SIMON JOHN EVELYN BOSCAWEN & ors. v NARIP DEEP SINGH BAJWA & anr. [1995] EWCA Civ 15

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR. E.G. NUGEE Q.C., sitting as a
Deputy Judge of the High Court)
[1995] EWCA Civ 15Case No BAILII Citation Number: [1995] EWCA Civ 15Venue Royal Courts of Justice, Strand, London, W.C.2.
Between
SIMON JOHN EVELYN BOSCAWEN & ors.NARIP DEEP SINGH BAJWA & anr.ABBEY NATIONAL plcSIMON JOHN EVELYN BOSCAWEN & ors.
Before
Lord Justice Stuart-SmithLord Justice WaiteLord Justice MillettMR. RICHARD SALTER (instructed by Messrs. Shoosmiths & Harrison, Solicitors, Northampton) appeared on behalf of the counterclaim Defendants (Appellants).Date 10 April 1995

LORD JUSTICE MILLETT:

This

[1]is an appeal by three of the defendants to counterclaim from a judgment of Mr. E.G.Nugee Q.C. sitting as a deputy High Court judge of the Chancery Division and given on 27th. May 1994 at the trial of the counterclaim in the action. The judge declared that the plaintiff by counterclaim Abbey National plc. ("the Abbey National") was entitled to a charge on the property 20 Windsor Road, Kew, Richmond, Surrey ("the property") by way of subrogation to the rights of the Halifax Building Society ("the Halifax") and in priority to any interest of the Appellants. At all material times the property was registered in the name of Narip Deep Singh Bajwa ("Mr. Bajwa"). On 29th. September 1989 he charged the property to the Halifax, and the charge was duly registered in the Charges Register of the title. The charge was discharged on 29th. April 1991 in circumstances which I shall shortly describe, and the Abbey National claims to be entitled to the benefit of the charge in equity by subrogation by reason of the fact that it provided virtually the whole of the money with which it was discharged. The Appellants are judgment creditors of Mr. Bajwa. They obtained a charging order nisi on the property on 4th. November 1991 which was made absolute on 2nd. January 1992. The present proceedings were commenced on 31st. March 1992 when the Appellants issued an originating summons against Mr. Bajwa and the Abbey National for enforcement of their charging order. An order for possession and sale was made and the property was duly sold. The net proceeds of sale amounting to £105,311.83 have been paid into court, and the present dispute concerns the rival claims of the Appellants and the Abbey National to the funds in court. It is common ground that a judgment creditor who obtains a charging order against his debtor's property can take only such interest as the debtor has in the property, so that questions of priority and notice do not arise: see Whitworth v Gaugain (1844) 3 Hare 416; Chung Khiaw Bank v United Overseas Bank [1970] AC 767 . Accordingly, the question which is determinative of the present is dispute is whether, at the time when the Appellants obtained the charging order, Mr. Bajwa was entitled to the freehold interest in the property free from incumbrances, 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 FACTS The detailed facts are fully set out in the judgment of Mr. Nugee Q.C. and I need not repeat them here. It is sufficient to summarise them in order to explain the basis on which the Abbey National claims an interest in the property. On 3rd August 1990 Mr. Bajwa exchanged contracts for the sale of the property for the sum of £165,000. It is common ground before us that the documents did not conform to the requirements of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, with the result that neither party became contractually bound. Neither of them realised this. After allowing for the payment of the deposit and an agreed reduction in the purchase price the balance payable on completion was £140,000. The purchasers had previously obtained an offer of a mortgage advance from the Abbey National of £140,000 which was to be secured by a first legal charge on the property. On 9th August 1990 at the request of the purchasers' solicitors B.Dave & Co ("Dave") the Abbey National sent £140,000 by telegraphic transfer to Dave's client account. As is common Dave were acting as solicitors both for the purchasers and for the Abbey National. They received the money on terms which obliged them to use the money for the completion of the purchase and to return the money if for any reason completion did not take place. On 16th August, following discussions between Dave and Hill Lawson, Mr. Bajwa's solicitors, Dave wrote to Hill Lawson and informed them that they had given instructions to their bank for the transmission of the balance of the purchase money amounting to £137,405 to Hill Lawson's client account with Barclays Bank. Dave recorded Hill Lawson's agreement on the telephone to hold the money "to our strict order pending execution of the transfer and release of the Title Deeds to ourselves ..." On the same day Dave obtained a bankers' draft for £137,405 from Lloyds Bank against a cheque drawn on the firm's client account and paid the draft into the client account of Hill Lawson at Barclay's Bank. The balance of £2,595 was initially retained by Dave to cover stamp duty, Land Registry fees, local authority fees and their own costs, all of which, of course, were the responsibility of the purchasers and not Mr. Bajwa. On 21st August Mr. Duckney, the solicitor at Hill Lawson who had the conduct of the matter, learned that only £137,405 had been received into his firm's client account. He told Dave that this was not enough. Dave promised to put a cheque for £2,595 in the post. Mr. Duckney also spoke to Mr. Bajwa, who told him to complete on receipt of the £140,000. The deputy judge found that, in reliance on these instructions and Dave's promise, Mr. Duckney "agreed some form of completion" with Dave on the telephone. Meanwhile the Halifax was pressing for payment. It had some time previously obtained a suspended order for possession of the property for non-payment of the mortgage instalments, but had agreed not to enforce it pending completion of a sale by Mr. Bajwa. On 15th August the Halifax's solicitors had written to Hill Lawson stating that the amount required to redeem the mortgage on 17th August was £141,222.40. This included a sum in respect of legal costs. Mr. Bajwa disputed these and tried to get the Halifax to accept £140,000 in full settlement. The Halifax would not agree to this, but on 22nd August it wrote to Hill Lawson stating that, if Mr. Bajwa wished to make a partial repayment in order to reduce the debt and accruing interest, it would have no objection. On 23rd August Hill Lawson remitted £140,000 from their client account to the Halifax's account by telegraphic transfer. Some days later Dave's cheque was returned to them dishonoured. They then transferred £2,595 from another account which they held for Mr. Bajwa in order to make good the deficit in their client account. Hill Lawson gave Dave notice of dishonour and required them to remedy the matter, but received no reply. In October the firm of B. Dave & Co ceased to exist, and shortly afterwards Mr. Dave, the sole equity partner, was made the subject of a bankruptcy order. The balance of £2,595 was never paid to Hill Lawson. After some months of argument, the balance required to discharge the Halifax's legal charge was agreed at £1,342.41. Mr. Bajwa paid this direct to the Halifax on 29th April 1991, and shortly afterwards the Halifax forwarded the title deeds to Hill Lawson together with a completed discharge in Form 53. Hill Lawson then wrote to Dave to inquire whether completion could take place, and indicated that they held the title deeds but were not prepared to release them until the balance of the purchase price together with interest thereon was paid. They received no reply. Hill Lawson still held in their possession the completed transfer of the property executed by Mr. Bajwa in the presence of Mr. Duckney but undated. It was never forwarded to Dave or submitted to the Land Registry for registration, and the purchasers, who never had an equitable interest in the property, never acquired a legal title either. It has not been suggested that Mr. Bajwa, who throughout relied on his solicitors, was guilty of any impropriety or want of probity. Nor is it suggested that either firm of solicitors acted dishonestly or in bad faith. It may be doubted whether Hill Lawson did anything more reprehensible than act precipitately in anticipation of the clearance of Dave's cheque and the receipt of further funds from Mr. Bajwa to complete the redemption of the Halifax's charge.It is, however, beyond dispute that, as a result of their actions, money belonging to the Abbey National, which was held by Dave & Co in their client account as trust money for and on behalf of the Abbey National, and later by Hill Lawson in their client account as trust money to Dave's order pending completion of the sale of the property, was applied in breach of trust in the partial discharge of the Halifax's legal charge without obtaining the completion of the sale and the execution of a new mortgage in favour of the Abbey National. It might, perhaps, have been argued that the transfer of the property was executed by Mr. Bajwa in escrow conditional upon the payment of the balance of £2,595 and that, on payment of that sum by the Abbey National the legal title would pass to the purchasers subject to a charge in its favour by way of subrogation to the unpaid vendor's lien. On that analysis Mr. Bajwa's interest in the property would be limited to his unpaid vendor's lien for the £2,595, and this (but nothing further) would be available to become subject to the Appellants' charging order. But the case has not been presented on this basis. It has been argued throughout on the footing that the sale of the property has fallen through, with the result that, at the date of the charging order, Mr. Bajwa remained solely and beneficially entitled to the property subject to such interest, if any, as the Abbey National can establish by way of subrogation to the former legal charge in favour of the Halifax. THE RIVAL CONTENTIONS. The deputy judge held that £137,405 of the Abbey National's money could be traced into the payment to the Halifax and was used (together with the two small sums of Mr. Bajwa's own money) to discharge the Halifax's legal charge. He held that in those circumstances the Abbey National was entitled to be subrogated to the Halifax's legal charge to the extent to which its money had been used to redeem it, and that this left nothing to which the Appellants' charging order could attach. Accordingly, he held that the Abbey National was entitled to the whole of the funds in court. The Abbey National supports his decision for the reasons he gave. The Appellants submit that the deputy judge was wrong to find that £137,405 of the Abbey National's money was used to discharge the Halifax's legal charge; that although it is clear that some part and perhaps most of it was used for this purpose, the evidence left it uncertain how much was so used; and that, the burden of proof being on the Abbey National, its claim should have been dismissed. 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 own 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 . In the events which happened, in which completion did not take place, it was not to have any security interest in the property; it was merely to have the return of its money. Accordingly, the Appellants submit, the Abbey National has personal remedies against Mr. Bajwa for money had and received and against Dave and Hill Lawson for breach of trust, but it cannot maintain a proprietary claim to an interest in the property to the prejudice of the Appellants. Further, the Appellants submit, the deputy judge was wrong to reason as he did that, although the use of the Abbey National's money in part discharge of the Halifax's charge was unauthorised, it was open to the Abbey National to adopt it and assert, as against Mr. Bajwa and Hill Lawson, that it was its money that was so applied. The Abbey National neither pleaded nor argued that it had adopted or ratified the payment to the Halifax; the proposition that it did so first appeared in the deputy judge's judgment. In fact, the Abbey National never did adopt or ratify the payment. Moreover, it could not have adopted or ratified the payment until it knew about it, and it did not know about it until after the Appellants had obtained their charging order. Accordingly, the Appellants submit, their charging order has priority. Finally the Appellants submit that even if the Abbey National succeeds on all the foregoing points its interest in the property should reflect the fact that the Halifax's charge was redeemed in part with Mr. Bajwa's own money. Accordingly, they contend, the interests of the Appellants and the Abbey National in the funds in court ought to be in the proportions which 2,595 bears to 137,405. TRACING AND SUBROGATION The submission that the deputy judge illegitimately conflated two different causes of action, the equitable tracing claim and the claim to a right of subrogation, betrays a confusion of thought which arises from the admittedly misleading terminology which is traditionally used in the context of equitable claims for restitution. Equity lawyers habitually use the expressions "the tracing claim" and "the tracing remedy" to describe the proprietary claim and the proprietary remedy which equity makes available to the beneficial owner who seeks to recover his property in specie from those into whose hands it has come. Tracing properly so-called, however, is neither a claim nor a remedy but a process. Moreover, it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. 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. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. 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. In such a case, the defendant will either challenge the plaintiff's claim that the property in question represents his property (ie. he will challenge the validity of the tracing exercise) or he will raise a priority dispute (eg. by claiming to be a bona fide purchaser without notice). If all else fails, he will raise the defence of innocent change of position. This was not a defence which was recognised in England before 1991, but it was widely accepted throughout the common law world. In Lipkin Gorman v Karpnale Ltd . [1991] 2 AC 548 the House of Lords acknowledged it to be part of English law also. The introduction of this defence not only provides the court with a means of doing justice in future, but allows a re-examination of many decisions of the past in which the absence of the defence may have led judges to distort basic principles in order to avoid injustice to the defendant. If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. 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 is 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. Subrogation, therefore, is a remedy, not a cause of action: see Goff & Jones Law of Restitution 4th. Ed. pp. 589 et seq. Orakpo v Manson Investments Ltd . [1978] AC 95 at p.104 per Lord Diplock; Re T.H.Knitwear (Wholesale) Ltd . [1988] Ch. 275, 284 CA. 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 subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. 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 in the one case or a constructive trust in the other. Accordingly, there was nothing illegitimate in the deputy judge's invocation of the two doctrines of tracing and subrogation 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. TRACING It is still a prerequisite of the right to trace in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being: see Agip (Africa) Ltd. v Jackson [1991] Ch 547 CA at p.566 per Fox LJ. That requirement is satisfied in the present case by the fact that from the first moment of its receipt by Dave in its general client account the £140,000 was trust money held in trust for the Abbey National. The Appellants do not dispute that the Abbey National can successfully trace £137,405 of its money into Hill Lawson's client account. But they do dispute the judge's finding that it can trace the sum further into the payment to the Halifax. The £137,405 was paid into Hill Lawson's general client account at the bank because it was only intended to be kept for a short time. Funds which were held for clients for any length of time were held in separate designated accounts. Hill Lawson's ledger cards showed Mr. Bajwa as the relevant client. According to Mr. Duckney, Hill Lawson also held other funds for Mr. Bajwa which were the result of an inheritance which he had received. These were the source from which Hill Lawson made good the shortfall of £2,595 which arose when Dave's cheque was dishonoured. The amount of these other funds is unknown, though it was certainly nothing like £140,000. The evidence does not show whether they were held in Hill Lawson's general client account or whether they were held in a separate designated account. If they were held in the general client account, the £137,405 received from Dave was (quite properly) mixed not only with moneys belonging to other clients but also with money belonging to Mr. Bajwa. Hill Lawson can be presumed not to have committed a breach of trust by resorting to moneys belonging to other clients, but they were perfectly entitled to use Mr. Bajwa's own money to discharge the Halifax's charge on his property. Whether they did so or not cannot be determined in the absence of any evidence of the amount involved. Accordingly, it is submitted, the Abbey National has failed to establish how much of its money was applied in the discharge of the Halifax's charge and how much of the money which was applied for this purpose was Mr. Bajwa's own money. The Abbey National answers this submission in two ways. First, it submits that Hill Lawson's ledger cards show that Hill Lawson appropriated the £137,405 which it had received from Dave towards the payment of the sum of £140,000 to the Halifax, and resorted to Mr. Bajwa's other funds only when Dave's cheque for the balance was dishonoured. The ledger cards were, of course, made up after the event, though long before any litigation ensued, so they are not primary evidence of actual appropriation; but they are reliable evidence of the appropriation which Hill Lawson believed that they had made. I accept this submission. It is not necessary to apply artificial tracing rules where there has been an actual appropriation. A trustee will not be allowed to defeat the claim of his beneficiary by saying that he has resorted to trust money when he could have made use of own; but if the beneficiary asserts that the trustee has made use of the trust money there is no reason why he should not be allowed to prove it. The second way in which the Abbey National answers the Appellants' submission is by reliance on equity's ability to follow money through a bank account where it has been mixed with other moneys by treating the money in the account as charged with the repayment of his money. As against a wrongdoer the claimant is not obliged to appropriate debits to credits in order to ascertain where his money has gone. Equity's power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour: see Re Hallett's Estate, Knatchbull v Hallett (1880), 13 ChD 696 ; Re Oatway, Hertslett v Oatway [1903] 2 Ch. 365; El Ajou v Dollar Land Holdings [1993] 3 All ER 717. The Appellants accept this, but submit that for this purpose Mr. Bajwa was not a wrongdoer. He was, as I have said, not guilty of any impropriety or want of probity. He relied on his solicitors, and they acted unwisely, perhaps negligently, and certainly precipitately, but not dishonestly. Mr. Bajwa, it is submitted, was an innocent volunteer who mixed trust money with his own. As such, he was not bound to give priority to the Abbey National, but could claim parity with it. Accordingly, Mr. Bajwa and the Abbey National must be treated as having contributed pari passu to the discharge of the Halifax's charge; and in the absence of the necessary evidence the amounts which were provided by Mr. Bajwa and the Abbey National respectively cannot be ascertained. (In fact, on this footing the Abbey National would be entitled to succeed to the extent of one half of its claim, but that is by the way). For this proposition the Appellants rely on a passage in Re Diplock [1948] 465 CA at p.524 which is as follows:
"Where an innocent volunteer (as distinct from a purchaser for value without notice) mixes 'money' of his own with 'money' which in equity belongs to another person, or is found in possession of such a mixture, although that other person cannot claim a charge on the mass superior to the claim of the volunteer he is entitled, nevertheless, to a charge ranking pari passu with the claim of the volunteer. ................... But this burden on the conscience of the volunteer is not such as to compel him to treat the claim of the equitable owner as paramount. That would be to treat the volunteer as strictly as if he himself stood in a fiduciary relationship to the equitable owner which ex hypothesi he does not. The volunteer is under no greater duty of conscience to recognize the interest of the equitable owner than that which lies upon a person having an equitable interest in one of two trust funds of 'money' which have become mixed towards the equitable owner of the other. Such a person is not in conscience bound to give precedence to the equitable owner of the other of the two funds."
This would be highly relevant if the distinction which the court was there making was between the honest and the dishonest recipient. But it was not. The distinction was between the innocent recipient who had no reason to suspect that the money was not his own to dispose of as he pleased, and the recipient who knew or ought to have known that the money belonged to another. In Re Diplock the defendants were the recipients of grants made to them by the personal representatives of a deceased testator in accordance with the terms of the residuary gift in his will. The gift was afterwards held by the House of Lords to be ineffective, with the result that the testator's residue passed on intestacy. The next of kin then brought proceedings to recover the moneys paid away. The defendants found themselves in an unenviable position. Not only had they received the money honestly and in good faith, but they had had no reason to think that it was not theirs. There was no question of their having consciously mixed money which belonged to another with their own. But the present case is very different. Neither Mr. Bajwa nor his solicitors acted dishonestly, but nor were they innocent volunteers. Hill Lawson knew that the money was trust money held to Dave's order pending completion and that it would become available for use on behalf of their client only on completion. They were manifestly fiduciaries. Mr. Bajwa, who was plainly intending to redeem the Halifax's mortgage out of the proceeds of sale of the property, must be taken to have known that any money which his solicitors might receive from the purchasers or their mortgagees would represent the balance of the proceeds of sale due on completion and that, since he had made no arrangement with the purchasers to be advanced any part of that amount before completion, it would be available to him only on completion. He cannot possibly have thought that he could keep both the property and the proceeds of sale. Had he thought about the matter at all, he would have realised that the money was not his to mix with his own and dispose of as he saw fit. The only reason that he and his solicitors can be acquitted of dishonesty is that he relied on his solicitors and they acted in the mistaken belief that, save for the tidying up of some loose ends, they were on the point of completing. It follows that Mr. Bajwa cannot avail himself of the more favourable tracing rules which are available to the innocent volunteer who unconsciously mixes trust money with his own. SUBROGATION The Appellants submit that the mere fact that the claimant's money is used to discharge someone else's debt does not entitle him to be subrogated to the creditor whose debt is paid. There must be "something more ": Paul v Speirway [1976] Ch. 220 at p. 230 per Oliver J; and see Orakpo v Manson Investments Ltd . where Lord Diplock said at p. 105::
"The mere fact that money lent has been expended upon discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose: Wylie v Carlyon [1922] 1 Ch. 51."
From this the Appellants derive the proposition that in order to be subrogated to the creditor's security the claimant must prove (i) that the claimant intended that his money should be used to discharge the security in question (that being the "something more" required by Oliver J.) and (ii) that he intended to obtain the benefit of the security by subrogation. I cannot accept that formulation as a rule of general application regardless of the circumstances in which the remedy of subrogation is sought. The cases relied on were all cases where the claimant intended to make an unsecured loan to a borrower who used the money to discharge a secured debt. In such a case the claimant is not entitled to be subrogated to the creditor's security since this would put him in a better position than he had bargained for. Oliver J. was not prepared to say more than that:
"It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say this: that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation. That really, as it seems to me, is to say no more than that the question of subrogation or no subrogation cannot be divorced from a review of the rights proved or presumed to be intended to be created between the payer of the money and the person requiring its payment."
In that passage Oliver J was plainly limiting his observations to a claim to be subrogated to the creditor's security. The mere fact that the payer of the money intended to make an unsecured loan will not preclude his claim to be subrogated to the personal rights of the creditor whose debt is discharged if the contractual liability of the original borrower proves to be unenforceable: see, for example, Re Wrexham, Mold and Connah's Quay Railway Co . [1899] 1 Ch 440 (where the borrowing was ultra vires ); Liggett (Liverpool ) Ltd. v Barclays Bank Ltd . [1928] 1 KB 48 (where the borrowing was unauthorised). In Orakpo v Manson Investments Ltd . Lord Diplock pointed out (at p. 104) that the remedy of subrogation was available in a whole variety of widely different circumstances, and that this made "particularly perilous any attempt to rely upon analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances." The converse is equally true. It is perilous to extrapolate from one set of circumstances where the court has required a particular precondition to be satisfied before the remedy of subrogation can be granted a general rule which makes that requirement a precondition which must be satisfied in other and different circumstances. In the present case there was no relevant transaction between Abbey National ("the payer of the money") and Mr. Bajwa ("the person at whose instigation it was paid"). This does not mean that the test laid down by Oliver J in Paul v Speirway has not been satisfied; it means that the test is not applicable. In Butler v Rice [1910] 2 Ch 277 the fact that the debtor had not requested the claimant to make the payment and did not know of the transaction was held to be immaterial. This is not to say that intention is necessarily irrelevant in a case of the present kind; it is to say only that where the payment was made by a third party and the claimant had no intention to make any payment to or for the benefit of the recipient the relevant intention must be that of the third party. In cases such as Butler v Rice and Ghana Commercial Bank v Chandiram [1960] AC 732 , where the claimant paid the creditor direct and intended to discharge his security, the court took the claimant's intention to have been to keep the original security alive for his own benefit save in so far as it was replaced by an effective security in favour of himself. In the present case the Abbey National did not intend to discharge the Halifax's charge in the events which happened, that is to say in the event that completion did not proceed. But it did not intend its money to be used at all in that event. If Butler v Rice and similar cases are relied upon to support the proposition that there can be no subrogation unless the claimant intended to keep the original security alive for its own benefit save insofar as it was replaced by a new and effective security, with the result that the remedy is not available where the claimant had no direct dealings with the creditor and did not intend his money to be used at all, then I respectfully dissent from that proposition. I prefer the view of Slade LJ in Re T.H. Knitwear (Wholesale) Ltd . that in some situations the doctrine of subrogation is capable of applying even though it is impossible to infer a mutual intention to this effect on the part of the creditor and the person claiming to be subrogated to the creditor's security. In the present case the payment was made by Hill Lawson, and it is their intention which matters. As fiduciaries, they could not be heard to say that they had paid out their principal's money otherwise than for the benefit of their principal. Accordingly, their intention must be taken to have been to keep the Halifax's charge alive for the benefit of the Abbey National pending completion. In my judgment this is sufficient to bring the doctrine of subrogation into play. The application of the doctrine in the present case does not create the problem which confronted Oliver J. in Paul v Speirway . The Abbey National did not intend to be an unsecured creditor of anyone. It intended to retain the beneficial interest in its money unless and until that interest was replaced by a first legal mortgage on the property. 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. The Abbey National's beneficial interest in the money can no longer be restored to it. If it is subrogated to the Halifax's charge its position will not be improved nor will Mr. Bajwa's position be adversely affected. Both parties will be restored as nearly as may be to the positions which they were respectively intended to occupy. The Appellants place much reliance on a passage in Re Diplock at pp. 549-550 where the court was dealing with the claim against the Leaf Homoeopathic Hospital. The Hospital received a grant for the specific purpose of enabling it to pay off a secured bank loan. The passage in question is as follows:
"Here, too, we think that the effect of the payment to the bank was to extinguish the debt and the charge held by the bank ceased to exist. The case cannot, we think, be regarded as one of subrogation, and if the appellants were entitled to a charge it would have to be a new charge created by the court. The position in this respect does not appear to us to be affected by the fact that the payment off of this debt was one of the objects for which the grant was made. The effect of the payment off was that the charity, which had previously held only an equity of redemption, became the owners of unincumbered property. That unincumbered property derived from a combination of two things, the equity of redemption contributed by the charity and the effect of the Diplock money in getting rid of the incumbrance. If equity is now to create a charge (and we say 'create' because there is no survival of the original charge) in favour of the judicial trustee, it will be placing him in a position to insist upon a sale of what was contributed by the charity. The case, as it appears to us, is in effect analogous to the cases where Diplock money is expended on improvements on charity land. The money was in this case used to remove a blot on the title; to give the judicial trustee a charge in respect of the money so used would, we think, be equally unjust to the charity who, as the result of such a charge, would have to submit to a sale of the interest in the property which it brought in. We may point out that if the relief claimed were to be accepted as a correct application of the equitable principle, insoluble problems might arise in a case where in the meanwhile fresh charge on the property had been created or money had been expended upon it."
The passage is not without its difficulties, and is in need of reappraisal in the light of the significant developments in the law of restitution which have taken place in the last 50 years. The second sentence is puzzling. The discharge of the creditor's security at law is certainly not a bar to subrogation in equity; it is rather a precondition. But the court was probably doing no more than equate the remedy to the creation of a new charge for the purpose of considering whether this was justified. It is also unclear what conclusion was thought to follow from the observation that the unincumbered property derived from two sources, the equity of redemption contributed by the charity and the money belonging to the next of kin which was used to redeem the mortgage. If the money had been used to buy the property without any contribution from the charity, the next of kin would have sought a declaration that they were solely and beneficially entitled to the property under a constructive trust. Their claim to be subrogated to the security which had been discharged with their money reflected the respective contributions which they and the charity had made and did not encroach upon the charity's equity of redemption at all. Nor is it clear to me why insoluble problems would arise in a case where there had been fresh charges created on the property 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. Taken as a whole, however, the passage cited is an explanation of the reasons why,in the particular circumstances of that case, it was considered unjust to grant the remedy of subrogation. The Hospital had changed its position to its detriment. It had in all innocence used the money to redeem a mortgage held by its bank which, no doubt, was willing to allow its advance to remain outstanding indefinitely so long as it was well secured and the interest was paid punctually. The next of kin were seeking to be subrogated to the bank's security in order to enforce it and enable a proper distribution of the estate to be made. This would have been unjust to the Hospital. It may be doubted whether, in its anxiety to avoid injustice to the Hospital, the court may not have done an even greater injustice to the next of kin, who were denied even the interest on their money. Justice did not require the withholding of any remedy, but only that the charge by subrogation should not be enforceable until the Hospital had had a reasonable opportunity to obtain a fresh advance on suitable terms from a willing lender, perhaps from the bank which had held the original security. Today considerations of this kind would be regarded as relevant to a change of position defence rather than as going to liability. They do not call for further consideration in the present case. ADOPTION. The Appellant's submissions on adoption and ratification are misconceived. The short answer to them is that the right to follow an asset, whether at common law or in equity, does not depend on adoption or ratification. In the leading case of Taylor v Plumer (1815), 3 M. & S. 562 Lord Ellenborough CJ pointed out that, had the successful party's case depended on ratification, it must fail; in United Australia Ltd. v Barclay's Bank Ltd . [1941] AC 1 at pp. 27-29 Lord Atkin exposed the doctrine as a fiction; and in Karpnale Ltd v Lipkin Gorman , after pointing out that tracing or following property into its product involves a decision by the original owner to assert his title to the product in place of his original property, Lord Goff at p. 573 said that this was sometimes referred to as ratification, but that he himself would not so describe it. In Agip (Africa) Ltd. v Jackson [1990] Ch. 265 the money was paid away by the bank in reliance on a forged payment order. It was argued that a forgery is a nullity and that the plaintiffs could not ratify it. It was pointed out that the plaintiffs did not rely on the forgery but on the bank's want of authority. They did not seek to ratify the payment or treat it as made with their authority; on the contrary, they pleaded that it was made without their authority and sought to recover it on that very ground. In my view Counsel for the Abbey National was correct in analysing the doctrine in play as one of election between remedies. The beneficiary who complains that his trustee has committed a breach of trust by using trust money to acquire an asset for himself may either reject the asset and insist that the trustee replace the money, or assert his title to the asset. In the latter case the breach of trust of which he complains is the trustee's retention of the asset for his own benefit. The fact that he does not also complain of the acquisition of the asset but seeks to take advantage of it does not mean that he adopts or ratifies it - he will almost certainly plead that it was a breach of trust - it means only that he does not seek a remedy in respect of it. There is no justification for the proposition that the Abbey National's right to be subrogated to the Halifax's charge did not arise until the Abbey National elected to seek that remedy. 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 unincumbered freehold interest in the property; but he never did, even for an instant, in equity. THE ABBEY NATIONAL'S ENTITLEMENT Finally, the Appellants' submission that the interests of the Appellants and the Abbey National in the funds in court ought to be in the proportions which 2,595 bears to 137,405 is in my view also erroneous. Had the sale gone through, then the purchasers would have acquired the beneficial interest in the property subject to the unpaid vendor's lien of Mr. Bajwa to secure the payment of the balance of the purchase price of £140,000. The Abbey National would have been subrogated to that lien to the extent of £137,405, and Mr. Bajwa would have retained his lien to the extent of the balance. They would have been entitled to the funds in court in those proportions up to £140,000, and the purchasers would have been entitled to any balance. In the events which have happened, however, the sale fell through; the sum of £140,000 which represented the balance of the purchase price payable on completion is no longer payable and the unpaid vendor's lien to secure its payment is subsumed in Mr. Bajwa's beneficial interest in the property. The relevant amounts are the £137,405 which the Abbey National paid towards the discharge of the Halifax's charge and the two sums of £2,595 and £1,342.41 which Mr. Bajwa himself paid to the Halifax in order to redeem the charge. But equity does not permit the debtor himself to obtain priority to subsequent incumbrancers by paying off his mortgage and then keeping it alive against them; still less does it permit the debtor to gain parity with his own mortgagee by paying off part of the mortgage and then keeping it alive against him. In favour of the Halifax and the Abbey National, Mr. Bajwa's payments discharged the Halifax's charge in equity as well as at law. They enured for the benefit of his equity of redemption and rank behind the subrogated charge of the Abbey National as they ranked behind the Halifax's charge. CONCLUSION For these reasons, which are substantially the same as those of the deputy judge, I would dismiss the appeal. LORD JUSTICE WAITE: I agree. LORD JUSTICE STUART-SMITH: I also agree. ([2]At all material times the property was registered in the name of Narip Deep Singh Bajwa ("Mr. Bajwa"). On 29th. September 1989 he charged the property to the Halifax, and the charge was duly registered in the Charges Register of the title. The charge was discharged on 29th. April 1991 in circumstances which I shall shortly describe, and the Abbey National claims to be entitled to the benefit of the charge in equity by subrogation by reason of the fact that it provided virtually the whole of the money with which it was discharged.[3]The Appellants are judgment creditors of Mr. Bajwa. They obtained a charging order nisi on the property on 4th. November 1991 which was made absolute on 2nd. January 1992. The present proceedings were commenced on 31st. March 1992 when the Appellants issued an originating summons against Mr. Bajwa and the Abbey National for enforcement of their charging order. An order for possession and sale was made and the property was duly sold. The net proceeds of sale amounting to £105,311.83 have been paid into court, and the present dispute concerns the rival claims of the Appellants and the Abbey National to the funds in court.[4]It is common ground that a judgment creditor who obtains a charging order against his debtor's property can take only such interest as the debtor has in the property, so that questions of priority and notice do not arise: see Whitworth v Gaugain (1844) 3 Hare 416; Chung Khiaw Bank v United Overseas Bank [1970] AC 767 . Accordingly, the question which is determinative of the present is dispute is whether, at the time when the Appellants obtained the charging order, Mr. Bajwa was entitled to the freehold interest in the property free from incumbrances, 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 FACTS[6]The detailed facts are fully set out in the judgment of Mr. Nugee Q.C. and I need not repeat them here. It is sufficient to summarise them in order to explain the basis on which the Abbey National claims an interest in the property. On 3rd August 1990 Mr. Bajwa exchanged contracts for the sale of the property for the sum of £165,000. It is common ground before us that the documents did not conform to the requirements of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, with the result that neither party became contractually bound. Neither of them realised this. After allowing for the payment of the deposit and an agreed reduction in the purchase price the balance payable on completion was £140,000.[7]The purchasers had previously obtained an offer of a mortgage advance from the Abbey National of £140,000 which was to be secured by a first legal charge on the property. On 9th August 1990 at the request of the purchasers' solicitors B.Dave & Co ("Dave") the Abbey National sent £140,000 by telegraphic transfer to Dave's client account. As is common Dave were acting as solicitors both for the purchasers and for the Abbey National. They received the money on terms which obliged them to use the money for the completion of the purchase and to return the money if for any reason completion did not take place.[8]On 16th August, following discussions between Dave and Hill Lawson, Mr. Bajwa's solicitors, Dave wrote to Hill Lawson and informed them that they had given instructions to their bank for the transmission of the balance of the purchase money amounting to £137,405 to Hill Lawson's client account with Barclays Bank. Dave recorded Hill Lawson's agreement on the telephone to hold the money "to our strict order pending execution of the transfer and release of the Title Deeds to ourselves ..."[9]On the same day Dave obtained a bankers' draft for £137,405 from Lloyds Bank against a cheque drawn on the firm's client account and paid the draft into the client account of Hill Lawson at Barclay's Bank. The balance of £2,595 was initially retained by Dave to cover stamp duty, Land Registry fees, local authority fees and their own costs, all of which, of course, were the responsibility of the purchasers and not Mr. Bajwa.[10]On 21st August Mr. Duckney, the solicitor at Hill Lawson who had the conduct of the matter, learned that only £137,405 had been received into his firm's client account. He told Dave that this was not enough. Dave promised to put a cheque for £2,595 in the post. Mr. Duckney also spoke to Mr. Bajwa, who told him to complete on receipt of the £140,000. The deputy judge found that, in reliance on these instructions and Dave's promise, Mr. Duckney "agreed some form of completion" with Dave on the telephone.[11]Meanwhile the Halifax was pressing for payment. It had some time previously obtained a suspended order for possession of the property for non-payment of the mortgage instalments, but had agreed not to enforce it pending completion of a sale by Mr. Bajwa. On 15th August the Halifax's solicitors had written to Hill Lawson stating that the amount required to redeem the mortgage on 17th August was £141,222.40. This included a sum in respect of legal costs. Mr. Bajwa disputed these and tried to get the Halifax to accept £140,000 in full settlement. The Halifax would not agree to this, but on 22nd August it wrote to Hill Lawson stating that, if Mr. Bajwa wished to make a partial repayment in order to reduce the debt and accruing interest, it would have no objection.[12]On 23rd August Hill Lawson remitted £140,000 from their client account to the Halifax's account by telegraphic transfer. Some days later Dave's cheque was returned to them dishonoured. They then transferred £2,595 from another account which they held for Mr. Bajwa in order to make good the deficit in their client account. Hill Lawson gave Dave notice of dishonour and required them to remedy the matter, but received no reply. In October the firm of B. Dave & Co ceased to exist, and shortly afterwards Mr. Dave, the sole equity partner, was made the subject of a bankruptcy order. The balance of £2,595 was never paid to Hill Lawson.[13]After some months of argument, the balance required to discharge the Halifax's legal charge was agreed at £1,342.41. Mr. Bajwa paid this direct to the Halifax on 29th April 1991, and shortly afterwards the Halifax forwarded the title deeds to Hill Lawson together with a completed discharge in Form 53. Hill Lawson then wrote to Dave to inquire whether completion could take place, and indicated that they held the title deeds but were not prepared to release them until the balance of the purchase price together with interest thereon was paid. They received no reply. Hill Lawson still held in their possession the completed transfer of the property executed by Mr. Bajwa in the presence of Mr. Duckney but undated. It was never forwarded to Dave or submitted to the Land Registry for registration, and the purchasers, who never had an equitable interest in the property, never acquired a legal title either.[14]It has not been suggested that Mr. Bajwa, who throughout relied on his solicitors, was guilty of any impropriety or want of probity. Nor is it suggested that either firm of solicitors acted dishonestly or in bad faith. It may be doubted whether Hill Lawson did anything more reprehensible than act precipitately in anticipation of the clearance of Dave's cheque and the receipt of further funds from Mr. Bajwa to complete the redemption of the Halifax's charge.It is, however, beyond dispute that, as a result of their actions, money belonging to the Abbey National, which was held by Dave & Co in their client account as trust money for and on behalf of the Abbey National, and later by Hill Lawson in their client account as trust money to Dave's order pending completion of the sale of the property, was applied in breach of trust in the partial discharge of the Halifax's legal charge without obtaining the completion of the sale and the execution of a new mortgage in favour of the Abbey National.[15]It might, perhaps, have been argued that the transfer of the property was executed by Mr. Bajwa in escrow conditional upon the payment of the balance of £2,595 and that, on payment of that sum by the Abbey National the legal title would pass to the purchasers subject to a charge in its favour by way of subrogation to the unpaid vendor's lien. On that analysis Mr. Bajwa's interest in the property would be limited to his unpaid vendor's lien for the £2,595, and this (but nothing further) would be available to become subject to the Appellants' charging order.[16]But the case has not been presented on this basis. It has been argued throughout on the footing that the sale of the property has fallen through, with the result that, at the date of the charging order, Mr. Bajwa remained solely and beneficially entitled to the property subject to such interest, if any, as the Abbey National can establish by way of subrogation to the former legal charge in favour of the Halifax. THE RIVAL CONTENTIONS.[17]The deputy judge held that £137,405 of the Abbey National's money could be traced into the payment to the Halifax and was used (together with the two small sums of Mr. Bajwa's own money) to discharge the Halifax's legal charge. He held that in those circumstances the Abbey National was entitled to be subrogated to the Halifax's legal charge to the extent to which its money had been used to redeem it, and that this left nothing to which the Appellants' charging order could attach. Accordingly, he held that the Abbey National was entitled to the whole of the funds in court. The Abbey National supports his decision for the reasons he gave.[18]The Appellants submit that the deputy judge was wrong to find that £137,405 of the Abbey National's money was used to discharge the Halifax's legal charge; that although it is clear that some part and perhaps most of it was used for this purpose, the evidence left it uncertain how much was so used; and that, the burden of proof being on the Abbey National, its claim should have been dismissed.[19]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.[20]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 own 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 . In the events which happened, in which completion did not take place, it was not to have any security interest in the property; it was merely to have the return of its money. Accordingly, the Appellants submit, the Abbey National has personal remedies against Mr. Bajwa for money had and received and against Dave and Hill Lawson for breach of trust, but it cannot maintain a proprietary claim to an interest in the property to the prejudice of the Appellants.[21]Further, the Appellants submit, the deputy judge was wrong to reason as he did that, although the use of the Abbey National's money in part discharge of the Halifax's charge was unauthorised, it was open to the Abbey National to adopt it and assert, as against Mr. Bajwa and Hill Lawson, that it was its money that was so applied. The Abbey National neither pleaded nor argued that it had adopted or ratified the payment to the Halifax; the proposition that it did so first appeared in the deputy judge's judgment. In fact, the Abbey National never did adopt or ratify the payment. Moreover, it could not have adopted or ratified the payment until it knew about it, and it did not know about it until after the Appellants had obtained their charging order. Accordingly, the Appellants submit, their charging order has priority.[22]Finally the Appellants submit that even if the Abbey National succeeds on all the foregoing points its interest in the property should reflect the fact that the Halifax's charge was redeemed in part with Mr. Bajwa's own money. Accordingly, they contend, the interests of the Appellants and the Abbey National in the funds in court ought to be in the proportions which 2,595 bears to 137,405. TRACING AND SUBROGATION[23]The submission that the deputy judge illegitimately conflated two different causes of action, the equitable tracing claim and the claim to a right of subrogation, betrays a confusion of thought which arises from the admittedly misleading terminology which is traditionally used in the context of equitable claims for restitution. Equity lawyers habitually use the expressions "the tracing claim" and "the tracing remedy" to describe the proprietary claim and the proprietary remedy which equity makes available to the beneficial owner who seeks to recover his property in specie from those into whose hands it has come. Tracing properly so-called, however, is neither a claim nor a remedy but a process. Moreover, it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. 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. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. 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.[24]In such a case, the defendant will either challenge the plaintiff's claim that the property in question represents his property (ie. he will challenge the validity of the tracing exercise) or he will raise a priority dispute (eg. by claiming to be a bona fide purchaser without notice). If all else fails, he will raise the defence of innocent change of position. This was not a defence which was recognised in England before 1991, but it was widely accepted throughout the common law world. In Lipkin Gorman v Karpnale Ltd . [1991] 2 AC 548 the House of Lords acknowledged it to be part of English law also. The introduction of this defence not only provides the court with a means of doing justice in future, but allows a re-examination of many decisions of the past in which the absence of the defence may have led judges to distort basic principles in order to avoid injustice to the defendant.[26]If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. 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 is 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. Subrogation, therefore, is a remedy, not a cause of action: see Goff & Jones Law of Restitution 4th. Ed. pp. 589 et seq. Orakpo v Manson Investments Ltd . [1978] AC 95 at p.104 per Lord Diplock; Re T.H.Knitwear (Wholesale) Ltd . [1988] Ch. 275, 284 CA. 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 subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. 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 in the one case or a constructive trust in the other.[27]Accordingly, there was nothing illegitimate in the deputy judge's invocation of the two doctrines of tracing and subrogation 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. TRACING[28]It is still a prerequisite of the right to trace in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being: see Agip (Africa) Ltd. v Jackson [1991] Ch 547 CA at p.566 per Fox LJ. That requirement is satisfied in the present case by the fact that from the first moment of its receipt by Dave in its general client account the £140,000 was trust money held in trust for the Abbey National. The Appellants do not dispute that the Abbey National can successfully trace £137,405 of its money into Hill Lawson's client account. But they do dispute the judge's finding that it can trace the sum further into the payment to the Halifax.[30]The £137,405 was paid into Hill Lawson's general client account at the bank because it was only intended to be kept for a short time. Funds which were held for clients for any length of time were held in separate designated accounts. Hill Lawson's ledger cards showed Mr. Bajwa as the relevant client. According to Mr. Duckney, Hill Lawson also held other funds for Mr. Bajwa which were the result of an inheritance which he had received. These were the source from which Hill Lawson made good the shortfall of £2,595 which arose when Dave's cheque was dishonoured. The amount of these other funds is unknown, though it was certainly nothing like £140,000. The evidence does not show whether they were held in Hill Lawson's general client account or whether they were held in a separate designated account. If they were held in the general client account, the £137,405 received from Dave was (quite properly) mixed not only with moneys belonging to other clients but also with money belonging to Mr. Bajwa. Hill Lawson can be presumed not to have committed a breach of trust by resorting to moneys belonging to other clients, but they were perfectly entitled to use Mr. Bajwa's own money to discharge the Halifax's charge on his property. Whether they did so or not cannot be determined in the absence of any evidence of the amount involved. Accordingly, it is submitted, the Abbey National has failed to establish how much of its money was applied in the discharge of the Halifax's charge and how much of the money which was applied for this purpose was Mr. Bajwa's own money. The Abbey National answers this submission in two ways. First, it submits that Hill Lawson's ledger cards show that Hill Lawson appropriated the £137,405 which it had received from Dave towards the payment of the sum of £140,000 to the Halifax, and resorted to Mr. Bajwa's other funds only when Dave's cheque for the balance was dishonoured. The ledger cards were, of course, made up after the event, though long before any litigation ensued, so they are not primary evidence of actual appropriation; but they are reliable evidence of the appropriation which Hill Lawson believed that they had made.[31]I accept this submission. It is not necessary to apply artificial tracing rules where there has been an actual appropriation. A trustee will not be allowed to defeat the claim of his beneficiary by saying that he has resorted to trust money when he could have made use of own; but if the beneficiary asserts that the trustee has made use of the trust money there is no reason why he should not be allowed to prove it.[32]The second way in which the Abbey National answers the Appellants' submission is by reliance on equity's ability to follow money through a bank account where it has been mixed with other moneys by treating the money in the account as charged with the repayment of his money. As against a wrongdoer the claimant is not obliged to appropriate debits to credits in order to ascertain where his money has gone. Equity's power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour: see Re Hallett's Estate, Knatchbull v Hallett (1880), 13 ChD 696 ; Re Oatway, Hertslett v Oatway [1903] 2 Ch. 365; El Ajou v Dollar Land Holdings [1993] 3 All ER 717.[34]The Appellants accept this, but submit that for this purpose Mr. Bajwa was not a wrongdoer. He was, as I have said, not guilty of any impropriety or want of probity. He relied on his solicitors, and they acted unwisely, perhaps negligently, and certainly precipitately, but not dishonestly. Mr. Bajwa, it is submitted, was an innocent volunteer who mixed trust money with his own. As such, he was not bound to give priority to the Abbey National, but could claim parity with it. Accordingly, Mr. Bajwa and the Abbey National must be treated as having contributed pari passu to the discharge of the Halifax's charge; and in the absence of the necessary evidence the amounts which were provided by Mr. Bajwa and the Abbey National respectively cannot be ascertained. (In fact, on this footing the Abbey National would be entitled to succeed to the extent of one half of its claim, but that is by the way). For this proposition the Appellants rely on a passage in Re Diplock [1948] 465 CA at p.524 which is as follows:
"Where an innocent volunteer (as distinct from a purchaser for value without notice) mixes 'money' of his own with 'money' which in equity belongs to another person, or is found in possession of such a mixture, although that other person cannot claim a charge on the mass superior to the claim of the volunteer he is entitled, nevertheless, to a charge ranking pari passu with the claim of the volunteer. ................... But this burden on the conscience of the volunteer is not such as to compel him to treat the claim of the equitable owner as paramount. That would be to treat the volunteer as strictly as if he himself stood in a fiduciary relationship to the equitable owner which ex hypothesi he does not. The volunteer is under no greater duty of conscience to recognize the interest of the equitable owner than that which lies upon a person having an equitable interest in one of two trust funds of 'money' which have become mixed towards the equitable owner of the other. Such a person is not in conscience bound to give precedence to the equitable owner of the other of the two funds."
[35]This would be highly relevant if the distinction which the court was there making was between the honest and the dishonest recipient. But it was not. The distinction was between the innocent recipient who had no reason to suspect that the money was not his own to dispose of as he pleased, and the recipient who knew or ought to have known that the money belonged to another. In Re Diplock the defendants were the recipients of grants made to them by the personal representatives of a deceased testator in accordance with the terms of the residuary gift in his will. The gift was afterwards held by the House of Lords to be ineffective, with the result that the testator's residue passed on intestacy. The next of kin then brought proceedings to recover the moneys paid away. The defendants found themselves in an unenviable position. Not only had they received the money honestly and in good faith, but they had had no reason to think that it was not theirs. There was no question of their having consciously mixed money which belonged to another with their own.[36]But the present case is very different. Neither Mr. Bajwa nor his solicitors acted dishonestly, but nor were they innocent volunteers. Hill Lawson knew that the money was trust money held to Dave's order pending completion and that it would become available for use on behalf of their client only on completion. They were manifestly fiduciaries. Mr. Bajwa, who was plainly intending to redeem the Halifax's mortgage out of the proceeds of sale of the property, must be taken to have known that any money which his solicitors might receive from the purchasers or their mortgagees would represent the balance of the proceeds of sale due on completion and that, since he had made no arrangement with the purchasers to be advanced any part of that amount before completion, it would be available to him only on completion. He cannot possibly have thought that he could keep both the property and the proceeds of sale. Had he thought about the matter at all, he would have realised that the money was not his to mix with his own and dispose of as he saw fit. The only reason that he and his solicitors can be acquitted of dishonesty is that he relied on his solicitors and they acted in the mistaken belief that, save for the tidying up of some loose ends, they were on the point of completing.[37]It follows that Mr. Bajwa cannot avail himself of the more favourable tracing rules which are available to the innocent volunteer who unconsciously mixes trust money with his own. SUBROGATION[38]The Appellants submit that the mere fact that the claimant's money is used to discharge someone else's debt does not entitle him to be subrogated to the creditor whose debt is paid. There must be "something more ": Paul v Speirway [1976] Ch. 220 at p. 230 per Oliver J; and see Orakpo v Manson Investments Ltd . where Lord Diplock said at p. 105::
"The mere fact that money lent has been expended upon discharging a secured liability of the borrower does not give rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose: Wylie v Carlyon [1922] 1 Ch. 51."
[39]From this the Appellants derive the proposition that in order to be subrogated to the creditor's security the claimant must prove(i) that the claimant intended that his money should be used to discharge the security in question (that being the "something more" required by Oliver J.) and(ii) that he intended to obtain the benefit of the security by subrogation. I cannot accept that formulation as a rule of general application regardless of the circumstances in which the remedy of subrogation is sought. The cases relied on were all cases where the claimant intended to make an unsecured loan to a borrower who used the money to discharge a secured debt. In such a case the claimant is not entitled to be subrogated to the creditor's security since this would put him in a better position than he had bargained for. Oliver J. was not prepared to say more than that:
"It is always dangerous to try to lay down general principles unnecessarily, but it does seem to me to be safe to say this: that where on all the facts the court is satisfied that the true nature of the transaction between the payer of the money and the person at whose instigation it is paid is simply the creation of an unsecured loan, this in itself will be sufficient to dispose of any question of subrogation. That really, as it seems to me, is to say no more than that the question of subrogation or no subrogation cannot be divorced from a review of the rights proved or presumed to be intended to be created between the payer of the money and the person requiring its payment."
[40]In that passage Oliver J was plainly limiting his observations to a claim to be subrogated to the creditor's security. The mere fact that the payer of the money intended to make an unsecured loan will not preclude his claim to be subrogated to the personal rights of the creditor whose debt is discharged if the contractual liability of the original borrower proves to be unenforceable: see, for example, Re Wrexham, Mold and Connah's Quay Railway Co . [1899] 1 Ch 440 (where the borrowing was ultra vires ); Liggett (Liverpool ) Ltd. v Barclays Bank Ltd . [1928] 1 KB 48 (where the borrowing was unauthorised).[42]In Orakpo v Manson Investments Ltd . Lord Diplock pointed out (at p. 104) that the remedy of subrogation was available in a whole variety of widely different circumstances, and that this made "particularly perilous any attempt to rely upon analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances." The converse is equally true. It is perilous to extrapolate from one set of circumstances where the court has required a particular precondition to be satisfied before the remedy of subrogation can be granted a general rule which makes that requirement a precondition which must be satisfied in other and different circumstances. In the present case there was no relevant transaction between Abbey National ("the payer of the money") and Mr. Bajwa ("the person at whose instigation it was paid"). This does not mean that the test laid down by Oliver J in Paul v Speirway has not been satisfied; it means that the test is not applicable. In Butler v Rice [1910] 2 Ch 277 the fact that the debtor had not requested the claimant to make the payment and did not know of the transaction was held to be immaterial. This is not to say that intention is necessarily irrelevant in a case of the present kind; it is to say only that where the payment was made by a third party and the claimant had no intention to make any payment to or for the benefit of the recipient the relevant intention must be that of the third party.[44]In cases such as Butler v Rice and Ghana Commercial Bank v Chandiram [1960] AC 732 , where the claimant paid the creditor direct and intended to discharge his security, the court took the claimant's intention to have been to keep the original security alive for his own benefit save in so far as it was replaced by an effective security in favour of himself. In the present case the Abbey National did not intend to discharge the Halifax's charge in the events which happened, that is to say in the event that completion did not proceed. But it did not intend its money to be used at all in that event. If Butler v Rice and similar cases are relied upon to support the proposition that there can be no subrogation unless the claimant intended to keep the original security alive for its own benefit save insofar as it was replaced by a new and effective security, with the result that the remedy is not available where the claimant had no direct dealings with the creditor and did not intend his money to be used at all, then I respectfully dissent from that proposition. I prefer the view of Slade LJ in Re T.H. Knitwear (Wholesale) Ltd . that in some situations the doctrine of subrogation is capable of applying even though it is impossible to infer a mutual intention to this effect on the part of the creditor and the person claiming to be subrogated to the creditor's security. In the present case the payment was made by Hill Lawson, and it is their intention which matters. As fiduciaries, they could not be heard to say that they had paid out their principal's money otherwise than for the benefit of their principal. Accordingly, their intention must be taken to have been to keep the Halifax's charge alive for the benefit of the Abbey National pending completion. In my judgment this is sufficient to bring the doctrine of subrogation into play.[45]The application of the doctrine in the present case does not create the problem which confronted Oliver J. in Paul v Speirway . The Abbey National did not intend to be an unsecured creditor of anyone. It intended to retain the beneficial interest in its money unless and until that interest was replaced by a first legal mortgage on the property. 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. The Abbey National's beneficial interest in the money can no longer be restored to it. If it is subrogated to the Halifax's charge its position will not be improved nor will Mr. Bajwa's position be adversely affected. Both parties will be restored as nearly as may be to the positions which they were respectively intended to occupy. The Appellants place much reliance on a passage in Re Diplock at pp. 549-550 where the court was dealing with the claim against the Leaf Homoeopathic Hospital. The Hospital received a grant for the specific purpose of enabling it to pay off a secured bank loan. The passage in question is as follows:
"Here, too, we think that the effect of the payment to the bank was to extinguish the debt and the charge held by the bank ceased to exist. The case cannot, we think, be regarded as one of subrogation, and if the appellants were entitled to a charge it would have to be a new charge created by the court. The position in this respect does not appear to us to be affected by the fact that the payment off of this debt was one of the objects for which the grant was made. The effect of the payment off was that the charity, which had previously held only an equity of redemption, became the owners of unincumbered property. That unincumbered property derived from a combination of two things, the equity of redemption contributed by the charity and the effect of the Diplock money in getting rid of the incumbrance. If equity is now to create a charge (and we say 'create' because there is no survival of the original charge) in favour of the judicial trustee, it will be placing him in a position to insist upon a sale of what was contributed by the charity. The case, as it appears to us, is in effect analogous to the cases where Diplock money is expended on improvements on charity land. The money was in this case used to remove a blot on the title; to give the judicial trustee a charge in respect of the money so used would, we think, be equally unjust to the charity who, as the result of such a charge, would have to submit to a sale of the interest in the property which it brought in. We may point out that if the relief claimed were to be accepted as a correct application of the equitable principle, insoluble problems might arise in a case where in the meanwhile fresh charge on the property had been created or money had been expended upon it."
[46]The passage is not without its difficulties, and is in need of reappraisal in the light of the significant developments in the law of restitution which have taken place in the last 50 years. The second sentence is puzzling. The discharge of the creditor's security at law is certainly not a bar to subrogation in equity; it is rather a precondition. But the court was probably doing no more than equate the remedy to the creation of a new charge for the purpose of considering whether this was justified.[47]It is also unclear what conclusion was thought to follow from the observation that the unincumbered property derived from two sources, the equity of redemption contributed by the charity and the money belonging to the next of kin which was used to redeem the mortgage. If the money had been used to buy the property without any contribution from the charity, the next of kin would have sought a declaration that they were solely and beneficially entitled to the property under a constructive trust. Their claim to be subrogated to the security which had been discharged with their money reflected the respective contributions which they and the charity had made and did not encroach upon the charity's equity of redemption at all.[48]Nor is it clear to me why insoluble problems would arise in a case where there had been fresh charges created on the property 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.[49]Taken as a whole, however, the passage cited is an explanation of the reasons why,in the particular circumstances of that case, it was considered unjust to grant the remedy of subrogation. The Hospital had changed its position to its detriment. It had in all innocence used the money to redeem a mortgage held by its bank which, no doubt, was willing to allow its advance to remain outstanding indefinitely so long as it was well secured and the interest was paid punctually. The next of kin were seeking to be subrogated to the bank's security in order to enforce it and enable a proper distribution of the estate to be made. This would have been unjust to the Hospital. It may be doubted whether, in its anxiety to avoid injustice to the Hospital, the court may not have done an even greater injustice to the next of kin, who were denied even the interest on their money. Justice did not require the withholding of any remedy, but only that the charge by subrogation should not be enforceable until the Hospital had had a reasonable opportunity to obtain a fresh advance on suitable terms from a willing lender, perhaps from the bank which had held the original security.[50]Today considerations of this kind would be regarded as relevant to a change of position defence rather than as going to liability. They do not call for further consideration in the present case. ADOPTION.[51]The Appellant's submissions on adoption and ratification are misconceived. The short answer to them is that the right to follow an asset, whether at common law or in equity, does not depend on adoption or ratification. In the leading case of Taylor v Plumer (1815), 3 M. & S. 562 Lord Ellenborough CJ pointed out that, had the successful party's case depended on ratification, it must fail; in United Australia Ltd. v Barclay's Bank Ltd . [1941] AC 1 at pp. 27-29 Lord Atkin exposed the doctrine as a fiction; and in Karpnale Ltd v Lipkin Gorman , after pointing out that tracing or following property into its product involves a decision by the original owner to assert his title to the product in place of his original property, Lord Goff at p. 573 said that this was sometimes referred to as ratification, but that he himself would not so describe it. In Agip (Africa) Ltd. v Jackson [1990] Ch. 265 the money was paid away by the bank in reliance on a forged payment order. It was argued that a forgery is a nullity and that the plaintiffs could not ratify it. It was pointed out that the plaintiffs did not rely on the forgery but on the bank's want of authority. They did not seek to ratify the payment or treat it as made with their authority; on the contrary, they pleaded that it was made without their authority and sought to recover it on that very ground.[52]In my view Counsel for the Abbey National was correct in analysing the doctrine in play as one of election between remedies. The beneficiary who complains that his trustee has committed a breach of trust by using trust money to acquire an asset for himself may either reject the asset and insist that the trustee replace the money, or assert his title to the asset. In the latter case the breach of trust of which he complains is the trustee's retention of the asset for his own benefit. The fact that he does not also complain of the acquisition of the asset but seeks to take advantage of it does not mean that he adopts or ratifies it - he will almost certainly plead that it was a breach of trust - it means only that he does not seek a remedy in respect of it. There is no justification for the proposition that the Abbey National's right to be subrogated to the Halifax's charge did not arise until the Abbey National elected to seek that remedy.[53]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 unincumbered freehold interest in the property; but he never did, even for an instant, in equity. THE ABBEY NATIONAL'S ENTITLEMENT[54]Finally, the Appellants' submission that the interests of the Appellants and the Abbey National in the funds in court ought to be in the proportions which 2,595 bears to 137,405 is in my view also erroneous. Had the sale gone through, then the purchasers would have acquired the beneficial interest in the property subject to the unpaid vendor's lien of Mr. Bajwa to secure the payment of the balance of the purchase price of £140,000. The Abbey National would have been subrogated to that lien to the extent of £137,405, and Mr. Bajwa would have retained his lien to the extent of the balance. They would have been entitled to the funds in court in those proportions up to £140,000, and the purchasers would have been entitled to any balance.[55]In the events which have happened, however, the sale fell through; the sum of £140,000 which represented the balance of the purchase price payable on completion is no longer payable and the unpaid vendor's lien to secure its payment is subsumed in Mr. Bajwa's beneficial interest in the property. The relevant amounts are the £137,405 which the Abbey National paid towards the discharge of the Halifax's charge and the two sums of £2,595 and £1,342.41 which Mr. Bajwa himself paid to the Halifax in order to redeem the charge. But equity does not permit the debtor himself to obtain priority to subsequent incumbrancers by paying off his mortgage and then keeping it alive against them; still less does it permit the debtor to gain parity with his own mortgagee by paying off part of the mortgage and then keeping it alive against him. In favour of the Halifax and the Abbey National, Mr. Bajwa's payments discharged the Halifax's charge in equity as well as at law. They enured for the benefit of his equity of redemption and rank behind the subrogated charge of the Abbey National as they ranked behind the Halifax's charge. CONCLUSION[56]For these reasons, which are substantially the same as those of the deputy judge, I would dismiss the appeal.

LORD JUSTICE WAITE: I agree.

LORD JUSTICE STUART-SMITH: I also agree. (

Order

Appeal dismissed with costs ) LORD JUSTICE MILLETT: This is an appeal by three of the defendants to counterclaim from a judgment of Mr. E.G.Nugee Q.C. sitting as a deputy High Court judge of the Chancery Division and given on 27th. May 1994 at the trial of the counterclaim in the action. The judge declared that the plaintiff by counterclaim Abbey National plc. ("the Abbey National") was entitled to a charge on the property 20 Windsor Road, Kew, Richmond, Surrey ("the property") by way of subrogation to the rights of the Halifax Building Society ("the Halifax") and in priority to any interest of the Appellants. Order: Appeal dismissed with costs )

Cited in 45 later judgments

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