Bank of Cyprus UK Limited v Menelaou [2015] UKSC 66

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

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

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

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

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

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

“The principle upon which C&G rely has been nowhere better stated than by Walton J in Burston Finance Ltd v Speirway Ltd (in liquidation) [1974] 1 WLR 1648 at p 1652B-C: [W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor. It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided by him.”

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

“It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say the charge is ‘kept alive’ for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him.”

“As Millett LJ pointed out, at p 339 [of Boscawen], the Abbey National expected to obtain a charge from the purchaser as legal owner after completion of the sale, and, in the event which happened of there being no such completion, did not intend its money to be used at all. This meant that: ‘The factual context in which the claim to subrogation arises is a novel one which does not appear to have arisen before but the justice of its claim cannot be denied.’ These cases seem to me to show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy. An example of a case which failed on the third ground is Orakpo v Manson Investments Ltd [1978] AC 95, in which it was considered that restitution would be contrary to the terms and policy of the Moneylenders Acts.”

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

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

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

“[T]he acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them. … The reality is that the purchaser of land who relies upon a building society or bank loan for the completion of his purchase never in fact acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise.”

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

“the society, having paid off the vendor, have a right to the remedies of the vendor – have a right, that is, to enforce the vendor’s lien. It is true that the society were not the vendors, but, having paid off the vendor, the society, as against the purchaser, stand in the place of the vendor.”

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

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

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

“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.”

“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, Page 40 in the event that completion did not proceed. But it did not intend its money to be used at all in that event.”

“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.”

“Both personal and proprietary claims are governed by the rule that the defendant’s enrichment must have been gained at the claimant’s expense, but the tests used to determine whether this requirement has been satisfied vary with the type of claim. Where the claimant seeks a personal remedy, he must show that there was a transfer of value between the parties, and this is tested by asking whether an event took place that caused the claimant to become worse off and the defendant to become better off. This is discussed in Chapter 6. In contrast, where the claimant seeks a proprietary remedy, it is not enough for him to show that there was a transfer of value between the parties: he must also show either that he previously owned the property in which he now claims an ownership or security interest, or else that the defendant acquired this property in exchange for property that was previously owned by the claimant, or else that this property was formerly the subject matter of an interest that was discharged with property that was previously owned by the claimant. This test is more stringent than the causal test used in the context of personal claims, and it serves as a control mechanism to prevent proprietary restitutionary remedies from becoming too freely available.” (para 7-02, emphasis added) The footnote refers to a list of cases cited later in the chapter (para 7-39, fn 87) including “in the subrogation context”

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

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