United Kingdom Supreme Court

“Thank you for your letter dated 5 September 2008. We confirm that upon receipt of £750,000 we will release our charges over [Rush Green Hall] subject to a third party legal charge over [Great Oak Court] which is registered in the name of Melissa Menelaou.”

Melissa was not aware of the Bank’s intention to take any charge over Great Oak Court.

The procedural history

The judgment

“It is sufficient for me to say that there must in my view be something in the nature of, to use the formula proposed in Burrows, The Law of Restitution, 3rd ed (2010) p 66, a transfer of value from the Bank to the claimant. But here the claimant’s benefit enured and was complete on 12 September 2008, while the Bank’s detriment through the mistaken release of its charges over Rush Green Hall occurred a month later. Whether or not time’s arrow must always and with full rigour be respected in the law of unjust enrichment, I am clear that this is not a case in which economic or any other kind of reality calls for its wholesale rejection.”

The Court of Appeal

Discussion

Was Melissa enriched at the expense of the Bank?

“67.     I must now draw the threads together, and state my conclusions on this difficult question. In the first place, I agree with Mr Rabinowitz that there can be no room for a bright line requirement which would automatically rule out all restitutionary claims against indirect recipients. Indeed, Mr Swift accepted as much in his closing submissions. In my judgment the infinite variety of possible factual circumstances is such that an absolute rule of this nature would be unsustainable. Secondly, however, the limited guidance to be found in the English authorities, and above all the clear statements by all three members of the Court of Appeal in Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733, [1997] QB 380, suggest to me that it is preferable to think in terms of a general requirement of direct enrichment, to which there are limited exceptions, rather than to adopt Professor Birks’ view that the rule and the exceptions should in effect swap places (see ‘At the expense of the claimant’: direct and indirect enrichment in English law in Unjustified Enrichment: Key Issues in Comparative Perspective, edited by David Johnston and Reinhard Zimmermann, Cambridge (2002), p 494). In my judgment the obiter dicta of May LJ in Filby and the line of subrogation cases relied on by Professor Birks, provide too flimsy a foundation for such a reformulation, whatever its theoretical attractions may be, quite apart from the difficulty in framing the general rule in acceptable terms if it is not confined to direct recipients.”

“The real question, therefore, is whether claims of the present type should be treated as exceptions to the general rule. So far as I am aware, no exhaustive list of criteria for the recognition of exceptions has yet been put forward by proponents of the general rule, and I think it is safe to assume that the usual preference of English law for development in a pragmatic and step-by-step fashion will prevail. Nevertheless, in the search for principle a number of relevant considerations have been identified, including (in no particular order):

(a) the need for a close causal connection between the payment by the claimant and the enrichment of the indirect recipient;

(b) the need to avoid any risk of double recovery, often coupled with a suggested requirement that the claimant should first be required to exhaust his remedies against the direct recipient;

(c) the need to avoid any conflict with contracts between the parties, and in particular to prevent ‘leapfrogging’ over an immediate contractual counterparty in a way which would undermine the contract; and

(d) the need to confine the remedy to disgorgement of undue enrichment, and not to allow it to encroach into the territory of compensation or damages.”

“57. I agree with Henderson J that these are relevant considerations in deciding the question of whether an indirect benefit was conferred at the claimant’s expense. But the various factors to which he refers are not, and were not I think intended to be, rigid principles. Far less can it be said that if one or more of the factors can be said to be adverse to the claim, the claim is necessarily doomed to failure.”

That approach seems to me to be consistent with the approach of the Court of Appeal in ITC, where Patten LJ said at the end of para 69:

“We consider that the correlative of taking a broad approach to the first consideration by taking account of ‘economic’ or ‘commercial’ reality is that it is important not to take a narrow view of what, under the third criterion, would conflict with contracts between the parties or with a relevant third party in a way which would undermine the contract.”

That seems to me to be a sensible approach.

“57.     In the present case, the Bank was to receive £1.9m upon the sale of Rush Green Hall in circumstances where it was owed £2.2m and had charges over Rush Green Hall to secure that indebtedness. The Bank had agreed that it would release its charges over Rush Green Hall upon receipt of £750,000 out of the sale proceeds, in return for a charge over Great Oak Court to secure what would be the remaining indebtedness, £1.45m, thereby enabling the Menelaou parents on the strength of that undertaking by the Bank to use £875,000 out of the sale proceeds of Rush Green Hall for the purchase of Great Oak Court in the name of Melissa. I do not see how this can sensibly be described as anything other than a transfer of value between the Bank and Melissa, in whose name the purchase of Great Oak Court was made.

58.       I am glad to be able to reach this conclusion. It gives effect to the reality of the transaction, whereas the conclusion of the judge, in my respectful view, amounts to that pure formalism which Lord Steyn has in this context deprecated …”

Defences

Remedies

“A plaintiff who brings an action in unjust enrichment must show that the defendant has been enriched at the plaintiff’s expense, for he cannot have been unjustly enriched if he has not been enriched at all. But the plaintiff is not concerned to show that the defendant is in receipt of property belonging beneficially to the plaintiff or its traceable proceeds. The fact that the beneficial ownership of the property has passed to the defendant provides no defence; indeed, it is usually the very fact which founds the claim. Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff’s interest.”

The sentence which I have put in italics shows that a claim in unjust enrichment does not need to show a property right.

“The principle upon which C&G rely has been nowhere better stated than by Walton J in Burston Finance Ltd v Speirway Ltd (in liquidation) [1974] 1 WLR 1648 at p 1652B-C:

[W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor. It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided by him.”

Neuberger LJ noted at para 26 that that formulation was cited with approval by (among others) Lord Hutton in Banque Financière at p 245C-D.

“As soon as a binding contract for sale [of land] is entered into, the vendor has a lien on the property for the purchase money and a right to remain in possession of the property until payment is made. The lien does not arise on completion but on exchange of contracts. It is discharged on completion to the extent that the purchase money is paid. … Even if the vendor executes an outright conveyance of the legal estate in favour of the purchaser and delivers the title deeds to him, he still retains an equitable lien on the property to secure the payment of any part of the purchase money which remains unpaid. The lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money.

The lien arises by operation of law and independently of the agreement between the parties. It does not depend in any way upon the parties’ subjective intentions. It is excluded where its retention would be inconsistent with the provisions of the contract for sale or with the true nature of the transaction as disclosed by the documents.”

“In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist.”

Lord Hoffmann added at p 236E-F:

“As Millett LJ pointed out, at p 339 [of Boscawen], the Abbey National expected to obtain a charge from the purchaser as legal owner after completion of the sale, and, in the event which happened of there being no such completion, did not intend its money to be used at all. This meant that:

‘The factual context in which the claim to subrogation arises is a novel one which does not appear to have arisen before but the justice of its claim cannot be denied.’

These cases seem to me to show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd [1978] AC 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.”

“My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of ‘subrogation’, but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances. Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company’s lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.”

“The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be.”

Finally, Lord Edmund-Davies said at p 112:

“Apart from specific agreement and certain well-established cases, it is conjectural how far the right of subrogation will be granted though in principle there is no reason why it should be confined to the hitherto recognised categories (Goff and Jones, The Law of Restitution (1966), pp 376-377).”

Conclusion

LORD NEUBERGER:

Can the Bank establish an unjust enrichment claim against Melissa?

The Bank’s proprietary claim

LORD CARNWATH:

Introduction

Subrogation – the principles

“A third party who provides some or all of the purchase money for a purchaser, thereby discharging the obligation to the vendor, can claim the benefit of the unpaid vendor’s lien by subrogation. This is so even after the lien has been, as between vendor and purchaser, extinguished. It is not intuitively clear how, or why, this should be the case. How is the unpaid vendor’s lien transferred from the vendor to the third party? It might be thought that once the obligation in question has been extinguished, there is nothing which the vendor could transfer. Even if there was something to transfer, by what legal mechanism does the transfer take place? There has been no assignment.” (para 17)

The view of the Court of Appeal

“I cannot see how the Bank can be afforded the remedy of subrogation in circumstances which, as I see it in agreement with the Judge, the Bank cannot properly be said to be the provider of the money used to discharge the debt owed to it by Mr and Mrs Namdar.” (Floyd LJ’s emphasis)

In the present case, however, Floyd LJ thought it sufficient the Bank had been “a provider of the funds” as a matter of “economic reality”:

“The mere fact that the claimant does some act in reliance on which there is a transfer of value between different parties is not sufficient. … When the Bank gave its undertaking to release its charges on Rush Green Hall, and thus release the purchase moneys for the purchase of Great Oak Court, there was, as I have held, a transfer of value from the Bank to Melissa. Moreover, if one asks Peter Gibson LJ’s question, namely whether it can properly be said that the Bank ‘is the provider of the money used to discharge the debt’, the answer in the present case is that it is. Certainly that is true if one asks whether the Bank is the source of the moneys used as a matter of economic reality. I therefore see no reason in principle or justice why the Bank should not be entitled to the remedy of subrogation.” (para 48)

Boscawen

“… the money used by the vendor’s solicitors to discharge the mortgage had been held by the purchasers’ solicitors as trust money for the building society and by the vendor’s solicitors to the purchasers’ solicitors’ order pending completion of the purchase; that, therefore, the money could be traced into the payment and the vendor’s solicitors in making it had to be taken to have intended to keep the mortgage alive for the benefit of the building society; and that, accordingly, the building society was entitled, by way of subrogation, to a charge on the proceeds of sale of the property in priority to the plaintiffs.”

The headnote rightly highlights the importance of establishing a “tracing link” between the plaintiffs’ money and the money used to discharge the mortgage, leading to a presumed intention to keep the mortgage alive for the plaintiff’s benefit.

“Tracing properly so-called, however, is neither a claim nor a remedy but a process. … It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. …”

“The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this, the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant’s land has been enhanced by the use of the plaintiff’s money. And if the plaintiff’s money has been used to discharge a mortgage on the defendant's land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff.”

The judge had not erred by invoking the two doctrines in the same case:

“They arose at different stages of the proceedings. Tracing was the process by which the Abbey National sought to establish that its money was applied in the discharge of the Halifax’s charge; subrogation was the remedy which it sought in order to deprive Mr Bajwa (through whom the appellants claim) of the unjust enrichment which he would thereby otherwise obtain at the Abbey National’s expense.” (p 334B-335F, emphasis added)

Academic discussion

“Both personal and proprietary claims are governed by the rule that the defendant’s enrichment must have been gained at the claimant’s expense, but the tests used to determine whether this requirement has been satisfied vary with the type of claim. Where the claimant seeks a personal remedy, he must show that there was a transfer of value between the parties, and this is tested by asking whether an event took place that caused the claimant to become worse off and the defendant to become better off. This is discussed in Chapter 6. In contrast, where the claimant seeks a proprietary remedy, it is not enough for him to show that there was a transfer of value between the parties: he must also show either that he previously owned the property in which he now claims an ownership or security interest, or else that the defendant acquired this property in exchange for property that was previously owned by the claimant, or else that this property was formerly the subject matter of an interest that was discharged with property that was previously owned by the claimant. This test is more stringent than the causal test used in the context of personal claims, and it serves as a control mechanism to prevent proprietary restitutionary remedies from becoming too freely available.” (para 7-02, emphasis added)

The footnote refers to a list of cases cited later in the chapter (para 7-39, fn 87) including “in the subrogation context” Boscawen (at p 334).

“… if the debt was secured by a charge over the defendant’s property then Equity can treat the debt and the charge, by a legal fiction, as though they were not extinguished by the payment, thereby enabling the beneficiaries to trace the value inherent in their money into the value inherent in the creditor’s fictionally subsisting chose in action against the defendant.”

Again the reference is to Boscawen. Notable here is the close link between subrogation and the doctrine of tracing, which as has been seen was central to the analysis by Millett LJ in that case. There is no apparent support for the Court of Appeal’s view that a sufficient link could be found in a looser test based on economic reality or simple causation.

Is there a tracing link in this case?

“… held on trust for the defendant, subject to a power for Mr and Mrs Menelaou to use the same to purchase a flat in the joint names of Danielle Menelaou and her partner and also to purchase the Property in the name of the claimant but only on condition that the outstanding debts of Mr and Mrs Menelaou were to be secured by a first legal charge over the Property.”

The issue was also addressed by the judge (paras 14-17), albeit not specifically by reference to the Quistclose principle. It does not depend on any further findings of fact. I see no reason therefore why it cannot properly be relied on by the Bank in this court.

“16. In the present case the agreement or understanding recorded in the Bank’s letter of 9 September 2008 did not address the question of ownership or even security rights in the sale proceeds of Rush Green Hall, and had no reason to do so. While the arrival of the sale proceeds from Rush Green Hall and the payment of £785,000 to the vendors of Great Oak Court (or their solicitors) and of £750,000 to the Bank could not have been literally simultaneous, it is unrealistic to suppose that the parties were concerned with the status of the incoming monies in any short interval between them. Critically, the agreement was concerned only with the circumstances in which the charges over Rush Green Hall would be released. So long as they remained in place, there was neither need nor reason for the Bank to have any rights over the proceeds of sale, or thereafter, since the charges were only to be released against substitute security over Great Oak Court. And should there be a defect in that substitute security, the Bank had protected itself by obtaining the undertakings given by Boulters in the Certificate of Title.”

“prior to use of the mortgage advance, to obtain in the form required by you the execution of a mortgage and a guarantee as appropriate by the persons whose identities have been checked in accordance with paragraph (1) above as those of the Borrower, any other person in whom the legal estate is vested and any guarantor ….”

LORD KERR AND LORD WILSON: