England and Wales Court of Appeal (Civil Division) Decisions

THE PLEADINGS

“2S. Had Unitbase not been paid then would have been indebted to Miss Garcia for the sum of £132,000 and the lien would have operated in equity as a charge over the property. Since no steps were ever taken to register either Unitbase Limited’s or Mr Khan’s titles to the property neither of them can have received anything more than an equitable interest in the property which would have been subject to Miss Garcia’s lien had she not been paid.

2T. Miss Garcia having been paid off in full Unitbase Limited and/or Mr Khan have been enriched to the extent that (i) they no longer have any liability to Miss Garcia and (ii) their respective interests in the property were (subject to the Claimant’s claims herein) freed from Miss Garcia’s lien. Such enrichment has been at the expense of the Claimant whose money was used to pay Miss Garcia.”

THE JUDGMENT OF HHJ HOWARTH

“Thereafter one gets complications in that on 19th December 1990 there is apparently a contract for sale from Unitbase Limited to Mr Omar for £150,000 with a deposit of £50,000 which is to be paid by 31st December and the balance of the purchase price by 31st December 1991. There is a 20-year lease also apparently on that date in relation to flat 178 where the lessee is Mr Omar, which grants a term of 20 years from 19 December 1990 at a yearly rent of £2,000, and Unitbase are the lessors, Mr Omar the lessee. Mr Omar says he went into occupation of the property in December 1990. On 31st December 1990 Thompsons write to Mr Omar saying that they hold the original land certificate which shows Mrs Garcia as the proprietor and also a transfer sealed by her in favour of Unitbase Limited, and it refers to possession having been granted, to a deposit of £50,000 having been paid, and undertakes for the land certificate to be delivered on payment of the balance of the purchase money by 31st December of the following year, 1991.

....

It can be seen in each of these three cases that the Halifax sent the mortgage money to Thompsons and they have paid the money due under the contract to the head vendors. In each case no charge in favour of the Halifax has either been executed or registered. No transfer has ever been executed in favour of any sub-purchaser or fully executed. Nothing of any of these transactions has ever been registered at the Land Registry. The Halifax seeks declarations that they are subrogated .... to the unpaid vendor’s [lien] held by .... Mrs Garcia.”

“There is certainly no evidence to indicate that the £132,000 came from any money supplied by any other institution. It seems to me that, on the balance of probabilities, the evidence indicates that it must have come from the Halifax, and I so find. The Halifax are, therefore, it seems to me, entitled to be subrogated in regard to all three transactions.”

“What about flat 178? The rights of both the Halifax and Mr Omar are equitable, and the normal rule is that the first in time is the first in priority, and there is no doubt that the Halifax is the first in time. It is alleged by Mr Omar that the Halifax have lost their priority, and one goes to the Re-Amended Defence and Counterclaim at paragraph 25 in particular .... and I read that: ‘The Second Defendant’s rights [that is, Mr Omar] in the property as set out above has or have priority over any equitable interest in the property or rights in respect of the property, if any, which is denied, is/are postponed to the interest of the Second Defendant by reason of the aforesaid negligence and frauds of the Claimant’s solicitors, Thompsons, and by the failure of the Claimant to take any steps to protect its claim to such an interest or rights, whether by lodging a caution at H.M. Land Registry against the registered title of the property or otherwise howsoever at any time prior to the Second Defendant contracting to purchase the same’.”

“It seems to me that negligence and fraud by Thompsons can be of no help at all to Mr Omar. Mr Thompson was busy defrauding his own client, the Halifax. He was joining with Mr Khan to do just that ... His fraudulent acts were not within the scope of his engagement by the Halifax. They were deliberately in breach of it and in breach of the trust which he undertook. I do not see how they can be attributed to the Halifax in any way. It thus boils down, it seems to me, to inaction on the part of the Halifax leading to a failure to register a caution until after 19th December, in other words in April of 1991.”

“Why should I accept that these visits, if they did take place, took place prior to 19the December 1990? I see no good reason to make that assumption. What documents did Mr Omar see? He says on the first visit he saw the transfer from Mrs Garcia to Unitbase Limited and probably the office copy entries in the name of Mrs Garcia. On the second visit he apparently collected a form from Mr Thompson which enabled him to make a search of the Land Registry in Harrow, where he spoke to a man on the counter, paid his fee and saw on a computer screen what the entries in respect of his title were but received no document back of any sort and what document he went away with he returned to Mr Thompson and it has disappeared, as has much of Mr Thompson’s paperwork, into a place where it can no longer be found. And he says then that the third visit was when the contract of lease were [sic] granted. No documents have been produced from the Land Registry, as I say, and when he gave his oral evidence it was clear that Mr Omar’s recollection of events, now over 10 years ago in some cases, was no longer good; not at all surprising. .... It seems to me that this visit to the Land Registry is wholly unconvincing. I do not accept at all the story of that visit and, even if it is true, I do not think there has been negligence of the sort required in this case to result in the postponement of the Halifax’s equitable rights to those of Mr Omar.”

“Thus, it seems to me that, for these reasons, there is no inequitable conduct here, no gross negligence of the requisite kind which will result in Mr Omar acquiring priority over the Halifax, and in those circumstances Mr Omar’s claim to priority fails. The general rule of the first equitable interest in time having priority over the later one will apply in the case of flat 178 and the Halifax are thus entitled to priority over Mr Omar.”

THE ISSUE ON THIS APPEAL

THE PRINCIPAL AUTHORITIES

Boscawen v. Bajwa

“... whether, at the time when the appellants obtained the charging order, Mr Bajwa was entitled to the freehold interest in the property free from encumbrances, or whether his interest in the property was subject to a charge in equity by way of subrogation in favour of the Abbey National.”

“The appellants’ primary submission, however, is that the deputy judge made an impermissible aggregation of two different equitable doctrines. Even if the Abbey National’s money could be traced to the Halifax, they submit, it was then lost. Money used to pay off a debt ceases to be traceable; it merely extinguishes the debt. The Halifax’s charge was discharged. Nothing of it remained. No traceable assets were received in exchange for the Abbey National’s money; and accordingly, its tracing claim must fail.

Then it is submitted that the deputy judge was in error in attempting to supply the absence of a tracing remedy by invoking the doctrine of subrogation. Subrogation is concerned with the assignment by operation of law of a third party’s rights (which may or may not be proprietary rights). It is based on intention, actual or inferred. In order to succeed in its claim to be subrogated to the Halifax’s charge, it is submitted, the Abbey National must show that it intended to keep the Halifax’s charge alive for its own benefit pending its replacement by an effective charge in its favour. But the Abbey National had no such intention. It intended the Halifax’s charge to be discharged on completion, not kept alive. It never intended to be a secured creditor of Mr Bajwa. If completion took place, it was to be a secured creditor of the purchasers....”

“... a confusion of thought which arises from the admittedly misleading terminology which is traditionally used in the context of equitable claims for restitution.”

“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.”

“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 subrogatoin, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose wherever it thinks it just to do so. The equity arises in circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. .... 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..."

“Nor is it clear to me why [as the Court of Appeal in Re Diplock had suggested] insoluble problems would arise in a case where there had been fresh charges on the properties 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 incumbrancer who took an equitable charge only would take free from the interest of the next of kin; the question has not yet arisen for decision, but it is not insoluble.”

“Nor, in my judgment, is there any justification for the proposition 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 discharged, it would have been unconscionable for Mr Bajwa to assert that it had been discharged for his benefit. At law, Mr Bajwa became the owner of an unencumbered freehold interest in the property; but he never did, even for an instant, in equity.”

The BFC Case

“My Lords, both the judge and Morritt LJ invoked the vocabulary of unjust enrichment or restitution. Nevertheless both courts ultimately treated the question at stake as being whether BFC is entitled to be subrogated to the rights of RTB. On the present appeal counsel adopted a similar approach. That position may have seemed natural at a stage when BFC apparently claimed to be entitled to step in the shoes of RTB as chargee with the usual proprietary remedies. On appeal to your Lordships’ House counsel for BFC attenuated his submission by making clear that BFC only seeks a restitutionary remedy against OOL. In these circumstances it seems sensible to consider directly whether the grant of the remedy would be consistent with established principles of unjust enrichment.”

“Four questions arise. (1) Has OOL benefited or been enriched? (2) Was the enrichment at the expense of BFC? (3) Was the enrichment unjust? (4) Are there any defences?”

“The Court of Appeal considered that subrogation if allowed would place BFC in a better position than if the postponement letter had been binding on Parc and OOL. The Court of Appeal considered the matter from the point of view of BFC seeking to step into the shoes of RTB as chargee. But it has now been made clear that BFC merely seeks the reversal of OOL’s unjust enrichment at the expense of BFC. BFC merely asserts restitutionary rights against OOL. In the circumstances conceptual difficulties about the remedy sought by BFC disappear.”

“In my view, on an application of established principles of unjust enrichment BFC are entitled to succeed against OOL. But, if it were necessary to do so, I would reach the same conclusion in terms of the principles of subrogation. It would admittedly not be the usual case of subrogation to security rights in rem and in personam. The purpose of giving the relief would be dictated by the particular form of the security, involving rights in personam against companies in the group, which BFC mistakenly thought it was obtaining. It is true that no decided case directly in point has been found. But distinguished writers have shown that the place of subrogation on the map of the law of obligations is by and large within the now sizeable corner marked out for restitution..... And there can be no conceptual impediment to the remedy of subrogation being allowed not in respect of both rights in rem and rights in personam but only in respect of rights in personam.

“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....

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.”

“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. ....

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 ... that, as against a borrower, subrogation to security will not be available where the transaction was intended merely to create an unsecured loan...

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. [BFC] advanced 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 [the holding company] was purporting to contract on behalf of all companies in the [Group], the payment was made under a mistake as to [the holding company’s] authority. On the construction adopted by the Court of Appeal the mistake was as to the power of [the holding company] to ensure that other group companies would postpone their claims. For my part, I prefer the construction adopted by the judge. But I do not think that for present purposes it matters much 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. .... 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.”

“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... 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 LJ pointed out in Boscawen v. Bajwa ..., 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 who 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 [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 [H] 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 the BFC claims in the action, would not give it more 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...”

“The claim which the appellants have eventually come to make is not for a share in the charge which had been effected over the [land] 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 readily be obscured by the use of the term “subrogation”.

“In my opinion this submission is invalid because it fails to take account of the consideration that the doctrine of subrogation applies in a variety of different circumstances where the defendant has been unjustly enriched at the expense of the plaintiff, and where equity considers that it would be unconscionable for the defendant to retain that enrichment. In such a case, as Goff and Jones say, the remedy is fashioned to the facts of the particular case.”

THE ARGUMENTS ON THIS APPEAL

“I take it to be a clear proposition that every conveyance of an equitable interest is an innocent conveyance, that is to say, the grant of a person in equity passes only that which he is justly entitled to and no more.”

CONCLUSIONS

“I thought during argument that the only security which the building society held for the £250 which they had paid for purchase-money was a lien upon and a right to retain the title-deeds and conveyance until the money had been repaid; but I am satisfied now, after discussing the matter with my brethren, that 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.”

“... no answer to the judgment of the Court of Appeal which affirms the subrogated right of the society to be repaid the money which they, standing in the shoes of the vendor, have a right to claim as a lien upon the property conveyed”.

“... while the society will take the benefit of that payment in succeeding to the vendor’s lien, they cannot maintain what remains of their case”.

“What is the basis of the doctrine of subrogation? It is simply that, where 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. There are other cases of subrogation where B is not secured, but the ordinary and typical example is as I have stated. 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, but of course only to the extent to which his money has, in fact, discharged their claims.

This formulation was not, I think, seriously in issue between the parties to this summons.”

“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 ...”

“The order merely satisfied a pre-existing equity.”

RESULT

Lord Justice Laws:

Lord Justice Simon Brown: