Subrogation — Tracing — Mortgage used to pay off unsecured bank loan — Validity of mortgage impugned — Whether respondent mortgagee subrogated to rights of bank — Appeal dismissed
The appellant and her husband purchased a house with the assistance of a building society mortgage. The husband subsequently arranged a mortgage with the respondent, purportedly secured by a first legal charge on the house, with which he paid off the building society mortgage, together with business debts owed to a bank on a loan account in the couple’s joint names. Although the new mortgage appeared to have been executed by both the appellant and her husband, the husband had in fact forged the appellant’s signature on both the mortgage application form and the mortgage deed. The appellant remained unaware of the existence of the mortgage. A second charge over the house, in favour of the bank, was later signed by both the appellant and her husband.
Payments to the respondent fell into arrears, and it obtained a possession order. It went into possession following the appellant’s divorce from her husband and the house was abandoned. The property was subsequently sold, and an issue arose over entitlement to the proceeds of sale. In proceedings brought by the respondent, the appellant argued, by way of counterclaim, that the mortgage was a nullity, and that she was therefore beneficially entitled to a half-share in the proceeds of sale. The respondent claimed to be subrogated to the rights of both the building society and the bank because debts owed to them had been discharged by moneys lent by the respondent.
The judge found in favour of the respondent. The appellant appealed in respect of the bank debt alone. She contended that it was not possible to trace the payment from the claimant to the bank, since the money used to discharge the bank debt was both legally and beneficially money belonging to her husband.
Held: The appeal was dismissed.
1. The remedy of equitable subrogation was a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant would be enriched if its financial position were materially improved, usually by relief from a financial burden. The enrichment would be at the expense of the claimant if, in reality, the claimant’s money had effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment would be unjust if the claimant did not obtain the security that it had expected when advancing the money, and if the defendant’s financial improvement could properly be seen as a windfall. The remedy did not extend to giving the claimant more than it had originally expected. The remedy was not limited to cases where both the claimant and defendant intended the money to be used to effect the improvement; it was sufficient that it was in fact so used. The remedy was flexible and adaptable in order to produce a just result. Within that framework, it was discretionary in the sense that, at every stage, it was a matter of judgment as to whether, on the facts, the necessary elements had been fulfilled. The label of “subrogation” was unhelpful. The essence of the remedy was that the court declared the claimant to have a right that embodied characteristics and content identical with those enjoyed (in the present instance) by the bank, subject to any modification necessary to ensure that the claimant did not get more than it had originally expected.
2. The present case was not merely a case of a contract, validly entered into and duly performed, that was voidable for misrepresentation. The effect of the forged signature was that the respondent did not get what it had expected. The contract was void and no proprietary interest in the money lent by the respondent ever passed to the husband. The money paid to the bank remained the property of the respondent until it reached the bank and was deposited into the joint account. The tracing requirements were fulfilled, in that the appellant had been unjustly enriched at the respondent’s expense. It followed that the judge’s decision should be upheld on a straight application of the orthodox analysis of the remedy of equitable subrogation: Boscawen v Bajwa [1996] 1 WLR 328 applied; Lonrho v Fayed (No 2) [1992] 1 WLR 1 distinguished. It made no difference that the bank loan had been unsecured at the time of the payment to the bank: Re Cleadon Trust [1939] Ch 286 distinguished. There was also a principled ground for granting a restitutionary remedy on the principles set out in Banque Financière de la Cité SA v Parc (Battersea) Ltd [1999] 1 AC 221.
Paul Marshall (instructed by Langleys, of Lincoln) appeared for the appellant; Nicole Sandells (instructed by Addleshaw Goddard, of Leeds) appeared for the respondent.
Sally Dobson, barrister
