Subrogation, shipping, and unjust enrichment

Cheltenham & Gloucester storefront 2007In an earlier post, I discussed the subrogation claim in Bell Lines v Waterford Multiport Ltd [2006] IEHC 188 (28 April 2006) (Dunne J) rvsd [2010] IESC 15 (18 March 2010). My basic point was that subrogation arises for all sorts of reasons. As Lord Diplock put it in Orakpo v Manson Investments [1978] AC 95, followed in this respect by Neuberger LJ in Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291 (15 March 2004) [32], it “embraces more than a single concept”. Apart from the insurance context where it is largely a matter of contract, several reasons have been proferred to explain when subrogation arises by operation of law.

For example, (i) it can reverse 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; (iv) it reflects the presumed or actual intention of the parties; and (v) it is all simply a matter of discretion. It is unlikely that a single over over-arching theory will explain the whole field. Instead, subrogation is a rather protean doctrine, founded upon many different principles. As a consequence, it is likely that unjust enrichment is simply the theoretical foundation of one facet of the doctrine of subrogation rather than for the whole ambit of the doctrine. Although, in my earlier post, I argued against too expansive a view of subrogation as founded upon unjust enrichment, I should have clarified that I accept that unjust enrichment does explain important aspects of the doctrine, and I omitted to say that I think that the subrogation claim pleaded by the plaintiffs in Bell Lines is of that nature and ought to have succeeded.

The plaintiffs were compelled by a court decision (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)) to pay various sums due in respect of minimum notice, holiday pay, preferential wages, redundancy and pension to the defendant’s employees. This is a classic case of the compulsory discharge of another’s debt (see, eg, Brooks Wharf and Bull Wharf Ltd v Goodman Bros [1937] 1 KB 534; East Cork Foods v O’Dwyer Steel [1978] IR 103). And in Bell Lines at first instance, Dunne J discussed the leading case of Moule v Garrett (1872) LR 7 Ex 100 and held that since the plaintiffs had “[u]ndoubtedly … been compelled by law to pay in their jurisdiction money which the companies were under a liability to pay”, the defendants had an “undoubted liability” to the plaintiffs. Similarly, in McCarthy v McCarthy & Stone Plc [2007] EWCA Civ 664 (04 July 2007), the plc had been compelled by the Revenue to pay taxes for which McCarthy was primarily liable. Following Bernard & Shaw Ltd v Shaw [1951] 2 AER 267, Peter Smith J concluded that McCarthy had no defence to the plc’s claim to recover the amounts of the compelled payments from him, and the Court of Appeal affirmed.

The key question is whether there is, along with this personal recoupment claim (in unjust enrichment), a parallel proprietary subrogation claim (also in unjust enrichment). For example, in Niru Battery Manufacturing Company v Milestone Trading Ltd [2004] EWCA Civ 487 (28 April 2004), the plaintiff successfully established parallel recoupment and subrogation claims. In Appleyard, Neuberger LJ said that “the classic case of subrogation involves a lender who expected to receive security (in the proprietary sense – eg a mortgage) claiming subrogation to another security” ([36]), and in Anfield (UK) Ltd v Bank of Scotland plc [2010] EWHC 2374 (Ch) (24 September 2010) Proudman J held that a “lender who has made advances which have been used to discharge a secured debt owed to another lender may be entitled to step into the shoes of the other lender as far as the security is concerned, thereby gaining priority over intermediate lenders also holding security over the same property” ([9]). This is the basic claim being made by the plaintiffs in Bell Lines. As Proudman J went on to explain in Anfield:

10. It is plain from the authorities cited and authoritatively analysed in Appleyard (and particularly the decision of the House of Lords in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, [1998] UKHL 7, [1999] 1 AC 221 (26 February 1998) that the principle underlying such subrogation is equitable in origin and is now recognised as primarily aimed at preventing unjust enrichment.

11. Intermediate lenders are necessarily enriched by the discharge of a prior security. However, in order for the principle to be engaged it is necessary to identify some unconscionable or unjust factor … Filby v Mortgage Express (No 2) Ltd [2004] EWCA (Civ) 759

More particularly, the various elements of the principle against unjust enrichment must be satisfied, and in the case of the plaintiffs in Bell Lines, those elements are indeed satisfied: the defendant was enriched when the plaintiffs’ payments to the employees discharged the defendant’s liabilities to the employees; the defendant’s enrichment was plainly at the expense of the plaintiff; the compulsion flowing from the ECJ’s judgment amounted to the unjust factor (as in Niru Battery Manufacturing Company, the compulsion underlying the recoupment claim would satisfy this requirement of an unjust factor); and there is no obvious defence on the facts.

What cases like Niru show is that where the plaintiff’s money is used to discharge the defendant’s debt, the plaintiff has a personal recoupment claim against the defendant; and where the discharged debt was secured, the plaintiff can subrogate to that security. On this basis, there was more to the plaintiff’s subrogation claim than Dunne J gave it credit for when she rejected it.