable degree of overlap between the first three questions. I agree.
20. In the instant case, there is no doubt that Melissa was enriched when she became the owner of Great Oak Court, which she was given by her parents, albeit on the basis that she would hold it for the benefit of herself and her two younger siblings. As it is correctly put on behalf of the Bank, her obligation to pay the purchase price of Great Oak Court to the vendor was discharged. The essential question is whether she was enriched at the expense of the Bank, since, if she was, there cannot in my opinion have been any doubt that the enrichment was unjust.
21. I would accept the submission made on behalf of the Bank that the unjust factor or ground for restitution is usually identified in subrogation cases as being, either (1) that the lender was acting pursuant to the mistaken assumption that it would obtain security which it failed to obtain: see eg Banque Financière per Lord Hoffmann at p 234H, or (2) failure of consideration: see the fourth and fifth points made by Neuberger LJ in Cheltenham & Gloucester plc v Appleyard (“C&G”) [2004] EWCA Civ 291, paras 35 and 36; [2004] 13 EG 127 (CS).
22. On the facts here the Bank expected to have a first legal charge over Great Oak Court securing the debts of the appellant’s parents and their companies but, as events turned out, it did not have that security interest. The critical question is therefore whether Melissa was enriched at the expense of the Bank.
Was Melissa enriched at the expense of the Bank?
23. According to Goff & Jones on The Law of Unjust Enrichment, 8th ed (2011), para 6-01, the requirement that the unjust enrichment of the defendant must have been at the expense of the claimant “reflects the principle that the law of unjust enrichment is not concerned with the disgorgement of gains made by defendants, nor with the compensation of losses sustained by claimants, but with the reversal of transfers of value between claimants and defendants”. I agree.
24. In my opinion the answer to the question whether Melissa was unjustly enriched at the expense of the Bank is plainly yes. The Bank was central to the scheme from start to finish. It had two charges on Rush Green Hall which secured indebtedness of about £2.2m. It agreed to release £785,000 for the purchase of Great Oak Court in return for a charge on Great Oak Court. It was thus thanks to the Bank that Melissa became owner of Great Oak Court, but only subject to the charge. Unfortunately the charge was void for the reasons set out above. In the result Melissa became the owner of Great Oak Court unencumbered by the charge. She was therefore enriched at the expense of the Bank because the value of the property to Melissa was considerably greater than it would have been but for the avoidance of the charge and the Bank was left without the security which was central to the whole arrangement.
25. As I see it, the two arrangements, namely the sale of Rush Green Hall and the purchase of Great Oak Court, were not separate but part of one scheme, which involved the Bank throughout. I respectfully disagree with the conclusions of the judge summarised in paras 13 to 16 above.
26. It is not, so far as I am aware, in dispute that, if the Bank had received all the proceeds of sale of Rush Green Hall and had then re-advanced the moneys required for the purchase of Great Oak Court, it would be entitled to succeed whether or not the re-advance was to the Menelaou parents or to Melissa. It is submitted on behalf of the Bank that, if that is so, it would be pure formalism for subrogation to be precluded simply because the moneys remained in Boulters’ client account (and were not paid to the respondent) between the sale of Rush Green Hall and the purchase of Great Oak Court; just as Lord Steyn commented in Banque Financière at p 227C that it would be “pure formalism” for the interposition of Mr Herzig between the loan by BFC of its advance and Parc’s obligation to repay to be treated as altering the substance of the transaction and the result of the claim. On the facts of the instant case the funds remained in Boulters’ client account and were not paid to the Bank because of a pre-acquisition agreement between it and the Menelaou parents. By this agreement it was agreed that money to which the Bank was otherwise absolutely entitled under its charges could remain advanced to the Menelaou parents for the purpose of purchasing Great Oak Court and was to be released only on condition that the Bank was given a specific charge over Great Oak Court.
27. I would accept those submissions, which support the conclusion in para 24 above. I would reject the submission that there must be a direct payment by the Bank to Melissa. Such a requirement, while sufficient, is not in my view necessary because it would be too rigid. As I see it, whether a particular enrichment is at the expense of the claimant depends upon the facts of the case. The question in each case is whether there is a sufficient causal connection, in the sense of a sufficient nexus or link, between the loss to the Bank and the benefit received by the defendant, here Melissa.
28. There has been much debate both among academics and judges as to the correct test. The contrast was noted by Henderson J at first instance in ITC. He discussed the problem in considerable detail between paras 47 and 73, especially between paras 52 and 73. The contrast is between a rule that requires there to be a direct causal link between the claimant’s payment and the defendant’s enrichment, subject to some exceptions (paras 52-59) and a broader more flexible approach (paras 60-69). He expressed his conclusions on the principles as follows in para 67:
“67. I must now draw the threads together, and state my conclusions on this difficult question. In the first place, I agree with Mr Rabinowitz that there can be no room for a bright line requirement which would automatically rule out all restitutionary claims against indirect recipients. Indeed, Mr Swift accepted as much in his closing submissions. In my judgment the infinite variety of possible factual circumstances is such that an absolute rule of this nature would be unsustainable. Secondly, however, the limited guidance to be found in the English authorities, and above all the clear statements by all three members of the Court of Appeal in Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733, [1997] QB 380, suggest to me that it is preferable to think in terms of a general requirement of direct enrichment, to which there are limited exceptions, rather than to adopt Professor Birks’ view that the rule and the exceptions should in effect swap places (see ‘At the expense of the claimant’: direct and indirect enrichment in English law in Unjustified Enrichment: Key Issues in Comparative Perspective, edited by David Johnston and Reinhard Zimmermann, Cambridge (2002), p 494). In my judgment the obiter dicta of May LJ in Filby and the line of subrogation cases relied on by Professor Birks, provide too flimsy a foundation for such a reformulation, whatever its theoretical attractions may be, quite apart from the difficulty in framing the general rule in acceptable terms if it is not confined to direct recipients.”
The reference to Filby is to Filby v Mortgage Express (No 2) Ltd [2004] EWCA Civ 759, [2004] All ER (D) 198 (Jun).
29. Henderson J continued as follows in para 68.
“The real question, therefore, is whether claims of the present type should be treated as exceptions to the general rule. So far as I am aware, no exhaustive list of criteria for the recognition of exceptions has yet been put forward by proponents of the general rule, and I think it is safe to assume that the usual preference of English law for development in a pragmatic and step-by-step fashion will prevail. Nevertheless, in the search for principle a number of relevant considerations have been identified, including (in no particular order):
(a) the need for a close causal connection between the payment by the claimant and the enrichment of the indirect recipient;
(b) the need to avoid any risk of double recovery, often coupled with a suggested requirement that the claimant should first be required to exhaust his remedies against the direct recipient;
(c) the need to avoid any conflict with contracts between the parties, and in particular to prevent ‘leapfrogging’ over an immediate contractual counterparty in a way which would undermine the contract; and
(d) the need to confine the remedy to disgorgement of undue enrichment, and not to allow it to encroach into the territory of compensation or damages.”
30. It is submitted on behalf of the Bank that on four occasions since the decision in ITC the Court of Appeal has endorsed the considerations identified by Henderson J. They variously described his approach thus: as “relevant considerations” in TFL Management Services v Lloyd’s TSB Bank plc [2014] 1 WLR 2006 (“TFL”) per Floyd LJ, para 57, as “of assistance” in Relfo Ltd v Varsani (No 2) [2014] EWCA Civ 360, [2015] 1 BCLC 14 per Arden LJ, para 96; and as “relevant considerations … skilfully distilled” in ITC on appeal, [2015] EWCA Civ 82 per Patten LJ (giving the judgment of the court), paras 67 and 69.
31. Further, in his judgment in this case Floyd LJ described Henderson J’s approach as “thoughtful and valuable” at para 39 and in TFL he said this about Henderson J’s para 68:
“57. I agree with Henderson J that these are relevant considerations in deciding the question of whether an indirect benefit was conferred at the claimant’s expense. But the various factors to which he refers are not, and were not I think intended to be, rigid principles. Far less can it be said that if one or more of the factors can be said to be adverse to the claim, the claim is necessarily doomed to failure.”
That approach seems to me to be consistent with the approach of the Court of Appeal in ITC, where Patten LJ said at the end of para 69:
“We consider that the correlative of taking a broad approach to the first consideration by taking account of ‘economic’ or ‘commercial’ reality is that it is important not to take a narrow view of what, under the third criterion, would conflict with contracts between the parties or with a relevant third party in a way which would undermine the contract.”
That seems to me to be a sensible approach.
32. There is scope for legitimate debate as to whether the correct approach is to adopt a narrow test with exceptions or a broader approach. However, it appears to me that, whichever test is adopted the result is likely to be the same. In any event it is not to my mind necessary to consider the issue further in this case because, as the Court of Appeal made clear, the position is clear on the facts of the instant case, which is concerned only with the first of Henderson J’s relevant considerations. In a case in which more such considerations were relevant, it would be necessary to have regard to a number of different factors, probably with no presumption one way or the other where the starting point is.
33. In short, I agree with the approach of the Court of Appeal. In particular, the position is neatly described by Tomlinson LJ as follows in paras 57 and 58:
“57. In the present case, the Bank was to receive £1.9m upon the sale of Rush Green Hall in circumstances where it was owed £2.2m and had charges over Rush Green Hall to secure that indebtedness. The Bank had agreed that it would release its charges over Rush Green Hall upon receipt of £750,000 out of the sale proceeds, in return for a charge over Great Oak Court to secure what would be the remaining indebtedness, £1.45m, thereby enabling the Menelaou parents on the strength of that undertaking by the Bank to use £875,000 out of the sale proceeds of Rush Green Hall for the purchase of Great Oak Court in the name of Melissa. I do not see how this can sensibly be described as anything other than a transfer of value between the Bank and Melissa, in whose name the purchase of Great Oak Court was made.
58. I am glad to be able to reach this conclusion. It gives effect to the reality of the transaction, whereas the conclusion of the judge, in my respectful view, amounts to that pure formalism which Lord Steyn has in this context deprecated …”
34. That was of course a reference to the speech of Lord Steyn in Banque Financière referred to in para 18 above. Both Floyd and Moses LJJ expressed much the same conclusions at paras 42 and 48 and 61-62 respectively. I am unable to accept that there is any significance in the point which attracted the judge (para 22) that the benefit to Melissa was complete on 12 September, whereas the detriment to the Bank occurred over a month later when its charges over Rush Green Hall were released. As Moses LJ put it at para 62, everyone knew, as a result of the Bank’s agreement on 9 September 2008, that the Bank’s security in Rush Green Hall would be released and, provided that the terms of that agreement were satisfied, the Bank was bound to release its charge.
35. For all these reasons I agree with the Court of Appeal that Melissa was enriched at the expense of the Bank. I have already expressed my view that she was unjustly so enriched.
Defences
36. The fourth question, namely whether there are any defences available to the defendant, must in my opinion be answered in the negative. On the assumption that the first three questions are answered in the affirmative, I do not understand Melissa to be relying upon any other defence. It is not suggested, for example, that she had a change of position defence. Nor was she a bona fide purchaser for value without notice. She was a mere donee and, as such can be in no better position than her parents as donors. As indicated at the end of para 31 above, I recognise that in another case there may well be defences or at least countervailing considerations, as indicated, for example, in considerations (b), (c) and (d) identified by Henderson J.
Remedies
37. The next question is what remedies are available to the Bank. The answer is that the Bank is subrogated to the unpaid seller’s lien. Subrogation (sometimes known in this context as restitutionary subrogation) is available as a remedy in order to reverse what would otherwise be Melissa’s unjust enrichment. It is important to recognise that a claim in unjust enrichment is different in principle from a claim to vindicate property rights; see eg Foskett v McKeown [2001] 1 AC 102 per Lord Browne-Wilkinson at p 108F, Lord Millett at p 129E-F and Lord Hoffmann at p 115F, where he agreed with Lord Millett.
38. Foskett was a claim to enforce property rights. Lord Millett expressed the distinction between that case and a case of unjust enrichment at p 129F:
“A plaintiff who brings an action in unjust enrichment must show that the defendant has been enriched at the plaintiff’s expense, for he cannot have been unjustly enriched if he has not been enriched at all. But the plaintiff is not concerned to show that the defendant is in receipt of property belonging beneficially to the plaintiff or its traceable proceeds. The fact that the beneficial ownership of the property has passed to the defendant provides no defence; indeed, it is usually the very fact which founds the claim. Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff’s interest.”
The sentence which I have put in italics shows that a claim in unjust enrichment does not need to show a property right.
39. In C&G Neuberger LJ (giving the judgment of the Court of Appeal) summarised the principles relevant to different types of subrogation concisely in paras 24-49. Like Floyd LJ at para 44, he set out the principles relevant here at para 25 as follows:
“The principle upon which C&G rely has been nowhere better stated than by Walton J in Burston Finance Ltd v Speirway Ltd (in liquidation) [1974] 1 WLR 1648 at p 1652B-C:
[W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor. It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided by him.”
Neuberger LJ noted at para 26 that that formulation was cited with approval by (among others) Lord Hutton in Banque Financière at p 245C-D.
40. He further noted at para 36 that in Banque Financière the lender bargained for what Lord Hoffmann called at p 229C “a negative form of protection in the form of an undertaking”, which he did not get. He added that this did not prevent his claim to be subrogated to a security, albeit essentially as a personal remedy: see per Lord Steyn at p 228C-D and Lord Hoffmann at p 229C.
41. The class of subrogation under discussion in this case is known as subrogation to an unpaid vendor’s lien. I agree with Floyd LJ at para 15 that it is not a concept which it is particularly straightforward to understand. He puts it thus. What the Bank seeks to achieve is to be placed in a position equivalent to that of the vendor of Great Oak Court at the point where the purchase money has not been paid. At that point the vendor would be able to refuse to convey the title to Great Oak Court, unless the purchase money was paid to him. He added that the lien was explained by Millett LJ in Barclays Bank plc v Estates & Commercial Ltd [1977] 1 WLR 415 at pp 419-420, in this way (omitting citations):
“As soon as a binding contract for sale [of land] is entered into, the vendor has a lien on the property for the purchase money and a right to remain in possession of the property until payment is made. The lien does not arise on completion but on exchange of contracts. It is discharged on completion to the extent that the purchase money is paid. … Even if the vendor executes an outright conveyance of the legal estate in favour of the purchaser and delivers the title deeds to him, he still retains an equitable lien on the property to secure the payment of any part of the purchase money which remains unpaid. The lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money.
The lien arises by operation of law and independently of the agreement between the parties. It does not depend in any way upon the parties’ subjective intentions. It is excluded where its retention would be inconsistent with the provisions of the contract for sale or with the true nature of the transaction as disclosed by the documents.”
42. Floyd LJ then set out the passage from the judgment of Walton J in Burston Finance set out by Neuberger LJ in C&G and quoted at para 39 above. I adopt Floyd LJ’s description of the position at para 17 of his judgment as follows. A third party who provides some or all of the purchase money for a purchaser, thereby discharging the obligation to the vendor, can claim the benefit of the unpaid vendor’s lien by subrogation. This is so even after the lien has been extinguished as between vendor and purchaser. Floyd LJ notes that it is not intuitively clear how, or why, this should be the case and asks how it is that the unpaid vendor’s lien transferred from the vendor to the third party. He says with force that it might be thought that once the obligation in question has been extinguished, there is nothing which the vendor could transfer. He further asks by what legal method the transfer takes place, even if there was something to transfer. He notes that there has been no legal assignment and suggests that it was conceptual problems such as these that gave rise to the notion that the vendor’s lien was “kept alive” for the benefit of the subrogated third party.
43. Floyd LJ resolves this apparent difficulty by adding that in Banque Financière at p 236 Lord Hoffmann explained that the phrase “keeping the charge alive” was not a literal truth but a metaphor or analogy:
“In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist.”
Lord Hoffmann added at p 236E-F:
“It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say the charge is ‘kept alive’ for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him.”
44. In para 19 Floyd LJ notes that Lord Hoffmann reviewed five authorities, namely Chetwynd v Allen [1899] 1 Ch 353, Butler v Rice [1910] 2 Ch 277, Ghana Commercial Bank v Chandiram [1960] AC 732, Paul v Spierway [1976] Ch 220 and Boscawen v Bajwa [1996] 1 WLR 328. Having done so, Lord Hoffmann noted at p 233 that in Boscawen there was no common intention that the vendor, whose mortgage had been paid off, should grant any security to Abbey National.
45. Lord Hoffmann then said this at pp 233H-234D:
“As Millett LJ pointed out, at p 339 [of Boscawen], the Abbey National expected to obtain a charge from the purchaser as legal owner after completion of the sale, and, in the event which happened of there being no such completion, did not intend its money to be used at all. This meant that:
‘The factual context in which the claim to subrogation arises is a novel one which does not appear to have arisen before but the justice of its claim cannot be denied.’
These cases seem to me to show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd [1978] AC 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.”
46. That appears to me to be an illuminating passage. Lord Hoffmann stresses what are the same questions as those referred to in para 18 above. Moreover, the reference to Orakpo seems to me to be of some significance. It demonstrates that, when Lord Hoffmann was referring to “subrogation as a remedy to prevent unjust enrichment”, he was not referring to subrogation to personal rights alone because Orakpo was a case concerning subrogation to property rights.
47. The case of Orakpo is also of interest because it shows the broad nature of the doctrine of unjust enrichment. Three examples suffice. Lord Diplock said at p 104E-F:
“My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of ‘subrogation’, but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances. Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company’s lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.”
48. Lord Salmon said this at p 110:
“The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be.”
Finally, Lord Edmund-Davies said at p 112:
“Apart from specific agreement and certain well-established cases, it is conjectural how far the right of subrogation will be granted though in principle there is no reason why it should be confined to the hitherto recognised categories (Goff and Jones, The Law of Restitution (1966), pp 376-377).”
49. Those statements seem to me to support a flexible approach to the remedies appropriate in a particular case. Indeed, the principles have been extended since the decision in Orakpo because there is now a general doctrine of unjust enrichment in a way that there was not when Lord Diplock drafted his speech. Lord Hoffmann stresses the importance of the questions identified in para 18 above. It appears to me that, on the facts of this case, if, as here, the first three questions are answered in the affirmative and the fourth in the negative, the appropriate equitable remedy is that the claimant is subrogated to the unpaid vendor’s lien as explained in paras 41 and 42 above. On the facts here the Bank is entitled to a lien on the property, which is in principle an equitable interest which it can enforced by sale. In short, by effectively reinstating Melissa’s liability under the charge, the remedy of subrogation is reversing what would otherwise be her unjust enrichment.
50. I would accept the submission made on behalf of the Bank that the analyses in Banque Financière have rationalised the older cases through the prism of unjust enrichment. Banque Financière was not limited to subrogation to personal rights. The remedy the House fashioned was subrogation to a property right but, as the Bank puts it, it was attenuated so as not to grant RTB a greater right than that for which it had bargained. There is no reason why, on the facts of this case, the remedy should not be subrogation as described above, even if the Bank did not retain a property interest in the proceeds of sale of Rush Green Hall. The remedy simply reverses the unjust enrichment which Melissa would otherwise enjoy by ensuring that the Bank not only has a personal claim against her but also has an equitable interest in Great Oak Court, as it would have had if the scheme had gone through in accordance with the agreement of the Bank and the Menelaou parents. Moreover, but for the proposed remedy the Bank would lose the benefit it was to receive from the scheme, namely a charge on Great Oak Court to replace the charges it had on Rush Green Hall.
51. In reaching these conclusions I have read Lord Carnwath’s judgment in draft with great interest. My own view is that the principles are somewhat broader than he suggests.
Conclusion
52. For these reasons I would dismiss the appeal.
53. As I see it, these conclusions make it unnecessary to decide whether the Bank had a security interest in the proceeds of sale that were used to buy Great Oak Court. In so far as the answer to that may depend upon the true ratio of the decision of the Court of Appeal in Buhr v Barclays Bank [2001] EWCA Civ 1223, [2002] BPIR 25 like the Court of Appeal I would prefer to leave that question for determination in a case in which it arises for decision. In so far as the Bank relies upon a Quistclose type trust (Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567), arising in a similar manner to that which arose in Twinsectra v Yardley [2002] 2 AC 164, there seems to me to be much to be said for the conclusions reached by Lord Carnwath. However, in my opinion it is not necessary for the Bank to do so.
Postscript
54. Since writing the above I have read Lord Neuberger’s judgment in draft. I essentially agree with his conclusions and reasoning. I also agree with his tentative conclusions and reasoning in paras 103, 104 and 106.
55. The one point upon which there is or may be a difference between us is whether the Bank would have a personal claim in unjust enrichment against Melissa. For my part I see no reason why it should not in principle have such a claim provided that it is dealt with as suggested by Lord Neuberger in para 81. In any event I agree with him that it is not necessary to decide this question in this appeal for reasons he gives in para 82. I would only say that there seems to me to be considerable force in his comments in para 81, namely that the standard response to unjust enrichment is a monetary restitutionary award in order to reverse the unjust enrichment. This must be left for decision on another day.
LORD NEUBERGER:
56. The facts of this case and the findings of the courts below are explained by Lord Clarke in paras 1-17.
57. The question which arises is whether, in the light of those facts, the Bank is entitled to claim a charge over the freehold of Great Oak Court by invoking a right to be subrogated to the unpaid vendor’s lien over the freehold of Great Oak Court (“the Lien”). In considering that issue, I shall adopt the nomenclature in Lord Clarke’s judgment.
58. The Bank’s primary case involves two steps; the first is that it has a claim based on unjust enrichment against Melissa; the second step is that that claim was or should be satisfied by subrogating the Bank to the Lien. Melissa’s main argument against the first step is that she was innocent of any wrong-doing and therefore cannot be said to have been unjustly enriched. As to the second step, her main argument is that subrogation as claimed by the Bank is not, as a matter of principle, available as a remedy for unjust enrichment in the circumstances of this case.
59. I agree with Lord Clarke, and with the Court of Appeal, that, despite Melissa’s arguments to the contrary, each of the two steps in the Bank’s argument is made out. I am also attracted to the view that the Bank’s case on the first step could be justified on the alternative basis of an orthodox proprietary claim rather than on unjust enrichment, which in turn would render the second step in its case even clearer.
60. Because the appeal raises points of some significance and because the state of the law appears to be somewhat unclear, I shall explain why I have reached these conclusions.
Can the Bank establish an unjust enrichment claim against Melissa?
61. The first step in the Bank’s case is that it has a claim against Melissa in unjust enrichment. A claim in unjust enrichment requires one to address the four questions which Lord Clarke sets out in para 18 above. I agree with what he says in relation to those four questions in this case in paras 19-35 above, and indeed with the analysis of Floyd LJ in the Court of Appeal at [2013] EWCA Civ 1960; [2014] 1 WLR 854, paras 29 to 42. I express the position in my own words as follows.
62. The answer to the first question, namely whether Melissa has been enriched, would appear to be plainly yes, because she received the freehold of Great Oak Court (“the freehold”) for nothing. However, although it does not affect the outcome in the present case, there is much to be said for the view that the relevant enrichment for present purposes is that she received the freehold free of any charge, instead of receiving it subject to a charge to secure her parents’ indebtedness to the Bank (a “Charge”).
63. This may be a more accurate way of answering the first question for present purposes, because the only aspect of Melissa’s enrichment which can be complained of by anyone arises from the fact that she received the freehold free of the intended Charge. The fact that the freehold was conveyed to her was an uncontroversial benefit, but the fact that it was not subject to a Charge was not just a benefit, but, in the light of the facts surrounding the sale of Rush Green Hall, the purchase of Great Oak Court and the preparation of the defective Deed of Charge (“the Deed”), it was accidental and unintended. (The fact that Melissa held the freehold on trust for herself and her siblings adds nothing for present purposes.)
64. In any event, it might be said to be somewhat artificial to distinguish between acquisition of the freehold and acquisition of the freehold subject to the Charge. After all, Great Oak Court could not have been acquired without the Bank’s agreement that some of the proceeds of sale of Rush Green Hall could be used to purchase it, and that agreement was conditional on the grant of the Charge contemporaneously with the purchase. This is reflected by the observations of Lord Oliver in Abbey National Building Society v Cann [1991] 1 AC 56, 92-93, albeit that his observations apply by analogy rather than directly:
“[T]he acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them. … The reality is that the purchaser of land who relies upon a building society or bank loan for the completion of his purchase never in fact acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise.”
65. I turn to the second question, namely whether the enrichment was at the expense of the Bank. Professor Burrows refers to this requirement as being that “the defendant’s enrichment must come from (be subtracted from) the claimant’s wealth” – Proprietary Restitution: Unmasking Unjust Enrichment (2001) 117 LQR 412, 415.
66. The Bank had the right to demand the whole of the proceeds of sale of Rush Green Hall, as the Menelaou parents’ debt to the Bank, which had been secured on the freehold of Rush Green Hall, exceeded the proceeds of sale. Instead, the Bank agreed that £875,000 of those proceeds of sale could be used to fund the purchase of the freehold of Great Oak Court, but only provided that the Bank was granted a Charge over that freehold at the time of its acquisition. So the Bank would have had the right to prevent the £875,000 being used to purchase the freehold if it had not been provided with a valid Charge. Even assuming (as Melissa asserts) that the Bank had released to the Menelaou parents £875,000 of the proceeds of sale of Rush Green Hall, the release was only on the basis that it would be granted a Charge over Great Oak Court. Therefore, it seems to me clear that the Bank could have prevented the purchase proceeding until it had been granted a Charge. Accordingly, again deriving support from the passage quoted from Abbey National, looking at the arrangements in relation to the purchase and charging of Great Oak Court, it seems to me plain that Melissa’s enrichment was at the expense of the Bank.
67. That conclusion is reinforced (if reinforcement is needed) by the point made by Lord Clarke in para 25 above, reflecting the realistic approach of the House of Lords in Abbey National, that it is appropriate not merely to consider the purchase of, and charge over, Great Oak Court as a single composite transaction. It is also appropriate in the present case to treat the sale of Rush Green Hall and the purchase of Great Oak Court as one scheme, at least for present purposes. I see nothing in any of the judgments in Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52, [2015] 1 AC 385 (sub nom Mortgage Business plc v O’Shaughnessy) which casts doubt on that approach.
68. If one regards the enrichment as having the freehold uncharged rather than subject to a Charge, it therefore seems clear that that enrichment was at the Bank’s expense. One gets the same answer if Melissa’s enrichment is regarded as being the freehold in its entirety: that enrichment would be at the expense of the Bank, albeit only to the extent that the freehold was uncharged rather than subject to the Charge, and therefore the points made in paras 66-67 above would apply with equal force.
69. The third question is whether the enrichment was unjust. At first sight, there may appear to be some attraction in Melissa’s argument that, as between the Bank and herself, her enrichment was not unjust. After all, as Mr Mark Warwick QC pointed out, she owed the Bank nothing, she was wholly unaware of a prospective or actual charge, and she was innocent of any oversight, let alone any wrong-doing, whether before, during or after the sale of Rush Green Hall and the purchase of Great Oak Court.
70. The answer to that contention, in my view, lies in the fact that Melissa received the freehold as a gift from her parents. Had she been a bona fide purchaser for full value, it may very well have been impossible to characterise her enrichment as unjust, especially if she had no notice of the Bank’s rights. If she had paid a small sum to her parents for her acquisition, a difficult question might have had to be faced, although, as at present advised, I think that her enrichment would still have been unjust, but the extent of any unjust enrichment would be reduced by the small sum. But she paid nothing, and she therefore cannot, in my view, be in any better position than her parents so far as the Bank’s claim is concerned. And there can be no doubt that, if the Menelaou parents, rather than directing the transfer to Melissa, had acquired the freehold themselves in circumstances where the Deed was for some reason invalid, the Bank would have had a claim against them in unjust enrichment.
71. Again, it seems to me to be easier to see why Melissa’s enrichment should be characterised as unjust if her enrichment is treated as being the receipt of the freehold uncharged instead of subject to the Charge. Her parents were quite properly able to direct the transfer of the freehold of Great Oak Court to Melissa, but they were not properly entitled, so far as the Bank was concerned, to direct the transfer to her of the unencumbered freehold; they were only properly able, at least as against the Bank, to direct the transfer to her of the freehold subject to a Charge.
72. Mr Warwick suggested that this analysis could be called into question by considering the likely outcome if the Menelaou parents had decided to direct the freehold of Great Oak Court to be transferred to a charity, instead of their daughter. I agree that the outcome would be no different, but I see no difficulties in accepting that the Bank would in those circumstances have had a claim in unjust enrichment against the charity.
73. A variant of Mr Warwick’s argument on this third aspect is the contention that, if the Bank could otherwise mount a valid unjust enrichment claim, that claim cannot succeed against Melissa, as she was only an “indirect recipient” of any enrichment, to use the language Goff & Jones on The Law of Unjust Enrichment, 8th ed (2012), eds Professors C Mitchell, P Mitchell and Watterson, paras 6-12ff and in Ben McFarlane’s article Unjust Enrichment, Property Rights, and Indirect Recipients (2009) 17 RLR 37. It is fair to say that there was a tripartite relationship in this case, in the sense that not merely Melissa and the Bank, but also the Menelaou parents, were parties to the arrangements which gave rise to the alleged unjust enrichment. However, as already explained above, there was in reality a single transaction, and it was from that transaction that Melissa directly benefitted, even though the benefit was effected at the direction of the Menelaou parents. The benefit to Melissa was direct because it arose as the immediate and inevitable result of the very transaction to which she was party and which gave rise to the unjust enrichment (in contrast to the examples at the beginning of Professor McFarlane’s article). I should add that, even if Melissa could be characterised as an indirect recipient of any enrichment, I do not consider that that would assist her: she would still properly be liable on the facts of this case, essentially for the same reasons.
74. As for the fourth question, it appears to me that, if (as I consider) the first three questions are answered in the Bank’s favour, there is no special reason precluding the conclusion that the Bank had a valid claim in unjust enrichment against Melissa.
75. As already mentioned, the fact that Melissa did not know of the circumstances which caused her enrichment to be unjust does not alter the fact that she was unjustly enriched; nor does it alter the extent of her unjust enrichment. However, it does render it more likely that she would be able to rely on subsequent events to give rise to an innocent change of position defence to a claim based on the unjust enrichment. However, no such defence appears to arise in this case.
76. It was rather tentatively suggested that the Bank should have no right to claim in unjust enrichment against Melissa, as it had a cast-iron case for recovering all its losses arising from the defective Deed from Boulters. There is nothing in that point. Boulters’ liability in no way impinges on the question whether, and to what extent, Melissa was unjustly enriched at the expense of the Bank: the Bank’s claim against Boulters is res inter alios acta so far as Melissa is concerned. (Further, although the point was not argued, it may well be that, if the Bank had recovered damages from Boulters, then Boulters would be subrogated to the Bank’s unjust enrichment claim against Melissa.)
77. Standing back, any fair-minded person would say that, as a matter of fairness and common sense, by acquiring the freehold from any Charge, Melissa was unjustly enriched at the expense of the Bank, albeit not because of any fault of hers. Tomlinson LJ’s analysis in the Court of Appeal, as set out by Lord Clarke in para 33 above, accurately summarises the position. Of course, fairness and common sense cannot safely be relied as the sole touchstones as to whether there has been unjust enrichment as a matter of law. In that connection, like Lord Clarke, I would commend Henderson J’s observations in Investment Trust Companies v Revenue and Customs Comrs [2012] EWHC 458 (Ch), [2012] STC 1150, paras 67-68, as containing what Floyd LJ called a “thoughtful and valuable” approach, while rightly not laying down rigid principles.
Can the Bank invoke subrogation on the basis of its unjust enrichment claim?
78. I turn then to the second step, namely whether the Bank’s claim in unjust enrichment can properly be satisfied by holding that it is subrogated to the Lien over the freehold to the extent of the price payable for the freehold, namely £875,000. (And in that connection, the fact that 10% of the £875,000 had already been paid as a deposit is irrelevant for present purposes, as the balance had to be paid to “rescue” the deposit.)
79. Given that the Bank has a claim based on unjust enrichment against Melissa to the extent described above, it is hard to identify a more appropriate remedy for the Bank to obtain against Melissa. Subrogation to the Lien would accord to the Bank, and impose on Melissa, a right very similar to, although rather less in value than, that which the Bank should have had. It would give the Bank a lien instead of a formal charge, and it would be in the sum of £875,000 (plus interest), rather than the larger debt, well over £1m at the time of the purchase of the freehold, owed by the Menelaou parents to the Bank.
80. An award of financial compensation might seem rather less appropriate. It was never intended that the Bank should have any personal claim against Melissa, merely that the freehold which she owned would be charged with the Menelaou parents’ debt to the Bank. Even if the compensation was limited to £875,000 (plus interest), it could prejudice Melissa – for instance, if the freehold declined in value as a result of a fall in the property market subsequent to her acquisition.
81. However, it is fair to say that the standard response to unjust enrichment is a “monetary restitutionary award”, to use the terminology adopted by in A Restatement of the English Law of Unjust Enrichment (Burrows et al, 2012), article 34, in order to reverse the unjust enrichment. In this case, the unjust enrichment could be quantified at £875,000, its value at the time it was conferred, or the difference in the value of the freehold uncharged and subject to the Charge at the date of the assessment of the unjust enrichment (or possibly at some other date). In so far as the quantification would result in an unfair or oppressive sum, the court could adjust the sum to avoid any unfairness or oppression.
82. It is not necessary for the purpose of the present appeal to decide whether the Bank has a monetary claim against Melissa in the light of her unjust enrichment, let alone to determine the precise amount which the Bank could seek from her on that basis, or to decide whether the existence of any monetary claim would be affected by the subrogation claim. Nor would it be appropriate to do so, given that none of these points was debated in any detail on this appeal: indeed, the issue of whether the Bank had a money claim against Melissa was barely touched on at all (and no complaint is thereby intended).
83. Turning now to the law, the circumstances in which an unpaid vendor’s lien typically arises and the circumstances in which subrogation typically can be claimed have been summarised by Millett LJ and Walton J respectively in the passages quoted by Lord Clarke in paras 41 and 39 above.
84. In the course of his attractive argument on behalf of Melissa, Mr Warwick contended that, because the Bank’s case against Melissa was based on unjust enrichment, it could not justify the Bank’s claim to be subrogated to the Lien. His contention was that the decided cases and judicial dicta which establish a right to be subrogated to a charge or a debt, all involved the money coming from the person who establishes subrogation being used to pay off the chargee or the creditor respectively– see eg per Sir John Romilly MR in Drew v Lockett (1863) 32 Beav 499, 505; per Lord Selborne LC in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1, 19; per Romer J in Chetwynd v Allen [1899] 1 Ch 353, 357, per Vaughan Williams LJ in Thurstan v Nottingham Permanent Benefit Building Society [1902] 1 Ch 1, 9; per Warrington J in Butler v Rice [1910] 2 Ch 277, 282; and, as quoted by Clarke LJ in para 39 above, per Walton J in Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648, 1652.
85. It is true that it can be fairly argued that the dicta in those cases as to when and how subrogation could arise do not apply here. However, there is nothing in those dicta to suggest that the judges in any of those cases were purporting to give an exclusive explanation or definition of when subrogation can arise. Further, as Mr Rainey QC, for the Bank, pointed out in his clear argument, no consideration was given in those cases to analysing whether actual ownership of the money on the part of the person claiming subrogation was needed. Nonetheless, that does not alter the point that subrogation should be accorded to the Bank in this case only if it can be achieved in accordance with principle.
86. In my view, Mr Warwick’s argument involves assuming that the circumstances in which subrogation can be claimed are more limited than they really are. That is made good by two decisions of the House of Lords. In Orakpo v Manson Investments Ltd [1978] AC 95, 104, Lord Diplock explained that there were “some circumstances in which the remedy [for unjust enrichment] takes the form of ‘subrogation’, but this expression embraces more than a single concept in English law”. He went on to describe subrogation as “a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances”. He described a case where a person who pays off a secured lender as being “[o]ne of the sets of circumstances in which a right of subrogation arises”.
87. In the same case at p 110, Lord Salmon expressed himself very broadly, suggesting that “[t]he test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical” and that the principle was that “the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be”. Lord Edmund-Davies suggested at p 112 that “there is no reason why it should be confined to the hitherto-recognised categories”. And, to much the same effect, Slade LJ described “the doctrine of subrogation” as “a flexible one, capable of giving a remedy in many and various situations” in In re T H Knitwear (Wholesale) Ltd [1988] Ch 275, 286F.
88. The opinion of Lord Hoffmann in the more recent decision of the House of Lords in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 includes some illuminating remarks about subrogation, which are much in point for present purposes. At p 231G-H, having described subrogation in the traditional case as “a contractual arrangement for the transfer of rights against third parties [which] is founded upon the common intention of the parties”, he went on to say that “the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived”. Then, at pp 231H-232A, he described the former principle as “part of the law of contract” and the latter, which seems, at least on the face of it, to cover the present case, as “part of the law of restitution”.
89. Lord Hoffmann’s subsequent analysis at p 232B-H confirms that the Bank’s subrogation claim in this case should not be in difficulties because Melissa was wholly ignorant of, and in no way responsible for, the fact that the Bank was intended to have a charge over the freehold (and, as Lord Hoffmann explained, this is confirmed by a number of earlier decisions including two of the cases relied on by Mr Warwick, namely Chetwynd and Butler). Thus, at p 234B-D, Lord Hoffmann observed that it was “a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention” (although he also said that this does not “mean that questions of intention may not be highly relevant to the question whether or not enrichment has been unjust”). He also expressed the view that “intention has played so prominent a part in the earlier cases … because of the influence of cases on contractual subrogation”, and that, in a case of a restitutionary subrogation claim, the appropriate questions were, in effect, those identified by Lord Clarke at para 18 above.
90. At p 236E, Lord Hoffmann explained that subrogation was “not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched”. Accordingly, as he went on to say, the notion (in this case) of the unpaid vendor’s lien being “kept alive” for the benefit of the Bank was “not a literal truth but rather a metaphor or analogy” (p 236D). Particularly significantly for present purposes, Lord Hoffmann said at p 236F that subrogation is “an equitable remedy against a party who would otherwise be unjustly enriched” and “a means by which the court regulates the legal relationships between a plaintiff and a defendant … in order to prevent unjust enrichment”. Accordingly, he said, it would “not by any means follow that the [Bank] must for all purposes be treated as an actual assignee of the benefit of the [unpaid vendor’s lien] and, in particular, that [it] would be so treated in relation to someone who would not be unjustly enriched” (p 236G).
91. In my view, the observations in Orakpo and, even more, in Banque Financière, support the Bank’s claim to be subrogated to the Lien as a result of what happened in this case. It seems to me that this view is supported by the views expressed by the current editors of Goff & Jones at para 39-10, where they describe “the true position” as that explained by Lord Hoffmann in the passage quoted in para 90 above from Banque Financière at p 236F. The editors go on to say at para 39-12 that “subrogation to extinguished rights is therefore a remedy that reverses unjust enrichment of a discharged debtor … which follows from the discharge of a debt, by affording the claimant new rights which prima facie replicate the creditor’s extinguished rights”. The same point is made in the following paragraphs. For instance in para 39-16, it is suggested that “the subrogation cases can all be explained” on “the ground for restitution that makes it unjust for the debtor … to be enriched at the claimant’s expense”.
92. It is true that there is nothing in Chapter 39 of Goff and Jones which deals with what is said to be the problem for the Bank in this case, namely that the money used to pay off the secured creditor (ie the unpaid vendor) did not emanate from the Bank itself. However, that does not seem to me to present the Bank with a problem in relation to its claim for subrogation. For the reasons given in paras 66-68 above, the Bank has established that Melissa’s enrichment was at its expense even though the money did not emanate from the Bank directly, so that its unjust enrichment is made out against her. I do not see why the Bank need establish anything more in this case in order to make good its case to be subrogated to the Lien. It is right to add that para 7-02 of Geoff & Jones, cited by Lord Carnwath in para 131 could be read as suggesting that a more stringent test has to be satisfied before the court will award subrogation (and see also paras 37-9 and 37-10). However, in the light of Orakpo and Banque Financière, I do not consider that those paragraphs can be read in this way.
93. Further, at para 6-30 of Goff & Jones, the editors describe the grant by the House of Lords in Banque Financière of a subrogation remedy as “unprecedented”. However that was primarily because subrogation was accorded to a party who thereby obtained, as Lord Hoffmann himself put it at p 229, “far greater security than it ever bargained for”, and perhaps also because of the adjustments which had to be made to the subrogated right in order to achieve equity (discussed in Goff & Jones at paras 39-44 and 39-45). The Bank’s claim to subrogation in this case is stronger in the sense that neither of those two points can be raised against it in this case.
94. Despite the broad statements in Banque Financière, what is said in Chapter 39 of Goff & Jones, and the way in which Lord Salmon and Lord Edmund-Davies expressed themselves in Orakpo, the combination of facts that (i) the Bank has a claim in unjust enrichment against Melissa arising out of her acquisition of the freehold, (ii) subrogation is a remedy which can be accorded to reverse unjust enrichment, (iii) the Lien arose out of the transaction giving rise to the acquisition, and (iv) the Lien is a right to which it is legally possible to subrogate, is not enough to justify the conclusion that the Bank should be subrogated to the Lien. There has to be a principled case to support such a conclusion.
95. Having said that, it seems to me that the conclusion is supported by principle. In addition to the general points identified in the previous paragraph, it appears to me that the following five points, when taken together, establish the Bank’s subrogation claim. (i) The freehold was acquired by being purchased through Boulters for £875,000; (ii) £875,000 was a sum which the Bank could have demanded from Boulters, and it only agreed to its being used to purchase the freehold if the Bank was granted a Charge; (iii) without that agreement, there would have been no £875,000 to purchase the freehold, (iv) owing to an oversight, the Bank was not granted a valid Charge; (v) the payment of £875,000 to purchase the freehold discharged the Lien.
96. In those circumstances, it is hard to see why subrogating the Bank to the unpaid vendor’s lien is not an appropriate way to remedy the unjust enrichment. I do not consider that the reasoning in Boscawen v Bajwa [1996] 1 WLR 328 presents a problem. In that case, at pp 334D and 335C, Millett LJ discussed in instructive detail both tracing, which he explained was “a process”, and subrogation, which he described as “a remedy”. (On reflection, I wonder whether the distinction, despite the approval of Lord Hoffmann in Banque Financière at p 236E of the description of subrogation as a remedy, is as satisfactory as it seems at first sight. It seems to me questionable whether a sharp distinction can satisfactorily be drawn between a process and a remedy, but the point has no effect on the outcome of this case.)
97. While I accept that Millett LJ treated tracing as the appropriate process to achieve subrogation in Boscawen, there are two important caveats for present purposes. First, he nowhere stated that subrogation was an impermissible remedy if tracing was not an available prior process. Secondly, as Mr Rainey QC pointed out, at p 339A-B Millett LJ said that it would be “perilous to extrapolate from one set of circumstances where the court has required a particular precondition to be satisfied before the remedy of subrogation can be granted a general rule which makes that requirement a precondition which must be satisfied in other and different circumstances”. Similarly, at p 334H, Millett LJ described subrogation as a remedy which “will be fashioned to the circumstances”.
98. Nor do I think that Lord Millett’s statement in Foskett v McKeown [2001] 1 AC 102, p 127F about property rights being “determined by fixed rules” and not being discretionary, casts doubt on my conclusion in this case. His analysis in that case has its critics – see eg Burrows, (2001) 117 LQR 412, 417 and The Law of Restitution, 3rd ed (2011), pp 140, 170-171 and 432-434, and Mitchell and Watterson, Subrogation: Law and Practice (2007), para 6.50. However, and more to the point, Lord Millett’s remarks were directed to proprietary claims not unjust enrichment claims. Lord Millett made that clear in a passage at p 129E-G, where he said, inter alia, that one must distinguish between a claim brought “to vindicate … property rights” and one brought “to reverse unjust enrichment”, and that Foskett was an example of the former. This point was also made by Lord Browne-Wilkinson and Lord Hoffmann at pp 108F and 115G respectively.
99. Finally on this aspect, it is worth mentioning that Melissa’s case represents a triumph of form over substance, or, to use the words of Lord Steyn in Banque Financière at 227C, “pure formalism”. It would have been perfectly open to the Bank to have requested Boulters to pay the whole proceeds of the sale of Rush Green Hall to the Bank, with the Bank then remitting back to Boulters the £875,000 needed to purchase Great Oak Court, on the basis that it would be subject to a charge in favour of the Bank to secure the Menelaou parents’ indebtedness. If that had happened, and the Menelaou parents had then directed the transfer of Great Oak Court to Melissa, and the defective Deed had been executed, it is very difficult to see why the Bank could not have claimed subrogation to the unpaid vendor’s lien. If Melissa’s case on this appeal is right, the fact that the Bank sensibly short-circuited the process, and agreed that the £875,000 could be retained by Boulters to purchase Great Oak Court, would mean that a small and practical change, of no apparent commercial significance, results in a substantially different commercial outcome. Such an outcome is, of course, possible, but its unattractiveness tends to support the conclusion which I have reached.
The Bank’s proprietary claim
100. This leads conveniently to the final point, namely whether the Bank’s claim to be subrogated to the unpaid vendor’s lien could in fact be justified by a simpler and less potentially controversial route. At least on the basis of the arguments we have heard, I am very sympathetic to the notion that the Bank had a proprietary interest in the £875,000 which was used to purchase Great Oak Court, and if that is right, its subrogation claim becomes relatively uncontroversial. I am, however, reluctant to express a concluded view on the topic, as the argument was developed very shortly, although it is fair to say that it was considered (and rejected) at first instance, albeit on a somewhat different basis from that which currently appeals to me.
101. In this connection, I would be inclined substantially to agree with the analysis of Lord Carnwath in paras 135-139 of his judgment.
102. It seems to me difficult, at least on the basis of the relatively limited argument we have heard, to argue against the proposition that the Bank had a proprietary interest in the £875,000 which was used to purchase Great Oak Court. What was intended to happen on 12 September 2006 was that the proceeds of sale of Rush Green Hall, which was charged to the Bank for a debt in excess of those proceeds, were split into two portions, one of which was to be paid to the Bank to reduce the debt, and the other of which was to be used to purchase Great Oak Court on terms that the Bank was to have charge over it for the outstanding indebtedness. In those circumstances, it would seem, either the second portion was the Bank’s money beneficially subject to its agreement that the money could be used to purchase Great Oak Court, or it was the Menelaou parents’ money beneficially subject to the Bank’s right to require it to be paid to the Bank to reduce the Menelaou parents’ debt unless it was used to purchase Great Oak Court subject to the Charge.
103. When it comes to the beneficial interests in this case, as I see it at the moment, the position would be as follows. There would be little need to resort to Quistclose Investments v Rolls Razor Ltd [1970] AC 597, because there could be no doubt but that Boulters held the £875,000 on trust: it was plainly not their money beneficially. Both the Menelaou parents and the Bank were their clients towards whom they had contractual and equitable duties, and, more particularly, both of whom had an interest in the £875,000. If the Bank beneficially owned the £875,000 (subject to its agreement that the Menelaou parents could use it to purchase Great Oak Court, subject to the Charge), cadit quaestio so far as the Bank’s subrogation to the Lien is concerned, as I see it: the Bank’s money was used to redeem the Lien. Assuming, however, that the Menelaou parents were the beneficial owners of the £875,000, the Bank would, in my view, have had the right of requiring that sum to be used to purchase Great Oak Court subject to a Charge back in favour of the Bank, failing which the Bank would have the right to demand that that sum be paid to it. I find it hard to see why that would not have given the Bank a sufficient interest in the £875,000 to enable it to claim to be subrogated to the Lien, even on Melissa’s restricted view of subrogation.
104. It may well be that the Bank could also claim that, if the £875,000 was to be treated as beneficially owned by the Menelaou parents, it was nonetheless subject to a charge in favour of the Bank, as discussed by Arden LJ in Buhr v Barclays Bank plc [2001] EWCA Civ 1223; [2002] BPIR 25, para 45. This argument was rejected by the Judge at first instance in this case – see at [2012] EWHC 1991 (Ch), paras 15-17. It is unnecessary and inappropriate to discuss that possibility further, as it was barely touched on in argument.
Conclusion
105. In those circumstances, I would dismiss Melissa’s appeal on the basis that the Bank has a valid unjust enrichment claim against her which is properly reflected in the Bank’s claim to be subrogated to the unpaid vendor’s lien over the freehold of Great Oak Court.
106. I add this. My strong, if provisional, opinion that the Bank had a proprietary interest in the £875,000 which was used to purchase the freehold leads me to wonder whether the conclusion that the Bank’s unjust enrichment claim is satisfied by subrogation could in fact be regarded as controversial, even before Orakpo and Banque Financière were decided. The reasons which persuade me that the unjust enrichment claim can properly be satisfied by subrogation to the Lien (see paras 91-95 above) are precious close to those which persuade me that there is a very strong case for saying that the Bank had a proprietary interest in the £875,000 (see para 103 above).
LORD CARNWATH:
Introduction
107. I agree that the appeal should be dismissed, but I arrive at that conclusion by a somewhat different route from that taken by my colleagues. In my view the respondent’s case can be supported (contrary to the decision of the deputy judge) by a strict application of the traditional rules of subrogation, without any need to extend them beyond their established limits.
108. I am less convinced with respect of the case for “rationalising” the older cases “through the prism of unjust enrichment”, as Lord Clarke suggests was done in Banque Financière (Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221), thus in effect conflating the two doctrines. As Lord Millett explained in Foskett v McKeown [2001] 1 AC 102, 129 (cited by Lord Clarke at para 38), there is a clear distinction of principle between a claim to enforce property rights and a claim for unjust enrichment. Earlier in the same judgment (at p 127F) he had emphasised that property rights are to be determined “by fixed rules and settled principles”, not by discretion or policy. Subrogation to a vendor’s lien is a claim to a property right, but it is, as Lord Clarke acknowledges, a less than straightforward concept. It should not be extended, nor should the established rules be distorted, without good reason.
109. Conversely, in the light of some decades of academic discussion and of the authorities reviewed by Lord Clarke, it is surely time for the principles of restitution or unjust enrichment to be allowed to stand on their own feet. A proprietary remedy may arguably be justified because, as Lord Neuberger says (paras 79-80), such a remedy, rather than a personal remedy, is the most appropriate response to the unjust enrichment found in this case; but not because of some tenuous relationship with a vendor’s lien which has no continuing existence or practical relevance. However, that is not how the case has been argued, and, since it is not necessary for my decision on the appeal, I shall limit my observations on those wider issues.
110. In this judgment I will take the facts as set out by Lord Clarke. I would only observe that I approach those facts without any particular predisposition in favour of the Bank’s claim. As Mr Warwick points out, if Melissa was enriched, it was because her parents gave to her, and to her two younger siblings, some of the proceeds of sale of their property, which she received in good faith. In the same way, Melissa’s older sister, Danielle, was enriched because she also received some of the proceeds of Rush Green Hall. Neither was aware of any interest of the Bank, and in Danielle’s case none has been asserted. Melissa’s ignorance of the Bank’s claim is the result of their own solicitors’ incompetence, not of any fault on her part.
Subrogation – the principles
111. A simple modern statement of the principle of subrogation, frequently adopted in later cases (see eg Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291, para 25, per Neuberger LJ); [2004] 13 EG 127 (CS), is that of Walton J in Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648, 1652B-C:
“[W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor. … It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged, in whole or in part, by the money so provided by him.”
112. Probably the fullest textbook discussion of the subject is to be found in Mitchell and Watterson Subrogation Law and Practice (2007) (It is noteworthy that both authors are also editors of the later edition of Goff & Jones (2011) to which I shall come.) Under the heading “transfer of extinguished proprietary rights” (para 3.26-8) the authors trace the origins of the rule whereby those whose money is used to pay off on land are “presumptively entitled to ‘acquire” the charge for their own benefit” (derived from Patten v Bond (1889) 60 LT 583). They describe as “anomalous” the extension of the rule beyond payments by someone with an existing interest in the land which requires protection. The anomaly lies in the absence of any sound policy reason to treat such a person any differently to any other person who has voluntarily paid off a person’s debt, and “for the more substantial reason that ‘liabilities are not to be forced on people behind their backs’” (citing Falcke v Scottish Imperial Insurance (1886) 34 Ch D 234, 248 per Bowen LJ). However, as they observe the principle became well-established in the case-law, approved for example in the Privy Council in Ghana Commercial Bank v Chandiram [1960] AC 732, the justification for acquisition of the security being that the claimant was “presumed to have intended this at the time when they parted with the money”.
113. The application of the concept in the context of an unpaid vendor’s lien is also well-established, but no less anomalous. Burston itself related to such a claim. The claim failed because, by taking a legal charge over the same property (even though invalid against the liquidator by reason of failure to register under the Companies Act 1948), the lien had been lost “either as a result of the doctrine of merger or by presumed intention to waive the unpaid vendor’s lien” (p 1653C).
114. The earliest example in the cases cited to the court was Thurstan v Nottingham Permanent Benefit Building Society [1902] 1 Ch 1. On a purchase of land by an infant, £250 of the purchase money was paid on her behalf by the building society to the vendor subject to a mortgage. Although the mortgage was held to be void because of the infancy, the Society was subrogated to, and so able to enforce, the vendor’s lien. Vaughan Williams LJ, after some initial uncertainty and consultation with his colleagues, concluded at pp 9-10:
“the society, having paid off the vendor, have a right to the remedies of the vendor – have a right, that is, to enforce the vendor’s lien. It is true that the society were not the vendors, but, having paid off the vendor, the society, as against the purchaser, stand in the place of the vendor.”
115. At first sight it seems odd that the Society, having failed due to its own mistake of law to get the security which it wanted, was able to revive and take advantage of a different security designed for a different purpose and a different person. As Floyd LJ observed in the Court of Appeal (para 15), the concept, although well-established, is not altogether straightforward:
“A third party who provides some or all of the purchase money for a purchaser, thereby discharging the obligation to the vendor, can claim the benefit of the unpaid vendor’s lien by subrogation. This is so even after the lien has been, as between vendor and purchaser, extinguished. It is not intuitively clear how, or why, this should be the case. How is the unpaid vendor’s lien transferred from the vendor to the third party? It might be thought that once the obligation in question has been extinguished, there is nothing which the vendor could transfer. Even if there was something to transfer, by what legal mechanism does the transfer take place? There has been no assignment.” (para 17)
116. As he explained, Lord Hoffmann made some attempt to address such conceptual concerns in Banque Financière:
“In my view, the phrase ‘keeping the charge alive’ needs to be handled with some care. It is not a literal truth but rather a metaphor or analogy: see Birks, An Introduction to the Law of Restitution, pp 93-97. In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist. … It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is ‘kept alive’ for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched.”(P 236D-E)
117. It is not clear to me, with respect, how describing the concept as a “metaphor” adds anything by way of explanatory force. I note that in the passage cited by Lord Hoffmann, Professor Birks began by observing that in the law of restitution, subrogation “really adds nothing” to the techniques otherwise available; “it is in the nature of a metaphor which can be done without” (ibid p 93). Thirty years on, I would respectfully agree. In the context of the law of unjust enrichment, the issue should be the nature of the appropriate remedy, not whether it conforms to an analogy derived from some other area of the law.
The view of the Court of Appeal
118. In the Court of Appeal (as in this court) the appellant submitted that, there was no justification for extending the rules of subrogation so as to provide a proprietary remedy in this case. A proprietary claim based on subrogation to vendor’s lien is available only to a claimant who can show that the purchase price has been paid off by use of his own money. That is a common feature of all the cases in which such a claim has been allowed. It is supported by the leading modern authority: Boscawen v Bajwa [1996] 1 WLR 328.
119. Floyd LJ acknowledged that no case had been cited to the court in which “a lender had been entitled to a remedy of subrogation when that lender had not advanced funds” (para 43). However, he considered that there was no strict requirement to that effect. He described the “unusual feature of the present case” that the Bank provided the value “by agreeing to release a security interest rather than by advancing specific funds”. The appellant had relied on Bankers Trust Co v Namdar [1997] NPC 22; [1997] EGCS 20, in which subrogation had been denied because, in the words of Peter Gibson LJ:
“I cannot see how the Bank can be afforded the remedy of subrogation in circumstances which, as I see it in agreement with the Judge, the Bank cannot properly be said to be the provider of the money used to discharge the debt owed to it by Mr and Mrs Namdar.” (Floyd LJ’s emphasis)
In the present case, however, Floyd LJ thought it sufficient the Bank had been “a provider of the funds” as a matter of “economic reality”:
“The mere fact that the claimant does some act in reliance on which there is a transfer of value between different parties is not sufficient. … When the Bank gave its undertaking to release its charges on Rush Green Hall, and thus release the purchase moneys for the purchase of Great Oak Court, there was, as I have held, a transfer of value from the Bank to Melissa. Moreover, if one asks Peter Gibson LJ’s question, namely whether it can properly be said that the Bank ‘is the provider of the money used to discharge the debt’, the answer in the present case is that it is. Certainly that is true if one asks whether the Bank is the source of the moneys used as a matter of economic reality. I therefore see no reason in principle or justice why the Bank should not be entitled to the remedy of subrogation.” (para 48)
120. Moses LJ preferred to speak of a “sufficiently close causal connection”, established by showing that, “but for” the Bank’s agreement to release its charges over Rush Green Hall, Great Oak Court would never have been purchased and the obligation to pay its vendors would never have been satisfied. In his view, there was no need to invoke the “somewhat fuzzy concept” of economic reality (paras 61-62).
Boscawen
121. In my view, the strict approach advocated by the appellant gains strong support from the judgment of Millett LJ in Boscawen v Bajwa [1996] 1 WLR 328. It is the leading modern authority on the application of principles of tracing and subrogation in a context not dissimilar to the present. As has been seen, it was cited with approval by Lord Hoffmann in Banque Financière at p 233F (“a valuable and illuminating analysis of the remedy of subrogation”). Because of its acknowledged importance in this area of the law, it justifies careful examination. Indeed, if the test was as flexible as that favoured by the Court of Appeal in this case, much of the discussion in that judgment would have been redundant.
122. The facts (as in the present case) involved a failure by solicitors to complete a transaction in the way intended by the main parties. A much simplified account will suffice. A building society (“Abbey National”) agreed to make an advance to clients for the purchase of a property from the defendant (Mr Bajwa) to be secured on a first legal charge. The property was subject to an existing mortgage in favour of another building society (“Halifax”). Abbey National paid the money to solicitors (Dave & Co) acting jointly for the society and the purchaser, on terms which obliged them to use the money for the purchase, and to return it if for any reason completion did not take place. They transferred it to the vendors’ solicitors (Hill Lawson) to hold to their order pending completion. Before completion Hill Lawson sent the money to Halifax in discharge of their mortgage, after which the sale fell through. In response to a subsequent claim to the property by judgment creditors of Mr Bajwa, the Abbey National claimed to be subrogated to the Halifax mortgage.
123. It was held (in the words of the headnote) that:
“… the money used by the vendor’s solicitors to discharge the mortgage had been held by the purchasers’ solicitors as trust money for the building society and by the vendor’s solicitors to the purchasers’ solicitors’ order pending completion of the purchase; that, therefore, the money could be traced into the payment and the vendor’s solicitors in making it had to be taken to have intended to keep the mortgage alive for the benefit of the building society; and that, accordingly, the building society was entitled, by way of subrogation, to a charge on the proceeds of sale of the property in priority to the plaintiffs.”
The headnote rightly highlights the importance of establishing a “tracing link” between the plaintiffs’ money and the money used to discharge the mortgage, leading to a presumed intention to keep the mortgage alive for the plaintiff’s benefit.
124. Millett LJ’s judgment needs to be read in the context of the issues before him. The main issue before the Court of Appeal was whether, in allowing the claim, the judge had “made an impermissible aggregation” of two different equitable doctrines, subrogation and tracing (p 333D-G). As Millett LJ explained, these arguments showed a “confusion of thought” as to the nature of “tracing”:
“Tracing properly so-called, however, is neither a claim nor a remedy but a process. … It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. …”
125. The process of tracing was to be distinguished from the “fashioning” of the appropriate remedy, once the plaintiff had succeeded in tracing his property “whether in its original or in some changed form” into the hands of the defendant, and overcome any defences:
“The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this, the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant’s land has been enhanced by the use of the plaintiff’s money. And if the plaintiff’s money has been used to discharge a mortgage on the defendant’s land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff.”
The judge had not erred by invoking the two doctrines in the same case:
“They arose at different stages of the proceedings. Tracing was the process by which the Abbey National sought to establish that its money was applied in the discharge of the Halifax’s charge; subrogation was the remedy which it sought in order to deprive Mr Bajwa (through whom the appellants claim) of the unjust enrichment which he would thereby otherwise obtain at the Abbey National’s expense.” (p 334B-335F, emphasis added)
126. Millett LJ went on to discuss separately the principles of tracing and subrogation, as applied to the instant case. In relation to the former (pp 335-337), it had been argued that the right to trace was lost when the money advanced by Abbey National went into Hill Lawson’s general client account, where it was mixed with other money including other funds belonging to Mr Bajwa. It was held in favour of Abbey National that, as against Hill Lawson and Mr Bajwa, who though not wrongdoers were not “innocent volunteers”, they could rely on equity’s ability to follow money through a mixed bank account “by treating the money in the account as charged with the repayment of his money” (pp 336F, 337G).
127. Under the heading “Subrogation” (pp 338-339) the principal issue was whether it mattered that Abbey National had failed to show an intention to obtain the benefit of the Halifax security. As Millett LJ explained:
“In cases such as Butler v Rice and Ghana Commercial Bank v Chandiram [1960] AC 732, where the claimant paid the creditor direct and intended to discharge his security, the court took the claimant’s intention to have been to keep the original security alive for his own benefit save in so far as it was replaced by an effective security in favour of himself. In the present case the Abbey National did not intend to discharge the Halifax’s charge in the events which happened, that is to say, in the event that completion did not proceed. But it did not intend its money to be used at all in that event.”
However, that did not mean that the remedy was unavailable:
“In the present case the payment was made by Hill Lawson, and it is their intention which matters. As fiduciaries, they could not be heard to say that they had paid out their principal’s money otherwise than for the benefit of their principal. Accordingly, their intention must be taken to have been to keep the Halifax’s charge alive for the benefit of the Abbey National pending completion. In my judgment this is sufficient to bring the doctrine of subrogation into play.” (p 339D-H)
128. These passages are of direct relevance to the arguments in the present case, and in my view difficult to reconcile with the more flexible approach of the Court of Appeal. It was clearly regarded by Millett LJ as necessary for the claimants to establish that the money used to pay off the loan was their money. “Tracing” was the process by which this was done. In the context of subrogation, tracing was not about identifying a particular asset in the hands of the defendant, as belonging notionally to the claimant; but rather as providing the necessary link with the payments made to discharge the relevant mortgage. In the passage quoted above, Millett LJ treated such payments as analogous to money spent in improving property. It was not regarded by him as sufficient to apply a broad causation or “economic reality” test, such as applied by the Court of Appeal in the present case. Had that been enough, the detailed examination of equitable rules relevant to tracing the money in the Hill Lawson account would have been unnecessary. It would have been enough that “but for” the receipt of the money from Abbey National, the Halifax mortgage would never have been paid off.
129. This aspect of the case is not affected by the decision in Banque Financière. Lord Hoffmann noted that there was no difficulty on the facts of that case in “tracing” the bank’s money into the discharge of the relevant debt, since by contrast with Boscawen the payment was direct (p 235C-D). I take him to have been using that term in the same sense as Millett LJ. The problem was not so much the right to a proprietary remedy but whether that right should be cut down so as to limit its scope by reference to the limited nature of the initial agreement. The decision itself, and in particular the nature of the remedy (personal, proprietary or hybrid?), have been much discussed (see Goff & Jones para 6-30). But it throws no doubt on the importance, in the present context, of establishing a tracing link between the claimant’s own money and the payment used to discharge the security.
Academic discussion
130. I should make brief reference to some of the academic discussion, if only to note the lack of consensus on the issues before us. Indeed, there are few more hotly debated issues among specialist academics in this field than the scope of the remedies, personal or proprietary, for unjust enrichment. In Mitchell and Watterson (op cit), there is an illuminating discussion of the various strands of academic opinion as it stood at the time of that edition (2007). I note in particular two sections, headed “Proprietary remedies for unjust enrichment generally” (para 8.40ff) and “Proprietary subrogation” (para 8.46-7). The former notes, for example, the view of some commentators that the English law of unjust enrichment “should be purged of proprietary remedies altogether” (para 8.41); contrasted with other “more accommodating” approaches, such as that of Professor Andrew Burrows (The Law of Restitution, 2nd ed (2002), para 8.42) who accepts the need for special justification for a proprietary remedy, but finds it in two factors, that the payment added to the value of the defendant’s asset and that the claimant did not voluntarily assume the risk of the defendant’s insolvency. Against that backdrop, it is said, the subrogation authorities reveal “a surprising readiness” to award proprietary remedies. Following Banque Financière, it is suggested that the courts should “look across from the subrogation authorities” to develop a consistent view of the circumstances in which proprietary restitutionary remedies should be awarded (para 8.46-7).
131. The clearest academic exposition in recent textbooks of the distinction on which the appellants rely appears in the current edition of Goff & Jones, The Law of Unjust Enrichment, 8th ed (2011). Floyd LJ referred to para 6-01, relating to the term “at the claimant’s expense”, without noting that this was in a chapter dealing specifically with “personal claims”. Chapter 7, headed “At the Claimant’s Expense; Proprietary Claims” contains the following important passage, which on its face appears to support the appellant’s case:
“Both personal and proprietary claims are governed by the rule that the defendant’s enrichment must have been gained at the claimant’s expense, but the tests used to determine whether this requirement has been satisfied vary with the type of claim. Where the claimant seeks a personal remedy, he must show that there was a transfer of value between the parties, and this is tested by asking whether an event took place that caused the claimant to become worse off and the defendant to become better off. This is discussed in Chapter 6. In contrast, where the claimant seeks a proprietary remedy, it is not enough for him to show that there was a transfer of value between the parties: he must also show either that he previously owned the property in which he now claims an ownership or security interest, or else that the defendant acquired this property in exchange for property that was previously owned by the claimant, or else that this property was formerly the subject matter of an interest that was discharged with property that was previously owned by the claimant. This test is more stringent than the causal test used in the context of personal claims, and it serves as a control mechanism to prevent proprietary restitutionary remedies from becoming too freely available.” (para 7-02, emphasis added)
The footnote refers to a list of cases cited later in the chapter (para 7-39, fn 87) including “in the subrogation context” Boscawen (at p 334).
132. The application of those principles to the payment of debts is discussed in more detail later in the chapter (para 7-42). The rule that “the tracing process” comes to an end when “the value being traced is dissipated” applies generally where the claimant’s money is used to pay off a debt. Subrogation is cited as one exception to the rule:
“… if the debt was secured by a charge over the defendant’s property then Equity can treat the debt and the charge, by a legal fiction, as though they were not extinguished by the payment, thereby enabling the beneficiaries to trace the value inherent in their money into the value inherent in the creditor’s fictionally subsisting chose in action against the defendant.”
Again the reference is to Boscawen. Notable here is the close link between subrogation and the doctrine of tracing, which as has been seen was central to the analysis by Millett LJ in that case. There is no apparent support for the Court of Appeal’s view that a sufficient link could be found in a looser test based on economic reality or simple causation.
Is there a tracing link in this case?
133. The Court of Appeal felt able to decide the case on the footing that the Bank did not have an interest in the money used to pay off the security. It found it unnecessary to decide whether that assumption was correct. In this court it has been submitted that it was not. It is argued that the Bank did have a sufficient interest on the basis either of the principle in Buhr v Barclays Bank plc [2001] EWCA Civ 1223, [2002] BPIR 25, or of a so-called Quistclose trust (after Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567).
134. Although the Quistclose principle does not appear in terms to have been relied on in argument in the courts below, the substance was sufficiently pleaded in the amended counterclaim (para 13), which asserts that the proceeds of the sale of Rush Green Hall released by the defendant Bank were –
“… held on trust for the defendant, subject to a power for Mr and Mrs Menelaou to use the same to purchase a flat in the joint names of Danielle Menelaou and her partner and also to purchase the Property in the name of the claimant but only on condition that the outstanding debts of Mr and Mrs Menelaou were to be secured by a first legal charge over the Property.”
The issue was also addressed by the judge (paras 14-17), albeit not specifically by reference to the Quistclose principle. It does not depend on any further findings of fact. I see no reason therefore why it cannot properly be relied on by the Bank in this court.
135. The Quistclose principle was explained and applied by the House of Lords in Twinsectra Ltd v Yardley [2002] 2 AC 164. A solicitor (Sims) had received money, lent by Twinsectra to his client (Mr Yardley) for the purchase of a property, under an undertaking that it would be utilised solely for the acquisition of property and for no other purpose. The money was paid to the defendant solicitor (Mr Leach), acting on behalf of the same client; he paid it out to the client who used it for purposes other than the purchase of the property. A claim against the defendant solicitor for dishonest assistance failed only because dishonesty was not established. The money was held to be subject to a trust in the first solicitor’s client account, the terms of which were found in the terms of the undertaking, which made clear that the money “was not to be at the free disposal of [the client]”:
“… the effect of the undertaking was to provide that the money in the Sims client account should remain Twinsectra’s money until such time as it was applied for the acquisition of property in accordance with the undertaking. For example, if Mr Yardley went bankrupt before the money had been so applied, it would not have formed part of his estate, as it would have done if Sims had held it in trust for him absolutely. The undertaking would have ensured that Twinsectra could get it back. It follows that Sims held the money in trust for Twinsectra, but subject to a power to apply it by way of loan to Mr Yardley in accordance with the undertaking …” (paras 12-13, per Lord Hoffmann)
136. In the present case the critical issue is the status of the money received by Boulters on 12 September 2008, as proceeds of the sale of Rush Green Hall. (I do not understand either party to suggest that the deposit £90,000 should be treated differently from the balance of £785,000.) The judge saw no reason to infer a proprietary interest in the Bank:
“16. In the present case the agreement or understanding recorded in the Bank’s letter of 9 September 2008 did not address the question of ownership or even security rights in the sale proceeds of Rush Green Hall, and had no reason to do so. While the arrival of the sale proceeds from Rush Green Hall and the payment of £785,000 to the vendors of Great Oak Court (or their solicitors) and of £750,000 to the Bank could not have been literally simultaneous, it is unrealistic to suppose that the parties were concerned with the status of the incoming monies in any short interval between them. Critically, the agreement was concerned only with the circumstances in which the charges over Rush Green Hall would be released. So long as they remained in place, there was neither need nor reason for the Bank to have any rights over the proceeds of sale, or thereafter, since the charges were only to be released against substitute security over Great Oak Court. And should there be a defect in that substitute security, the Bank had protected itself by obtaining the undertakings given by Boulters in the Certificate of Title.”
137. With respect to the judge, this analysis (like my own as trial judge in Twinsectra) seems to me to start from the wrong end. In the Boulters client account the money was undoubtedly trust money, in the sense that it was held beneficially for their clients (see eg In re A Solicitor [1952] Ch 328). That is not affected by the brevity of the period for which it was expected to be held. The relevant questions are: for whose benefit was it so held and on what terms? By this time they were acting for both the Menelaous and the Bank. Their respective interests in the money depended on the arrangements between them and with their solicitors. It is true that the Bank’s letter of 9 September 2008 said nothing in terms about an interest in the money to be used for the new purchase. But there is nothing to suggest that the money was treated as freely at the disposal of the Menelaous, which would have been inconsistent with the general purpose of the arrangement.
138. The terms of the certificate of title provided to the Bank by Boulters on 10 September are also relevant. In it Melissa was named as “borrower”, and the price as £875,000. It included a standard form undertaking –
“prior to use of the mortgage advance, to obtain in the form required by you the execution of a mortgage and a guarantee as appropriate by the persons whose identities have been checked in accordance with paragraph (1) above as those of the Borrower, any other person in whom the legal estate is vested and any guarantor ….”
139. They also undertook to notify the Bank of anything coming to their attention before completion which would render the certificate untrue or inaccurate, and if so to “defer completion pending your authority to proceed and … return the mortgage advance to you if required …”. I agree with Mr Rainey that in its context the reference in the certificate of title to the “mortgage advance” must be read as a reference to the money received by them from the sale of Rush Green Hall. The natural implication of the undertakings was that, if the sale failed, the sum so defined would be paid to the Bank; not simply transferred to the Menelaous.
140. It follows in my view that there is no difficulty in this case in finding the necessary “tracing link” between the Bank and the money used to purchase the new property. In this respect it is a much simpler case than Boscawen. The Bank’s interest in the purchase money was clear and direct. On this relatively narrow ground, I would hold that the appeal should be dismissed.
LORD KERR AND LORD WILSON:
141. Subject to the sentence which follows, we agree with the judgments both of Lord Clarke and of Lord Neuberger. We consider, however, that it is preferable to leave the availability of a personal claim against Melissa entirely open and so to that extent we prefer the terms in which Lord Neuberger expresses himself in paras 80-82 above to the marginally different terms in which Lord Clarke expresses himself in para 55 above.
Niru Battery Manufacturing Company & Anor v Milestone Trading Ltd & Ors
[2004] EWCA Civ 487
Lord Justice Clarke:
Introduction
This is the second appeal which this constitution of the Court of Appeal has heard from decisions of Moore-Bick J in this action. In the first appeal, in judgments delivered on 23 October 2003, reference [2003] EWCA Civ 1446, we dismissed the appeals of both Credit Agricole Indosuez (“CAI”) and SGS United Kingdom Limited (“SGS”) against the order made by the judge on 17 July 2002 giving judgment against them. The judgment was in the sum of US$5,712,762 together with interest and costs in favour of the claimants, Niru Battery Manufacturing company (“Niru”) and Bank Sepah Iran (“Bank Sepah”), and was given jointly and severally against Mr Mahdavi, CAI and SGS, who were the third, fourth and fifth defendants respectively.
As indicated in paragraphs 2 and 3 of my judgment in the first appeal, the bases of the judge’s judgment were as follows. Mr Mahdavi was held liable in the tort of deceit, as a constructive trustee of monies obtained from Bank Sepah by fraud and as an accessory to a breach of trust. The claim against CAI failed in the tort of deceit but succeeded in restitution on the basis that the circumstances in which it paid money away did not afford it a defence to the claimants’ claim. The claim against SGS succeeded on the basis that it was in breach of a duty of care owed to the claimants. After judgment had been given, it was agreed between the parties, without argument before or determination by the judge, that judgment should be given both jointly and severally against CAI and SGS.
In the first appeal SGS appealed on the basis that the judge was wrong to hold that it owed a duty of care to Niru, that it was in breach of that duty and that the breach caused the loss. The appeal failed on all three grounds, with the result that the position remains that SGS was correctly held liable to the claimants in tort for damages for negligence. As to the position of CAI, Niru and SGS submitted that the judge was wrong to acquit CAI of deceit, while CAI submitted that, having acquitted CAI of dishonesty, he was wrong to hold that it was liable in restitution but should have held that it had a defence of change of position. We concluded that the judge was entitled to acquit CAI of dishonesty and deceit but that, given his conclusions as to the circumstances in which it paid the monies away on the instructions of Mr Mahdavi, he was correct to hold that CAI was liable in restitution. I shall return to the basis of our conclusions below.
This appeal arises out of the contribution proceedings between CAI and SGS, which themselves have a somewhat unusual history, as the judge himself explained in his judgment of 8 May 2003. It is that judgment which has given rise to this second appeal. CAI and SGS issued Part 20 proceedings against each other seeking contribution under section 1 of the Civil Liability (Contribution) Act 1978 (“the 1978 Act”). At the trial it was common ground between them that if they were both liable they could claim contribution from each other under section 1 of the 1978 Act, even though SGS might be liable in tort and CAI in restitution.
That was common ground because of the decision of this court in Friends’ Provident Life Office v Hillier Parker May & Rowden [1997] QB 85 in which it was held that the 1978 Act enabled contribution to be claimed in such circumstances. Both CAI and SGS argued their cases on contribution at the trial on that basis, the argument being almost entirely directed to the relative responsibilities of SGS and CAI for the loss that Niru had suffered. Under section 2(1) of the 1978 Act the amount of contribution recoverable is to be such as may be found to be just and equitable having regard to the extent of the contributor’s responsibility for the damage in question. The judge considered the relative extent of the responsibility of CAI and SGS and prepared a draft judgment in which he concluded that they were equally responsible. He included his conclusions in his principal judgment and distributed it to the parties in draft in the ordinary way.
However, before the judgment was formally handed down, the judge’s attention was drawn to the decision of the House of Lords in Royal Brompton Hospital NHS Trust v Hammond [2002] UKHL 14, [2002] 1 WLR 1397, in which Lord Steyn, with whom the rest of their Lordships agreed, disapproved the part of the judgment in the Friends’ Provident case that had underpinned the parties’ approach to the question of contribution. The judge therefore delivered judgment in the main action and adjourned the Part 20 proceedings for further argument in order to allow the parties to consider and subsequently to address him on the effect of that decision.
Before a further hearing could be held there were what the judge called two further significant developments. The first was that the claimants had entered judgment against SGS and CAI jointly and severally pursuant to an order the terms of which were agreed between all parties to the action. The claimants had decided to look to SGS alone to satisfy the judgment and it had done so. The result was that by the time that the issues between SGS and CAI came to be argued before the judge SGS had paid the whole of the judgment, including a sum that he had ordered to be paid on account of the claimants’ costs, and CAI had paid nothing. Also by then both parties had reflected on the implications of the Royal Brompton Hospital case in the light of these further events.
As a result SGS sought (and was granted) permission to amend its particulars of claim in the Part 20 proceedings to add to its existing claim for a contribution under section 1 of the 1978 Act claims for relief by way of subrogation, recoupment and contribution based on the satisfaction of the judgment. SGS now submitted that it was entitled to recover the whole of the amount which it had paid by way of subrogation and/or recoupment. It further submitted that section 1 of the 1978 Act applied notwithstanding anything said in the House of Lords in the Royal Brompton Hospital case and that it would be just and equitable for CAI to bear either the whole or the majority of the loss.
Mr Bloch QC submitted to the judge on behalf of CAI that neither the principles of subrogation nor those of recoupment assisted SGS and that he should follow the opinion expressed by Lord Steyn in the Royal Brompton Hospital case and hold that the 1978 Act has no application in a case of this kind. Alternatively he submitted (as I understand it) that the judge should apportion the loss equally between CAI and SGS as set out in his draft judgment.
The judge held that SGS was entitled to be subrogated to Niru’s claim against CAI and that it was entitled to recover the whole of the amount it had paid to Niru in respect of its liability for principal and interest. He accordingly gave judgment for SGS against CAI in the total sum of US$7,087,034.80. He further held that SGS was not entitled to recover by way of recoupment and, on contribution, that he should follow Lord Steyn and hold that the 1978 Act has no application as between those liable in damages and those liable in restitution.
This second appeal is brought by CAI pursuant to permission granted by the judge. Mr Bloch QC submits on behalf of CAI that the judge was wrong to hold that SGS is entitled to be subrogated to Niru’s claim against CAI, although, if I understand him correctly, he submits that if that is wrong the court can and should hold that SGS is only subrogated so far as it is just and equitable in all the circumstances. Miss Andrews QC submits on behalf of SGS that the judge was right on subrogation but wrong on recoupment. She also submits if necessary that the judge was wrong to hold that the 1978 Act has no application as between SGS and CAI and that he should have awarded 100 per cent contribution in favour of SGS. She submits that the judge’s view expressed in his draft judgment in this regard was wrong.
I should note in passing that the judge treated the orders for costs differently. He held that the principles of subrogation and recoupment had no application to costs because the liability to costs arose out of the proceedings themselves. He held that SGS was entitled to a contribution from CAI in respect of what it had paid in satisfaction of that part of the judgment and assessed the contribution at 50 per cent. Neither SGS nor CAI challenges that conclusion in this appeal, which is therefore concerned only with liability for principal and interest. In this regard it seems to me to be convenient first briefly to consider the facts then to consider subrogation, recoupment and contribution.
The facts
The facts were set out in great detail in the original judgment of the judge, [2002] EWHC (Comm) 705, and summarised in paragraphs 4 to 26 of my judgment in the first appeal. I shall not repeat them here save in so far as necessary to understand the issues in this appeal. For present purposes it is sufficient to summarise the facts in much the same way as the judge did in his second judgment.
These proceedings arise out of a contract for the sale by Milestone Trading Limited (“Milestone”) to Niru of 10,000 metric tons of lead ingots made in February 1998 which provided for payment by letter of credit against presentation of (among other documents) FIATA multimodal transport bills of lading and an inspection certificate issued by SGS. In due course a letter of credit was opened by Bank Sepah in favour of Milestone. Milestone was one of a group of companies known as the “Woralco” group controlled by Mr Mahdavi. It had no significant assets of any kind and was used by the Woralco group as a single purpose vehicle for entering into the contract with Niru.
In order to obtain the lead needed to perform its contract with Niru, Milestone, acting through Mr Mahdavi, obtained financing from CAI against the deposit of the warehouse warrants relating to the goods. The warrants, possession of which gave CAI complete control over the goods, were to be released to Milestone only on repayment of the advance. However, the letter of credit represented Milestone’s only source of funds and it therefore became necessary for Mr Mahdavi to find a way in which documents could be presented for payment before the warrants had been released by the bank. That was achieved by enlisting the help of the second defendant, Maritime Freight Services Ltd (“Maritime”), which was prepared to issue a FIATA bill of lading stating that it had taken the goods in charge for carriage to Iran at a time when CAI still held the warrants and the goods themselves were still in the warehouse.
Most of the lead that Milestone intended to deliver was held in a warehouse at Gothenburg; the remainder, about 2,000 metric tons, was held in a different warehouse at Helsingborg. By the time Maritime issued its bill of lading SGS, acting on instructions from Milestone, had already inspected, sampled and tested the goods at Gothenburg. On being informed that Maritime had issued a bill of lading recording that it had taken the goods in charge for carriage to Iran, SGS issued an inspection certificate in which it certified, among other things, that the goods were marked with the name of Niru and that the quality, quantity and packing of the goods loaded complied with the contract. The certificate was inaccurate in two respects: the goods were not marked with Niru’s name and had not been put under the control of Maritime, let alone loaded on to any form of transport. The judge held that SGS was negligent in issuing the certificate and therefore liable to Niru in tort. As already stated, SGS’ appeal against that finding failed in the first appeal.
The documents, including the bill of lading and the inspection certificate, were presented to Bank Sepah under the letter of credit by CAI, which presented them as a principal. After some minor discrepancies had been corrected, the documents were accepted by Bank Sepah, but it was unable to make payment because the authorities in Iran failed to make the necessary foreign currency available. The price of lead began to fall causing CAI to become concerned about the adequacy of its security and eventually, after consulting Mr Mahdavi but without telling Bank Sepah or Niru, it sold the goods to reimburse itself. Then, somewhat to everyone’s surprise, funds were made available to enable Bank Sepah to honour the letter of credit and a sum of about US$5.8 million was remitted to CAI for payment to Milestone. The officer responsible for Milestone’s account, Mr Francis, knew that the bank had sold the lead that was to have been delivered under the contract and had assumed that the transaction was dead. He was unsure, therefore, how to respond to the receipt of the funds, but having spoken to Mr Mahdavi he was persuaded to release them to another company in the Woralco group, Nikam Metal Finance Ltd. Needless to say (as the judge put it) they were subsequently lost.
In the result no goods were delivered to Niru by Milestone, or by any other company under the Mahdavi umbrella. Niru was, however, out of pocket because, pursuant to its counter-indemnity, Bank Sepah had debited its account with the full amount of the payment. In short, Niru had been induced to part with the sum of US$5.8 million and received nothing in return other than the sum of US$116,760 which was paid under a performance guarantee provided by Milestone under the contract.
The judge held that CAI had been unjustly enriched by the receipt of the funds from Bank Sepah and that it could not rely on change of position as a defence to a claim in restitution because it had failed to act in good faith when dealing with the funds. The judge also held that, although the funds had been remitted by Bank Sepah, Niru was entitled in the circumstances of this case to recover against CAI in restitution.
As already indicated, CAI’s appeal against liability failed in the first appeal. My own reasons for reaching that conclusion are set out in paragraphs 145 to 170 of the judgments in the first appeal and those of Sedley LJ are set out in paragraphs 176 to 192. I detect no significant difference between us. The key parts of my own conclusions, so far as they are relevant to this appeal, can be seen from the following quotation from my earlier judgment:
“167. I set out the judge’s findings of fact in this regard in paragraph 122 above. On those findings, especially those in paragraphs 120 and 121 of the judgment, Mr Francis did not know that a false bill of lading had been presented to Bank Sepah in order to obtain payment under the letter of credit but he knew that CAI had sold the warrants (and thus the lead) which formed the basis of the transaction and that the transaction could not therefore be completed. He therefore realised that Bank Sepah must have paid by reason of a mistake. Moreover, as the judge put it in paragraph 121 of his judgment, a moment’s reflection would have led Mr Francis to appreciate that the reason given by Mr Mahdavi for wishing to retain the money did not justify the course he was asking the bank to take. In these circumstances the judge was entirely justified in saying at the end of paragraph 121:
“Thus, on the facts as Mr Francis understood them, nothing said by Mr Mahdavi actually undermined Bank Sepah’s right to repayment of the money.”
168. In these circumstances, having realised that Bank Sepah had paid by mistake, to my mind, good faith required Mr Francis to enquire of Bank Sepah before paying the money away in accordance with Mr Mahdavi’s instructions and the judge was correct so to hold. As I read his judgment, the judge acquitted Mr Francis of dishonesty because he did not consciously act in disregard of the standards to be expected of the ordinary honest banker. The judge I think took the view that Mr Francis’ state of mind was that CAI owed no duty to Bank Sepah, which could look after itself, but that CAI did owe a duty to its customer and in those circumstances paid the money away in accordance with Mr Mahdavi’s instructions. The judge thought that that was misguided but not dishonest. As indicated earlier, it is my view that the judge was entitled to reach those conclusions.
169. On the other hand, the judge concluded that good faith required a person in Mr Francis’ position who realised that the money had been paid by mistake to make enquiries of Bank Sepah to ascertain the position and not to pay the money away in the meantime. I have reached the clear conclusion that he was correct so to hold. This is, at the very least, an example of the case of the kind of bad faith expressly mentioned by Lord Goff in Lipkin Gorman and quoted in paragraph 146 above, namely where a person “has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution”. Here, on the judge’s findings of fact, when the money was paid away, Mr Francis (and thus CAI) knew the facts which entitled Bank Sepah to restitution, namely that it had paid under a mistake of fact.
170. In all these circumstances the judge was in my opinion correct to hold that CAI did not act in good faith in paying the money away and that it would be inequitable or unconscionable to deny Bank Sepah a right to restitution by repayment of the monies paid under the letter of credit. I would dismiss CAI’s appeal under this head.”
In the light of those conclusions I summarised my view in paragraph 171(v) and (vi) by saying that as I saw it the essential question is whether on the facts of a particular case it would in all the circumstances be inequitable or unconscionable, and thus unjust, to allow the recipient of money paid under a mistake of fact to deny restitution to the payer and that on the facts the judge was entitled to hold that it would be inequitable, unconscionable and unjust to deny restitution to Bank Sepah of the monies paid under the letter of credit. As I read it, Sedley LJ’s reasoning is to the same effect and the President agreed with us both.
Subrogation
Miss Andrews’ submissions both before the judge and before us may be summarised in this way. Having satisfied the judgment, SGS was entitled to be subrogated to Niru’s rights against CAI (except in so far as the judgment related to costs) and was thus entitled to obtain a full indemnity in respect of the sum it had paid. SGS had been compelled by law to compensate Niru in full; by doing so it conferred a benefit on CAI by relieving it from any obligation to pay Niru; CAI was initially unjustly enriched at the expense of Niru and was now unjustly enriched at the expense of SGS; accordingly, SGS should be granted the remedy of subrogation in order to prevent that unjust enrichment.
As the judge observed in paragraph 28 of his judgment, this argument depends, at least in part, on the proposition that CAI continued to be unjustly enriched as a result of receiving the funds transferred to it by Bank Sepah. Mr Bloch resisted the submission on several bases but the judge ultimately accepted Miss Andrews’ submissions after considering a number of authorities, notably Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221.
He expressed his conclusions in this way in paragraph 54:
“If SGS were denied relief in the present case CAI would in my view be unjustly enriched at its expense, CAI was unjustly enriched by the receipt of the money from Bank Sepah and as a result became liable to restore it, CAI did not cease to be liable when it parted with the money: on the contrary, it remained liable because it had received a benefit which it was bound to restore. That liability merged in the judgment and came to an end only when, and by reason of the fact that, the judgment was satisfied in full by SGS. SGS was not responsible for CAI’s decision to part with the money: that was the result of a combination of Mr Mahdavi’s insistence that the bank follow his instructions and its own failure to act in good faith. CAI has been relieved of liability at the expense of SGS and as a party liable to make restitution on the grounds of unjust enrichment I do not think that in relation to SGS it can be treated as if it did not receive the benefit on which its liability was based, any more than it could in relation to Niru.”
That reasoning seems to me to be compelling and, for my part, absent any authority to the contrary, I would follow it. Moreover, I agree with the view expressed by the judge in paragraph 55 of his judgment that the point can be tested by reference to the position which would have arisen if CAI had retained the money which it had received from Bank Sepah instead of paying it away in accordance with Mr Mahdavi’s instructions.
It is convenient to consider the position in different factual situations as follows: (1) Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and CAI satisfies the judgment; (2) Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and SGS pays the judgment debt in circumstances in which CAI still holds the money received from Bank Sepah; (3) Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and SGS pays in circumstances in which CAI had paid money away and has no change of position defence (this case); and (4) Niru sues SGS but not CAI and obtains judgment against SGS which SGS satisfies.
Before considering these particular situations, it is appropriate to refer to what I agree with the judge is the leading modern authority on the equitable remedy of subrogation, namely the Banque Financière case. In that case, as the judge observed in paragraph 29 of his judgment, Lord Hoffman, with whom the majority of the other members of the House agreed, drew a distinction between contractual subrogation of the kind most commonly encountered in connection with contracts of insurance and subrogation in equity. He pointed out that the former is founded upon the common intention of the parties whereas the latter is an equitable remedy designed to reverse or prevent unjust enrichment. It does not depend on agreement between the party enriched and the party deprived but upon principles of restitution.
Lord Hoffmann summarised the principles governing the availability of the equitable remedy in the following terms at page 234C-D:
“I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy.”
I return to the examples which I identified above with that general approach in mind.
It is common ground that in the first of the examples CAI would not be entitled to stand in Niru’s shoes and sue SGS in order to recover the amount it had paid to Niru by exercising a right of subrogation. There would in those circumstances be no question of SGS being unjustly enriched by CAI’s payment. Indeed, if CAI had paid back the money in the first place instead of paying it away on the instructions of Mr Mahdavi, as it ought to have done and as it would have done if it had been acting in good faith, Niru would have suffered no loss and SGS would not have been liable to Niru. The only basis upon which CAI might be able to proceed against SGS in those circumstances would be under the 1978 Act, to which I will return briefly below.
In the second example, where CAI retains the money in circumstances in which it should have repaid it, but SGS discharges a joint and several liability with CAI by paying the whole judgment debt to Niru, I do not think that there can be any doubt but that SGS would be entitled to recover the whole of the amount that it had paid from CAI. Any other solution would leave CAI holding monies which, if acting in good faith, it would have repaid to Bank Sepah and thus to Niru. The effect of allowing CAI to retain any part of the monies would be tantamount to affording it a defence of change of position, at least in part, in circumstances in which it had failed to make out such a defence. It was no doubt for this reason that Mr Bloch did not feel able to submit that, if CAI had retained any of the monies paid to it by Bank Sepah, it could have retained them as against SGS.
Moreover, as I see it, that would have been the position regardless of the reason why the monies were mistakenly paid to CAI by Bank Sepah. Thus in my opinion it would make no difference if the mistake was the result of carelessness on the part of Niru or Bank Sepah or negligence on the part of SGS. I briefly considered the case of carelessness on the part of the payer in paragraphs 160 and 161 of my judgment in the first appeal by reference to the decision of the Privy Council in Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193, where the judgment of the Judicial Committee was given by Lord Bingham and Lord Goff. The Privy Council rejected the propriety of introducing a concept of relative fault into a determination of whether the recipient of money paid under a mistake of fact or law was obliged to repay it: see the discussion at paragraphs 40 to 46.
It was no doubt for that reason that no-one suggested to us in the course of the first appeal that it was sufficient to show that CAI was negligent in order to defeat a defence of change of position or, indeed, that carelessness on the part of Niru or Bank Sepah would be relevant to the defence of change of position. The view of the Judicial Committee can be seen from paragraph 45 of the judgments in Dextra:
“Their Lordships are, however, most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as a sufficient requirement in this context.”
Lord Hoffmann expressed a strong view to the same effect in the Banque Financière case at page 235E-G.
It seems to me that, if carelessness is not sufficient to defeat a claim of this kind by the payer, there is no good reason for holding that negligence on the part of someone else which caused or contributed to the mistaken payment is sufficient. That is because, as Lord Bingham and Lord Goff put it, relative fault is irrelevant and good faith on the part of the recipient is a sufficient requirement for the defence of change of position. By contrast, lack of good faith is to my mind a sufficient basis for holding that the recipient who has failed to repay the money in good faith and who still holds the money is bound either to repay the money to a careless payer or to pay it to a person in the position of SGS in the example, whose negligence has made it liable to the payer. There would have been no such liability if the recipient had acted in good faith.
The third example is this case. For my part, I do not see that there is any difference in principle between the second and third examples. Thus I see no distinction in principle between the position of the recipient who retains the money and the recipient who has paid it away otherwise than in good faith. In both examples the recipient seems to me to be unjustly enriched.
Mr Bloch submits that that conclusion is wrong and would involve an unnecessary and undesirable extension of the categories of case in which subrogation has traditionally been recognised by the courts. A key reason for that submission is that it would have the undesirable effect that CAI would be liable in full in circumstances in which the judge had expressed the view in his first (albeit draft) judgment that SGS and CAI were equally to blame. Not unnaturally in the light of that view, it was an underlying theme of Mr Bloch’s submissions that there was nothing to choose between SGS and CAI and that a solution which left CAI to bear the whole liability would be unjust and thus inequitable.
However, in my judgment, that is not a sound foundation upon which to build a convincing submission. In their written submissions Mr Bloch and Miss Scott submitted (in paragraph 6) that SGS had been found to be at fault for failing to fulfil its duty of care to Niru whereas CAI had been found liable to restore monies received in error on what might be termed a ‘no-fault’ basis. They submitted that CAI could not raise a defence to Niru’s claim because of a ‘commercial’ failure to have regard to Niru’s interests. To my mind, that is not an accurate way of putting the true position. It is correct that SGS’ liability was based on a breach of a duty of care or, to put it shortly, negligence but it is wrong to regard CAI’s liability as no-fault liability or as based on a ‘commercial’ failure to have regard to Niru’s interests.
As indicated in the authorities, including Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, especially per Lord Goff at pages 579 and 580, and the Dextra case, especially in paragraph 45 quoted above, a recipient in the position of CAI would have a defence of change of position only if it acted in good faith and would not have such a defence if it acted in bad faith. In the instant case CAI acted in bad faith in paying the monies away. In these circumstances (as already indicated) it is to my mind be treated, both as between itself and Niru and as between itself and SGS, in the same way as if it retained the monies. It does not seem to me to be appropriate to treat CAI and SGS as equally responsible. It is true that SGS was careless (and thus negligent because of the duty of care owed to Niru) but it would not have been liable if CAI had not paid the money away in bad faith because Niru’s cause of action would not have been complete. For the reasons already given, just as Niru’s carelessness would have afforded CAI no defence to its claim, so SGS’ carelessness or negligence should not in my opinion afford CAI any defence to SGS’ claim (as it were in Niru’s name), now that SGS has discharged its liability to Niru.
This approach seems to me to be consistent with the approach of this court in the recent case of McDonald v Coys of Kensington [2004] EWCA Civ 47. In that case Mr and Mrs Cressman instructed Coys, who were auctioneers, to sell a Mercedes car at auction but expressly instructed them not to sell the car’s personalised number plate TAC 1. Coys sold the car to Mr McDonald, who asserted that the sale included the number plate. The Cressmans sued Coys for damages for breach of contract and Coys settled their claim for £12,000 plus interest, which amounted to £13,608.12 in all. The Cressmans also assigned to Coys all and any causes of action against Mr McDonald. Coys subsequently sued Mr McDonald alleging that he had been unjustly enriched by receiving, at the expense of the Cressmans, a benefit in the form of the number plate which was valued at £15,000 which he knew or ought to have known he was not contractually entitled to have.
The trial judge so held and awarded Coys a total of £15,000. He awarded £1,391.88 under the assignment and £13,608.12 as contribution to Coys’ liability to the Cressmans on the basis that both Coys and Mr McDonald had been liable to the Cressmans in respect of the same damage within the meaning of section 1(1) of the 1978 Act and that it was “just and equitable having regard to the extent of [Mr McDonald’s] responsibility for the damage in question” within the meaning of section 2(1) that he should make a full 100 per cent contribution in respect of Coys’ liability to the Cressmans. In this court it was contended that the Act did not apply because of the reasoning of Lord Steyn in the Royal Brompton Hospital case but the point was taken at a very late stage and the court refused to entertain it and decided the appeal on the assumption that the 1978 Act applied.
One of the defences advanced at the trial by Mr McDonald was that he had changed his position by transferring the car and the number plate to his partner. Both the judge and this court rejected that defence on the facts, holding that there was no such transfer. Mance LJ (with whom Thorpe LJ and Wilson J agreed) said in paragraph 21 that, even if Mr McDonald did transfer the car to his partner, he can only have done so knowing that the car had brought with it the ‘cherished’ mark TAC 1 through some mistake and not as part of the auction bargain. Mance LJ agreed with the judge that as soon as Mr McDonald knew that the car had brought with it the entitlement to the mark he also knew that that was something that he was not supposed to have.
Mance LJ observed in paragraph 22 that it was common ground, based on the Banque Financière case per Lord Steyn at page 227A and The Queen on the application of Charles Rowe v Vale of White Horse DC [2003] EWHC (Admin) per Lightman J at paragraphs 10-11, that four questions arise when considering a claim for unjust enrichment as follows. (1) Has the defendant benefited or been enriched? (2) Was the enrichment at the expense of the claimant? (3) Was the enrichment unjust? (4) Is there any specific defence available to the defendant (such as change of position)? Those questions seem to me to cover essentially the same ground as the three questions posed by Lord Hoffmann set out above.
On the facts of McDonald v Coys the court answered the first three questions yes and the fourth no. As part of his discussion of benefit Mance LJ said this in paragraph 37:
“Looking at the matter generally, I have no doubt that justice requires that a person, who (as a result of some mistake which it becomes evident has been made in the execution of an agreed bargain) has a benefit or the right to a benefit for which he knows that he has not bargained or paid, should reimburse the value of that benefit to the other party if it is readily returnable without substantial difficulty or detriment and he chooses to retain it (or give it away to a third party) rather than to re-transfer it on request. Even if realisable benefit alone is not generally sufficient, the law should recognise, as a distinct category of enrichment, cases where a benefit is readily returnable. A person who receives another’s chattel must either return it or pay damages, commonly measured by reference to its value. …. However, Mr McDonald’s insistence on keeping the mark and the absence of any obvious means of compelling its re-transfer are reasons for analysing this case in terms of unjust enrichment. Mr McDonald knew that he had not bargained or paid for the mark. The mark or its benefit was in practice easily returnable. If Mr McDonald chose to keep it, then I see every reason for treating him as benefited.”
Mance LJ said in paragraph 36 that, although Mr McDonald had not realised the value of the mark, it was a readily realisable benefit and that, if he had transferred it to his partner, that could go at most to a possible change of position defence. In my opinion, the same is true here. Thus I would not accept Mr Bloch’s submission that having paid the money away on Mr Mahdavi’s instructions CAI did not benefit from the payment.
In that case the court rejected the change of position defence on much the same basis as it did here. In the light of Mance LJ’s conclusions in paragraph 21 referred to above, it was held that even if the car had been transferred to Mr McDonald’s partner, he was in possession of sufficient knowledge to exclude inequity or good faith: see paragraph 41.
On contribution Mance LJ expressed his conclusions thus in paragraphs 47 and 48:
“47. … The real damage lies in the [Cressmans’] continuing deprivation of the mark or its value, which was still the result of Coys’ breach, but was, much more directly, the result of Mr McDonald’s determination to retain and refusal to re-transfer the mark.
48. On the hypothesis on which we must approach this part of the appeal, it was therefore open to the judge to treat both parties as causally responsible for the same damage. Bearing in mind that it is Mr McDonald who received the benefit of the mark, and that the whole proceedings would have been unnecessary had he re-transferred the mark to the estate’s order as he should have done, the judge’s conclusion that Coys should recover 100% contribution from him appears to me unassailable in this court.”
Thus in the result Mr McDonald was left liable for the whole of the value of the benefit on the footing that the 1978 Act applied and that a contribution of 100 per cent was just and equitable having regard to the extent of Mr McDonald’s responsibility for the damage in question. I have reached the same conclusion on the facts of this case. The relative positions of SGS and CAI seem to me to be very different. Although both SGS and CAI were liable for the same loss suffered by Niru, as in the Coys case the real damage was caused by CAI’s failure to repay the monies which had been paid by mistake.
As indicated earlier, and as the judge observed in paragraph 55 of his judgment, if the monies had been returned to Bank Sepah immediately by CAI, as they would have been if CAI had acted in good faith, Niru would have been unable to pursue a claim against SGS because it would have suffered no loss and CAI would have had no claim against SGS either. Although (as the judge put it) in one sense SGS would have benefited by the repayment, it could not have been regarded as unjustly enriched because it was only liable to pay the amount of loss actually sustained by Niru: see eg Receiver for the Metropolitan Police District v Croydon Corporation [1957] 2 QB 154. The same would be true if CAI had satisfied the judgment rather than SGS.
The judge plainly thought that his conclusion on subrogation represented the just result notwithstanding his earlier view that contributions of 50/50 would be appropriate under the 1978 Act. He said in paragraph 52 that, in the light of Lord Steyn’s speech in the Royal Brompton Hospital case and the helpful arguments of counsel in the course of the adjourned contribution proceedings, it had become clear that insufficient attention had previously been paid to the question of unjust enrichment and the different nature of the defendant’s liability in each case. I agree.
It is fair to say that the judge added:
“It may be that in a broad sense SGS and CAI were equally to blame for the loss suffered by Niru, but it does not follow that there is no distinction to be drawn between them in terms of the benefit they received. In these circumstances I do not feel constrained by the views I expressed in my final judgment to hold that consideration of justice and equity preclude relief by way of subrogation in this case.”
Mr Bloch relies upon the judge’s observation that it may be that in a broad sense SGS and CAI were equally to blame as being inconsistent with the conclusion that CAI should bear 100 per cent of the loss. However, as I read the judgment as a whole, the judge was saying that when all the circumstances are taken into account, a solution which left CAI bearing the whole of the loss was a just result. In any event, I have reached the conclusion that that is indeed the just solution.
It seems to me that, whether by the route of subrogation, recoupment or the operation of the 1978 Act (assuming it applies) the just result is that CAI should bear the whole of the loss. This too can be tested by considering the position if CAI still retained the monies. In that case, I do not think that there can be any doubt that the just result would be that the whole of the sum paid should be repaid either to Niru or, in circumstances in which SGS had discharged its liability under the judgment, to SGS. To my mind the position is no different in circumstances where CAI has paid the monies away otherwise than in good faith, any more than it was in the Coys case on the assumption that Mr McDonald had transferred the car and its number plate to his partner. Thus, notwithstanding the views expressed by the judge the first time round, I would not accept the central thrust of Mr Bloch’s submission that SGS and CAI were equally liable for Niru’s loss, albeit under different causes of action.
I would add that it seems to me that this conclusion is consistent with the approach of the House of Lords to contribution in the case of Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 1 Lloyd’s Rep 65, where it was held that in deciding issues of contribution between a firm of solicitors held liable for dishonest assistance and two individuals who had been held to be dishonest participants in a fraudulent scheme, an important factor was the amount of money which the latter had received and retained as a result of that participation. The facts here are of course very different but to my mind the key feature of the case is that CAI received monies under the letter of credit and did not return them.
However, Mr Bloch submits to us, as he did to the judge, that there are recognised categories of case in which the remedy of subrogation is appropriate and that this case falls outside them. He relies upon the speech of Lord Selborne in Duncan Fox & Co v North & South Wales Bank (1880) 6 App Cas 1 at 10-11. In short he submits that, in the absence of some prior agreement between the party seeking subrogation and the party against whom the claim is made which determines their respective liabilities, it is necessary for the claimant to show that the defendant is primarily liable in respect of the obligation in question. Although (for the reasons given below in the context of recoupment) I would hold that CAI was primarily liable, I agree with the judge that Lord Selborne was not limiting the categories of case in which the principle might be applied in the manner suggested by Mr Bloch. I also agree with the judge that the law of restitution based on the principle of unjust enrichment has undergone significant development since 1880.
Mr Bloch placed some reliance upon the speech of Lord Diplock in Orakpo v Manson Investments [1978] AC 95 at page 104 and upon the judgment of Millett LJ in Boscawen v Bajwa [1996] 1 WLR 328. In the Orakpo case Lord Diplock said that some rights of subrogation
“are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.
This makes particularly perilous any attempt to rely upon analogy to justify applying one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances.”
Nothing in the conclusions which I have reached seems to me to be inconsistent with those views. The same is true of the statements of Millett LJ in Boscawen v Bajwa, where he said at page 335:
“Subrogation, therefore, is a remedy not a cause of action … It is available in a wide variety of different factual situations in which it is required in order to reverse the defendant’s unjust enrichment. Equity lawyers speak of a right of subrogation or of an equity of subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.”
Lord Hutton said much the same in the Banque Financière case at page 245, where he stressed the wide variety of different circumstances in which the remedy of subrogation may be appropriate. He quoted with approval the statement from the then edition of Goff & Jones on The Law of Restitution at page 593 that:
“subrogation is essentially a remedy, which is fashioned to the facts of the particular case and which is granted in order to prevent the defendant’s unjust enrichment.”
Lord Hutton also referred with approval to parts of the passages from the Orakpo case and Boscawen v Bajwa which I have quoted above.
In these circumstances, it is I think clear that the remedy of subrogation is appropriate in much wider circumstances than was submitted by Mr Bloch. As I see it, and as stated in the Coys case, the correct approach today is to ask the questions posed by Lord Hoffmann and Lord Steyn in the Banque Financière case. The judge answered Lord Hoffmann’s questions one and two yes and his third question no. For the same reasons he would have answered Lord Steyn’s first three questions yes and his fourth question no.
In my opinion the judge answered those questions correctly for the reasons which he gave. The judge held that if subrogation were refused, that is if CAI were not ordered to repay SGS, CAI would be benefited or enriched at the expense of SGS and thus answered Lord Hoffmann’s first question and Lord Steyn’s first two questions yes. His reason was that by satisfying the judgment in full SGS had relieved CAI of liability to Niru. That is plainly correct.
Lord Hoffmann’s second question and Lord Steyn’s third question ask whether such enrichment would be unjust. The judge held that it would. In deciding that question he considered all the circumstances of the case and for that purpose he looked behind the judgment. He was in my opinion right to do so for the reasons which he gave in paragraph 39 of his judgment, which it is not necessary to repeat here.
I have already set out in some detail my reasons for concluding that CAI would be unjustly enriched if SGS could not recover the amount it paid to Niru under the judgment. In short, if CAI retained the monies there can be no doubt that continued retention of them would leave it unjustly enriched. It paid them away on the instructions of Mr Mahdavi in bad faith. I have already expressed my view that CAI should not be in any better position by paying the monies away in bad faith than if it had retained them. It would be unjustly enriched in either case: see paragraphs 34 to 49 above.
Lord Steyn’s fourth question is whether there are any defences. I have already expressed my view that CAI has no defence to a claim by SGS based on change of position by paying the money away any more than it had a defence to the claim by Niru on that basis. I can think of no other defences unless there are reasons of policy for denying SGS a remedy, in which case Lord Hoffmann’s third question would have to be answered yes.
In my opinion there are no reasons of public policy to deny SGS a remedy. Mr Bloch relies upon the rule in Merryweather v Nixan (1799) 8 TR 186, as subsequently developed in the cases, namely that contribution was not permitted between tortfeasors. However, as the judge observed, that rule did not apply as between a tortfeasor on the one hand and a person liable in equity on the other. I can see no reason of public policy why the court should not afford SGS a remedy in equity in order to achieve what I regard as the just result. I would accept Miss Andrews’ submission that, as the judge held in paragraph 54, if SGS is not subrogated to Niru’s rights, CAI will remain unjustly enriched, the only difference between that position and the position before the judge’s first judgment being that it will be unjustly enriched at SGS’ expense instead of at the expense of Niru. In short, far from being contrary to public policy, it would, as I see it, be unconscionable for CAI to keep any of the money which it received by mistake and which it paid away otherwise than in good faith.
In paragraph 26 above I identified a fourth example, namely where Niru sues SGS but not CAI and obtains judgment against SGS which SGS satisfies. That is not this case so that there is no need to discuss it in any detail. I would only say that it seems likely to me that SGS would be able to recover in that case too.
It might be objected that it is inappropriate to describe SGS as being subrogated to Niru’s rights against CAI because, once SGS discharged CAI’s obligation under the judgment, Niru no longer had any rights against CAI to which SGS could be subrogated. However, that would be to view the matter too technically. The principle upon which the judge relied was that of restitution by reason of unjust enrichment and, if the remedy of subrogation were not available, the correct course would not be to hold that SGS was not entitled to recover from CAI but to describe its remedy as a direct restitutionary right to payment enforceable against CAI. However, as Lord Clyde put it in the Banque Financière case at page 237F, the remedy may vary with the circumstances of the case, the object being to effect a fair and just balance between the rights and interests of the parties concerned and in my opinion it is appropriate to describe the remedy available to SGS as subrogation.
In any event, for the reasons which I have given I would uphold the judge’s conclusion that SGS is entitled to recover the amount it paid to Niru in discharge of the judgment in accordance with the principles of the law of restitution, whether the remedy is correctly described as subrogation or not.
I would only add this. In the course of his submissions Mr Bloch suggested that it might be possible to hold that SGS’ right or remedy should be limited to something less than the whole of the liability to reflect a just balance between the parties on the facts of this particular case. Having regard to my conclusion that the just result is that CAI should meet the whole of the judgment (except on costs), this point does not arise and I say nothing further about it.
Recoupment
Miss Andrews submits that the judge was wrong to hold that SGS’ claim against CAI does not satisfy the principles of recoupment. Although, in the light of my conclusions on subrogation, it is not necessary to decide this question, I will shortly state my opinion on it since it was the subject of argument. The relevant principles were stated by Cockburn CJ in Moule v Garrett (1872) LR 7 Ex 101 as follows:
“Where the plaintiff has been compelled by law to pay, or, being compellable by law, has paid, money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability: under such circumstances the defendant is held indebted to the plaintiff in the account”.
The judge set out that passage and added that the principle depends upon the compulsory discharge of a liability which rested primarily on the defendant (my emphasis). He referred to paragraph 15-001 of the 6th edition of Goff & Jones on The Law of Restitution, where the position was put as follows:
“In general, anybody who has under compulsion of law made a payment whereby he has discharged the primary liability of another is entitled to be reimbursed by that other. …
To succeed in his claim for recoupment, the plaintiff must satisfy certain conditions. He must show:
(1) that he was compelled, or was compellable, by law to make the payment;
(2) that he did not officiously expose himself to the liability to make the payment; and
(3) that his payment discharged a liability of the defendant.”
The judge held that the payment by SGS to Niru pursuant to the judgment was a compulsory discharge of CAI’s liability under the judgment and that CAI thus obtained the benefit of it. Miss Andrews submits that, having correctly so held, the judge should have asked himself whether, as between SGS and CAI, CAI was primarily or ultimately liable to pay Niru, that he should have considered how to answer that question by reference to the underlying circumstances and that, having done so, he should have answered the question yes.
I would accept those submissions. It seems to me that, for all the reasons already given under the heading of subrogation, the ultimate or primary liability as between CAI and SGS was indeed that of CAI. This case is a far cry from joint (or indeed several) tortfeasors responsible for the same damage. The crucial distinction is that already referred to, namely the fact that CAI was at no time entitled to retain or make use of the monies which it had received by mistake. If it had acted in good faith it would have repaid the monies and SGS would not have been liable at all. In these circumstances both law and equity should in my opinion regard CAI as primarily or ultimately liable as between itself and SGS, as that expression is used in the cases.
The reasons why the judge rejected the claim based on recoupment are set out in paragraphs 59 and 60 of his judgment:
“59. In the present case the satisfaction of the judgment by SGS discharged CAI’s liability under the judgment, but I do not think that of itself can be enough since the judgment was simply the means by which SGS was compelled to pay. The question whether SGS was compelled to discharge a liability that rested primarily on CAI is one that can only be answered by reference to the underlying rights and liabilities.
60. The underlying liabilities of SGS and CAI were, however, quite different in nature: SGS incurred liability in tort and CAI liability in restitution. I do not think that the payment by SGS of damages for negligence would have discharged CAI’s liability to restore the benefit it had received any more than the payment by Esso to the crofters in The ‘Esso Bernicia’ discharged the liability of Hall Russell. In those circumstances Niru would have been unjustly enriched for the reasons explained by Lord Goff in that case and SGS would have been subrogated to its claim against CAI. The fact that SGS has been sued to judgment does not in my view alter the position; that is simply the means by which SGS has been compelled to satisfy its own liability to Niru. For these reasons I do not think that the present case can be brought within the principles of recoupment.”
Miss Andrews submits that that reasoning is flawed and should not be followed. She submits that in those paragraphs the judge did not consider the matter along the lines set out in paragraph 69 above. That appears to me to be correct. It does not seem to me that this case is like the Esso Bernicia case, that is Esso Petroleum Ltd v Hall Russell & Co Ltd [1989] 1 AC 643, where the facts were radically different from those here.
For the reasons given in paragraph 69 I would hold that SGS was entitled to recover by way of recoupment as well as by way of subrogation.
Contribution
I have already expressed my view as to the appropriate result on the assumption that the 1978 Act applies, namely that CAI should pay the whole amount of the judgment save as to costs. This conclusion makes it unnecessary to consider whether the 1978 Act applies. I will therefore add only this.
It is not easy to know how we should approach the problem. As indicated earlier, in Friends’ Provident Life Office v Hillier Parker May & Rowden [1997] QB 85 this court held that the 1978 Act enabled contribution to be claimed as between a tortfeasor and a person liable in restitution. That conclusion was based upon what was held to be the true construction of sections 1(1) and 6(1) of the Act, which provide as follows:
“1(1) Subject to the following provisions of this section any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).
…
6(1) A person is liable in respect of any damage for the purposes of this Act if the person who suffered it …. is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).”
This court held in the Friends’ Provident case that in a case like the present CAI and SGS were liable in respect of the “same damage” within the meaning of section 1(1) of the 1978 Act, namely the loss sustained by Niru, and Niru was entitled to recover “compensation” from both SGS and CAI within the meaning of section 6(1). The court gave “compensation” a broad and purposive interpretation, which was followed in Hurstwood Developments Ltd v Motor and General & Andersley & Co Insurance Services Ltd [2001] EWCA 1785.
In the Royal Brompton Hospital case Lord Steyn considered the problem in some detail and agreed with the view expressed in the 5th edition of Goff & Jones at page 396 that a restitutionary claim is not one for “damage suffered” and that a claim for restitution cannot be said to be a claim to recover “compensation” within the meaning of the Act: see in particular paragraphs 26-30, 33 and 34.
Although Lord Steyn described the views of Auld LJ in the Friends’ Provident case as dicta, it was common ground between the parties in the instant case that they were part of the decision. By contrast, it was common ground between the parties that the views of Lord Steyn were obiter dicta and not necessary for the decision in the Royal Brompton Hospital case. If that is correct, (as it may well be) the strict position appears to be that we remain bound by the decision in the Friends’ Provident case.
In these circumstances, although both parties made detailed submissions on the question whether a claim for restitution is a claim for “compensation”, I do not think that it would be appropriate for me to express my own view on the point, at any rate unless it were necessary to do so in order to resolve the issues in this appeal. In the light of the conclusions which I expressed earlier it is not necessary to express such an opinion. I have already expressed my conclusion that if the 1978 Act applies the just result would be to order CAI to pay a contribution of 100 per cent, as was done in the Coys case, and for similar reasons. No question of any possible conflict between the effects of subrogation, recoupment and contribution therefore arises. On the other hand, if the Act does not apply, the result is the same, namely that SGS is entitled to recover in full from CAI by way of subrogation or recoupment. In these circumstances, it is not necessary or appropriate for me further to lengthen this judgment by my own analysis of the meaning of “compensation” in section 6(1) of the 1978 Act.
Postscript
Since writing the above, I have seen a copy of the very recent decision of this court in Cheltenham & Gloucester Plc v Appleyard [2004] EWCA 291, which contains a valuable discussion of the principles of subrogation. It does not, however, seem to me to contain anything which should lead me to alter the views expressed above.
CONCLUSION
For the reasons I have given I would dismiss this appeal and uphold the conclusion of the judge that SGS is entitled to recover the whole of the amount which it paid to Niru in respect of principal and interest. I would do so on the basis that SGS is entitled to restitution and that the appropriate remedy is the equitable remedy of subrogation, although I would also do so by the application of the principles of recoupment. If the 1978 Act applies, I would hold that CAI should contribute 100 per cent of the same amount on the basis that it would be just and equitable having regard to CAI’s responsibility for Niru’s loss. Finally, I would like to thank counsel for their assistance in this interesting case.
Lord Justice Sedley
I do not dissent from the conclusion reached by the President and Lord Justice Clarke that CAI should indemnify SGS in the full amount of the latter’s liability to Niru. I am, however, uneasy at some of the discontinuities in the developing law of restitution and contribution which the argument before us has exposed. I am mindful that, as Lord Justice Clarke points out, the applicability of the 1978 Act does not matter once one has decided (a) that SGS can recover in full both by subrogation and by recoupment and (b) that if the 1978 Act applies, SGS is entitled to a full indemnity under it as well; but the merits of a not very different case could well be such as to require the court to decide whether it is bound by law to award all or nothing rather than allocate the loss as justice requires.
These Part 20 proceedings concern the just distribution of Niru’s loss as between SGS, who caused Bank Sepah to pay out on a negligent certification that the lead ingots had been loaded when they had not, and CAI, who unlawfully paid away the funds consequently transferred to them. In modern statutory contribution proceedings between two such parties as defendants, it would be unsurprising to find them ordered (as Moore-Bick J was initially disposed to order them) to share Niru’s loss on the ground that but for either defendant’s breach of its duty to Niru the loss would not have occurred. It is only because of the doctrinal difference between restitution and tort that this logic is apparently unavailable to us. I cannot help wondering whether this is the way the law should be going. It is even less satisfactory that the same logic may not be available in subrogation or recoupment, even though these doctrines are directed to the same end of ensuring so far as possible that losses are distributed justly.
There is good authority about the position of a restitution claimant who has neglected his own interests, but none about a restitution claimant who himself has acted unlawfully, where in both cases the claimant has by his act contributed to the occurrence of the eventual loss. In the first class of case one sees readily that the enrichment of the defendant may be no less unjust because of the claimant’s own weakness or foolishness. His neglect of his own interests until 1945 defeated a claim made by him for damages in negligence; since then, if causative, it has diminished any such claim. But a claim in restitution is axiomatically not a claim for damages.
The way in which Miss Andrews accordingly puts her claim in this terra incognita is that SGS, having been sued to judgment for the full amount (indeed having shrewdly paid it), should be regarded as in the same position as the innocent loser in whose shoes SGS now stands. Yet each party to these Part 20 proceedings is able legitimately to say that but for the other’s unlawful act the loss would not have occurred. That is not, either literally or by analogy, the Kelly v Solari situation. Nor is it the situation which has faced the court in any reported case that we have seen. If, as Lord Clyde said in his assenting speech in Banque Financière, at 237, the restitutionary remedy “may vary with the circumstances of the case, the object being to effect a fair and just balance between the rights and interests of the parties concerned”, why should it not be relevant that the right in which SGS sues, whether by subrogation or in recoupment, is a function of its own wrongdoing?
Miss Andrews’ answer, that the entire burden comes to rest on the party “primarily” or “ultimately” liable, is not helpful. Her epithets beg all the questions posed by Lord Nicholls in Dubai Aluminium v Salaam [2003] 1 Ll.R.65, para.51. “Responsibility,” Lord Nicholls said, “includes both blameworthiness and causative potency”. Primary and ultimate liability, by contrast, are protean terms which could as readily implicate SGS as CAI.
This case does not fall within the doctrine of Merryweather v Nixan (1799) 8 TR 186, summarised by Lord Denman in Betts v Gibbins (1834) 2 Ad. & E 57, 74, as being that “between wrongdoers there is neither indemnity nor contribution: the exception [being] where the act is not clearly illegal in itself”. The rule exemplifies the non-justiciability of acts of turpitude, and I agree with Moore-Bick J that it has no application here. If it did, however, it would still not necessarily shut out the application of the 1978 Act.
Section 2(1) of the 1978 Act requires the court to apportion each person’s contribution “having regard to the extent of that person’s responsibility for the damage”. This court, I agree, remains bound by what it decided in Friends’ Provident notwithstanding the doubt later cast upon it by as respected an authority as Lord Steyn who, as both counsel accept, was speaking obiter. Moreover, the academic critique of Friends’ Provident is, at least in my respectful view, not obviously right. Since the word “damage” in s.1(1) has the meaning given to it by s.6(1), the fact (if it is a fact) that a restitutionary claim is not a claim for “damage suffered” is nothing to the point. The question is whether it is a claim for compensation in respect of damage for which the other party is liable. There is no obvious misnomer in describing a claim like the present Part 20 claim as concerned with compensating SGS in respect of damage, that is to say loss or harm, for which CAI has been held liable.
This solution would also address the real difficulty to which Mr Bloch drew attention in relation to restitution: CAI has not been enriched at all. It has parted with the money, and to the extent that the Part 20 proceedings are successful it is now going to be impoverished. There is nothing wrong with that in terms of statutory contribution and elementary justice, but it does not sound like restitution of a sum by which CAI has been unjustly enriched. That could apply only to the conspicuously absent Mr Mahdavi.
Our task has not been made any easier by the parties’ unwillingness to debate an apportioned contribution except under pressure from the court. Counsel’s arguments have essentially been for all or for nothing, and in the circumstances I do not dissent from the conclusion of the other two members of the court that the justice of this particular case requires CAI to reimburse SGS in full, whether by way of subrogation or recoupment or contribution. But for my part I would have preferred to be able to put the statutory remedy of contribution first rather than last among the reasons for so concluding.
Dame Elizabeth Butler-Sloss P
I agree that the appeal should be dismissed for the reasons given by Lord Justice Clarke.
Order: Appeal dismissed. All consequential orders to be decided on paper.
(Order does not form part of the approved judgment)
Bell Lines & ors -v- Waterford Multiport Ltd
[2010] IESC 15 (18 March 2010)
Judgment delivered by Mr. Justice Fennelly on the 18th day of March 2010.
1. This appeal raises a succinct technical point in a liquidation. Does a body which pays off preferential creditors step into their shoes and benefit from the preferential status of those creditors?
2. The claim is made by the Insolvency Agency of the United Kingdom in the Liquidation of the Bell group of companies. The Agency was obliged, following a decision of the European Court of Justice, to discharge the claims of more than 200 Bell employees in the United Kingdom. The Agency claims, with the support of the liquidator, the same right to preferential treatment in the liquidation as would have been enjoyed by the employees if they had not been paid. The High Court (Unreported, High Court, Dunne J., 28th April, 2006) rejected the claim. The liquidator appeals. The Port of Waterford represents the general body of unsecured creditors.
3. The Bell Group was, at one time, an important and successful group of shipping and transport companies, principally based in the Port of Waterford. On the 4th July, 1997, David Hughes of Ernst and Young, chartered accountants, was appointed as official liquidator to the companies.
4. A number of employees were based in the United Kingdom; one was in Northern Ireland. Following the collapse of the group, all employees in the United Kingdom were made redundant. They made their claims against the relevant Insolvency Service, established in England, for the purposes of Council Directive 80/987/E.E.C. of 20 October, 1980, on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer, O.J. L283/23 28.10.1980.That Directive was designed to provide for employees a certain minimum level of protection in the event of such insolvency. It required the Member States to establish a “guarantee institution.” Article 3 of the Directive provided:-
“1. Member States shall take the measures necessary to ensure that guarantee institutions guarantee, subject to Article 4, payment of employees’ outstanding claims resulting from contracts of employment or employment relationships and relating to pay for the period prior to a given date.
2. At the choice of the Member States, the date referred to in paragraph 1 shall be: – either that of the onset of the employer’s insolvency;
– or that of the notice of dismissal issued to the employee concerned on account of the employer’s insolvency;
– or that of the onset of the employer’s insolvency or that on which the contract of employment or the employment relationship with the employee concerned was discontinued on account of the employer’s insolvency.”
5. The Agency function in the United Kingdom has been performed by the United Kingdom Department of Government bearing various names but currently it is titled the Department for Business Innovation and Skills. A similar function in respect of the employee based in Northern Ireland is performed by the Northern Ireland Department for Employment and Learning. From this point on, I will simply refer to the UK Agency, as if there were only one.
6. The UK Insolvency Service resisted the claims of the former employees of the group, claiming that they should make their claims in this jurisdiction. Questions were referred by an Industrial Tribunal to the European Court of Justice. In Everson and Barrass v. Secretary of State for Trade and Industry and Bell Lines Limited (in liquidation) (Case 198/98) [1999] ECR I 8903 the Court of Justice determined that the “competent institution……for payment to those employees of outstanding claims is that of the State within whose territory they were employed.”
7. Thus the UK Agency was obliged, by virtue of Article 3 of the Directive, to discharge the claims of a number of the employees in respect of wages and a number of other entitlements and did in fact do so. Part of the sums so paid related to preferential debts due to the employees under the Companies Acts and fall to be considered in the present appeal. Payments which were made in respect of redundancy and minimum notice are not covered by the relevant section and are not claimed to rank for preferential treatment.
8. The liquidator applied in the High Court for a determination that the UK Agency should be admitted, subject to adjudication as a creditor in the Liquidation, in respect of the relevant payments, as a preferential creditor insofar as payments had been made in respect of Irish preferential debts.
Relevant Statutory Provisions
9. Section 285 of the Companies Act 1963 (as amended) (“the Act of 1963”) deals with preferential claims in a winding up. The relevant date, for the purposes of the present case is the date of the appointment of the provisional liquidator. The appeal is concerned with wages and certain other sums due at the relevant date to employees as described in the section. Section 285(2) of the Act of 1963 provides for three headings, (b), (c) and (d) of preferential payment. Two more, (h) and (i), were added by section 10 of the Companies (Amendment) Act 1982. The combined provision is, so far as relevant, as follows:-
“In a winding up there shall be paid in priority to all other debts—
(b) all wages or salary (whether or not earned wholly or in part by way of commission) of any clerk or servant in respect of services rendered to the company during the 4 months next before the relevant date;
(c) all wages (whether payable for time or for piece work) of any workman or labourer in respect of services rendered to the company during the 4 months next before the relevant date;
(d) all accrued holiday remuneration becoming payable to any clerk, servant, workman or labourer (or in the case of his death to any other person in his right) on the termination of his employment before or by the effect of the winding-up order or resolution;
(h) all sums due to any employee pursuant to any scheme or arrangement for the provision of payments to the employee while he is absent from employment due to ill health;
(i) any payments due by the company pursuant to any scheme or arrangement for the provision of superannuation benefits to or in respect of employees of the company whether such payments are due in respect of the company’s contribution to that scheme or under that arrangement or in respect of such contributions payable by the employees to the company under any such scheme or arrangement which have been deducted from the wages or salaries of employees.”
10. In colloquial terms, these headings provide for preferential treatment of amounts due in respect of wages, holiday pay, sickness benefit and pension rights, when claimed by what the Act of 1963 variously described as clerks, servants, workmen or labourers, but which the Act of 1982 described by the single term, “employees,” which I will use so far as possible.
11. The persons primarily entitled to the preferential treatment are the employees themselves. The UK Agency makes its claim by reference to the additional provision made by section 285(6) of the Act of 1963, as follows:-
“Where any payment has been made—
(a) to any clerk, servant, workman or labourer in the employment of a company, on account of wages or salary; or
(b) to any such clerk, servant, workman or labourer or, in the case of his death, to any other person in his right, on account of accrued holiday remuneration;
out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid up to the amount by which the sum, in respect of which the clerk, servant, workman or labourer or other person in his right, would have been entitled to priority in the winding up has been diminished by reason of the payment having been made.”
12. The Act of 1963 was enacted, not only prior to the adoption of Directive 80/987, but prior to accession of Ireland to membership of what was then the European Economic Community. The question, nonetheless, arises as to whether payments required to be made by the insolvency agencies of the Member States can come within sub-section (6). The Oireachtás has made specific provision in respect of payments made under the Protection of Employees (Employers’ Insolvency) Act 1984 (“the Act of 1984”) the Act which implements Directive 80/987 into Irish law. That Act established the Redundancy and Employers’ Insolvency Fund as the Irish guarantee institution, for the purposes of making payments, some of which come within the scope of section 285 of the Act of 1963, to employees of companies in the event of insolvency. Section 10 of the Act of 1984 provides, in the relevant part:-
“(1) Where, in pursuance of section 6 of this Act, the Minister makes any payment to an employee in respect of any debt to which that section applies, any rights and remedies of the employee in respect of that debt (or, if the Minister has paid only part of it, in respect of that part) shall, on the making of the payment, become rights and remedies of the Minister.
(2) Without prejudice to the generality of subsection (1) of this section, where rights and remedies become, by virtue of subsection (1) of this section, rights and remedies of the Minister, there shall be included amongst them any right to be paid in priority to all other debts under—
(a) section 4 of the Preferential Payments in Bankruptcy (Ireland) Act, 1889; or
(b) section 285, as amended by section 10 of the Companies (Amendment) Act, 1982, of the Companies Act, 1963
and the Minister shall be entitled to be so paid in priority to any other unsatisfied claim of the employee concerned being a claim which, but for this subsection, would be payable to the employee in such priority; and in computing for the purposes of any of the provisions of the said section 4 or the said section 285, as so amended, any limit on the amount of sums to be paid, any sums paid to the Minister shall be treated as if they had been paid to the employee.”
The High Court Judgment
13. The liquidator relied upon the wording of section 285 of the 1963 Act, but also submitted that the payments should be treated as preferential based on a restitutionary right of subrogation to the position of the person whose debt had been discharged. The ordinary creditors resisted, contending that, in Irish law, there was no provision for preferential status for the guarantee institution, save as provided for under the Act of 1984.
14. Dunne J. observed that there was no dispute whatsoever regarding the entitlement of the UK Agency to claim, as a creditor, in the liquidation. She held, however, that there was no entitlement to preferential status, except as provided by statute. She did not think that section 285(6) could be interpreted so as to grant that status to the UK Agency. If that were possible, she questioned whether there would have been any need to enact section 10 of the Act of 1984. There was no provision, she said, within the legislation, for guarantee institutions from outside the jurisdiction to enjoy the preferential status accorded to the Irish institution.
15. Dealing with the alternative argument, based on equitable principles of restitution, she did not think that those principles would enable the UK Agency to acquire preferential status, in the absence of express statutory authority.
16. The learned judge also rejected the reliance placed by the liquidator on arguments based on an unjust enrichment. She could not see how the general body of creditors would be in any way unjustly enriched by the refusal of the preferential status claimed.
The Appeal
17. The appellant (the liquidator), supported by the UK Agency relied, in the first instance, on section 285 (6) of the 1963 Act and, in the alternative, on general equitable principles of restitution or unjust enrichment. They relied, in particular, on the principle that this section should receive a “benevolent interpretation.” For this purpose, they relied upon the High Court decision of Carroll J. in Station Motors Ltd v. Allied Irish Banks Ltd [1985] I.R. 756, which does not appear to have been opened to the learned trial judge. It was submitted that an entity which discharges a preferential liability of a company in liquidation should not suffer a disadvantage by being reduced to a lower status of debt.
18. Counsel for the Port of Waterford, representing the general body of unsecured creditors, argued that the fact that the payments in question were made under compulsion had no bearing on the question of priority. In this regard, so to provide would be to rewrite the statute. The legislature had identified the circumstances in which preferential status could be enjoyed by the combined effect of section 285 of the Act of 1963 and section 10 of the Act of 1984. He submitted that the expression “out of money advanced” necessarily meant an advance to somebody else, i.e., to somebody other than the employee. The ordinary meaning of the word “advanced” is that it refers to monies paid over to the company as a borrower. There was no loan by the UK Agency; that body had not advanced any money. Furthermore, any payment, in order to qualify under the subsection must have been made before the winding up: the subsection implies that the person (employee) receiving the payment must be employed at the time of the payment. Finally, it was submitted that section 10 of the Act of 1984 and section 285(6) constitute the exclusive statutory basis upon which persons other than those to whom the priority debts were payable might step into the shoes of those persons.
Decision
19. The claim for preferential status advanced by the UK Agency must be considered by reference to the provisions of section 285 (6) of the Act of 1963. I do not think that equitable principles of restitution are relevant. The question here is not the right of the UK Agency to reimbursement. That is not in issue. The only question relates to priority.
20. I would thus express the question to be decided in the following way. The employees of the companies, based in the UK (including Northern Ireland) had claims in the liquidation which enjoyed preferential status to the limited extent provided for in section 285 (2). For example, only four months wages come within the provision. The UK Agency discharged those payments because it was obliged by law to do so.
21. It is not contested that the UK Agency is entitled to prove as an unsecured creditor in the liquidation for sums including those representing the employees’ preferential claims. The precise legal basis of that entitlement has not been spelled out in the High Court judgment. It is clear that the UK Agency discharged liabilities of the company by virtue of a legal obligation. Where any person, under compulsion of law, makes a payment for which another person is primarily liable, the first person is entitled to recover the amount of the payment from the second person. The result is the same as where a payment is made to a third-party at the request of a person. On the facts of the present case, these conditions are satisfied. The companies (in liquidation) were liable to their employees for wages and other employment benefits. The UK Agency was legally compelled, by virtue of the Directive 80/987/EC, to discharge those payments. It did so.
22. The decisive question then is, of course, whether those payments were made to the employees “out of money advanced” by the UK Agency “for that purpose.” It is entitled to preferential status only if that question receives an affirmative answer.
23. In Station Motors Ltd v. Allied Irish Banks Ltd [1985] I.R. 756, a bank had advanced money to a company, part of which it knew was to be used to pay wages, although there was no clear division between those payments and more general payments. Carroll J. found, at p. 764:- “the bank in fact advanced money knowing part of it would be used for wages. Therefore, in my opinion, insofar as that part is concerned, they are entitled to the benefit of subrogation provided in s. 285, sub-section 6.” In reaching this conclusion, she had relied on a judgment of Plowman J. in Re Rampgill Mill Ltd. [1967] 1 Ch. 1138, whose facts she summarised as follows:
“This was an action between a bank and a liquidator and it was common ground that within the limit of £500 per week, there was no restriction on the purpose for which cheques could be drawn on the bank. It was also common ground that the arrangement was made with wages in mind. In that case, as in this, the bank did not insist on a wages account being opened and operated in such a way as to allow the bank to get maximum priority.”
Plowman J expressed the following views at page 1145:-
“In my judgment, counsel for the liquidator seeks to apply too rigid a test. The object of section 319 [4]” [the equivalent of s. 285, sub-s. (6), of the Companies Act, 1963], “as I see it, was to establish a principle of subrogation in favour of banks [although its operation is not, of course, confined to banks], and the subsection should, therefore, in my judgment, be given a benevolent construction rather than one which narrows the limits of its operation . . . In the present case, the bank clearly had a purpose in advancing money to the company — namely, the purpose of enabling it to meet its commitments. I then ask myself, ‘what commitments?’, and my answer, so far as the money provided under the Alston arrangement is concerned, is wages, which were the whole raison d’etre of that arrangement.”
24. The problem addressed in those two cases arose from the uncertain or loose arrangements between the respective banks and the company with regard to the use of the monies advanced. No such problem arises in the present case. The money was paid directly to the employees to discharge ascertained debts. Nonetheless, these cases establish a principle of “benevolent construction” of section 285(6) of the Act of 1963.
25. As I see it, three objections based on interpretation of the sub-section are raised on behalf of the general body of creditors, namely: that the UK Agency did not “advance” the money; that the payments were not made out of a sum advanced, but were paid directly to the employees; that the subsection applies only to monies advanced prior to the winding up.
26. The court was referred to dictionary definitions and authorities with regard to the meaning of the word “advance.” So far as relevant to the present context the following from the Oxford English Dictionary (1989 2nd ed.) is useful: “The advancing or paying beforehand of money; payment in advance.” It is, of course, true that “advance” may also and frequently does refer to the act of lending money. But that is not its exclusive meaning. It may, depending on the context, refer to a prepayment of sums to be due in the future. I am satisfied that the UK Agency made payments to the employees of the companies in advance of their rights being discharged in the liquidation. If they had not been paid by the UK Agency, the employees would have had to await payment at some uncertain future date in the course of the liquidation. In that sense, therefore, the UK Agency advanced the payments to the employees.
27. The second point is somewhat more difficult. The UK Agency did not make the payments to the employees “out of” any identifiable larger sum. Nor were they made to the companies or to any other intermediary, as was the case in Station Motors v. Allied Irish Banks Ltd and Re Rampgill Mill Ltd., both already cited. It is accepted that the sub-section has normally been invoked where a bank or other lender has “advanced” money to the company for the payment of wages. But the subsection does not require either payment to the company or another intermediary or that the monies be advanced out of any larger sum. What is required, in the first instance is that a “payment has been made…,” which is indisputably the case. As a matter of simple fact, they were made out of monies advanced by the UK Agency. While the language may suggest that there is a larger fund from which the individual payments come, there is nothing to suggest that such a fund has to be established outside or independent of the payer’s own funds. Thus, I do not see the prepositions “out of” as obstacles to the application of the section in this case.
28. The third point is whether the sub-section imposes a temporal limit on the advance of the monies for which preferential status is claimed. Must they have been paid prior to the winding up? There is nothing to that effect in the section. Subsection (2)(b) speaks of “all wages or a salary…… of any clerk or servant in respect of services rendered to the company during the 4 months next before the relevant date…” It does not refer to a former employee. Subsection (6) speaks of a payment which “has been made…,” without specifying that the payment must have been made prior to the “relevant date” carefully specified in subsection (2). That sub-section refers, in the case of paragraphs (b) and (c) to wages or salary “in respect of services rendered to the company during the four months next before the relevant date…” and in the case of paragraph (d) to “all accrued holiday remuneration…… payable… on the termination of his employment before or by the effect of the winding- up order.” These provisions relate to amounts becoming due to employees prior to the winding up. Although they are concerned with those employees’ rights in the winding up, they do not refer to them as “former employees.” Nor does subsection 6 speak of former employees. Accordingly, the latter subsection is capable of referring to payments made to employees, who are technically no longer in the employment of the company, so long as those payments are made in discharge of liabilities arising, as required by subsection (2), in respect of employment during the period prior to the relevant date.
29. Finally, I should refer to the significance attached by the learned trial judge to section 10 of the Act of 1984, which makes special provision allowing the Minister, acting as the Irish guarantee institution, to claim priority under section 285(6) of the Act of 1963. Clearly, the legislature did not contemplate a case such as the present where the employees’ claims have been discharged by the guarantee institution of another member state. The UK Agency has not attempted to make any claim pursuant to section 10 of the Act of 1984. Clearly it could not having regard to its terms. The exclusion of the guarantee institutions of other member states may well have been an oversight. The Act was passed long before the decision in Everson and Barrass v. Secretary of State for Trade and Industry and Bell Lines Limited (in liquidation), already cited. The exclusion of the UK Agency from the preferential rights available to the Irish agency might appear to discriminate between the guarantee institutions of the member states. It may be that the principle of “conforming interpretation” could have been invoked on its behalf. See Case 14/83 Von Colson and Kamann v. Land Nordrhein-Westfalen [1984] ECR 1891; Case C-106/89 Marleasing SA v. La Comercial de Alimentacion SA [1990] ECR I-4135. This point has not been argued and I express no concluded view. It would tend to lead to the same result as is proposed in this judgment. For present purposes, however, it suffices to state that this omission from the Act of 1984 cannot affect the proper interpretation of section 285 (6) of the Act of 1963, if the latter provision, properly interpreted, allows for the claim of the UK Agency.
30. For the reasons already given, I am satisfied that the UK Agency is entitled to appropriate priority pursuant to section 286(6). I would allow the appeal and, instead, make an order pursuant to paragraph D of the notice of motion returnable for 11 July 2005.
Doyle v. Wicklow County Council [1973] IESC 1 (14th December, 1973)
Supreme Court
Joseph Doyle
(Plaintiff)
v.
The Council of the County of Wicklow
(Defendants)
No. 4 of 1972
[14th of December, 1973]
Status: Reported at [1974] IR 55
FitzGerald C.J.
I agree with the judgment about to be delivered by Mr. Justice Griffin.
Walsh J.
1. I agree with the judgment which is about to be read by Mr. Justice Griffin. I wish, however, to add one qualification in respect of the portion of it which deals with the question of insurance.
2. A policy of fire insurance is a policy of indemnity only. Therefore, the fact that an applicant is the holder of a policy of fire insurance is not a matter to be taken into account when he brings an application for damages for malicious injury. The vast majority of such policies contain a clause giving the insurance company a right to subrogate, and to bring the claim in their own name. However, it is possible (though the cases may be few) to have a policy of fire insurance which expressly excludes the right of subrogation. In such a case an insurance company would not be entitled to bring a claim in the name of the applicant. If a County Council wishes to challenge the right of an insurance company to proceed in the name of an applicant under a claim of subrogation, and the matter has been put in issue, then questions may be asked with reference to the nature of the policy of insurance and the policy itself would be both relevant and admissible in evidence.
Budd J.
3. I agree with the judgment of Mr. Justice Griffin.
Henchy J.
4. I also agree with that judgment.
Griffin J.
5. The facts appear sufficiently from the Case Stated and from the transcript of Dr. Browne’s evidence which, though not forming part of the Case Stated, by consent of the parties was opened to the Court and was deemed to be included in the Case Stated.
6. In relation to the first question, counsel on behalf of the respondents submitted that, on the hearing of this application for compensation under the criminal injury code, the Circuit Court judge, in considering the question of insanity, should not apply the standards or rules appropriate to a criminal trial. In my opinion, this submission is not well founded. Before the application for compensation can succeed, the applicant must prove that a crime has been committed by some person or persons, known or unknown, for which the community is to be made liable: per Kennedy C.J. in Artificial Coal Company v. Minister for Finance [1928] I.R. 238. If by reason of insanity the perpetrator of the act here in question is to be excepted from criminal responsibility, no “crime” has been committed by him and, in my view, it would be quite illogical to hold that, on the hearing of the application for compensation for criminal injury arising out of the same act, a standard different from that applied in a criminal prosecution should be applied for the purpose of determining his sanity or insanity.
7. The first question submitted by the learned Circuit Court judge necessarily involves a consideration of what are the standards to be applied in relation to the sanity or insanity of the youth who set fire to the abattoir at Bray on the night of the 28th January, 1970, and also consideration of the so-called McNaghten rules. Mr. Peart, for the respondents, concedes that if the McNaghten rules are applied the Circuit Court judge is bound to find against the respondents; but he invites this Court to consider the extent to which the McNaghten rules apply. The answering of a question in a Case Stated which arises in the course of a claim for compensation for criminal injury is not the most appropriate circumstance in which to consider the application of rules which have been widely applied in criminal trials for upwards of 130 years. However, since the enactment of the Criminal Justice Act, 1964 (under which the death penalty has, with certain exceptions, been abolished) it is less likely that this Court will be required to consider the McNaghten rules in a criminal appeal. Neither this Court nor its predecessor, the Supreme Court of Justice, has had to decide the extent to which the McNaghten rules apply or whether they are the sole and exclusive test for determining the insanity of an accused person.
8. Whilst insanity has always exempted from criminal responsibility a person doing an act which would otherwise be a crime, the approach of the courts and writers to the question of insanity has become less rigid with the passage of time, as might be expected. In the time of Coke, insanity did not provide a defence to a criminal charge unless the insanity alleged was of such a nature that the accused resembled a beast rather than a man. Hale’s test was “such a person as labouring under melancholy distempers hath yet ordinarily as great understanding, as ordinarily a child of fourteen years hath, is such a person as may be guilty of treason or felony” (1 Hale P.C. 30). This somewhat extreme approach to the insane persisted into the 18th century at which time the view regularly accepted by the courts was that no mentally disturbed person should be excepted from criminal responsibility unless he “is totally deprived of his understanding and memory, and doth not know what he is doing, no more than an infant, than a brute, or a wild beast” – per Tracy J. in Arnold’s Case (1724) 16 St. Tr. 695. However, in R. v. Hadfield (1800) 27 St. Tr. 1281 the test applied by Lord Kenyon C.J. was that if a man is completely deranged so that he knows not what he does, if he is lost to all sense so that he cannot distinguish good from evil, and cannot judge of the consequences of his actions then he cannot be guilty of crime because the will, which to a certain extent is the essence of every crime, is wanting. Hadfield, who had made an unsuccessful attempt on the life of George III in Drury Lane, was acquitted. In Bellingham’s Case (1812 – 1 Collinson on Lunatics, 636.) the test applied by Sir James Mansfield C.J. was whether, when the act was done, the prisoner was capable of distinguishing right from wrong or was under the influence of any delusion which rendered his mind insensible of the nature of his act.
9. In 1843 Daniel McNaghten shot Edward Drummond who was the secretary of the Prime Minister, Sir Robert Peel, believing his victim to be the Prime Minister. At McNaghten’s trial Tindal C.J. directed the jury :- “If upon balancing the evidence in your minds you should think the prisoner a person capable of distinguishing right from wrong with respect to the act of which he stands charged, he is then a responsible agent.” McNaghten was acquitted on the ground of insanity and, following his acquittal, a debate took place in the House of Lords in consequence whereof a series of questions was put to and answered by the judges in relation to the law respecting alleged crimes committed by persons afflicted with insane delusions. Tindal C.J. expressed the opinions of all the judges except Maule J. who gave a somewhat more qualified answer.
10. It is well to bear in mind that “ Daniel M’Naghten’s case (1843) 10 Cl. & F. 200 was not a legal decision but a statement of the views of the Judges, given in answer to a series of questions put to them by the House of Lords, arising out of a debate in that House. The Judges protested as to the inconvenience of being called upon to express their opinions in the abstract, not in relation to the facts of a particular case and without argument or debate of the matter”– per Kennedy C.J. delivering the judgment of the Court of Criminal Appeal in Attorney General v. O’Brien[1936] I.R. 263.
11. The wording of the first question in M’Naghten’s Case (1843) 10 Cl. F. 200 and the answer thereto would seem to indicate that the House of Lords and the judges had in mind the cases of Hadfield (1800) 27 St. Tr. 1281, Bellingham (1812 — 1 Collinson on Lunatics, 636) and McNaghten (1843) 10 Cl. & F. 200. The questions posed in M’Naghten’s Case (1843) 10 Cl. & F. 200 which have given rise to the greatest discussion, and which are most relevant in the present case, are the second and third questions. Question 2 was in the following terms :- “What are the proper questions to be submitted to the jury, where a person alleged to be afflicted with insane delusion respecting one or more particular subjects or persons, is charged with the commission of a crime (murder, for example), and insanity is set up as a defence?” Question No. 3 was as follows :- “In what terms ought the question to be left to the jury, as to the prisoner’s state of mind at the time when the act was committed?” The judges answered (pp. 210-11) both questions together, their opinion being “that the jurors ought to be told in all cases that every man is to be presumed to be sane, and to possess a sufficient degree of reason to be responsible for his crimes, until the contrary be proved to their satisfaction; and that to establish a defence on the ground of insanity, it must be clearly proved that, at the time of the committing of the act, the party accused was labouring under such a defect of reason, from disease of the mind, as not to know the nature and quality of the act he was doing; or, if he did know it, that he did not know he was doing what was wrong. The mode of putting the latter part of the question to the jury on these occasions has generally been, whether the accused at the time of doing the act knew the difference between right and wrong: which mode, though rarely, if ever, leading to any mistake with the jury, is not, as we conceive, so accurate when put generally and in the abstract, and when put with reference to the party’s knowledge of right and wrong in respect to the very act with which he is charged. If the question were to be put as to the knowledge of the accused solely and exclusively with reference to the law of the land, it might tend to confound the jury, by inducing them to believe that an actual knowledge of the law of the land was essential in order to lead to a conviction; whereas the law is administered upon the principle that every one must be taken conclusively to know it, without proof that he does know it. If the accused was conscious that the act was one which he ought not to do, and if that act was at the same time contrary to the law of the land, he is punishable; and the usual course therefore has been to leave the question to the jury, whether the party accused had a sufficient degree of reason to know that he was doing an act that was wrong: and this course we think is correct, accompanied with such observations and explanations as the circumstances of each particular case may require.” I do not deem it necessary to quote the first, fourth and fifth questions in M’Naghten’s Case and the answers given. Since 1843, the McNaghten rules have been recognised in the main as the authoritative statement of the law in England as to criminal responsibility.
12. However, there has not been universal interpretation of the McNaghten rules and, as Lord Reid pointed out in Williams v. Williams [1964] A.C. 698, for many years those rules have not been regarded as entirely satisfactory and have frequently been applied liberally; it appears to be the general opinion of medical men that there are types of insanity outside the rules which deprive the insane man of choice or responsibility just as much as the types covered by the rules. In R. v. Windle [1952] 2 Q.B. 826 the Court of Criminal Appeal in England held that the rules are not limited to cases in which the accused is suffering from delusions but apply in all cases of insanity, whatever may be the nature of the insanity or disease of the mind from which the accused is suffering. The Court of Criminal Appeal in Ireland in Attorney General v. O’Brien [1936] I.R. 263 took a different view for Kennedy C.J., who delivered the judgment of that court, said at p. 268 of the report :- “It is to be noted that all the questions are framed in relation to crimes committed by ‘persons afflicted with insane delusion, in respect of one or more particular subjects or persons.’ The answers to the first and fourth questions are definitely limited by this qualification of the questions. It is in the answer to the second and third questions that the statement is contained to which it has been commonly sought to give a wide general application (though the questions were limited in the same way).” Having set out the answer given to the second and third questions, he continued at p. 269 of the report :- “As I have mentioned, the questions submitted to the Judges for opinion were in express terms limited to crimes committed by ‘persons afflicted with insane delusion in respect of one or more particular subjects or persons.’ It follows, in our opinion, that the opinions given by the Judges must in every case be read with the like specific limitation. Nevertheless, the opinions which I have quoted from the answer to the second and third questions have been commonly read as applying to the whole field of insanity, which is, of course, of far wider area, and comprises a more extensive and varied range of cases of mental disease than those which can be conveniently summed up as affliction with insane delusion. Hence the dissatisfaction expressed by many legal and medical persons with the opinions as so read with the wide and general interpretation wrongly given to them. The scientific exploration of mental diseases has in modern times been pursued with results to knowledge not contemplated at a time not very remote from the present.” Again, in R. v. Windle [1952] 2 Q.B. 826 the Court of Criminal Appeal in England held that the word “wrong” meant “contrary to law.” However, Windle’s Case was not followed in the High Court of Australia in Stapleton v. The Queen (1952) 86 C. L.R. 358 and the test was taken to be whether the accused had the capacity to appreciate that his act was wrong according to the standards adopted by reasonable men.
13. In my opinion, the McNaghten rules do not provide the sole or exclusive test for determining the sanity or insanity of an accused. The questions put to the judges were limited to the effect of insane delusions and I would agree with the opinion expressed by the Court of Criminal Appeal in Attorney General v. O’Brien [1936] I.R. 263 that the opinions given by the judges must be read with the like specific limitation.
14. The questions and answers were also directed to knowledge, and this matter was considered by Mr. Justice Henchy in The People (Attorney General) v. Hayes (Central Criminal – November, 1967) which trial was noted in an article entitled “Not Guilty Because of Insanity” by Professor R. J. O’Hanlon: see Irish Jurist (N.S.), Vol. III, p. 61. That article was of considerable assistance to me in preparing this judgment. In that case the accused was charged with the murder of his wife. Submissions were made by counsel on behalf of the Attorney General as to the form in which the issue of insanity should be left to the jury, and in the course of his considered judgment in relation to these submissions Henchy J. said :- “In the normal case, tried in accordance with the McNaghten rules, the test is solely one of knowledge: did he know the nature and quality of his act or did he know that the act was wrong? The rules do not take into account the capacity of a man on the basis of his knowledge to act or to refrain from acting, and I believe it to be correct psychiatric science to accept that certain serious mental diseases, such as paranoia or schizophrenia, in certain cases enable a man to understand the morality or immorality of his act or the legality or illegality of it, or the nature and quality of it, but nevertheless prevent him from exercising a free volition as to whether he should or should not do that act. In the present case the medical witnesses are unanimous in saying that the accused man was, in medical terms, insane at the time of the act. However, legal insanity does not necessarily coincide with what medical men would call insanity, but if it is open to the jury to say, as say they must, on the evidence, that this man understood the nature and quality of his act, and understood its wrongfulness, morally and legally, but that nevertheless he was debarred from refraining from assaulting his wife fatally because of a defect of reason, his mental illness, it seems to me that it would be unjust, in the circumstances of this case, not to allow the jury to consider the case on those grounds.” I would adopt what was said by Mr. Justice Henchy as being a correct statement of the law on this matter, and in my view it provides the correct test to be applied by the learned Circuit Court judge in determining whether the act of the youth who burned the abattoir in Bray was malicious within the criminal injury code.
15. Having regard to the findings of the learned Circuit Court judge and the evidence of Dr. Browne, it seems to me that the respondents have not made out a case that legal insanity absolved the youth, who set fire to the abattoir, from criminal responsibility; for it is legal insanity with which the Courts are concerned, and not medical insanity. }However, this is a matter which will have to be determined by the learned Circuit Court judge.
16. With regard to the second question posed in the Case Stated, counsel for the respondents contend that they are entitled to investigate whether the applicant was insured against damage by fire and they submit that, if he was, he is not entitled to recover compensation from the respondents under the Criminal Injury code. They submit that if the applicant is insured against loss, and has been paid, he would be getting unjust enrichment if he were entitled to recover from the respondents, for the net result would be that he would be paid twice for the same loss. Alternatively, they say that, while the proceedings have been brought in the name of the insured, this is effectively a claim on behalf of the insurance company to whom the premises damaged did not “belong” within the meaning of s. 135 of the Grand Jury (Ireland) Act, 1836; and that, accordingly, the insurance company is not entitled to recover compensation. This argument ignores the basis of a policy of fire insurance, which is simply a contract of indemnity. In my opinion, it is beyond question that all claims of the insured arising out of any ground of legal responsibility vest in the insurer by subrogation. The value of all benefits received by the insured from claims which have been satisfied before payment under the policy ought to be deducted from the indemnity at the time of payment; equally, after the insurers have paid the insured under the policy, they have an equity in respect of all the insured’s unsatisfied claims. When the insured person receives any benefits from such claims he must account to the insurers therefore and repay to them anything which he receives beyond a complete indemnity. The right of an insured plaintiff to proceed against the wrongdoer for the benefit of the insurers was recognized early: see Mason v. Sainsbury (1782) 3 Doug. K.B. 61. In that case it was contended that the insurers should not be entitled to recover in an action, brought in the plaintiff’s name, because they had received the insurance premium and were entitled to no more – whether a loss occurred or not. This argument was rejected by the court, Lord Mansfield saying at p. 64 :- “The office paid without suit, not in ease of the hundred, and not as co-obligors, but without prejudice. It is, to all intents, as if it had not been paid . . . I am satisfied that it is to be considered as if the insurers had not paid a farthing.” – see also Castellain v. Preston (1883) 11 Q. B.D. 380.
17. Quite apart from principle, there is ample judicial authority against the proposition propounded by the respondents. In Jones v. Belfast Corporation (1897) 32 I.L.T.R. 32 Sir Peter O’Brien L.C.J., without giving reasons, stated that the law was quite clear on the point at issue and awarded compensation notwithstanding the fact that the premises damaged by fire were fully covered by insurance and that the insurance money had been actually paid to the owner. In Ballymagauran Co-operative Agricultural and Dairy Society v. County Councils of Cavan and Leitrim [1915] 2 I.R. 85 it was held by the Court of Appeal in Ireland, upon an application for compensation under the criminal injury code, that the fact that the premises damaged were insured against fire cannot be taken into consideration when assessing the amount of compensation to be recovered from the County by the owner of the premises. O’Brien L.C. said at p. 92 :- “The practice of insuring, in cities at any rate, property against loss caused by malicious injury, be it fire or any other wanton or unlawful method of destruction, is now very general; and if the view which is presented to us by the counties in this case is correct in law, the result would be that the large body of property owners insuring against malicious damage would really be only insuring in the interest of others who are in no sense in privity with the contract of insurance at the time it is made. It appears to me that the liability is primarily on the county, and not primarily on the insurance company. If it were primarily on the insurance company, then, of course, there would be great force on broad grounds of justice in the contention of the county.” Palles C.B. said at p. 100 :- “I am of opinion that, as held in Mason v. Sainsbury(1782) 3 Doug. K.B. 61 as regards England, so also in Ireland, although the hundred, barony, or county is not criminally responsible, it is for civil purposes put in the place of the wrongdoers, and the primary liability is on the hundred, barony, or county, from which it follows that as between it and the person whose property is damaged his insurer and himself are one.”
18. In my opinion, the Ballymagauran Case was correctly decided so it is irrelevant whether the applicant in the present case had insured against the risk of damage by fire or otherwise, or whether or not he had been paid on foot of his policy of insurance. If he had already been paid on foot of the policy of insurance he, as the insured, must account to the insurers for any benefit he receives from his claim for compensation against the respondents. In my opinion, therefore, the question was correctly disallowed by the learned Circuit Court judge. Because of the latter answer, the remaining questions posed in the Case Stated do not need to be answered.