The Supreme Court has widened the scope of subrogation to take account of the economic and commercial reality of a series of linked transactions.
The Bank had security on Prop1 owned by M’s parents. They agreed to release that security on the basis that when Prop1 was sold and Prop2 was acquired in the name of their daughter M the Bank would;
- be paid a lump sum out of the proceeds of sale of Prop1;
- £850k would be used to buy Prop2; and
- The Bank would be given a charge by M over Prop2 to secure the parents remaining debt to the Bank.
M acquired Prop2 and was registered as proprietor. The Bank was given a charge over Prop2 and registered as the proprietor of the charge. When the Bank tried to enforce the security over Prop2 M pointed out that her signature was a forgery and that the security had been altered without her consent when lawyers amended the identity of “the Customer” in the security from M to refer to her parents without first taking instructions from M. Either ground would have invalidated the security so Bank had no security over Prop2.
The Bank claimed that M had been unjustly enriched at the Banks expense and consequently that it should be subrogated to the unpaid Vendors lien (i.e. the lien of the Vendor of Prop2). M argued that she had not been paid any money by the Bank so it could not be the party that – unjustly or otherwise – enriched her. The £850k from the sale of Prop1 had been paid to her parents pursuant to their agreement with the Bank. The parents had then made those funds available to M by way of gift so that Prop2 could be bought in her name. She accepted she had been enriched but at the expense of her parents not the Bank.
At first instance judgment was given for M. In the Court of Appeal the Bank won. The Supreme Court held the Bank was subrogated to the unpaid Vendors lien and the two transactions (sale of Prop1 and acquisition of Prop2) should be viewed as one for the purposes of assessing who had “enriched” M.
The more usual cases of subrogation where a lender fails to get security it bargained for involve a lender paying off an existing secured creditor or making some other direct payment to or on behalf of the party from whom security should have been taken. This decision widens the scope of an unjust enrichment claim and the associated remedy of subrogation to cases where there are a series of connected parties. It allows the Court to consider the “economic or commercial reality” – rather than looking at the formal steps taken – to justify the application of these equitable principles.
A second point is a reminder that altering any document – security or guarantee – even to correct an obvious error requires the agreement of all the parties (or following the process they have agreed in the document) once it has been signed or executed even if signed or executed by one party and awaiting signature by others.