Shipping and subrogation

Bell Lines logo, via flagspot.netBy 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 particular, it is the process by which one party is substituted for another so that the first party may enforce that other’s rights against a third party. In the classic triangular fact pattern, it arises where a creditor has rights against a debtor, the third party pays the creditor, and is then subrogated to the rights of the creditor against the debtor. In Bell Lines v Waterford Multiport Ltd [2006] IEHC 188 (28 April 2006) rvsd [2010] IESC 15 (18 March 2010), unemployment agencies in the UK paid various entitlements to UK-based employees of an Irish company in liquidation, and successfully sought to be subrogated to those employees’ preferential claims against the company in the Irish liquidation.

The litigation raises, but does not answer, some rather profound questions about the nature of subrogation. In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, [1998] UKHL 7 (26 February 1998) and Bofinger v Kingsway (2009) 239 CLR 269, [2009] HCA 44 (13 October 2009), the House of Lords and the High Court of Australia took different approaches to the relationship of unjust enrichment and subrogation (see my previous posts). These cases demonstrate that there are several possible approaches to the doctrine of subrogation, and many of them are on show in the judgments in Bell Lines v Waterford Multiport Ltd. However – rather disappointingly – no attempt is made to choose between them (if necessary), or to explain their inter-relationship (if any). Even so, the fact that so many potential principles are invoked in the judgments is intriguing.

The background is the decision of the ECJ in Case C-198/98 Everson and Barrass v Secretary of State for Trade and Industry and Bell Lines Limited [1999] EUECJ C-198/98 (16 December 1999), holding that the company’s UK employees were entitled to claim sums due in respect of minimum notice, holiday pay, preferential wages, redundancy and pension from the Department of Trade and Industry (DTI) and the Northern Ireland Department of Employment and Learning (DEL) (as appropriate). The DTI and the DEL (the Departments) in turn sought preferential status in the Irish liquidation, either on foot of section 285 of the Companies Act, 1963 (also here) or on the basis that they were subrogated to the employee’s preferential claims against the company. The claims failed at first instance ([2006] IEHC 188 (28 April 2006)) before Dunne J, but succeeded in the Supreme Court ([2010] IESC 15 (18 March 2010)).

In the High Court, counsel for the Departments argued that subrogation can arise to prevent unjust enrichment in a variety of circumstance, and that if the Departments were not to succeed to the employees’ claims, it would unjustly enrich the general body of creditors in circumstances where the intent of the legislation is that the general body of creditors stands behind the debts identified in section 285. In support of this argument, he relied on three cases.

First, in Boscawen v Bajwa [1996] 1 WLR 328, [1995] 4 All ER 769 Millett LJ held:

Subrogation … is a remedy, not a cause of action … it is available in a wide variety of different factual situations in which it is required in order to reverse the defendant’s unjust enrichment. Equity lawyers speak of a right of subrogation or equity of subrogation, but this merely reflects the fact that it is not a remedy, which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well settled established principles and in defined circumstances which make it unconscionable for the defendant to deny the propriety interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other.

Second, in Orakpo v Manson Investments [1978] AC 95 (which was referred to by Murphy J in the High Court and Blayney J in the Supreme Court in Highland Finance (Ireland) v Sacred Heart College of Agriculture [1998] 2 IR 180), Lord Salmon held:

The test as to whether the court 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 demands that it should be.

Third, in Re Downer Enterprises [1974] 1 WLR 1460, a lessee who had assigned a lease to a subsequent lessee was forced to pay the subsequent lessee’s outstanding rent. The landlord’s right to rent had the status of a preferential debt in the insolvency; and Pennycuick J held that the initial lessee had a right to the landlord’s preferential status. The judgment language is suffused with notions of discretion; and counsel for the Departments argued that the initial lessee’s claim arose as a consequence of subrogation, which should be applied by analogy to the Departments’ claims.

These various submissions identify several different principles potentially underlying the doctrine of subrogation: (i) it reverses unjust enrichment; (ii) it arises on “well settled established principles and in defined circumstances”; (iii) it will be applied when “reason and justice” demand that it should be; and (iv) that it is all a matter of discretion. All that is missing is the common argument that a plaintiff can be subrogated to a third-party’s claims against the defendant because this was the presumed or actual intention of the parties (see, for example, Highland Finance (Blayney J)). These various explanations are not necessarily identical; indeed, they may not even all overlap; but counsel for the Departments took the view that in their various ways they supported the submission that the only just way of dealing with the matter is to allow the Departments the status accorded to the debt which they were compelled to discharge. Dunne J rejected these submissions:

Far from being unjust enrichment in the sense contended for by Mr. Shipsey, the body of unsecured creditors are not postponed to any creditor of the company other than those expressly provided for by statute. … in the absence of express statutory authority there is no entitlement of a debt to preferential status. … it does not seem to me to be possible to obtain on foot of subrogation preferential status. If that were possible, one would have to question the need for section 285(6) of the Companies Act, 1963 and section 10 of the Protection of Employees (Employers Insolvency) Act, 1984. … In essence it seems to me that the category of creditors entitled to priority has been carefully and narrowly drawn by the legislature.

There is no doubt in this case that DTI and DEL are entitled to claim as creditors in respect of the sums paid by them to the employees of the companies. That much is not in dispute. However I cannot conclude from any of the authorities … that that right of subrogation extends to an entitlement not just to seek to have the debt repaid but also to step into the status that the employee would have had directly against the companies. Preference has been given to certain categories of creditors in respect of certain types of debt. That priority is delimited by reference to the statutory provisions. There is no provision within the legislation for guarantee institutions from outside the jurisdiction. In the absence of such legislation I have come to the conclusion that the [Departments] cannot have preferential status.

Dunne J made two further interesting comments. First, she (rather puzzlingly) treated Re Downer as a case in which the doctrine of subrogation gave rise to a claim – but not a priority – in liquidation (in any event, the case is probably an example of the equitable salvage lien (see “Liens, Necessity and Unjust Enrichment” (2006) 57 Northern Ireland Legal Quarterly 288) rather than subrogation). Second, relying on Moule v Garrett (1872) LR 7 Exch 101, counsel for the Departments argued that since they had been compelled to make the payments to the employees, they were entitled to recover the amounts of the payments from the employer who was primarily liable for those payments; and Dunne J held that it was difficult to see how the undoubted liability of the companies to the Departments was elevated to preferential status as a result.

The Departments appealed, and the Supreme Court (Fennelly J, Macken and Finnegan JJ concurring) reversed. However – as with the decision of Murphy J in Presho v Doohan [2009] IEHC 619 (17 July 2009), blogged here – the Supreme Court decided the case on the basis of a benevolent interpretation of section 285(6) of 1963 Act, and declined to reach “equitable principles of restitution”. Nevertheless, Fennelly J quoted with approval the decision of Carroll J in Station Motors Ltd v Allied Irish Banks Ltd [1985] IR 756 which treated section 285(6) as a statutory form of subrogation. Along with the four approaches to subrogation discernible in Dunne J’s judgment at first instance, this constitutes a fifth approach to subrogation. Given the decisions discussed by Dunne J at first instance, to say nothing of Banque Financière de la Cité v Parc (Battersea) Ltd and Bofinger v Kingsway, it is a pity that Fennelly J did not consider “equitable principles of restitution” and their inter-relationship with the statutory example in section 285(6). Had he done so, he might have been guided by the analogy between the constructive trust and subrogation drawn by Millett LJ in Boscawen v Bajwa (above).

The constructive trust has, in its time, played home to many over-arching theories, from the counsel of despair that there are no unifying or explanatory principles at all, through claims that the various heads of constructive trust are unified or explained by a single theory such as the principle against unjust enrichment, to the view that the constructive trust is founded upon a blend of applicable explanatory principles. A similarly wide-range of views can be seen in the context of subrogation; at least four can be discerned in Bell Lines alone.

In the context of the constructive trust, debates began by claiming that a particular principle explained the whole of the doctrine and that an alternative principle did not. However, it is now generally accepted that the constructive trust is a rather protean doctrine, founded upon many different principles, and debates now tend to be about the inter-relationship of those various principles. To take one example, whilst unjust enrichment was claimed as an organising principle for the constructive trust as a whole, it is now taken to be one principle amongst many, explaining some constructive trusts, but not all of them.

So it is with subrogation. As reflected in the judgments in Bell Lines, recent debates have claimed that a particular principle (atomism, intention, reason and justice, discretion, unjust enrichment) explained the whole of the doctrine, but – as with the constructive trust – a single over over-arching theory is unlikely to explain the whole field. Instead, subrogation, too, is a rather protean doctrine, founded upon many different principles, the variety and plausibility of which suggest that none is dominant and that each has some role to play. In particular, any attempt to incorporate the whole doctrine into the principle against unjust enrichment is as unlikely to be successful in the long run in this context as it was in the context of the constructive trust. Rather, it is likely that unjust enrichment will simply be the theoretical foundation of one facet of the doctrine of subrogation. The task, then, is to set out the various facets of subrogation, and to identify the various theoretical foundations on which they are constructed.

The speeches in Banque Financière de la Cité v Parc (Battersea) Ltd suggest that unjust enrichment will have some role to play in this analysis; though the judgments in Bofinger v Kingsway suggest that its role may not be extensive. If the principle against unjust enrichment is the foundation of existing aspects of subrogation, all well and good. If not, unjust enrichment can be taken as the basis of a new species of subrogation. In other words, even if Parc does not explain the pre-existing heads of subrogation, they can be taken as establishing a new head of subrogation, alongside the existing heads.

In this way, just as with the constructive trust, the law of subrogation will be seen to be founded upon a blend of principles, a blend which includes the principle against unjust enrichment but which also includes a wide range of other principles as well.