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|Judgments - Banque Financière De La Cité v. Parc (Battersea) Limited and Others
The present dispute arose out of the short term refinancing by the appellant ("BFC"), a Swiss bank, of part of an existing bank loan made available by Royal Trust Bank (Switzerland) ("RTB") to Parc (Battersea) Limited ("Parc") for the purpose of buying development land at Battersea Wharf, London, S.W.11. Parc was part of the Omni Group of companies which was controlled by Mr. Werner Rey, a Swiss national. The ultimate holding company was Omni Holding AG ("Holding"). Mr. Markus Herzig was the General Manager of Holding. The refinancing transaction was concluded and completed at the end of September and the beginning of October 1990. The relevant events and circumstances were as follows. (1) The transaction was negotiated by Mr. Rey and Mr. Herzig with officers of BFC. Originally, the parties intended a loan directly from BFC to Parc. That would have brought into operation a disclosure obligation on BFC under Swiss Federal Banking Regulations. In order to avoid this requirement the transaction was restructured by interposing Mr. Herzig as the immediate borrower. (2) BFC lent DM30m. to Mr. Herzig and Mr. Herzig took steps to ensure that the sterling equivalent of this sum was paid directly by BFC to Parc in reduction of the existing loan granted to Parc by RTB. (3) At the request of BFC Mr. Herzig handed a signed letter on the letterhead of Holding to BFC. This letter read as follows:
I will call this letter the postponement letter. (4) On 1 October Parc issued to Mr. Herzig a promissory note for the relevant sum and soon afterwards Mr. Herzig assigned the note to BFC.
In April 1991 the Omni Group collapsed. Parc is insolvent. BFC obtained a judgment for £12m. against Parc representing the sum due on the note, with interest. RTB and Omnicorp Overseas Limited ("OOL"), a company incorporated in the British Virgin Islands, respectively had first and second charges over the Battersea Wharf Property. OOL was a company in the Omni Group and the second charge related to an intra-group debt as it has been described. OOL obtained a judgment for £30m. against Parc. Parc and OOL contended that the debt owed to OOL took priority over the debt owed by BFC by reason of OOL's second charge. BFC asserted that by reason of the letter of postponement and its utilization to obtain the refinancing the rights of BFC took priority over the rights of OOL Parc and OOL had been unaware of the letter of postponement. The judge upheld BFC's contention. The Court of Appeal disagreed and allowed the appeal.
The starting point is the letter of postponement, Robert Walker J. (now Robert Walker L.J.) found that it was not binding on Parc or OOL Although they were "companies of our group" within the meaning of the letter Parc and OOL were not bound by its terms either by agency or estoppel. But Robert Walker J. concluded that properly construed the letter of postponement was intended to be directly binding on all companies in the Omni Group. The Court of Appeal came to the opposite conclusion. Morritt L.J. held that the agreement expressed in the postponement letter was intended to be that of Holding alone. This interpretation does not involve an undertaking on the part of Holding to procure the consent of companies in the group: it takes effect as a warranty by Holding. Morritt L.J. relied strongly on the fact that companies in the group were neither consulted nor informed of the letter. Given Mr. Rey's dominance and control of the Omni Group I do not attach much weight to this factor. The letter was badly drafted, and it is certainly capable of more than one interpretation. But ultimately I take the same view as the judge. The context is important. The letter was requested by BFC, and tendered by Mr. Herzig, as a form of security albeit not security involving rights in rem. Moreover, the letter shows that BFC wanted security not from Parc but in respect of intra-group indebtedness. The letter was the result of a negotiation between commercial men. In my view the commercial construction is one that treats the letter as intended to give effective protection in respect of all companies in the group, i.e. it was intended to be directly binding on all companies in the group. And I am reinforced in this view by the fact that Robert Walker J., who was steeped in the realities of the context of the letter, ultimately favoured it. From this conclusion it follows that the expectation of BFC was that the letter of postponement effectively protected BFC against loans granted by group companies to Parc. In the result that expectation has not been fulfilled. In any event, the important point is that BFC would not have lent had it not mistakenly believed that its priority in respect of intra-group indebtedness was secured effectively against subsidiaries of the group.
My Lords, both the judge and Morritt L.J. 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. OOL committed no wrong: it cannot therefore be a case of unjust enrichment by wrongdoing. If it is a case of unjust enrichment, it must in the vivid terminology of Prof. Peter Birks be unjust enrichment by subtraction. If the case is approached in this way it follows that BFC is either entitled to a restitutionary remedy or it is not so entitled. After all, unjust enrichment ranks next to contract and tort as part of the law of obligations. It is an independent source of rights and obligations.
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 first requirement is satisfied: the repayment of £10m. of the loan pro tanto improved OOL's position as chargee. That is conceded. The second requirement was in dispute. Stripped to its essentials the argument of counsel for OOL was that the interposition of the loan to Mr. Herzig meant that the enrichment of OOL was at the expense of Mr. Herzig. The loan to Mr. Herzig was a genuine one spurred on by the motive of avoiding Swiss regulatory requirements. But it was nevertheless no more than a formal act designed to allow the transaction to proceed. It does not alter the reality that OOL was enriched by the money advanced by BFC via Mr. Herzig to Parc. To allow the interposition of Mr. Herzig to alter the substance of the transaction would be pure formalism.
That brings me to the third requirement, which was the ground upon which the Court of Appeal decided against BFC. Since no special defences were relied on, this was also the major terrain of debate on the present appeal. It is not seriously disputed that by asking for a letter of postponement BFC expected that they would obtain a form of security sufficient to postpone repayment of loans by all companies in the Omni groups until repayment of the BFC loan. In any event, that fact is clearly established. But for BFC's mistaken belief that it was protected in respect of intra-group indebtedness BFC would not have proceeded with the refinancing. In these circumstances there is in my judgment a principled ground for granting a restitutionary remedy.
Counsel for OOL challenged the view that restitutionary liability is prima facie established by submitting that there was no mutual intention that BFC should have priority as against OOL. Restitutionary liability is triggered by a range of unjust factors or grounds of restitution. Defeated bilateral expectations are a prime source of such liability. But sometimes unilateral defeated expectations may be sufficient, e.g. payments made under a unilateral mistake of fact where the ground of liability is the mistake of one party. I would reject the idea that in a case such as the present a test of mutuality must be satisfied.
It is now necessary to mention the other factors which the Court of Appeal relied on in concluding that BFC was not entitled to succeed. Perhaps in passing Morritt L.J. commented that neither Parc nor OOL was guilty of any misrepresentation. It is sufficient to say that restitution is not a fault-based remedy. Morritt L.J. then pointed out that BFC failed to take elementary precautions to safeguard their interests. Counsel for OOL conceded that this feature is not a self-sufficient answer to the claim. At one stage he argued that this feature is relevant to the exercise of a discretion but I understood him ultimately to concede that the relief sought is not discretionary. In any event, the neglect of BFC is akin to the carelessness of a mistaken payor: it does not by itself undermine the ground of restitution.
On the arguments as presented in the Court of Appeal Morritt L.J. concluded that BFC, if subrogated, would be in competition with RTB Factually this is incorrect. BFC knew that RTB had a first charge over the property. The letter of postponement, and the circumstances of the case, show that BFC merely expected to receive priority over loans by other companies in the Omni group. This particular obstacle is not a real one.
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 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 the relief would be dictated by the particular form of 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: see Goff and Jones, The Law of Restitution, 4th ed. (1993), pp. 526, 531; Birks, An Introduction to the Law of Restitution, (1985), p. 93 et seq; Burrows, The Law of Restitution, (1993), p. 92; Mitchell, The Law of Subrogation, (1994), p. 4. 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.
For these reasons, as well as the reasons contained in the speech of my noble and learned friend, Lord Hoffmann, I would allow the appeal.
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hoffmann. For the reasons which he gives I, too, would allow the appeal.
This appeal raises, in unusual circumstances, a question on the scope of the equitable remedy of subrogation. The appellant, the Banque Financiere de la Cité ("BFC") made an advance of DM30m. for the purpose of enabling Parc (Battersea) Ltd. ("Parc") to repay part of a loan from another bank secured by a first charge upon its property. The transaction did not contemplate that Parc would provide any security. It was however an express condition of the advance that other companies in the group to which Parc belonged would not demand repayment of their loans until BFC had been repaid. One such company was Omnicorp Overseas Ltd ("OOL") which was owed £26.25m. secured by a second charge over the property. Unfortunately the persons who negotiated the transaction had no authority to commit OOL to such an undertaking and it was not binding upon it. Parc is insolvent and if BFC has no priority over OOL's second charge, it is unlikely to be repaid. The question is whether, as against OOL, BFC is entitled to be subrogated to the first charge to the extent that its money was used to repay the debt which it secured. The judge, Robert Walker J., decided that the remedy was available. The Court of Appeal, in a judgment delivered by Morritt L.J. decided that it was not. Against that decision BFC appeals to your Lordships' House.
The striking feature of this case, which distinguishes it from familiar cases on subrogation to which it bears a partial resemblance such as Butler v. Rice  2 Ch. 278 and Ghana Commercial Bank v. Chandiram  A.C. 732 is that BFC did not contemplate that Parc would provide it with any security at all. As against Parc, it was content to be an unsecured creditor. What was contemplated was a negative form of protection from certain of Parc's other creditors, namely the other companies in the group, in the form of an undertaking that they would not enforce any claims they might have against Parc in priority to BFC. It is this distinction which is principally relied upon by the respondents for their submission, which found favour in the Court of Appeal, that subrogation is not available. To allow BFC to be subrogated to the first charge would mean, it is said, giving it far greater security than it ever bargained for. But there are also other distinctions and for this purpose it is necessary to set out the facts in rather more detail.
Parc is an English company owning development land in Battersea and OOL is registered in the British Virgin Islands. They belonged to the Omni Group, based in Switzerland, where the ultimate holding company, Omni Holdings AG ("Holdings"), was incorporated. The principal officers of Holdings were its founder and principal shareholder Mr. Werner Rey and its chief financial officer Mr. Markus Herzig. Parc acquired the Battersea land in 1988 with the aid of a £30m. bridging loan from Royal Trust Bank (Switzerland) ("RTB"), secured by a first charge, and additional finance from OOL, in respect of which it subsequently obtained a second charge. The RTB loan was partially repaid in 1989 but £20m. was extended until 28 September 1990. Parc was unable to refinance its borrowing on the London market and turned to Mr. Herzig for help. He approached BFC, which had previously lent to the Omni Group. On 14 September 1990 it agreed in principle to advance DM30m. for two months and the necessary arrangements were concluded in haste. A difficulty was that a further loan to a member of the Omni Group would have had to be reported to the Swiss banking authorities. To avoid this, BFC agreed to make the loan to Mr. Herzig personally on the basis that he would pass it on to Parc, which would issue him with a promissory note which he would assign to BFC as security. The principal security was to be the pledge of 35,000 bearer shares in Holdings, which BFC valued at DM40m and, in addition, BFC required the "postponement letter" in respect of the claims of other group companies. This read as follows:
Completion took place on 28 September 1990, when Mr. Herzig handed over the pledged shares and postponement letter, signed by himself and another officer of Holdings, and BFC, at the direction of Mr. Herzig, paid DM30m. to RTB for the account of Parc, which was credited with £10.097m. The promissory note was issued by Parc to Mr. Herzig on 8 November 1990 and duly assigned by him to BFC. Its terms were quite different from those of BFC's loan to Mr. Herzig: it was for £11.775m. payable on 28 September 1991, representing an advance of £10m and interest at a fixed rate of 17.75 per cent, and unsecured. BFC's loan was DM30m for two months, secured as I have described and bearing interest at 1.25 per cent over 2 months LIBOR from time to time.
Mr. Herzig defaulted on repayment of the loan and in April 1991 the Omni Group collapsed. BFC had realised some of the pledged shares before they became worthless and repaid itself about DM5m. but the rest of the advance remains unpaid. Parc still owns the land in Battersea but is in receivership and has no other assets. Mr. Herzig is unable personally to repay.
The first issue at the trial before Robert Walker J. concerned the purported effect of the postponement letter. He rejected a submission that it was not intended to have legal effect and this point has not been pursued. He also dealt with a point of construction: were Holdings purporting to contract on behalf of the other group companies or were they merely warranting on their own behalf that they would take whatever steps were necessary to ensure that the other group companies did not make claims in priority to BFC? He declared himself "narrowly persuaded" that the former construction was correct. The main question at the trial then became whether OOL was bound by the postponement letter, either because Holdings (or Mr. Herzig) had authority to contract on its behalf or because it was estopped from denying this. The judge held that OOL (which, like Parc, was administered from London) had not given the necessary authority and had no knowledge of the postponement letter at any time which could have raised an estoppel. There was no appeal against these findings of fact.
On the question of subrogation, the judge held that although Parc, like OOL, knew nothing of the postponement letter, it knew enough to permit the presumption of whatever mutual intention was needed to activate the remedy of subrogation. Your Lordships may think this summary of his reasoning somewhat cryptic but I shall in due course expand upon the issues which it raises. He went on to say that BFC did not get all it expected to get in the way of a binding postponement letter and the effect of its failure to bind OOL would, in the absence of subrogation, result in OOL being enriched at BFC's expense. This, he held, would "in the technical sense" be unjust and therefore brought subrogation into play.
In the Court of Appeal, Morritt L.J. (with whom Mummery and Beldam L.JJ. agreed) disagreed. He accepted that OOL would be enriched at the expense of BFC but said that such enrichment would not be unjust or unconscionable. His reasons were as follows:
(1) The loan was structured to avoid disclosure under Swiss banking regulations. As a result, the loan by BFC was to Mr. Herzig on different terms from the loan by Mr. Herzig to Parc and the idea of a second charge in favour of the Bank over the Battersea property had been considered and for similar reasons rejected.
(2) The reason why BFC did not get a binding postponement letter was its own failure to take the elementary precaution of checking that Holdings had the necessary authority.
(3) There had been no misrepresentation or sharp practice on the part of the recipient of the enrichment, OOL.
(4) There was a conceptual problem about the subrogation of BFC to part of the debt secured by the charge in favour of RTB, which would have prejudiced the security of RTB in respect of the rest of its debt. It was also said to be contrary to a Priority Agreement executed on 13 February 1990 which had confirmed RTB's priority over OOL's second charge.
(5) Subrogation would give BFC the rights of a first mortgagee over the Battersea land. This would give it rights for which it had never bargained--indeed, the possibility of even a second charge had been considered and rejected--and would place it in a more favourable position than if the postponement letter had been binding.