The Supreme Court has for the first time permitted a claim to a proprietary interest in an asset on the basis of unjust enrichment, without tracing.

The traditional approach of English law to proprietary claims has been to allow them only where they can be viewed as a vindication of a pre-existing interest or property in a particular asset. Tracing is the process used to establish what has happened to a claimant's property, and is deployed to establish 'property' in an asset in the hands of a defendant. If a claimant can trace into such an asset, he can ask the court to declare that he has a proprietary interest in it: if he cannot, a claim to a proprietary interest would fail.  

There has for some time been uncertainty about whether the rules might be different where the claim is to reverse unjust enrichment. A claim in unjust enrichment requires the claimant to show that the defendant has been enriched at his expense. Such claims are not (in most cases) concerned with the vindication of pre-existing property rights, and a claimant is not required to show that the defendant has received property belonging beneficially to the claimant. The question in Menelaou was whether that requirement arises where the claimant seeks a proprietary remedy for unjust enrichment. The leading text on restitution, Goff & Jones, suggests that the claimant must also prove that he previously owned the property in which he now claims an ownership or security interest (as would a claimant of a proprietary remedy against, for example, a knowing recipient or a dishonest assistant). The Supreme Court has now held that that is not the law, at least where the proprietary remedy sought is subrogation.

Background

Menelaou's parents sold their home ('Rush Green Hall'), using the proceeds to buy a home for Menelaou ('Great Oak Court'). The Bank had security over Rush Green Hall and agreed to release it without the parents' debts being fully repaid if Menelaou gave a charge over Great Oak Court to secure them. The Bank failed to take valid security, but unwittingly permitted the Great Oak purchase to complete, releasing its security over Rush Green Hall. The Bank claimed an equitable interest in Great Oak Court by way of subrogation to the unpaid vendor's lien (the interest the seller of Great Oak Court had had in the property after exchange of contracts but before he was paid the sale price).

At first instance the Deputy Judge held that Great Oak Court was not purchased with money owned by the Bank (ruling out a traditional proprietary claim) and that Menelaou's enrichment was not at the Bank's expense (ruling out any claim for restitution). The Court of Appeal allowed an appeal and granted the Bank proprietary relief. Floyd LJ (with whom Moses and Tomlinson LJJ. agreed) held that there was a sufficient causal connection between the release of the security over Rush Green Hall and the purchase of Great Oak Court to establish that the enrichment was at the expense of the Bank: the Bank was "as a matter of economic reality" the source of the money used to purchase Great Oak Court, and there was therefore no reason in principle or justice why it should not be entitled to the remedy of subrogation. He declined to decide whether the Bank had a traceable proprietary interest in the Great Oak Court purchase money.

Ms. Menelaou's appeal was unanimously dismissed. Lord Carnwath differed from the other judges as to the correct approach. He decided that the Bank was able by tracing to establish a pre-existing proprietary interest in Great Oak Court, and declined to decide the case on the basis that the Bank could be granted a proprietary interest, without tracing. Lords Clarke and Neuberger (Lords Kerr and Wilson agreeing) decided the case on the basis that subrogation to reverse unjust enrichment was available, even without tracing. Lord Neuberger then expressed a "strong, if provisional, opinion" that the Bank could establish a pre-existing proprietary interest by tracing. Lord Clarke "essentially" agreed with Lord Neuberger on this alternative basis.

Lord Neuberger's reasons for permitting restitutionary subrogation were that the Bank could have required the solicitors acting for it and Menelaou in the purchase of Great Oak Court to pay it the purchase monies, that its agreement to the money being used in the purchase was conditional upon being granted a charge which, owing to an oversight, it never got; and finally that the purchase monies discharged the unpaid seller's lien over Great Oak Court.

Lord Clarke, relying on Banque Financière de la Cité v Parc and Orakpo v Manson Investments, said that the law supported a flexible approach to the remedies in each case. In this case he saw subrogation as an appropriate way of "effectively reinstating [Menelaou's] liability under the charge". He went on to say that there was no reason why subrogation should not be granted even if the bank did not retain a property interest in the proceeds of sale of Rush Green Hall: subrogation gave the Bank the equitable interest it would have had if the scheme had gone through in accordance with the agreement of the Bank and the Menelaou parents.

Lord Neuberger's obiter alternative analysis was that if the money in the solicitors' account belonged to the Bank then it was the Bank's property that discharged the unpaid seller's line. On the other hand, if the money belonged beneficially to the customers (the parents),  the Bank had the right to require the money to be used to purchase Great Oak Court subject to a charge back in its favour, failing which it would have the right to demand that an equivalent amount be paid to it. He found it hard to see why that would not have given the Bank a sufficient interest in the purchase money to enable its claim to be subrogated to the lien. He concluded that these reasons were not much different from his reasons for permitting restitutionary subrogation.

Comment

Although the majority confined their comments about proprietary remedies for unjust enrichment to the immediate context of subrogation to an unpaid vendor's lien, it seems likely that their explicit de-coupling of the remedy of subrogation from the need to establish a pre-existing property interest by tracing will be applied in claims by way of unjust enrichment to other proprietary remedies. A claimant will not always be better off seeking a proprietary remedy in unjust enrichment rather than bringing a tracing-based claim: the defences to unjust enrichment are considerably broader than those applicable to a tracing-based claim. Until the principles in Menelaou are applied and developed, proprietary claims to reverse unjust enrichment (other than where the remedy sought Is subrogation) will carry a greater risk than those with more settled doctrinal foundations.

Menelaou v Bank of Cyprus, Supreme Court, 4 November 2015