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

(back to preceding text)

      The claim made by BFC that it is entitled to subrogation to RTB's charge on Parc's Battersea property is advanced on the basis that it expected the letter of postponement to give it security for its loan, but this expectation was disappointed because it transpired that OOL was not bound by the letter. Therefore the question arises whether, if the letter had been enforceable against OOL, the letter would have given the bank a "security", so that the letter can now be regarded as a "defective security". In my opinion it can, because BFC expected that by reason of the letter its loan would be repaid in priority to the debts owing by Parc to the companies in the Omni group, and I consider that if the letter had operated in that way, it would have given BFC protection which can be regarded as a form of security.

      Another principal argument advanced on behalf of OOL was that any enrichment of OOL at the expense of BFC was not unjust. A number of reasons were advanced in support of this contention. One reason related to the security which BFC did receive in respect of its loan and to a security which it decided not to require. In the discussions prior to the making of the loan to Mr. Herzig BFC stipulated for, and obtained, security in the form of a pledge of 35,000 bearer shares in Holding (with an initial margin of cover of about 160 per cent), and this pledge of shares would have constituted ample security for the loan if the Omni group had not become insolvent. Moreover, whereas the bank had originally required a second charge to be granted to it over Parc's Battersea property, it subsequently agreed not to require such a charge. Therefore it was submitted that the remedy of subrogation should not be granted to a lender who had got all that it bargained for in lending to the borrower. In particular, a new lender who lends on an unsecured basis will not be entitled to be subrogated to the security of an earlier lender. In support of this submission Mr. Kosmin relied on the judgment of Oliver J. in Paul v. Speirway Ltd. [1976] 1 Ch. 220, 233B where he said:

     "As it seems to me, where a court, upon a review of the facts, comes to the conclusion that what was intended between the parties was really an unsecured borrowing, there is no room for the doctrine of subrogation. That really is analogous to the situation envisaged in the judgment which I have just read, because to apply the doctrine of subrogation in such a case would in fact be putting the lender in a better position than he is bargaining to be put in when he advances money."

It was submitted that, equally, a new lender who bargains for and gets his own security should not be subrogated to the security of an earlier lender merely because its security turned out to be inadequate.

      Linked to this submission was the further submission that there was no mutual intention on the part of BFC and Parc that BFC should be subrogated to the rights of RTB. My Lords, I agree with the view of my noble and learned friend Lord Hoffmann that the concept of mutual intention, whether actual or presumed, can be artificial in a case such as the present one, where the claim to subrogation arises because the security intended by the lender has proved to be defective. In my opinion in such circumstances the doctrine of subrogation is to be applied unless its application will produce an unjust result. This view finds strong support in the judgment of Nicholls J. in Boodle Hatfield & Co. v. British Films Ltd. [1986] P.C.C. 176, where, after referring to the judgments in the Orakpo case, he stated at p. 182:

     "First, one of the ways (because I do not think that Lord Diplock meant that this was the only way) in which the implication of subrogation to the existing security rights of the vendor may be displaced is by the express terms in the contract made between the lender and the borrower being inconsistent with the acquisition by the lender of the security rights. Secondly, the failure of the lender and the borrower to address themselves to the question whether the lender will acquire the security rights of the vendor will not of itself negative the application of the doctrine of subrogation. A lender who advances money to enable a borrower to complete and who stipulates for a legal charge to be given when his loan is made is unlikely to consider what his security position will be if the legal charge produced is invalid; that is, whether in that event he will acquire a lien by subrogation. But the view of both Lord Diplock and Lord Keith was that such a lender may acquire the pre-existing security rights by subrogation. Thirdly, and of overriding importance, the equitable doctrine of subrogation will not be applied when its application would produce an unjust result. One of the circumstances in which subrogation may lead to an unjust result is if, without the implication of subrogation, the lender obtained all that he bargained for."

      And at p. 183:

     "Moreover, I do not think that the absence of any agreement or even discussion regarding security leads to the conclusion that there was by implication a common intention that the lender should have no security. The explanation for the absence of any discussion on this subject is the simple one, that neither party considered what the plaintiffs' position would be if the cheque was not met. Mr. Smith did not consider this, because he was relying on the assurance of a person who was well known to his firm. Obviously he was taking a risk that the cheque might not be met after all. But I do not think that from this I should infer that he was agreeing to waive or release any rights which the plaintiffs otherwise would have had in respect of the financial assistance they were providing to their client." . . .

     "As to the argument that the plaintiffs obtained all they bargained for, it is important to remember that subrogation applied in this case unless excluded. Accordingly, the question is not: did the plaintiffs bargain for the transfer to them of the vendor's security rights? Rather it is: did the bargain made by the plaintiffs with the defendant exclude that transfer, either expressly or impliedly? Unless this is kept in mind, consideration of whether the plaintiffs obtained what they bargain for is likely to mislead rather than assist in a case where, at the time, in the course of one short conversation neither party directed his mind to the crucial question."

This view is also supported by the judgment of Oliver J. in Paul v. Speirway Ltd. [1976] Ch. 220, 232B where he said:

     "I think respectfully that the wide general formulation in Coote on Mortgages, 9th ed. (1927), vol. 2, p. 1377 and in Ghana Commercial Bank v. Chandiram [1960] A.C. 732 is the right one, and that where the given circumstances exist subrogation applies unless the contrary appears. The real divergence here, as it seems to me, is on the strength of the evidence which is required to demonstrate a contrary intention."

A further submission was that as BFC had not maintained its original requirement to have a charge on Parcs' Battersea property, and had obtained the security it required, which was the pledge of shares in Holding, BFC would receive more than it had bargained for if it were granted subrogation. I do not accept this submission because, in the events which have happened, there are competing claims by BFC and OOL to priority in receiving payment from Parc's remaining asset, the Battersea property. Therefore, as Robert Walker J. observed at p. 65 of his judgment, to permit BFC to be subrogated to the RTB security, to the extent of its loan to Mr. Herzig, would give rise to a result not dissimilar to that which would have occurred if the postponement letter had operated as BFC had expected.

      It was also submitted on behalf of OOL that BFC should not be subrogated to RTB's security because it had neglected to take simple steps to ensure that the letter of postponement would operate effectively to bind the other companies of the Omni group. In my opinion this submission is invalid because there is no requirement that before a lender can claim the benefit of subrogation he must show that he took reasonable precautions to ensure that the security for which he stipulated would be effective. It is because the intended security proved to be defective that the need for subrogation arises.

      It was further submitted that there was no misrepresentation or sharp practice on the part of OOL or Parc, and that this was a consideration which pointed to the conclusion that there was no unjust enrichment of OOL. But in my opinion a remedy for unjust enrichment is granted where the defendant has been enriched at the expense of the plaintiff, and it would be unjust to allow the defendant to retain the enrichment. I consider that for a plaintiff to establish that it would be unjust for the defendant to keep the benefit which he had gained at the expense of the plaintiff, the plaintiff does not need to prove that the defendant was guilty of misconduct. In order for a claim for unjust enrichment to succeed at common law the plaintiff does not have to prove a wrong committed by the defendant against him. In Lipkin Gorman v. Kaspuale Ltd. [1991] 2 A.C. 548, 572E Lord Goff of Chieveley stated:

     "Furthermore, it appears that in these cases the action for money had and received is not usually founded upon any wrong by the third party, such as conversion; nor is it said to be a case of waiver of tort. It is founded simply on the fact that, as Lord Mansfield said, the third party cannot in conscience retain the money--or, as we say nowadays, for the third party to retain the money would result in his unjust enrichment at the expense of the owner of the money."

      A separate submission advanced by Mr. Kosmin was that where the creditor who held a charge over the property of the debtor received payment by reason of a subsequent loan made to the debtor by a new lender, the essence of the subrogation granted to the new lender was the acquisition by him of the benefit of the charge held by the creditor who had been paid off: that, as stated by Lord Diplock in the Orakpo case [1978] A.C. 95, 104D, there is "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". But in the present case there were two closely linked and inter-related reasons why subrogation should not be granted to BFC. One reason was that the payment of about £10m. which RTB received from Mr. Herzig did not discharge the entire debt owing to it by Parc. A balance of more than £10m. remained owing, and the charge held by RTB remained in being as security for that balance (although it was subsequently repaid to RTB at the end of October 1990 with money advanced by OOL). Therefore it was not conceptually possible for BFC to be subrogated to RTB's charge. Before the Court of Appeal BFC relied upon the decision of Romer J. in Chetwynd v. Allen [1899] 1 Ch. 353 in answer to this submission. In his judgment at p. 24 Morritt L.J. referred to the passage at p. 359 in the judgment of Romer J. where he made it clear that his decision in that case was not based on the principle of subrogation, and accordingly Morritt L.J. stated that he did not regard the decision as being of any assistance to BFC.

      My Lords, I consider that the decision does materially assist BFC, as it establishes that a lender, whose loan is used to discharge part of a sum owing on a mortgage, will be treated by equity as having a charge on the mortgaged property to secure his loan without prejudice to the security given by the mortgage to the first lender. In Chetwynd v. Allen [1899] 1 Ch. 353 there was a mortgage to Terrell of two properties, the "Cedars", of which Chetwynd's wife, the plaintiff, was the beneficial owner, and the "Riding School" owned by Chetwynd, to secure £2,000 lent to him by Terrell. Mynors subsequently lent £1,200 to Chetwynd on a promise by Chetwynd that he should have a transfer of the earlier mortgage to Terrell, and Chetwynd applied £1,000 of the sum of £1,200 advanced by Mynors in partial repayment of the loan of £2,000 made by Terrell. Romer J. stated, at p. 357:

     "On these facts I have to consider what Mynors' rights are. Now, in my opinion, when Mynors advanced the £1200 on the representations and promise above mentioned, and the £1000 was applied in part payment to Terrell, the charge on the Cedars and school to the extent of the £1000 was kept alive in equity in favour of Mynors, so far as that could be done without prejudicing Terrell or the plaintiff. So far as Chetwynd was concerned, he could not complain that the charge was kept alive also on the school, seeing that it was by his fraud that the true facts as to Terrell's charge were kept hidden from Mynors. As regards Terrell, he clearly was not prejudiced, for the balance of his mortgage debt had priority over Mynors' charge; and as regards the plaintiff she was not prejudiced, so long as no extra costs were thrown on the Cedars by reason of the original mortgage debt of £2000 being divided as between Terrell and Mynors (and this I can provide for), and provided that as between the school and the Cedars the former remained primarily liable for the debt as between her and her husband."

      It is somewhat puzzling to read, at the present day, the statement relating to subrogation at the end of Romer J's. judgment, to which Morritt L.J. referred, and which clearly influenced him to hold, erroneously in my respectful opinion, that the decision was not of assistance to BFC. The report of Chetwynd v. Allen [1899] 1 Ch. 353, 355 states that after having ruled in favour of the plaintiff, Chetwynd's wife, on a number of points which had been raised, Romer J. reserved for further consideration "the question which had been raised as to the right of the defendant Mynors to be subrogated to the rights of Terrell under the mortgage of June 4, 1891, so far as concerned the £1000 paid off to Terrell out of the £1200 advanced by Mynors to Chetwynd." And at p. 356 it is reported that in the subsequent argument on the reserved question counsel for Mynors submitted that "Mynors is entitled on the principle of subrogation to stand in the shoes of Terrell to the extent of the £1000 paid off to him out of the £1200." I consider that the decision of Romer J. in favour of Mynors was a decision which today would be described as one that Mynors was entitled to the extent of £1000 to a charge upon the "Cedars" under the doctrine of subrogation, and it appears that the decision was treated as an application of that doctrine by Lord Jenkins in the Ghana Commercial Bank case [1960] A.C. 732, 745. It may be that Romer J. considered at the time of his decision, 100 years ago, that a case should not be regarded as one to which the principle of subrogation applied unless the debt of the first lender was completely discharged and the new lender succeeded to the entirety of the charge held by the first lender. Whilst that is the usual situation where the new lender is entitled to subrogation, it is not the only situation, because as Goff and Jones on the Law of Restitution, 4th ed. (1993) state at p. 593:

     ". . . 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."

And in Burston Finance Ltd. v. Speirway Ltd. [1974] 1 W.L.R. 1648, 1652 Walton J., referring to subrogation, 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." (emphasis added)

The second related reason relied on by Mr. Kosmin as to why BFC could not be subrogated in part to RTB's charge, ranking behind the balance of the charge held by RTB, was because this would not, in reality, have constituted subrogation to RTB's rights but a grant to BFC by the court of new rights created specially for the purpose. Mr. Kosmin's submission was that the court had no jurisdiction to confer such new rights.

      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. In the Orakpo case at 104E Lord Diplock stated that some rights by subrogation "appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment."

      And in Boscawen v. Bajwa [1996] 1 W.L.R. 328, 335 Millett L.J. referring to subrogation, said:

     "This is available in a wide variety of different factual situations in which it is required in order to reverse the defendants' unjust enrichment."

      Therefore, in the present case, where OOL was enriched at the expense of BFC, where it would be unconscionable to permit OOL to retain that enrichment, and where BFC had expected to receive the form of security constituted by the postponement of the demands of OOL and the other companies in the group, I consider that BFC is entitled in the circumstances to the order made by Robert Walker J. (subject to the amendment proposed by my noble and learned friend Lord Hoffmann), the effect of which is that its loan will be repaid in priority to the payment claimed by OOL.

      As I have observed, the submissions advanced by Mr. Kosmin to this House were largely accepted by the Court of Appeal, and the grounds upon which Morritt L.J. held in favour of OOL can be summarised as follows (in a different order to that stated by the learned Lord Justice). First, the failure of the BFC to obtain the security for which it stipulated, which was an agreement binding on all the companies of the Omni group that they would postpone their demands against Parc, was due entirely to the failure of BFC to take the normal and elementary precautions. Secondly, there had been no misrepresentation or sharp practice on the part of OOL. Thirdly, there was the conceptual difficulty that BFC could not be subrogated to the rights given by RTB's charge when that charge remained vested in RTB to secure the balance of the debt owing to it, and the decision of Romer J. in Chetwynd v. Allen [1899] 1 Ch. 353 did not assist BFC. For the reasons which I have stated in considering the submissions advanced by Mr. Kosmin I am unable to agree with these grounds given by Morritt L.J. for dismissing BFC's claim.

      In addition there was a further reason for dismissing the bank's action given by Morritt L.J., which was a reason advanced to Robert Walker J. and the Court of Appeal by Mr. Kosmin, but which he did not rely upon as a separate ground before the House. This was that the loan was made by the bank to Mr. Herzig, and not to Parc, in order to avoid the impact of the Swiss Federal Banking regulations. The decision of Robert Walker J. at p. 63 of his judgment on this aspect of the case was as follows:

     "It is clear that the Swiss regulatory authorities took the view that the loan to Mr. Herzig was a breach of the reporting requirement. That breach carried criminal sanctions, though in fact the plaintiff received only a reprimand. The breach did not invalidate the loan. I do not consider that those circumstances are a reason for refusing subrogation, either by themselves or in conjunction with the plaintiff's failure, in its apparent eagerness to oblige Mr. Rey, to make enquiries about intra-group indebtedness."

I consider that the conclusion of Robert Walker J. on this point was correct and I agree with his view that the breach of the reporting requirement should not prevent the court from remedying the unjust enrichment of OOL at the expense of BFC.

      Accordingly I would allow this appeal and restore the order of Robert Walker J. with the proposed amendment. 



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