Subrogation and unjust enrichment in the High Court of Australia

Kingsway logo, via their websiteBy means of the doctrine of subrogation, one person is substituted for another in the exercise of that other’s rights against a third person. In the classic triangular fact pattern, it arises where a creditor has rights against a debtor, and the claimant is subrogated to the rights of the creditor against the debtor. It is a doctrine which admits of many possible explanations. For example, on the view taken by Meagher, Gummow & Lehane, subrogation largely follows a similar pattern in a series of otherwise unconnected islands: they are content to set out the categories, which, for them, are not closed, and to conclude that there are no universally applicable criteria for the intervention of equity in such cases. On another view of subrogation, taken by Hedley, and by Lord Salmon in Orakpo v Manson Investments [1978] AC 95 (HL), there are some relatively loose connections between the specific contexts but only at an abstract level: Hedley argues for a broad general principle that (subject to defences) the claimant can exercise whatever rights the creditor would, but for the claimant’s payment, have had against the debtor; whilst Lord Salmon argued for an “entirely empirical … principle … that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be”. A third view of subrogation, exemplified by Blayney J in Highland Finance v Sacred Heart College of Agriculture [1998] 2 IR 180 (Ir SC), holds that the claimant can be subrogated to the third-party’s claims against the defendant because this was the presumed or actual intention of the parties.

Finally, a fourth view of subrogation has recently emerged: for Mitchell and Watterson, there are tight connections and similarities where the specific contexts are united and explained by the principle against unjust enrichment; and this explanation was adopted by Lord Hoffmann in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 223; [1998] UKHL 7 (26 February 1998). Now, in Bofinger v Kingsway Group Limited [2009] HCA 44 (13 October 2009), the High Court of Australia has confirmed that, as a matter of Australian law, the doctrine of unjust enrichment does not explain the doctrine of subrogation. Their honours do not explain which of the other three explanations, if any, might explain the doctrine; but they are clear that it is not within the bailiwick of unjust enrichment. For what it’s worth, I think that Banque Financière is unsustainable, and that the best of the other three explanations is that based upon the presumed or actual intention of the parties. So, I welcome the rejection of the unjust enrichment explanation in Bofinger v Kingsway. On the facts of the case itself, the Court held that a guarantor who has guaranteed a series of mortgages over the same property can insist that, on the discharge of the first mortgage, the first mortgagee must account to the guarantor rather than to the second mortgagee for any excess on the first mortgage. Extracts from the judgment:

Gummow, Hayne, Heydon, Kiefel and Bell JJ

[1] The resolution of this appeal calls for application of “the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts” (Warman International Ltd v Dwyer (1995) 182 CLR 544, 559; [1995] HCA 18 [29] (23 March 1995)). The nature of the present case and the particular facts engage the law respecting sureties, their obligation to indemnify the creditor and right to indemnity by the principal debtor, and the operation of the doctrine of equity associated with the term “subrogation”. …

Subrogation and guarantees

[6] In Orakpo v Manson Investments Ltd [1977] 1 WLR 347, 357 (affd [1978] AC 95 (HL)) Buckley LJ remarked that the relevant equitable considerations respecting a claim to subrogation may differ, for example, where the basis of subrogation is a contract of indemnity, or concerns ultra vires borrowings by a corporation, or the lending of funds to complete a purchase or pay off an existing mortgage. To that list may be added the subrogation of creditors of a trustee to the trustee’s lien over the trust property (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367; [1979] HCA 61 [15] (27 November 1979)). Therefore, if for no other reason, it is unhelpful to speak of subrogation as if it were a “cause of action” in the sense recognised at common law (cf Boscawen v Bajwa [1996] 1 WLR 328, 335; Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336, 340-341.

[7] In its widest sense, that apparently used by Buckley LJ in Orakpo, an indemnity includes a contract obliging one person to make good the loss suffered by another, and contracts of guarantee and those of insurance fall within that description. …

[8] This notion of the ultimate liability of the principal provides a foundation for the application of subrogation in aid of the surety. Thus, where a claim to the benefit of securities held by the creditor is made by a surety, it was said by Turner V-C (in Yonge v Reynell (1852) 9 Hare 809, 818-819; 68 ER 744, 748-749; [1852] EngR 655) that the equity for subrogation is derived from the obligation of the principal debtor to indemnify the surety (Friend v Brooker (2009) 255 ALR 601, 614; [2009] HCA 21 [55] (28 May 2009)). There is “nothing hard” in the act of a court of equity in placing the surety in exactly the situation of the creditor with respect to those securities, because it would be unconscientious for the debtor to recover back the securities from the creditor while the debtor was obliged to indemnify the surety. …

Unjust enrichment and the English decisions

[86] In a passage in their reasons in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 378-379; [1992] HCA 48 [45] (7 October 1992), Mason CJ, Deane, Toohey, Gaudron and McHugh JJ rejected the submissions that in Australian law unjust enrichment was more than “just a concept” and that it was “a definitive legal principle according to its own terms”. The use of the phrase “unifying legal concept” earlier in the joint reasons must be understood with what was said in that later passage. In the years which have followed the Court has reaffirmed this position (Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 156; [2007] HCA 22 [151] (24 May 2007); Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635, 664-665; [2008] HCA 27 [83]-[85] (18 June 2008)) and all other Australian courts are bound accordingly. …

[88] The concept of unjust enrichment may provide a means for comparing and contrasting various categories of liability. … Subrogation may be seen as preventing the unjust enrichment of the principal debtor who otherwise might escape carriage of ultimate liability and contribution prevents one of equal obligors bearing more than its share of the burden. The two doctrines do not let matters lie where they would fall if the carriage of risk between the various actors involved were to be left entirely to be worked out within the limits of their contractual obligations. But … the two doctrines have different foundations in equity and operate with different results.

[89] The concept of unjust enrichment also may assist in the determination by the ordinary processes of legal reasoning of the recognition of obligations in a new or developing category of case (Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 257; [1987] HCA 5 [14] (4 March 1987); Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635, 665; [2008] HCA 27 [85] (18 June 2008)). An example is the conclusion reached in David Securities itself, that the vitiating factors which enliven the action for money had and received include mistakes of fact or law. But this appeal is not in that category. The principles of equity which govern the outcome are well developed and have the vitality to permit further development in an orthodox fashion.

[90] Subrogation, like other equitable doctrines, is applicable to a variety of circumstances, as explained earlier in these reasons. One circumstance concerns sureties, another the paying off of an existing mortgage. But that is not to say that subrogation is a “tangled web” in need of the imposition of the “top-down” reasoning which is a characteristic of some all-embracing theories of unjust enrichment.

[91] Such all-embracing theories may conflict in a fundamental way with well-settled equitable doctrines and remedies. Reference was made in the opening paragraph of these reasons to the importance attached by equity to the fashioning of the particular remedy to meet the nature of the case. The administration of the remedies of injunction and specific performance provides perhaps the most obvious examples. So also the remedial constructive trust, as these reasons have sought to demonstrate. …

[94] As these reasons have sought to show, the relevant principles of equity do not operate at large and in an idiosyncratic fashion. So it was that in Boscawen v Bajwa, Millett LJ, after denying that subrogation is a remedy which the court has a general discretion to impose whenever it thinks fit to do so, went on:

The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.

[95] That was said in 1995. In England matters appear now to stand differently. …

[96] … [In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 223; [1998] UKHL 7 (26 February 1998)] Lord Hoffmann, who gave the most detailed opinion, referred to the use of the term “subrogation”

to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived … 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.

[97] However, there is difficulty in identifying the “unjust” enrichment in subrogation cases, which necessarily involve multilateral, rather than bilateral, relationships. …

[98] … for the above reasons … the doctrinal basis of equitable subrogation in Australian law is not unsettled.


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