Menelaou v Bank of Cyprus UK Ltd

Michaelmas Term

[2015] UKSC 66

On appeal from: [2013] EWCA Civ 814 and 1960

Bank of Cyprus UK Limited (Respondent) v Menelaou (Appellant)

before

Lord Neuberger, President

JUDGMENT GIVEN ON

4 November 2015

Heard on 17 and 18 June 2015

Appellant	Respondent
Mark Warwick QC	Philip Rainey QC
Joseph England	Timothy Polli

1. This appeal is concerned with the law of unjust enrichment and subrogation. The original parties to the action were Melissa Menelaou as claimant (“Melissa”), the Bank of Cyprus UK Ltd as defendant (“the Bank”) and a firm of solicitors,

Boulter & Co, as third party (“Boulters”). The trial of the action came before David

Donaldson QC, sitting as an additional judge of the Chancery Division (“the judge”):

[2012] EWHC 1991 (Ch). The trial began on 16 May 2012 and lasted three days.

By the end of the trial only the Bank’s counterclaim against Melissa was live. On

19 July 2012 the judge handed down a judgment dismissing the counterclaim. The Bank appealed to the Court of Appeal (Moses, Tomlinson and Floyd LJJ), which allowed the appeal on 4 July 2013: [2013] EWCA Civ 1960, [2014] 1 WLR 854. Melissa appeals to this court.

The background facts

2. The facts can largely be taken from the agreed statement of facts and issues. Melissa, who was born on 27 January 1990, is the second of the four children of Mr

Parris and Mrs Donna Menelaou (“the Menelaou parents”). The other children were

Danielle, born on 9 August 1986, Max, born on 24 June 1991 and Ella-Mae, born on 6 February 2002. In mid-2008, the Menelaou parents and their three youngest

children lived at Rush Green Hall, Great Amwell, Hertfordshire (“Rush Green Hall”), which was a property owned by the Menelaou parents jointly. Melissa was

18 and a student at a nearby college. Rush Green Hall was subject to two charges in favour of the Bank. The Menelaou parents directly owed the Bank about £2.2m, and had personally guaranteed loans made by the Bank to their companies.

3. The Menelaou parents decided to sell Rush Green Hall, to apply some of the proceeds to buy a smaller property as the family home, to provide funds for Danielle to pay the deposit on a house which she wanted to buy with her future husband and to free up capital to invest in a further development project. The Menelaou parents instructed Boulters to act for them in the conveyancing transaction. The senior

partner of Boulters was Mr Menelaou’s sister. They used Mr Paul Cacciatore, who

was employed by Boulters as a legal executive and who was also one of Mr

Menelaou’s brothers-in-law. On 15 July 2008 contracts were exchanged for the sale

of Rush Green Hall for the price of £1.9m. The contractual purchasers of Rush Green Hall paid a deposit of £190,000 to Boulters for the account of the Menelaou parents.

4. About a week later, Mr Menelaou informed Mr Cacciatore that he had found a new property to serve as the family home at 2 Great Oak Court, Hunsdon,

Hertfordshire (“Great Oak Court”). On 24 July 2008 contracts were exchanged for

the purchase of Great Oak Court for the price of £875,000. On Mr Menelaou’s

instructions, the purchaser of Great Oak Court was to be Melissa. The deposit payable was £87,500. This deposit was paid from the £190,000 held by Boulters as the deposit for the sale of Rush Green Hall. Mr Menelaou told Melissa that Great Oak Court was being bought in her name as a gift to her, on the basis that she would hold the property for the benefit of herself and her two younger siblings. She agreed to the arrangement.

5. The Bank was not approached about the proposed arrangement prior to the exchanges of contracts. The Bank sanctioned the proposed arrangements with some reluctance given the overall indebtedness of the Menelaou parents and their companies. On 5 September 2008 Boulters wrote to the Bank saying that it understood that the Bank was to take a charge over Great Oak Court from Melissa, which Boulters understood would be a third party charge. Completion was to be on 12 September. On 9 September 2008 the Bank wrote to Boulters in these terms:

“Thank you for your letter dated 5 September 2008. We

confirm that upon receipt of £750,000 we will release our charges over [Rush Green Hall] subject to a third party legal charge over [Great Oak Court] which is registered in the name

of Melissa Menelaou.”

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

Court.

6. The Bank also instructed Boulters to act as its solicitors to deal with the discharge of its charges over Rush Green Hall and to obtain a charge in favour of the Bank over Great Oak Court. On 10 September 2008 Boulters replied to the

Bank’s letter of 9 September enclosing a certificate of title undertaking to obtain an

executed mortgage in Melissa’s name over Great Oak Court and to confirm that they had complied or would comply with the Bank’s instructions. On 11 September 2008

Boulters sent the Bank a form of legal charge over Great Oak Court, purportedly

signed by Melissa and identifying her as “the customer”. It was (and is) Melissa’s

case, supported by her brother and by handwriting evidence, that the signature on the charge was not hers. Indeed, she was unaware of the existence of the charge until 2010. On the same day, 11 September 2008, the Bank telephoned Boulters and pointed out that the identity of the customer in the charge should be the Menelaou parents and not Melissa. Boulters did not contact Melissa. Instead, an employee of Boulters simply changed the name of the customer in manuscript on the charge from that of Melissa to those of the Menelaou parents.

7. On 12 September 2008 completion of the sale of Rush Green Hall by the Menelaou parents and the purchase of Great Oak Court by Melissa both took place. As part of the completion process, Boulters received the balance of the price of Rush Green Hall from its purchasers. They remitted £750,000 to the Bank and sent a further £785,000 to the vendors of Great Oak Court to meet the remaining 90% of the purchase price for Great Oak Court. Boulters also sent the Bank two deeds to be sealed by the Bank authorising the cancellation of the entries in respect of the two registered charges over Rush Green Hall. The discharge of mortgage forms were not returned by the Bank until 13 October 2008. After a considerable delay, Melissa was registered as the proprietor of Great Oak Court. The Bank was also registered as the purported chargee. Following completion, the Menelaou parents, Melissa, and her two younger siblings moved into Great Oak Court and occupied it as their family home.

8. In the spring of 2010 Melissa was told by her parents that their business was experiencing difficulties. It was proposed that Great Oak Court would be sold and a smaller property purchased. It was at this point that Melissa discovered the existence

of the charge dated 12 September 2008 over Great Oak Court. Melissa’s

conveyancing solicitors then corresponded with Boulters. The Bank was made aware of the challenge to the validity of its charge and, through its solicitors, intimated a claim against Boulters. Many allegations of breach of duty (fiduciary and otherwise) were made by the Bank against Boulters.

The procedural history

9. On 2 November 2010 Melissa issued a Part 7 claim in the Chancery Division seeking orders that all references to the charge, as appearing in the Charges Register for Great Oak Court, be removed. The main basis for this claim was that, not having

been signed by Melissa, the Bank’s charge was void. The Bank defended the claim

but also counterclaimed for a declaration that the Bank was entitled to be subrogated

to an unpaid vendor’s lien over Great Oak Court.

10. On 14 January 2011 the Bank issued a Part 20 claim against Boulters for damages for breach of trust and/or fiduciary duty, and an indemnity against all costs and expenses that it might incur in the main claim. After the exchange of witness statements, it became clear to Melissa and her advisers that Boulters had altered the

charge without consulting her. By consent of the parties, pursuant to Melissa’s

application dated 13 April 2012, the particulars of claim were amended to rely upon

this alteration as a further ground for rendering the charge void. The Bank’s response

was to continue to challenge the invalidity of the charge.

11. As stated above, the trial of the case began on 16 May 2012. At the commencement of the trial all issues were live. Melissa was called to give evidence and was duly cross-examined. Thereafter, following an interchange between counsel and the judge, Boulters conceded in the Part 20 claim that the charge was void and that Melissa was entitled to the relief sought in her claim and, as it is put in the statement of facts and issues, reflexively, the Bank conceded the same in the main

claim. The issue of liability in the Bank’s claims against Boulters was then

compromised and a written agreement was entered into between the Bank and Boulters whereby Boulters accepted that it was in breach of its duties in both contract and tort and was liable to indemnify the Bank for its losses as a result of an invalid charge being entered against Great Oak Court. As a result of that agreement,

the only remaining live issue for determination at the trial was the Bank’s

counterclaim against Melissa.

12. Judgment was reserved and (as stated above) was handed down on 19 July 2012 dismissing the counterclaim. No formal order was made on that day but a further hearing took place on 23 October 2012, when the judge made an order that

the Bank’s charge be removed from the Register (reflecting the Bank’s and Boulters’

concession that the Bank’s charge was void) and formally dismissed the Bank’s

counterclaim with costs. The judge granted the Bank permission to appeal against

the dismissal of its counterclaim.

The judgment

13. The judge made these findings in the course of his judgment. Whether by operation of law or as a result of any agreement or understanding between the parties, there was nothing to qualify the straightforward position that, in receiving the sale proceeds of Rush Green Hall, Boulters was acting as agent for Mr and Mrs Menelaou and held all the moneys for them alone (para 17). As regards the totality of the purchase price of Great Oak Court, it was not discharged by the use of moneys belonging to the Bank (para 19).

14. The judge approached the matter on two bases, which he described as the narrow or traditional approach to the doctrine of subrogation to the unpaid vendor’s

lien and the wider approach based on the law of unjust enrichment (para 14). He held that the fact that the moneys provided for the purchase were not paid by, and did not belong to, the Bank was fatal to the counterclaim on the narrow or traditional approach (para 19). As to the wider approach, he concluded that there was both benefit to Melissa, namely the gratuitous acquisition of Great Oak Court (albeit to be held on trust for her two younger siblings), and detriment to the Bank, namely

the release of its two charges (para 22). He held that “The existence of both detriment

and benefit does not however establish the further element that the latter should have

been at the expense of the Bank (para 22 - original emphasis)”.

15.       He added, also in para 22:

“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.”

16. The judge concluded that, although this left Melissa without any charge over her property, it did not leave the Bank without all recourse. This was because the

Bank had an indemnity for its losses from Boulters (in reality with that firm’s

indemnity insurers), which indemnity was agreed during the course of the trial (para

11).

The Court of Appeal

17.       In a judgment handed down on 2 July 2013 the Court of Appeal unanimously

allowed the Bank’s appeal. The question in this appeal is whether it was correct to

do so. I will consider its reasoning in the course of my discussion of the issues argued before us. On 4 July 2003 the Court of Appeal handed down a further judgment dealing with a number of consequential issues. It declared that the Bank was entitled

to be subrogated to an equitable charge by way of an unpaid vendor’s lien over Great Oak Court for £875,000 plus interest. The result of the Court of Appeal’s decision is that Melissa’s property, Great Oak Court, has been subjected to an equitable charge

for £875,000 plus interest. The Bank’s application to a Master in the Chancery

Division seeking to enforce the equitable charge has been stayed by agreement pending the outcome of this appeal.

Discussion

18. In the course of the argument, there was much discussion of the relevant legal principles. However, in my opinion it is not necessary to resolve all the possible issues which were discussed. It appears to me that this is a case of unjust enrichment. In Benedetti v Sawiris [2013] UKSC 50, [2014] AC 938 the Supreme Court recognised that it is now well established that the court must ask itself four questions when faced with a claim for unjust enrichment. They are these: (1) Has the defendant

been enriched? (2) Was the enrichment at the claimant’s expense? (3) Was the

enrichment unjust? (4) Are there any defences available to the defendant? See, for example, Benedetti at para 10, following Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 per Lord Steyn at 227 (and per Lord Hoffmann to much the same effect at 234) and Investment Trust Companies v Revenue and Customs Comrs [2012] EWCH 458 (Ch), [2012] STC 1150 per Henderson J at para 38 (ITC).

19. In that paragraph Henderson J noted that Professor Andrew Burrows QC said in The Law of Restitution, 3rd ed (2011) p 27 that, if the first three questions are answered affirmatively and the fourth negatively, the claimant will be entitled to

restitution and that those four elements “constitute the fundamental conceptual

structure of an unjust enrichment claim”. In para 39, Henderson J accepted that

approach, although he said that the four questions were no more than broad headings for ease of exposition, that they did not have statutory force and that there may be a considerable degree of overlap between the first three questions. I agree.

20. In the instant case, there is no doubt that Melissa was enriched when she became the owner of Great Oak Court, which she was given by her parents, albeit on the basis that she would hold it for the benefit of herself and her two younger siblings. As it is correctly put on behalf of the Bank, her obligation to pay the purchase price of Great Oak Court to the vendor was discharged. The essential question is whether she was enriched at the expense of the Bank, since, if she was, there cannot in my opinion have been any doubt that the enrichment was unjust.

21. I would accept the submission made on behalf of the Bank that the unjust factor or ground for restitution is usually identified in subrogation cases as being, either (1) that the lender was acting pursuant to the mistaken assumption that it would obtain security which it failed to obtain: see eg Banque Financière per Lord Hoffmann at p 234H, or (2) failure of consideration: see the fourth and fifth points

made by Neuberger LJ in Cheltenham & Gloucester plc v Appleyard (“C&G”)

[2004] EWCA Civ 291, paras 35 and 36; [2004] 13 EG 127 (CS).

22.       On the facts here the Bank expected to have a first legal charge over Great

Oak Court securing the debts of the appellant’s parents and their companies but, as

events turned out, it did not have that security interest. The critical question is
therefore whether Melissa was enriched at the expense of the Bank.
Was Melissa enriched at the expense of the Bank?

23. According to Goff & Jones on The Law of Unjust Enrichment, 8th ed (2011), para 6-01, the requirement that the unjust enrichment of the defendant must have

been at the expense of the claimant “reflects the principle that the law of unjust

enrichment is not concerned with the disgorgement of gains made by defendants, nor with the compensation of losses sustained by claimants, but with the reversal of

transfers of value between claimants and defendants”. I agree.

24. In my opinion the answer to the question whether Melissa was unjustly enriched at the expense of the Bank is plainly yes. The Bank was central to the scheme from start to finish. It had two charges on Rush Green Hall which secured indebtedness of about £2.2m. It agreed to release £785,000 for the purchase of Great Oak Court in return for a charge on Great Oak Court. It was thus thanks to the Bank that Melissa became owner of Great Oak Court, but only subject to the charge. Unfortunately the charge was void for the reasons set out above. In the result Melissa became the owner of Great Oak Court unencumbered by the charge. She was therefore enriched at the expense of the Bank because the value of the property to Melissa was considerably greater than it would have been but for the avoidance of the charge and the Bank was left without the security which was central to the whole arrangement.

25. As I see it, the two arrangements, namely the sale of Rush Green Hall and the purchase of Great Oak Court, were not separate but part of one scheme, which involved the Bank throughout. I respectfully disagree with the conclusions of the judge summarised in paras 13 to 16 above.

26. It is not, so far as I am aware, in dispute that, if the Bank had received all the proceeds of sale of Rush Green Hall and had then re-advanced the moneys required for the purchase of Great Oak Court, it would be entitled to succeed whether or not the re-advance was to the Menelaou parents or to Melissa. It is submitted on behalf of the Bank that, if that is so, it would be pure formalism for subrogation to be

precluded simply because the moneys remained in Boulters’ client account (and

were not paid to the respondent) between the sale of Rush Green Hall and the purchase of Great Oak Court; just as Lord Steyn commented in Banque Financière

at p 227C that it would be “pure formalism” for the interposition of Mr Herzig between the loan by BFC of its advance and Parc’s obligation to repay to be treated

as altering the substance of the transaction and the result of the claim. On the facts

of the instant case the funds remained in Boulters’ client account and were not paid

to the Bank because of a pre-acquisition agreement between it and the Menelaou parents. By this agreement it was agreed that money to which the Bank was otherwise absolutely entitled under its charges could remain advanced to the Menelaou parents for the purpose of purchasing Great Oak Court and was to be released only on condition that the Bank was given a specific charge over Great Oak Court.

27. I would accept those submissions, which support the conclusion in para 24 above. I would reject the submission that there must be a direct payment by the Bank to Melissa. Such a requirement, while sufficient, is not in my view necessary because it would be too rigid. As I see it, whether a particular enrichment is at the expense of the claimant depends upon the facts of the case. The question in each case is whether there is a sufficient causal connection, in the sense of a sufficient nexus or link, between the loss to the Bank and the benefit received by the defendant, here Melissa.

28. There has been much debate both among academics and judges as to the correct test. The contrast was noted by Henderson J at first instance in ITC. He discussed the problem in considerable detail between paras 47 and 73, especially between paras 52 and 73. The contrast is between a rule that requires there to be a

direct causal link between the claimant’s payment and the defendant’s enrichment,

subject to some exceptions (paras 52-59) and a broader more flexible approach (paras 60-69). He expressed his conclusions on the principles as follows in para 67:

“67. I must now draw the threads together, and state my conclusions on this difficult question. In the first place, I agree with Mr Rabinowitz that there can be no room for a bright line requirement which would automatically rule out all restitutionary claims against indirect recipients. Indeed, Mr Swift accepted as much in his closing submissions. In my judgment the infinite variety of possible factual circumstances is such that an absolute rule of this nature would be unsustainable. Secondly, however, the limited guidance to be found in the English authorities, and above all the clear statements by all three members of the Court of Appeal in Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733, [1997] QB 380, suggest to me that it is preferable to think in terms of a general requirement of direct enrichment, to which there are limited exceptions, rather than to adopt

Professor Birks’ view that the rule and the exceptions should in

effect swap places (see ‘At the expense of the claimant’: direct

and indirect enrichment in English law in Unjustified Enrichment: Key Issues in Comparative Perspective, edited by David Johnston and Reinhard Zimmermann, Cambridge (2002), p 494). In my judgment the obiter dicta of May LJ in Filby and the line of subrogation cases relied on by Professor Birks, provide too flimsy a foundation for such a reformulation, whatever its theoretical attractions may be, quite apart from the difficulty in framing the general rule in acceptable terms if it is

not confined to direct recipients.”

The reference to Filby is to Filby v Mortgage Express (No 2) Ltd [2004] EWCA Civ
759, [2004] All ER (D) 198 (Jun).

29.       Henderson J continued as follows in para 68.

“The real question, therefore, is whether claims of the present

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

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

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

(c) the need to avoid any conflict with contracts between

the parties, and in particular to prevent ‘leapfrogging’

over an immediate contractual counterparty in a way
which would undermine the contract; and

(d) the need to confine the remedy to disgorgement of undue enrichment, and not to allow it to encroach into

the territory of compensation or damages.”

30. It is submitted on behalf of the Bank that on four occasions since the decision in ITC the Court of Appeal has endorsed the considerations identified by Henderson

J. They variously described his approach thus: as “relevant considerations” in TFL

Management Services v Lloyd’s TSB Bank plc [2014] 1 WLR 2006 (“TFL”) per

Floyd LJ, para 57, as “of assistance” in Relfo Ltd v Varsani (No 2) [2014] EWCA Civ 360, [2015] 1 BCLC 14 per Arden LJ, para 96; and as “relevant considerations

… skilfully distilled” in ITC on appeal, [2015] EWCA Civ 82 per Patten LJ (giving

the judgment of the court), paras 67 and 69.

31. Further, in his judgment in this case Floyd LJ described Henderson J’s approach as “thoughtful and valuable” at para 39 and in TFL he said this about

Henderson J’s para 68:

“57. I agree with Henderson J that these are relevant

considerations in deciding the question of whether an indirect

benefit was conferred at the claimant’s expense. But the

various factors to which he refers are not, and were not I think intended to be, rigid principles. Far less can it be said that if one or more of the factors can be said to be adverse to the claim,

the claim is necessarily doomed to failure.”

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

“We consider that the correlative of taking a broad approach to

the first consideration by taking account of ‘economic’ or

‘commercial’ reality is that it is important not to take a narrow

view of what, under the third criterion, would conflict with contracts between the parties or with a relevant third party in a

way which would undermine the contract.”

That seems to me to be a sensible approach.

32. There is scope for legitimate debate as to whether the correct approach is to adopt a narrow test with exceptions or a broader approach. However, it appears to me that, whichever test is adopted the result is likely to be the same. In any event it is not to my mind necessary to consider the issue further in this case because, as the Court of Appeal made clear, the position is clear on the facts of the instant case,

which is concerned only with the first of Henderson J’s relevant considerations. In

a case in which more such considerations were relevant, it would be necessary to have regard to a number of different factors, probably with no presumption one way or the other where the starting point is.

33. In short, I agree with the approach of the Court of Appeal. In particular, the position is neatly described by Tomlinson LJ as follows in paras 57 and 58:

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

58. I am glad to be able to reach this conclusion. It gives effect to the reality of the transaction, whereas the conclusion of the judge, in my respectful view, amounts to that pure

formalism which Lord Steyn has in this context deprecated …”

34. That was of course a reference to the speech of Lord Steyn in Banque Financière referred to in para 18 above. Both Floyd and Moses LJJ expressed much the same conclusions at paras 42 and 48 and 61-62 respectively. I am unable to accept that there is any significance in the point which attracted the judge (para 22) that the benefit to Melissa was complete on 12 September, whereas the detriment to the Bank occurred over a month later when its charges over Rush Green Hall were

released. As Moses LJ put it at para 62, everyone knew, as a result of the Bank’s agreement on 9 September 2008, that the Bank’s security in Rush Green Hall would be

released and, provided that the terms of that agreement were satisfied, the Bank was
bound to release its charge.

35. For all these reasons I agree with the Court of Appeal that Melissa was

enriched at the expense of the Bank. I have already expressed my view that she was
unjustly so enriched.

Defences

36. The fourth question, namely whether there are any defences available to the defendant, must in my opinion be answered in the negative. On the assumption that the first three questions are answered in the affirmative, I do not understand Melissa to be relying upon any other defence. It is not suggested, for example, that she had a change of position defence. Nor was she a bona fide purchaser for value without notice. She was a mere donee and, as such can be in no better position than her parents as donors. As indicated at the end of para 31 above, I recognise that in another case there may well be defences or at least countervailing considerations, as indicated, for example, in considerations (b), (c) and (d) identified by Henderson J.

Remedies

37. The next question is what remedies are available to the Bank. The answer is that the Bank is subrogated to the unpaid seller’s lien. Subrogation (sometimes

known in this context as restitutionary subrogation) is available as a remedy in order

to reverse what would otherwise be Melissa’s unjust enrichment. It is important to

recognise that a claim in unjust enrichment is different in principle from a claim to vindicate property rights; see eg Foskett v McKeown [2001] 1 AC 102 per Lord Browne-Wilkinson at p 108F, Lord Millett at p 129E-F and Lord Hoffmann at p 115F, where he agreed with Lord Millett.

38. Foskett was a claim to enforce property rights. Lord Millett expressed the distinction between that case and a case of unjust enrichment at p 129F:

“A plaintiff who brings an action in unjust enrichment must

show that the defendant has been enriched at the plaintiff’s

expense, for he cannot have been unjustly enriched if he has not been enriched at all. But the plaintiff is not concerned to

show that the defendant is in receipt of property belonging

beneficially to the plaintiff or its traceable proceeds. The fact that the beneficial ownership of the property has passed to the defendant provides no defence; indeed, it is usually the very fact which founds the claim. Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it

if he received it with notice of the plaintiff’s interest.”

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

39. In C&G Neuberger LJ (giving the judgment of the Court of Appeal) summarised the principles relevant to different types of subrogation concisely in paras 24-49. Like Floyd LJ at para 44, he set out the principles relevant here at para 25 as follows:

“The principle upon which C&G rely has been nowhere better

stated than by Walton J in Burston Finance Ltd v Speirway Ltd

(in liquidation) [1974] 1 WLR 1648 at p 1652B-C:

[W]here A’s money is used to pay off the claim of B,

who is a secured creditor, A is entitled to be regarded in

equity as having had an assignment to him of B’s rights

as a secured creditor. It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided

by him.”

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

40. He further noted at para 36 that in Banque Financière the lender bargained for what Lord Hoffmann called at p 229C “a negative form of protection in the form of an undertaking”, which he did not get. He added that this did not prevent his claim

to be subrogated to a security, albeit essentially as a personal remedy: see per Lord
Steyn at p 228C-D and Lord Hoffmann at p 229C.

41. The class of subrogation under discussion in this case is known as subrogation to an unpaid vendor’s lien. I agree with Floyd LJ at para 15 that it is not

a concept which it is particularly straightforward to understand. He puts it thus. What the Bank seeks to achieve is to be placed in a position equivalent to that of the vendor of Great Oak Court at the point where the purchase money has not been paid. At that point the vendor would be able to refuse to convey the title to Great Oak Court, unless the purchase money was paid to him. He added that the lien was explained by Millett LJ in Barclays Bank plc v Estates & Commercial Ltd [1977] 1 WLR 415 at pp 419-420, in this way (omitting citations):

“As soon as a binding contract for sale [of land] is entered into,

the vendor has a lien on the property for the purchase money and a right to remain in possession of the property until payment is made. The lien does not arise on completion but on exchange of contracts. It is discharged on completion to the

extent that the purchase money is paid. … Even if the vendor

executes an outright conveyance of the legal estate in favour of the purchaser and delivers the title deeds to him, he still retains an equitable lien on the property to secure the payment of any part of the purchase money which remains unpaid. The lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money.

The lien arises by operation of law and independently of the agreement between the parties. It does not depend in any way

upon the parties’ subjective intentions. It is excluded where its

retention would be inconsistent with the provisions of the contract for sale or with the true nature of the transaction as

disclosed by the documents.”

42. Floyd LJ then set out the passage from the judgment of Walton J in Burston Finance set out by Neuberger LJ in C&G and quoted at para 39 above. I adopt Floyd

LJ’s description of the position at para 17 of his judgment as follows. A third party

who provides some or all of the purchase money for a purchaser, thereby discharging

the obligation to the vendor, can claim the benefit of the unpaid vendor’s lien by

subrogation. This is so even after the lien has been extinguished as between vendor and purchaser. Floyd LJ notes that it is not intuitively clear how, or why, this should

be the case and asks how it is that the unpaid vendor’s lien transferred from the

vendor to the third party. He says with force that it might be thought that once the obligation in question has been extinguished, there is nothing which the vendor could transfer. He further asks by what legal method the transfer takes place, even if there was something to transfer. He notes that there has been no legal assignment and suggests that it was conceptual problems such as these that gave rise to the

notion that the vendor’s lien was “kept alive” for the benefit of the subrogated third

party.

43. Floyd LJ resolves this apparent difficulty by adding that in Banque Financière at p 236 Lord Hoffmann explained that the phrase “keeping the charge alive” was not a literal truth but a metaphor or analogy:

“In a case in which the whole of the secured debt is repaid, the

charge is not kept alive at all. It is discharged and ceases to

exist.”

Lord Hoffmann added at p 236E-F:

“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.”

44. In para 19 Floyd LJ notes that Lord Hoffmann reviewed five authorities, namely Chetwynd v Allen [1899] 1 Ch 353, Butler v Rice [1910] 2 Ch 277, Ghana Commercial Bank v Chandiram [1960] AC 732, Paul v Spierway [1976] Ch 220 and Boscawen v Bajwa [1996] 1 WLR 328. Having done so, Lord Hoffmann noted at p 233 that in Boscawen there was no common intention that the vendor, whose mortgage had been paid off, should grant any security to Abbey National.

45.       Lord Hoffmann then said this at pp 233H-234D:

“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.”

46. That appears to me to be an illuminating passage. Lord Hoffmann stresses what are the same questions as those referred to in para 18 above. Moreover, the reference to Orakpo seems to me to be of some significance. It demonstrates that,

when Lord Hoffmann was referring to “subrogation as a remedy to prevent unjust

enrichment”, he was not referring to subrogation to personal rights alone because

Orakpo was a case concerning subrogation to property rights.

47. The case of Orakpo is also of interest because it shows the broad nature of

the doctrine of unjust enrichment. Three examples suffice. Lord Diplock said at p
104E-F:

“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.”

48.       Lord Salmon said this at p 110:

“The test as to whether the courts will apply the doctrine of

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

be.”

Finally, Lord Edmund-Davies said at p 112:

“Apart from specific agreement and certain well-established

cases, it is conjectural how far the right of subrogation will be granted though in principle there is no reason why it should be confined to the hitherto recognised categories (Goff and Jones,

The Law of Restitution (1966), pp 376-377).”

49. Those statements seem to me to support a flexible approach to the remedies appropriate in a particular case. Indeed, the principles have been extended since the decision in Orakpo because there is now a general doctrine of unjust enrichment in a way that there was not when Lord Diplock drafted his speech. Lord Hoffmann stresses the importance of the questions identified in para 18 above. It appears to me that, on the facts of this case, if, as here, the first three questions are answered in the affirmative and the fourth in the negative, the appropriate equitable remedy is that

the claimant is subrogated to the unpaid vendor’s lien as explained in paras 41 and

42 above. On the facts here the Bank is entitled to a lien on the property, which is in principle an equitable interest which it can enforced by sale. In short, by effectively

reinstating Melissa’s liability under the charge, the remedy of subrogation is

reversing what would otherwise be her unjust enrichment.

50. I would accept the submission made on behalf of the Bank that the analyses in Banque Financière have rationalised the older cases through the prism of unjust enrichment. Banque Financière was not limited to subrogation to personal rights. The remedy the House fashioned was subrogation to a property right but, as the Bank puts it, it was attenuated so as not to grant RTB a greater right than that for which it had bargained. There is no reason why, on the facts of this case, the remedy should not be subrogation as described above, even if the Bank did not retain a property interest in the proceeds of sale of Rush Green Hall. The remedy simply reverses the unjust enrichment which Melissa would otherwise enjoy by ensuring that the Bank not only has a personal claim against her but also has an equitable interest in Great Oak Court, as it would have had if the scheme had gone through in accordance with the agreement of the Bank and the Menelaou parents. Moreover, but for the proposed remedy the Bank would lose the benefit it was to receive from the scheme, namely a charge on Great Oak Court to replace the charges it had on Rush Green Hall.

51. In reaching these conclusions I have read Lord Carnwath’s judgment in draft

with great interest. My own view is that the principles are somewhat broader than
he suggests.

Conclusion

52.       For these reasons I would dismiss the appeal.

53. As I see it, these conclusions make it unnecessary to decide whether the Bank had a security interest in the proceeds of sale that were used to buy Great Oak Court. In so far as the answer to that may depend upon the true ratio of the decision of the Court of Appeal in Buhr v Barclays Bank [2001] EWCA Civ 1223, [2002] BPIR 25 like the Court of Appeal I would prefer to leave that question for determination in a case in which it arises for decision. In so far as the Bank relies upon a Quistclose type trust (Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567), arising in a similar manner to that which arose in Twinsectra v Yardley [2002] 2 AC 164, there seems to me to be much to be said for the conclusions reached by Lord Carnwath. However, in my opinion it is not necessary for the Bank to do so.

Postscript

1. Since writing the above I have read Lord Neuberger’s judgment in draft. I

essentially agree with his conclusions and reasoning. I also agree with his tentative
conclusions and reasoning in paras 103, 104 and 106.

55. The one point upon which there is or may be a difference between us is whether the Bank would have a personal claim in unjust enrichment against Melissa. For my part I see no reason why it should not in principle have such a claim provided that it is dealt with as suggested by Lord Neuberger in para 81. In any event I agree with him that it is not necessary to decide this question in this appeal for reasons he gives in para 82. I would only say that there seems to me to be considerable force in his comments in para 81, namely that the standard response to unjust enrichment is a monetary restitutionary award in order to reverse the unjust enrichment. This must be left for decision on another day.

LORD NEUBERGER:

56. The facts of this case and the findings of the courts below are explained by Lord Clarke in paras 1-17.

57. The question which arises is whether, in the light of those facts, the Bank is entitled to claim a charge over the freehold of Great Oak Court by invoking a right

to be subrogated to the unpaid vendor’s lien over the freehold of Great Oak Court

(“the Lien”). In considering that issue, I shall adopt the nomenclature in Lord

Clarke’s judgment.

1. The Bank’s primary case involves two steps; the first is that it has a claim

based on unjust enrichment against Melissa; the second step is that that claim was

or should be satisfied by subrogating the Bank to the Lien. Melissa’s main argument

against the first step is that she was innocent of any wrong-doing and therefore cannot be said to have been unjustly enriched. As to the second step, her main argument is that subrogation as claimed by the Bank is not, as a matter of principle, available as a remedy for unjust enrichment in the circumstances of this case.

59. I agree with Lord Clarke, and with the Court of Appeal, that, despite Melissa’s arguments to the contrary, each of the two steps in the Bank’s argument is made out. I am also attracted to the view that the Bank’s case on the first step

could be justified on the alternative basis of an orthodox proprietary claim rather than on unjust enrichment, which in turn would render the second step in its case even clearer.

60. Because the appeal raises points of some significance and because the state

of the law appears to be somewhat unclear, I shall explain why I have reached these
conclusions.

Can the Bank establish an unjust enrichment claim against Melissa?

1. The first step in the Bank’s case is that it has a claim against Melissa in unjust

enrichment. A claim in unjust enrichment requires one to address the four questions which Lord Clarke sets out in para 18 above. I agree with what he says in relation to those four questions in this case in paras 19-35 above, and indeed with the analysis of Floyd LJ in the Court of Appeal at [2013] EWCA Civ 1960; [2014] 1 WLR 854, paras 29 to 42. I express the position in my own words as follows.

62. The answer to the first question, namely whether Melissa has been enriched, would appear to be plainly yes, because she received the freehold of Great Oak Court

(“the freehold”) for nothing. However, although it does not affect the outcome in

the present case, there is much to be said for the view that the relevant enrichment for present purposes is that she received the freehold free of any charge, instead of

receiving it subject to a charge to secure her parents’ indebtedness to the Bank (a
“Charge”).

63.       This may be a more accurate way of answering the first question for present

purposes, because the only aspect of Melissa’s enrichment which can be complained

of by anyone arises from the fact that she received the freehold free of the intended Charge. The fact that the freehold was conveyed to her was an uncontroversial benefit, but the fact that it was not subject to a Charge was not just a benefit, but, in the light of the facts surrounding the sale of Rush Green Hall, the purchase of Great

Oak Court and the preparation of the defective Deed of Charge (“the Deed”), it was

accidental and unintended. (The fact that Melissa held the freehold on trust for
herself and her siblings adds nothing for present purposes.)

64. In any event, it might be said to be somewhat artificial to distinguish between acquisition of the freehold and acquisition of the freehold subject to the Charge.

After all, Great Oak Court could not have been acquired without the Bank’s

agreement that some of the proceeds of sale of Rush Green Hall could be used to purchase it, and that agreement was conditional on the grant of the Charge contemporaneously with the purchase. This is reflected by the observations of Lord Oliver in Abbey National Building Society v Cann [1991] 1 AC 56, 92-93, albeit that his observations apply by analogy rather than directly:

“[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.”

65.       I turn to the second question, namely whether the enrichment was at the

expense of the Bank. Professor Burrows refers to this requirement as being that “the defendant’s enrichment must come from (be subtracted from) the claimant’s wealth”

– Proprietary Restitution: Unmasking Unjust Enrichment (2001) 117 LQR 412, 415.

66. The Bank had the right to demand the whole of the proceeds of sale of Rush Green Hall, as the Menelaou parents’ debt to the Bank, which had been secured on

the freehold of Rush Green Hall, exceeded the proceeds of sale. Instead, the Bank agreed that £875,000 of those proceeds of sale could be used to fund the purchase of the freehold of Great Oak Court, but only provided that the Bank was granted a Charge over that freehold at the time of its acquisition. So the Bank would have had the right to prevent the £875,000 being used to purchase the freehold if it had not been provided with a valid Charge. Even assuming (as Melissa asserts) that the Bank had released to the Menelaou parents £875,000 of the proceeds of sale of Rush Green Hall, the release was only on the basis that it would be granted a Charge over Great Oak Court. Therefore, it seems to me clear that the Bank could have prevented the purchase proceeding until it had been granted a Charge. Accordingly, again deriving support from the passage quoted from Abbey National, looking at the arrangements in relation to the purchase and charging of Great Oak Court, it seems to me plain

that Melissa’s enrichment was at the expense of the Bank.

67. That conclusion is reinforced (if reinforcement is needed) by the point made by Lord Clarke in para 25 above, reflecting the realistic approach of the House of Lords in Abbey National, that it is appropriate not merely to consider the purchase of, and charge over, Great Oak Court as a single composite transaction. It is also appropriate in the present case to treat the sale of Rush Green Hall and the purchase of Great Oak Court as one scheme, at least for present purposes. I see nothing in any of the judgments in Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52, [2015]

1 AC 385 (sub nom Mortgage Business plc v O’Shaughnessy) which casts doubt on

that approach.

68.       If one regards the enrichment as having the freehold uncharged rather than

subject to a Charge, it therefore seems clear that that enrichment was at the Bank’s

expense. One gets the same answer if Melissa’s enrichment is regarded as being the

freehold in its entirety: that enrichment would be at the expense of the Bank, albeit only to the extent that the freehold was uncharged rather than subject to the Charge, and therefore the points made in paras 66-67 above would apply with equal force.

69.       The third question is whether the enrichment was unjust. At first sight, there

may appear to be some attraction in Melissa’s argument that, as between the Bank

and herself, her enrichment was not unjust. After all, as Mr Mark Warwick QC pointed out, she owed the Bank nothing, she was wholly unaware of a prospective or actual charge, and she was innocent of any oversight, let alone any wrong-doing, whether before, during or after the sale of Rush Green Hall and the purchase of Great Oak Court.

70. The answer to that contention, in my view, lies in the fact that Melissa received the freehold as a gift from her parents. Had she been a bona fide purchaser for full value, it may very well have been impossible to characterise her enrichment

as unjust, especially if she had no notice of the Bank’s rights. If she had paid a small

sum to her parents for her acquisition, a difficult question might have had to be faced, although, as at present advised, I think that her enrichment would still have been unjust, but the extent of any unjust enrichment would be reduced by the small sum. But she paid nothing, and she therefore cannot, in my view, be in any better

position than her parents so far as the Bank’s claim is concerned. And there can be

no doubt that, if the Menelaou parents, rather than directing the transfer to Melissa, had acquired the freehold themselves in circumstances where the Deed was for some reason invalid, the Bank would have had a claim against them in unjust enrichment.

71. Again, it seems to me to be easier to see why Melissa’s enrichment should be characterised as unjust if her enrichment is treated as being the receipt of the freehold uncharged instead of subject to the Charge. Her parents were quite properly able to direct the transfer of the freehold of Great Oak Court to Melissa, but they were not properly entitled, so far as the Bank was concerned, to direct the transfer to her of the unencumbered freehold; they were only properly able, at least as against the Bank, to direct the transfer to her of the freehold subject to a Charge.

72. Mr Warwick suggested that this analysis could be called into question by considering the likely outcome if the Menelaou parents had decided to direct the freehold of Great Oak Court to be transferred to a charity, instead of their daughter. I agree that the outcome would be no different, but I see no difficulties in accepting that the Bank would in those circumstances have had a claim in unjust enrichment against the charity.

1. A variant of Mr Warwick’s argument on this third aspect is the contention

that, if the Bank could otherwise mount a valid unjust enrichment claim, that claim

cannot succeed against Melissa, as she was only an “indirect recipient” of any

enrichment, to use the language Goff & Jones on The Law of Unjust Enrichment, 8th ed (2012), eds Professors C Mitchell, P Mitchell and Watterson, paras 6-12ff

and in Ben McFarlane’s article Unjust Enrichment, Property Rights, and Indirect

Recipients (2009) 17 RLR 37. It is fair to say that there was a tripartite relationship in this case, in the sense that not merely Melissa and the Bank, but also the Menelaou parents, were parties to the arrangements which gave rise to the alleged unjust enrichment. However, as already explained above, there was in reality a single transaction, and it was from that transaction that Melissa directly benefitted, even though the benefit was effected at the direction of the Menelaou parents. The benefit to Melissa was direct because it arose as the immediate and inevitable result of the very transaction to which she was party and which gave rise to the unjust enrichment

(in contrast to the examples at the beginning of Professor McFarlane’s article). I

should add that, even if Melissa could be characterised as an indirect recipient of any enrichment, I do not consider that that would assist her: she would still properly be liable on the facts of this case, essentially for the same reasons.

74.       As for the fourth question, it appears to me that, if (as I consider) the first

three questions are answered in the Bank’s favour, there is no special reason

precluding the conclusion that the Bank had a valid claim in unjust enrichment
against Melissa.

75. As already mentioned, the fact that Melissa did not know of the circumstances which caused her enrichment to be unjust does not alter the fact that she was unjustly enriched; nor does it alter the extent of her unjust enrichment. However, it does render it more likely that she would be able to rely on subsequent events to give rise to an innocent change of position defence to a claim based on the unjust enrichment. However, no such defence appears to arise in this case.

76. It was rather tentatively suggested that the Bank should have no right to claim in unjust enrichment against Melissa, as it had a cast-iron case for recovering all its losses arising from the defective Deed from Boulters. There is nothing in that point.

Boulters’ liability in no way impinges on the question whether, and to what extent,

Melissa was unjustly enriched at the expense of the Bank: the Bank’s claim against

Boulters is res inter alios acta so far as Melissa is concerned. (Further, although the point was not argued, it may well be that, if the Bank had recovered damages from

Boulters, then Boulters would be subrogated to the Bank’s unjust enrichment claim

against Melissa.)

77. Standing back, any fair-minded person would say that, as a matter of fairness and common sense, by acquiring the freehold from any Charge, Melissa was unjustly enriched at the expense of the Bank, albeit not because of any fault of hers.

Tomlinson LJ’s analysis in the Court of Appeal, as set out by Lord Clarke in para

33 above, accurately summarises the position. Of course, fairness and common sense cannot safely be relied as the sole touchstones as to whether there has been unjust enrichment as a matter of law. In that connection, like Lord Clarke, I would

commend Henderson J’s observations in Investment Trust Companies v Revenue

and Customs Comrs [2012] EWHC 458 (Ch), [2012] STC 1150, paras 67-68, as

containing what Floyd LJ called a “thoughtful and valuable” approach, while rightly

not laying down rigid principles.

Can the Bank invoke subrogation on the basis of its unjust enrichment claim?

1. I turn then to the second step, namely whether the Bank’s claim in unjust

enrichment can properly be satisfied by holding that it is subrogated to the Lien over the freehold to the extent of the price payable for the freehold, namely £875,000. (And in that connection, the fact that 10% of the £875,000 had already been paid as

a deposit is irrelevant for present purposes, as the balance had to be paid to “rescue”

the deposit.)

79. Given that the Bank has a claim based on unjust enrichment against Melissa to the extent described above, it is hard to identify a more appropriate remedy for the Bank to obtain against Melissa. Subrogation to the Lien would accord to the Bank, and impose on Melissa, a right very similar to, although rather less in value than, that which the Bank should have had. It would give the Bank a lien instead of a formal charge, and it would be in the sum of £875,000 (plus interest), rather than the larger debt, well over £1m at the time of the purchase of the freehold, owed by the Menelaou parents to the Bank.

wrongdoers were not “innocent volunteers”, they could rely on equity’s ability to

follow money through a mixed bank account “by treating the money in the account

as charged with the repayment of his money” (pp 336F, 337G).

127. Under the heading “Subrogation” (pp 338-339) the principal issue was

whether it mattered that Abbey National had failed to show an intention to obtain

the benefit of the Halifax security. As Millett LJ explained:

“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.”

However, that did not mean that the remedy was unavailable:

“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.” (p 339D-H)

128. These passages are of direct relevance to the arguments in the present case, and in my view difficult to reconcile with the more flexible approach of the Court of Appeal. It was clearly regarded by Millett LJ as necessary for the claimants to

establish that the money used to pay off the loan was their money. “Tracing” was

the process by which this was done. In the context of subrogation, tracing was not about identifying a particular asset in the hands of the defendant, as belonging notionally to the claimant; but rather as providing the necessary link with the payments made to discharge the relevant mortgage. In the passage quoted above, Millett LJ treated such payments as analogous to money spent in improving property. It was not regarded by him as sufficient to apply a broad causation or

“economic reality” test, such as applied by the Court of Appeal in the present case.

Had that been enough, the detailed examination of equitable rules relevant to tracing the money in the Hill Lawson account would have been unnecessary. It would have

been enough that “but for” the receipt of the money from Abbey National, the

Halifax mortgage would never have been paid off.

129. This aspect of the case is not affected by the decision in Banque Financière. Lord Hoffmann noted that there was no difficulty on the facts of that case in

“tracing” the bank’s money into the discharge of the relevant debt, since by contrast

with Boscawen the payment was direct (p 235C-D). I take him to have been using that term in the same sense as Millett LJ. The problem was not so much the right to a proprietary remedy but whether that right should be cut down so as to limit its scope by reference to the limited nature of the initial agreement. The decision itself, and in particular the nature of the remedy (personal, proprietary or hybrid?), have been much discussed (see Goff & Jones para 6-30). But it throws no doubt on the importance, in the present context, of establishing a tracing link between the

claimant’s own money and the payment used to discharge the security.
Academic discussion

130. I should make brief reference to some of the academic discussion, if only to note the lack of consensus on the issues before us. Indeed, there are few more hotly debated issues among specialist academics in this field than the scope of the remedies, personal or proprietary, for unjust enrichment. In Mitchell and Watterson (op cit), there is an illuminating discussion of the various strands of academic opinion as it stood at the time of that edition (2007). I note in particular two sections,

headed “Proprietary remedies for unjust enrichment generally” (para 8.40ff) and

“Proprietary subrogation” (para 8.46-7). The former notes, for example, the view of

some commentators that the English law of unjust enrichment “should be purged of

proprietary remedies altogether” (para 8.41); contrasted with other “more

accommodating” approaches, such as that of Professor Andrew Burrows (The Law

of Restitution, 2nd ed (2002), para 8.42) who accepts the need for special justification for a proprietary remedy, but finds it in two factors, that the payment

added to the value of the defendant’s asset and that the claimant did not voluntarily

assume the risk of the defendant’s insolvency. Against that backdrop, it is said, the

subrogation authorities reveal “a surprising readiness” to award proprietary

remedies. Following Banque Financière, it is suggested that the courts should “look across from the subrogation authorities” to develop a consistent view of the

circumstances in which proprietary restitutionary remedies should be awarded (para
8.46-7).

131. The clearest academic exposition in recent textbooks of the distinction on which the appellants rely appears in the current edition of Goff & Jones, The Law of Unjust Enrichment, 8th ed (2011). Floyd LJ referred to para 6-01, relating to the

term “at the claimant’s expense”, without noting that this was in a chapter dealing

specifically with “personal claims”. Chapter 7, headed “At the Claimant’s Expense;

Proprietary Claims” contains the following important passage, which on its face

appears to support the appellant’s case:

“Both personal and proprietary claims are governed by the rule

that the defendant’s enrichment must have been gained at the claimant’s expense, but the tests used to determine whether this

requirement has been satisfied vary with the type of claim. Where the claimant seeks a personal remedy, he must show that there was a transfer of value between the parties, and this is tested by asking whether an event took place that caused the claimant to become worse off and the defendant to become better off. This is discussed in Chapter 6. In contrast, where the claimant seeks a proprietary remedy, it is not enough for him to show that there was a transfer of value between the parties: he must also show either that he previously owned the property in which he now claims an ownership or security interest, or else that the defendant acquired this property in exchange for property that was previously owned by the claimant, or else that this property was formerly the subject matter of an interest that was discharged with property that was previously owned by the claimant. This test is more stringent than the causal test used

in the context of personal claims, and it serves as a control mechanism to prevent proprietary restitutionary remedies from

becoming too freely available.” (para 7-02, emphasis added)

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

132. The application of those principles to the payment of debts is discussed in more detail later in the chapter (para 7-42). The rule that “the tracing process” comes to an end when “the value being traced is dissipated” applies generally where the

claimant’s money is used to pay off a debt. Subrogation is cited as one exception to

the rule:

“… if the debt was secured by a charge over the defendant’s

property then Equity can treat the debt and the charge, by a legal fiction, as though they were not extinguished by the payment, thereby enabling the beneficiaries to trace the value

inherent in their money into the value inherent in the creditor’s
fictionally subsisting chose in action against the defendant.”

Again the reference is to Boscawen. Notable here is the close link between subrogation and the doctrine of tracing, which as has been seen was central to the analysis by Millett LJ in that case. There is no apparent support for the Court of

Appeal’s view that a sufficient link could be found in a looser test based on

economic reality or simple causation.

Is there a tracing link in this case?

133. The Court of Appeal felt able to decide the case on the footing that the Bank did not have an interest in the money used to pay off the security. It found it unnecessary to decide whether that assumption was correct. In this court it has been submitted that it was not. It is argued that the Bank did have a sufficient interest on the basis either of the principle in Buhr v Barclays Bank plc [2001] EWCA Civ 1223, [2002] BPIR 25, or of a so-called Quistclose trust (after Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567).

134. Although the Quistclose principle does not appear in terms to have been relied on in argument in the courts below, the substance was sufficiently pleaded in the amended counterclaim (para 13), which asserts that the proceeds of the sale of Rush Green Hall released by the defendant Bank were -

“… held on trust for the defendant, subject to a power for Mr

and Mrs Menelaou to use the same to purchase a flat in the joint names of Danielle Menelaou and her partner and also to purchase the Property in the name of the claimant but only on condition that the outstanding debts of Mr and Mrs Menelaou

were to be secured by a first legal charge over the Property.”

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

135.     The Quistclose principle was explained and applied by the House of Lords in

Twinsectra Ltd v Yardley [2002] 2 AC 164. A solicitor (Sims) had received money, lent by Twinsectra to his client (Mr Yardley) for the purchase of a property, under an undertaking that it would be utilised solely for the acquisition of property and for no other purpose. The money was paid to the defendant solicitor (Mr Leach), acting on behalf of the same client; he paid it out to the client who used it for purposes other than the purchase of the property. A claim against the defendant solicitor for dishonest assistance failed only because dishonesty was not established. The money

was held to be subject to a trust in the first solicitor’s client account, the terms of

which were found in the terms of the undertaking, which made clear that the money

“was not to be at the free disposal of [the client]”:

“… the effect of the undertaking was to provide that the money

in the Sims client account should remain Twinsectra’s money

until such time as it was applied for the acquisition of property in accordance with the undertaking. For example, if Mr Yardley went bankrupt before the money had been so applied, it would not have formed part of his estate, as it would have done if Sims had held it in trust for him absolutely. The undertaking would have ensured that Twinsectra could get it back. It follows that Sims held the money in trust for Twinsectra, but subject to a power to apply it by way of loan to

Mr Yardley in accordance with the undertaking …” (paras 12-

13, per Lord Hoffmann)

136. In the present case the critical issue is the status of the money received by Boulters on 12 September 2008, as proceeds of the sale of Rush Green Hall. (I do not understand either party to suggest that the deposit £90,000 should be treated differently from the balance of £785,000.) The judge saw no reason to infer a proprietary interest in the Bank:

“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.”

137. With respect to the judge, this analysis (like my own as trial judge in Twinsectra) seems to me to start from the wrong end. In the Boulters client account the money was undoubtedly trust money, in the sense that it was held beneficially for their clients (see eg In re A Solicitor [1952] Ch 328). That is not affected by the brevity of the period for which it was expected to be held. The relevant questions are: for whose benefit was it so held and on what terms? By this time they were acting for both the Menelaous and the Bank. Their respective interests in the money depended on the arrangements between them and with their solicitors. It is true that

the Bank’s letter of 9 September 2008 said nothing in terms about an interest in the

money to be used for the new purchase. But there is nothing to suggest that the money was treated as freely at the disposal of the Menelaous, which would have been inconsistent with the general purpose of the arrangement.

138.     The terms of the certificate of title provided to the Bank by Boulters on 10

September are also relevant. In it Melissa was named as “borrower”, and the price

as £875,000. It included a standard form undertaking –

“prior to use of the mortgage advance, to obtain in the form

required by you the execution of a mortgage and a guarantee as appropriate by the persons whose identities have been checked in accordance with paragraph (1) above as those of the Borrower, any other person in whom the legal estate is vested

and any guarantor ….”

139. They also undertook to notify the Bank of anything coming to their attention before completion which would render the certificate untrue or inaccurate, and if so

to “defer completion pending your authority to proceed and … return the mortgage

advance to you if required …”. I agree with Mr Rainey that in its context the

reference in the certificate of title to the “mortgage advance” must be read as a

reference to the money received by them from the sale of Rush Green Hall. The natural implication of the undertakings was that, if the sale failed, the sum so defined would be paid to the Bank; not simply transferred to the Menelaous.

140.     It follows in my view that there is no difficulty in this case in finding the

necessary “tracing link” between the Bank and the money used to purchase the new

property. In this respect it is a much simpler case than Boscawen. The Bank’s

interest in the purchase money was clear and direct. On this relatively narrow

ground, I would hold that the appeal should be dismissed.

LORD KERR AND LORD WILSON:

141. Subject to the sentence which follows, we agree with the judgments both of Lord Clarke and of Lord Neuberger. We consider, however, that it is preferable to leave the availability of a personal claim against Melissa entirely open and so to that extent we prefer the terms in which Lord Neuberger expresses himself in paras 80- 82 above to the marginally different terms in which Lord Clarke expresses himself in para 55 above.