Judgment - Banque Financière De La Cité v. Parc (Battersea) Limited and Others  continued

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      My Lords, the subject of subrogation is bedeviled by problems of terminology and classification which are calculated to cause confusion. For example, it is often said that subrogation may arise either from the express or implied agreement of the parties or by operation of law in a number of different situations: see, for example, Lord Keith of Kinkel in Orakpo v. Manson Investments Ltd. [1978] A.C. 95, 119. As a matter of current terminology, this is true. Lord Diplock, for example, was of the view that the doctrine of subrogation in contracts of insurance operated entirely by virtue of an implied term of the contract of insurance (Hobbs v. Marlowe [1978] A.C. 16, 39) and although in Lord Napier and Ettrick v. Hunter [1993] A.C. 713 your Lordships rejected the exclusivity of this claim for the common law and assigned a larger role to equitable principles, there was no dispute that the doctrine of subrogation in insurance rests upon the common intention of the parties and gives effect to the principle of indemnity embodied in the contract. Furthermore, your Lordships drew attention to the fact that it is customary for the assured, on payment of the loss, to provide the insurer with a letter of subrogation, being no more nor less than an express assignment of his rights of recovery against any third party. Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But 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. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other part of the law of restitution. Unless this distinction is borne clearly in mind, there is a danger that the contractual requirement of mutual consent will be imported into the conditions for the grant of the restitutionary remedy or that the absence of such a requirement will be disguised by references to a presumed intention which is wholly fictitious. There is an obvious parallel with the confusion caused by classifying certain restitutionary remedies as quasi-contractual and importing into them features of the law of contract.

      In this case there was plainly no common intention as between OOL, the party enriched, and BFC, the party deprived. OOL had no knowledge of the postponement letter or reason to believe that the advance to Parc of the money provided by BFC was otherwise than unsecured. But why should this necessarily exclude subrogation as a restitutionary remedy? I shall refer to five authorities which in my view demonstrate the contrary.

      In Chetwynd v. Allen [1899] 1 Ch. 353 one Terrell had in 1891 lent Mr. Chetwynd £2,000 secured upon mortgages over two properties: a house called Cedars, which belonged to his wife, and a riding school, which was his own. Mrs. Chetwynd had consented to the mortgage over her property. In 1892 Mr. Chetwynd borrowed £1,200 from one Mynors, saying that it was to pay off Terrell's mortgage on Cedars and promising him a transfer of that mortgage. He did not disclose that Cedars belonged to his wife or that Terrell's mortgage was for a larger sum and was over the riding school as well. Mr. Chewynd applied £1,000 of Mynor's money in part repayment to Terrell. Mrs. Chetwynd, who had known nothing of the transaction with Mynors, claimed that she was entitled to Cedars with the benefit of the part repayment to Terrell but free of any claim by Mynors. Romer J. held, at p. 357 that the charge over Cedars and the riding school was, to the extent of £1,000, "kept alive in equity in favour of Mynors." I shall have to return to the question of what that expression means, but the case shows that the remedy of subrogation does not depend upon any common intention between the plaintiff and the party enriched.

      In Butler v. Rice [1910] 2 Ch. 277, Mrs. Rice owned properties in Bristol and Cardiff which were equitably mortgaged to a bank (by deposit of title deeds) to secure a loan of £450. Mr. Rice asked Mr. Butler to lend him £450 to pay off the mortgage on the Bristol property, not mentioning the Cardiff property or the fact that both belonged to his wife. Mr. Butler agreed to lend on a mortgage for £300 over the Bristol property and a guarantee for the rest from Mr. Rice's solicitor. The money was used to pay off the bank but Mrs. Rice refused to execute a mortgage over the Bristol property. She too had known nothing about the transaction before the bank's mortgage was paid off. Warrington J. said, at p. 282 that the question was whether the bank's charge had been "paid off or kept alive" and on that question "the concurrence of the mortgagor is immaterial." He followed Chetwynd v. Allen [1899] 1 Ch. 353 in holding that Mr. Butler was entitled to the benefit of the mortgage over the Bristol property to secure the £450 he had advanced.

      In Ghana Commercial Bank v. Chandiram [1960] A.C. 732 the bank made an advance to the owner of property in Accra which was used to pay off his indebtedness to Barclays (D.C. & O.) Ltd, secured by an equitable mortgage. The owner executed a legal mortgage in favour of the Ghana Bank, but this was invalidated by a previous attachment of the property by a creditor. The Privy Council, following Butler v. Rice and Chetwynd v. Allen held that the Ghana Bank was entitled to be subrogated to the equitable mortgage which had been paid off. Lord Jenkins said, at p. 745:

     "It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit. . ."

      In Paul v. Speirway Ltd. [1976] Ch. 220 the plaintiff made a loan to a company in which he had a joint interest in order to enable it to pay the price due under a contract for the purchase of development land. When the company failed, he claimed to be a secured creditor by subrogation to the vendor's lien. Oliver J. found on the facts that the advance to the company was intended to be an unsecured loan and held that this excluded any remedy by way of subrogation, which would give the plaintiff more than he had bargained for. The learned judge rejected the proposition, advanced by counsel for the company, that the remedy of subrogation was available only when the common intention of the parties was (as in the three earlier cases to which I have referred) that the plaintiff should have some security which, for one reason or another, he did not get. He confined himself to the much narrower proposition, at p. 232 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 instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation."

      In formulating this proposition, the learned judge was clearly confining himself to cases in which the claim was to subrogation to security and not referring to subrogation to a mere debt, as in cases of ultra vires borrowings.

      The wisdom of the caution shown by Oliver J. was demonstrated by the facts in Boscawen v. Bajwa [1996] 1 W.L.R. 328, which contains a valuable and illuminating analysis of the remedy of subrogation by Millett L.J. The Abbey National Building Society agreed to make an advance on mortgage to a purchaser of property and paid the money to the solicitors acting for them and the purchaser to hold on behalf of the Abbey National until paid over against a first legal charge on the property. The solicitors paid it over to the vendor's solicitors to hold to their order pending completion but the latter used the money in advance of completion to pay off the vendor's mortgage to the Halifax Building Society. In fact completion never took place: the vendor failed to convey to the purchaser and the Abbey National accordingly obtained no legal charge or other security. It claimed to be subrogated to the Halifax mortgage. It will be seen at once that there was no common intention that the vendor, whose mortgage had been paid off, should grant any security to the Abbey National. As Millett L.J. pointed out, at p. 339, 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:

     "[t]he 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 is 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] A.C. 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.

      This does not of course mean that questions of intention may not be highly relevant to the question of whether or not enrichment has been unjust. I would certainly not wish to question the proposition of Oliver J. in Paul v. Speirway Ltd. [1976] Ch. 220 that, as against a borrower, subrogation to security will not be available where the transaction was intended merely to create an unsecured loan. I do not express a view on the question of where the burden of proof lies in these matters. Oliver J., following the dictum of Lord Jenkins in Ghana Commercial Bank v. Chandiram [1960] A.C. 732, 745 which I have quoted, held that if the plaintiff's money was used to discharge a secured liability, he was presumed to "intend that the mortgage shall be kept alive for his own benefit" and this presumption was applied by Nicholls J. in Boodle Hatfield & Co. v. British Films Ltd. [1986] P.C.C. 176. However, if it is recognised that the use of the plaintiff's money to pay off a secured debt and the intentions of the parties about whether or not the plaintiff should have security are only materials upon which a court may decide that the defendant's enrichment would be unjust, it could be argued that on general principles it is for the plaintiff to make out a case of unjust enrichment.  In this case, I think that in the absence of subrogation, OOL would be enriched at BFC's expense and that prima facie such enrichment would be unjust. The bank advanced the DM30m. upon the mistaken assumption that it was obtaining a postponement letter which would be effective to give it priority over any intra-group indebtedness. It would not otherwise have done so. On the construction of the letter adopted by Robert Walker J., namely that Holdings was purporting to contract on behalf of all companies in the Omni group, the payment was made under a mistake as to Holdings's authority. On the construction adopted by the Court of Appeal the mistake was as to the power of Holdings to ensure that other group companies would postpone their claims. For my part, I prefer the construction adopted by judge. But I do not think that for present purposes it matters which view one takes. In either case, BFC failed to obtain that priority over intra-group indebtedness which was an essential part of the transaction under which it paid the money. It may have attached more importance to the pledge of the shares but the provision of the postponement letter was a condition of completion. The result of the transaction is that BFC's DM30m. has been used to reduce the debt secured by RTB's first charge and that this reduction will, by reason of OOL's second charge, enure wholly to the latter's advantage.  I turn, therefore, to the grounds upon which the Court of Appeal decided that the enrichment of OOL would not be unjust. The first four seem to me to carry little weight. It is true that the transaction was structured to pass the money through the hands of Mr. Herzig in order to avoid disclosure under Swiss banking law. But there is no difficulty in tracing BFC's money into the discharge of the debt due to RTB: the payment to RTB was direct. In this respect, the case is stronger than in Boscawen v. Bajwa [1996] 1 W.L.R. 328. Since the money can be traced, the differences in the terms of the loans by BFC to Mr. Herzig and by Mr. Herzig to Parc do not seem to me to matter, although of course on the principle of Paul v. Speirway Ltd. [1976] Ch. 220, BFC could not, on the basis of any terms agreed between Mr. Herzig and Parc, assert by way of subrogation greater rights than they bargained for. As for the avoidance of Swiss banking law, it seems to me that there was no evidence that this amounted to an illegality which would disqualify BFC from obtaining equitable relief and I do not think that Morritt L.J. suggested this to be the case.

      The second ground was that BFC did not take proper precautions to ensure that Mr. Herzig had authority to execute the postponement letter. But there is, so far as I know, no case in which it has been held that carelessness is a ground for holding that a consequent enrichment is not unjust. No doubt Mr. Mynors (in Chetwynd v. Allen [1899] 1 Ch. 353) and Mr. Butler (in Butler v. Rice [1910] 2 Ch. 277) were careless in parting with their money without bothering to inspect the borrower's title deeds. They relied upon Mr. Chetwynd and Mr. Rice as BFC relied upon Mr. Herzig. But that did not entitle Mrs. Chetwynd or Mrs. Rice to be enriched as a result of their mistakes. As a third ground, Morritt L.J. said that there had been no misrepresentation or sharp practice on the part of the recipient of the enrichment. But neither had there been on the part of Mrs. Chetwynd or Mrs. Rice. Both were found to have known nothing about the transactions which resulted in their indebtedness being paid off. All that could be said against them was that they, in common with OOL, wanted to retain the benefit of their enrichment.

      Fourthly, there is the "conceptual problem" about BFC and RTB appearing to share the same security. In my view this is not a real problem. BFC does not claim any priority over RTB. It accepts that RTB was entitled to rely upon its first charge, in priority to BFC, in respect of the whole of its outstanding indebtedness. BFC claims only to be able to rely upon that security against OOL after RTB has been paid. In this respect the case is in my view no different from Chetwynd v. Allen [1899] 1 Ch. 353, 357 in which Romer J. said that the unpaid balance of Terrell's debt would take priority over Mynors's claim by way of subrogation to his security. Morritt L.J. regarded this authority as of no assistance because "Romer J. made it plain that his decision was not based on any principle of subrogation." It is true that Romer J., following the submissions of counsel, appeared to distinguish between "keeping the charge alive," or what would now be called subrogation to the security, and "subrogation," by which he seems to have meant subrogation to the debt (and, presumably, the security). But subrogation to the security is precisely the remedy sought in this case and Chetwynd v. Allen therefore seems to me very much in point. In any case, the priority of RTB over BFC can be explained on a wider ground which I shall in due course discuss.

      This brings me to the fifth reason relied upon by the Court of Appeal and what I regard as the main question in the case, namely the fact that "keeping the charge alive" for the benefit of BFC would give it more than it was entitled to expect. The transaction contemplated that BFC would be an unsecured creditor of Parc; "keeping the charge alive" would give it the benefit of a first charge. This makes it necessary, as I earlier foreshadowed, to examine more closely what is involved in subrogation to a security.

      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 Professor Birks's An Introduction to the Law of Restitution, (1985) 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. In a case like the present, in which part of the secured debt is repaid, the charge remains alive only to secure the remainder of the debt for the benefit of the original chargee. Nothing can affect his rights and there is no question of competition between him and the party claiming subrogation. It is important to remember that, as Millett L.J. pointed out in Boscawen v. Bajwa [1996] 1 W.L.R. 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.

      This, I interpose, is the real reason why there is no "conceptual problem" about treating BFC as subrogated to part of the RTB secured debt. The equitable remedy is available only against OOL, which is the only party which would be unjustly enriched. As between RTB and BFC, subrogation has no part to play. RTB is entitled to its security and BFC is no more than an unsecured creditor. The same is true as between BFC and any secured or unsecured creditor of Parc other than the members of the Omni group. The transaction contemplated that as against non-group creditors, BFC would incur no more than an unsecured liability, evidenced by the promissory note issued to Mr. Herzig and assigned by him to BFC. As against such creditors, therefore, the remedy of subrogation is not available. Nor is it available against Parc itself, so as to give BFC the rights of sale, foreclosure etc. which would normally follow from BFC being treated as if it were an assignee of the RTB charge.

      It follows that subrogation as against OOL, which is all that BFC claims in the action, would not give it greater rights than it bargained for. All that would happen is that OOL would be prevented from being able to enrich itself to the extent that BFC's money paid off the RTB charge. This is fully within the scope of the equitable remedy. I would therefore allow the appeal. Robert Walker J. made a declaration that BFC "is and has since the 28th day of September 1990 been entitled to the benefit of" the RTB charge and the Priority Agreement of 13 February 1990. I think that this declaration goes further than is justified. As against Parc, BFC is not entitled to such a declaration. I would therefore insert after the words "entitled to" the words "be treated as against OOL as if it had." Subject to that amendment, I would restore the declaration made by the judge.


My Lords,

      The basis for the appellants' claim is to be found in the principle of unjust enrichment, a principle more fully expressed in the Latin formulation, nemo debet locupletari aliena jactura. The principle is equitable in the sense that it seeks to secure a fair and just determination of the rights of the parties concerned in the case. But it is not a principle which is entirely discretionary in its application so as to enable a court in any case to withhold a remedy where all the necessary elements for its satisfaction have been established, although there may be circumstances where on grounds which may be described as grounds of public policy a remedy may be refused. Without attempting any comprehensive analysis, it seems to me that the principle requires at least that the plaintiff should have sustained a loss through the provision of something for the benefit of some other person with no intention of making a gift, that the defendant should have received some form of enrichment, and that the enrichment has come about because of the loss. The loss may be an expenditure which has not met with the expected return. 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. The obligation to provide the remedy does not rest on any contractual basis but on the general principle of the common law and it may find its expression in a variety of circumstances.

      The claim which the appellants have eventually come to make is not for a share in the charge which had been effected over the Battersea Wharf in favour of RTB, so as to give them a preference over all creditors of Parc, but only a personal right to rank in priority to OOL, effective only as between RTB and OOL and open to be defeated by any further transactions by Parc, which in the event have not occurred. I would have had difficulty in accepting that the appellants would be entitled to have even a pro tanto right to the charge in circumstances where they did not intend to obtain any such security, indeed such a provision had been deliberately considered and deleted from the documentation. The more modest claim which they now make, however, seems to me to have been made out. The difference between these two positions, which to my mind is critical in the case, can be readily obscured by the use of the term "subrogation."

      It is agreed that OOL was enriched by the repayment of some £10m. of the RTB loan. The structural arrangements made with Mr. Herzig in order to avoid a breach of the Swiss banking regulations do not seem to me to prevent recognition of the reality of the granting of the funds by the appellants to RTB for Parc's account. Indeed the money was transmitted by them through the Deutsche-Schweizische Bank AG to RTB for the account of Parc. The appellants were well aware that the money was required for a partial reduction of an existing bank loan. The enrichment which is agreed to have occurred seems to me to have come about through the expenditure which the appellants made. Parc then incurred a direct liability to the appellants through the promissory note which Parc supplied and, ill-drafted as it was, the appellants certainly must have come to expect through the letter of postponement that they would in any question with OOL enjoy a priority to OOL in the enforcing of their own claim against Parc. It does not in my view matter that neither Parc nor OOL knew anything about the letter nor that the letter was ineffective to achieve what the appellants expected. In the circumstances it seems to me to in accordance with principle that they should be accorded the priority which they now claim.

      For these reasons and for the reasons more fully set out by my noble and learned friend Lord Hoffmann I would allow the appeal.


My Lords,

      The case made on this appeal by the appellant, the Banque Financiere de la Cité ("BFC"), is that there is an equitable principle that where a lender advances a sum of money to another person intended to be a secured loan, and the money is used by that person to discharge a debt owed by him to a secured creditor, the lender is entitled to be subrogated to the charge of that creditor if his security proves to be defective. The appellant further contends that its claim comes within the ambit of this principle.

      In some circumstances such a principle is applied by equity. It was applied in Ghana Commercial Bank v. Chandiram [1960] A.C. 732 where, in the context of that case, the lender's security having proved to be defective, Lord Jenkins said, at p. 745:

     "It is not open to doubt that where a third party pays off a mortgage he is presumed,  unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit: see Butler v. Rice."

The issue on this appeal is whether, in the unusual circumstances of this case, the appellant can rely on this principle. The facts giving rise to the appellant's claim have been set out by my noble and learned friend Lord Hoffmann and I need not repeat them.

      It is clear that one of the elements which gives rise to the right to subrogation is the unjust enrichment of the defendant at the expense of the plaintiff. In Orakpo v. Manson Investments Ltd. [1978] A.C. 95, 104C Lord Diplock stated:

     "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 not disputed by the respondent, Omnicorp Overseas Limited ("OOL"), that it had been enriched by the reduction of the debt owing to Royal Trust Bank (Switzerland) ("RTB") secured by a first charge held by RTB on the freehold property of Parc (Battersea) Limited ("Parc") in Battersea, London ("the Battersea property") so that OOL's second charge over the Battersea property was made more valuable. But the argument advanced on behalf of OOL, which was rejected by Robert Walker J. but was largely accepted by the Court of Appeal, was that there were a number of features of the transaction involving BFC, Mr. Herzig, Omni Holdings AG and Parc which resulted in the payment of about £10m. to RTB on 28 September 1990, which took the case outside the ambit of the doctrine of subrogation and which defeated BFC's claim against OOL.

      One of the submissions advanced to the House by Mr. Kosmin on behalf of OOL was that OOL had not been enriched at BFC's expense. A claim based on unjust enrichment cannot succeed unless the plaintiff can establish that the defendant was unjustly enriched at its expense: see per Lord Goff of Chieveley in Lipkin Gorman v. Karpnale Ltd. [1991] 2 A.C. 548, 578C. Mr. Kosmin submitted that OOL had not been enriched at the expense of BFC but at the expense of Mr. Herzig. BFC did not lend to Parc but deliberately lent to Mr. Herzig who then lent an equivalent sum to Parc. Moreover Mr. Herzig lent to Parc on different terms in that, whereas BFC's loan to Mr. Herzig was for a short period of two months and was secured by a pledge of shares, Mr. Herzig's loan to Parc was for a period of 12 months and was unsecured. Accordingly it was argued that having chosen to lend to Mr. Herzig, BFC could not subsequently claim that OOL had been enriched at its expense. Both Robert Walker J. and the Court of Appeal rejected this submission. The findings of Robert Walker J. at pp. 23 and 24 of his judgment made it clear that the understanding and intention of BFC was that the loan to be made by it was a loan to enable Parc to make partial repayment of a debt owing by it to a bank. Therefore I consider that Robert Walker J. and the Court of Appeal were right to hold that the reality was that OOL was enriched at the expense of BFC.

      Before considering Mr. Kosmin's further submissions it is necessary to refer to the terms of the letter of 28 September 1990 sent to BFC by Omni Holding AG ("the postponement letter"):

     "This is to confirm that we and all companies of our group will not demand any repayment of loans granted to Parc (Battersea) Ltd., London, until the full repayment of your loan of DM 30,000,000--granted to Mr. M. Herzig, which is secured by a deep discount promissory note amounting to GBP 10,000,000 -, issued by Parc (Battersea) Ltd."

      I agree with Robert Walker J. and the Court of Appeal that the postponement letter was intended to have legal effect, and I did not understand Mr. Kosmin to dispute this conclusion. Robert Walker J. held that the intended effect of the postponement letter was an agreement by Omni Holding AG ("Holding") on its own behalf and as agent for all the other companies in the Omni group that all of those companies would not demand any repayment of loans granted to Parc until the full repayment of BFC's loan to Mr. Herzig, but the judge further held that Holding did not have authority to contract as agent on behalf of OOL and the other companies in the group. The Court of Appeal held that the only undertaking contained in the letter was an undertaking by Holding on its own behalf which did not bind OOL.

      The letter was drafted in terms which are imprecise and lacking in clarity, but for the reasons stated by Robert Walker J. I incline, on balance, to the view that the letter was intended to constitute an undertaking by Holding both on its own behalf and as agent for the other companies. But even if the letter constituted only an undertaking by Holding on its own behalf, I consider that its terms were such and the relationship, as known to BFC, between Holding and the other companies in its group (all of which were controlled by Mr. Rey) was such that the letter gave rise to the expectation by BFC that all the members of the Omni group would postpone their claims against Parc until the loan made by BFC had been repaid to it.