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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Menelaou v Bank of Cyprus UK Ltd [2013] EWCA Civ 1960 (02 July 2013) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2013/1960.html Cite as: [2013] EWCA Civ 1960, [2014] 1 WLR 854, [2013] 2 P &CR 21, [2014] WLR 854, [2013] WLR(D) 266 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR DAVID DONALDSON QC SITTING AS A DEPUTY HIGH COURT JUDGE
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE TOMLINSON
and
LORD JUSTICE FLOYD
____________________
MELISSA MENELAOU |
Respondent/Claimant |
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- and - |
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BANK OF CYPRUS UK LIMITED |
Appellant/ Defendant |
____________________
MARK WARWICK QC (instructed by Jeffrey Green Russell Ltd) for the Respondent
The Third Party did not appear on the appeal
Hearing date: April 23 2013
____________________
Crown Copyright ©
Lord Justice Floyd:
"We confirm that upon receipt of £750,000 we will release our charges over [Rush Green Hall] subject to a 3rd party legal charge over the property known as 2 Great Oak Court which is registered in the name of Melissa Menelaou."
i) in failing to obtain for the Bank an enforceable charge over Great Oak Court as security for the debts of the Menelaou parents, Boulters were in breach of duties which they owed to the Bank in contract and in tort;
ii) it was thereby liable to the Bank for the loss it had suffered in consequence of the invalidity of the charge as security for those debts.
"Subrogation to an unpaid vendor's lien"
"As soon as a binding contract for sale 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 of sale or with the true nature of the transaction as disclosed by the documents."
"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 …. 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."
"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."
"It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 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 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."
"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."
"Subrogation is not a remedy which the Court has a general discretion to impose whenever it is just to do so. The equity arises from the conduct of the parties on well settled principles and in defined circumstances."
The judgment
"The detriment to the Bank relied upon is its release of two charges over Rush Green Hall (worth £1.9 million) securing indebtedness of £1.45 million (£2.2 million less £750,000). The benefit to [Melissa] is her gratuitous acquisition of Great Oak Court … The existence of both detriment and benefit does not however establish the further element that the latter should have been at the expense of the Bank. Whether a causal link between detriment and benefit is required or sufficient, and of what nature, remains little explored by both courts and academic commentators, and even less resolved. I do not intend to make a contribution to that debate beyond expressing my endorsement of the helpful examination of this area by Henderson J in Investment Trust Ltd v HMRC [2010] EWHC 458, and it would serve no purpose if I were to attempt to do so. It is sufficient for me to say that there must be something in the nature of, to use the formula proposed in Burrows, the Law of Restitution 3rd ed. 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 mistaken release of its charges 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 arguments of the parties
i) Is a proprietary interest in the funds advanced necessary in order to claim the remedy of subrogation in an unjust enrichment case? His primary submission was that a proprietary interest in the funds advanced was not necessary.
ii) If a proprietary interest is necessary, did the Bank here have such an interest? He submitted that the Bank had a sufficient interest in the proceeds of sale of Rush Green Hall to support the claim. This aspect of the Bank's case involved reliance on the decision of this Court in Barclays Bank v Buhr [2001] EWCA Civ 1223.
iii) Was the link between detriment to the Bank and the enrichment of Melissa sufficiently close to say that she was enriched at the Bank's expense? He submitted that there was a sufficient link to support the claim.
Was the enrichment at the expense of the Bank?
"signifies that the claimant must have suffered a loss that was sufficiently closely linked to the defendant's gain for the law to hold that there was a transfer of value between the parties. This rule reflects the principle that the law of unjust enrichment is not concerned with the disgorgement of gains made by defendants, nor with the compensation of losses sustained by claimants, but with the reversal of transfers of value between claimants and defendants."
"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."
"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. …
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 WLR 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."
"Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant's money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant's financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result. Within this framework, the remedy is discretionary in the sense that at each stage it is a matter of judgment whether on the facts the necessary elements are fulfilled."
"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, 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, loc.cit., at page 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."
"it cannot even be said that that the VAT was paid or accounted for to HMRC out of the money paid by the claimant to the Managers, or that the VAT would not have been paid but for the payments by the claimants to the Managers".
Should the court grant the Bank subrogation to reverse Melissa's unjust enrichment?
"But in that case, as in every other case in this particular area of subrogation to which we have been referred, the person entitled to be subrogated was a lender providing the money used to discharge original secured creditor's debt. 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."
True it is that without the guarantee given by the Bank to DWB, DWB would not have released the money deposited with it. But it is not suggested that the bank owned that money in DWB's hands or that it was derived from the Bank… [counsel for the bank] submitted that "it was possible to trace from the guarantee to the monies released by DWB to the Bank". But I do not see how that can be done. The guarantee is not an asset of the Bank but a continuing obligation assumed by the Bank. I do not follow how the creation of a continuing obligation owed by the Bank, not giving rise to an asset of the Bank, can be traced into what is asserted to be an asset of the Bank, viz, the monies paid to it to discharge the secured debt. No authority on tracing has been cited to us that supports what, I have to say, seems to me to be a misconceived proposition. In Lipkin Gorman v Karpale Ltd [1991] 2 AC 548 at p 573 Lord Goff said:
"It is well established that a legal owner is entitled to trace his property into its product, provided that the latter is indeed identifiable as the product of his property … Of course, 'tracing' or 'following' property into its product involves a decision by the owner of the original property to assert his title to the product in place of his original property".
Here there is no "original property" of the Bank, but only the creation of a contingent liability and it cannot be said that the Bank decided to assert title to the monies paid to it in place of any original property of the Bank. In no meaningful sense can it be said that the guarantee is represented by the monies paid to it." (emphasis added)
"… reason and justice do not demand that the Bank which did not pay and was not otherwise the source of the monies used to discharge its secured debts should by subrogation retain its security."
Did the bank have a proprietary interest in the funds used to buy GOC?
Should the deposit be treated separately?
"... in the event of completion of the contract it is applicable towards the payment of the purchase price."
Disposition
Lord Justice Tomlinson:
Lord Justice Moses: