Unjust enrichment? Bank secures equitable charge where it failed to get a legal charge: Menelaou v Bank of Cyprus [2015] UKSC 66

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1 Unjust enrichment? Bank secures equitable charge where it failed to get a legal charge: Menelaou v Bank of Cyprus [2015] UKSC The decision of the Supreme Court in Menelaou v Bank of Cyprus UK Ltd is controversial. By a majority, the Supreme Court granted restitutionary subrogation as a remedy, to give the bank an equitable charge over a property that had been bought with the proceeds of sale of another property; where, because of failings by its solicitors, the bank that had failed to get a legal charge over the second property, to replace that which it had held over the first. The Supreme Court did so in order to reverse what it considered would otherwise be the unjust enrichment of Ms Menelaou. 2. In so doing, the Supreme Court effectively granted a proprietary remedy (a charge) to the bank, in respect of that which was essentially a personal claim (for unjust enrichment) against Ms Menelaou. The headnote records that (restitutionary) subrogation can apply to personal rights as well as property rights: and therein lies the controversy. That is all the more so where there are no clear principles by reference to which one might seek to determine whether any given enrichment is unjust ; and particularly where Lord Neuberger said that fairness and common sense cannot safely be relied [upon] as the sole touchstones as to whether there has been unjust enrichment as a matter of law. 3. As Lord Carnwath made clear, the ultimate result can be justified on the alternative basis of an orthodox proprietary claim, rather than an unjust enrichment claim. Lord Clarke and Lord Neuberger (with whom Lord Kerr and Lord Wilson agreed) were both attracted by Lord Carnwath s analysis. Lord Neuberger said that The reasons which persuade me that the unjust enrichment claim can properly be satisfied by subrogation to the lien are precious close to those which persuade me that there is a very strong case for saying that the bank had a proprietary interest 4. It is therefore all the more difficult to see why the majority did not decide the case on the basis of a proprietary claim; and, instead, to grant a proprietary remedy on a personal claim. 5. In practice, it may be that the decision will only be of any practical effect in cases where a claim can also be justified on the basis of an orthodox proprietary claim. That is, perhaps, all 1

2 the more so in the light of the subsequent decision in Angove s Pty Ltd v Bailey 1, where the Supreme Court albeit obiter dicta took a more restrictive approach to the circumstances in which a restitutionary constructive trust might be established by a creditor against a company that subsequently goes in to liquidation. Background and decision 6. In Menelaou, the bank had released charges over a property, which belonged to Ms Menelaou s parents. These secured debts from the parents of around 2.2m. It did so, to enable that first property to be sold for 1.9m, to release money (i) to pay down the parents debts to the bank, by some 750,000 and (ii) to buy a second property, for 875,000, using the proceeds of sale, for Ms Menelaou and her siblings. Against this background: a. The bank had expected to get a first legal charge over the second property (which was bought with the proceeds of sale of the first property) to secure the balance of debts due to it from Ms Menelaou s parents and their companies. The bank, however, failed to get that security. That was as a result of breaches of duty by its solicitors. They had sent the bank a form of legal charge over the second property, purportedly signed by Ms Menelaou, which was later registered. Ms Menelaou, however, supported by handwriting evidence, proved that the signature was not hers. b. In contrast, Ms Menelaou believed she was receiving a gift of the second property. She owed the bank nothing, she was wholly unaware of any prospective or actual charge over the second property, and was innocent of any oversight, or any wrongdoing, in taking what she believed to be a gift. c. When Ms Menelaou learned that a legal charge, ostensibly bearing her signature, had been registered, she issued proceedings for an order to cancel that (purported) charge: and obtained an order that it was void and of no effect because she had not signed it. d. The bank, however, succeeded on its counterclaim that Ms Menelaou had been unjustly enriched, and obtained a declaration that it was entitled to be subrogated to an unpaid vendor s lien over the second property, and then an order for sale 2. 1 [2016] UKSC 47, at para Master Matthews has since held that bank is entitled to an order for the sale of the second property: [2016] EWHC 2656 (Ch). He did so, notwithstanding that Ms Menelaou had never had any contractual relationship or liability to 2

3 7. The bank s problem was that Ms Menelaou did not owe the bank any money. She had not received any money directly from it. The money that had been used to pay for the second property had come from the proceeds of sale that had been paid by the purchaser of the first property, and the bank did not benefit from the assignment of any contractual, statutory or other charges that might have existed over either property. 8. Accordingly, the bank did not have, or at least did not pursue as its primary claim, a proprietary claim against Ms Menelaou. Its claim was essentially a personal one, based on principles of unjust enrichment; albeit seeking a proprietary remedy. 9. In the Supreme Court, Lord Clarke held that, in a claim for unjust enrichment, the court has to ask 4 questions: a. Question 1: Whether the defendant has been enriched, b. Question 2: Whether the enrichment has been at the claimant s expense, c. Question 3: Whether the enrichment was unjust and d. Question 4: Whether there are any defences available to the defendant. 10. These were described as broad headings for ease of exposition, and the first 3 questions may overlap 11. If the first three questions are answered affirmatively and the fourth negatively, a claimant will be entitled to restitution. These were described as the fundamental conceptual structure of an unjust enrichment claim. 12. The Supreme Court found, by a majority, that Ms Menelaou had been unjustly enriched (in becoming the owner of the second property, without having to pay the purchase price, and free of any charge), at the expense of the bank (even though the money to pay had not come directly from it). The majority held that she had no defence to the claim, and subrogated the bank to an equitable charge, by way of an unpaid vendor s lien, over the second property. the bank, and her parents (who had had a contractual liability to the bank) had been discharged from their personal debt liability by subsequent bankruptcy. 3

4 13. Lord Clarke said that whether a particular enrichment is at the expense of the claimant depends on the facts of the case. The question in each case is whether there is a sufficient causal connection, in the sense of a sufficient nexus or link, between the loss to the bank and the benefit received by the defendant, here Melissa. He said that unjust enrichment is concerned with the reversal of transfers of value between claimants and defendants. If you had to establish a direct payment, you would be much closer to a proprietary claim, which might otherwise fetter the principles of unjust enrichment. One should, however always be astute to distinguishing proprietary and non-proprietary claims and the remedies for each. 14. Once it was established that Ms Menelaou had been enriched, Lord Clarke said that the essential question was whether she was enriched at the expense of the bank. If she was, he said that there cannot in my opinion have been any doubt that the enrichment was unjust. If that is the case, the 1 st 3 questions not only overlap, they also begin to merge into one. 15. Unfortunately, there is little guidance as to the principles which one should apply in seeking to determine whether any given enrichment was unjust. The determination that Ms Menelaou s enrichment was unjust does have more of the look and feel of what their Lordships considered to be unjust by reference to their views of fairness and common sense; notwithstanding Lord Neuberger s concern that these should not be the touchstones as to whether there had been unjust enrichment as a matter of law:- a. As already indicated, Lord Clarke said, that, if Ms Menelaou was enriched at the expense of the bank there cannot in my opinion have been any doubt that the enrichment was unjust. He said that the unjust factor in subrogation cases such as this is usually either (1) that the bank was acting on the mistaken assumption that it would obtain the security that it failed to get or (2) a failure of consideration. The bank did not get the first legal charge that it had expected to get: and his Lordship evidently took the view that that was the unjust factor. His Lordship did not consider the fact that Ms Menelaou was acting on the mistaken and honest belief that she was receiving a gift, and that the bank had a good claim against its solicitors. b. Lord Neuberger said that, at first sight, there was some attraction in the argument that, as between the bank and Ms Menelaou, her enrichment was not unjust - not least bearing in mind the points that Ms Menelaou believed she was receiving a gift of the 4

5 second property; she owed the bank nothing; she was wholly unaware of any prospective or actual charge over the second property; and was innocent of any oversight, or any wrong-doing, in taking what she believed to be a gift. His Lordship nevertheless held that her enrichment was unjust: The answer to that contention lies in the fact that Ms Menelaou received the freehold as a gift from her parents. Had she been a bona fide purchaser for full value, it may very well have been impossible to characterise her enrichment as unjust, especially if she had no notice of the bank's rights. If she had paid a small sum to her parents for her acquisition, a difficult question might have had to be faced, although, as at present advised, I think that her enrichment would still have been unjust, but the extent of any unjust enrichment would be reduced by the small sum. But she paid nothing, and she therefore cannot, in my view, be in any better position than her parents so far as the bank's claim is concerned. c. The reference to a bona fide purchaser for full value, however, seems to confuse a defence to a proprietary claim with the various criteria for establishing a claim for unjust enrichment. d. Lord Neuberger recognised that the bank had a cast iron claim against its solicitors; but specifically held that there was nothing in the point that all of the bank s losses would be covered by that claim. His Lordship did not address, in terms, the fact that, while Ms Menelaou might have been enriched by getting something that her parents might not otherwise have been able to give her, the bank had also got something that it did not previously have: the claim against its solicitors. Leaving aside the claim against the bank s solicitors (and their insurers), it is difficult to see where the injustice was as between Ms Menelaou and the bank in these circumstances. e. The essence of the unjust enrichment may lie in the argument that Ms Menelaou should not be in any better position than her parents. That, however, begs the question, on Lord Neuberger s analysis, as to why her position, as against the bank, should then be just if she had paid her parents (rather than the bank) anything for the property. f. Given the current cost of property in England, it is also difficult to see what is inherently unjust in an adult child receiving a gift of a freehold property from their 5

6 parents. Gifts to children, either inter vivos, or on death, are not uncommon. In any event, according to a report on the BBC website dated 3 May 2016, lending from the Bank of Mum & Dad, to help children get on the UK property ladder, would amount to 5 billion in 2016 not all of which will necessarily be repaid, and might ultimately end up, in fact, as gifts. 16. Having answered the first 3 questions (para 9 above) in the affirmative, it was then necessary to consider the 4 th question: whether any defences were available. The majority held that the bank had made out its claim for unjust enrichment and that Ms Menelaou did not have any defence to the claim: a. Lord Clarke said that Ms Menelaou was a donee, and could be in no better position than her parents as donors. There was no suggestion that she was a bona fide purchaser for value, without notice, or otherwise changed her position. These are the same points that Lord Neuberger made, albeit in relation to the answer to the 3 rd question (was the enrichment unjust?) b. Lord Neuberger said that Ms Menelaou might have been more likely to establish a change of position defence given her lack of knowledge of the circumstances that gave rise to her unjust enrichment - but, on the facts, she did not have such a defence. 17. The result in Menelaou is more readily justified by reference to the dissenting judgment of Lord Carnwath. He held that the bank had a proprietary claim to the money that was used to buy the second property, and could be traced in to that property; and that the bank was therefore entitled to a proprietary remedy. Lord Clarke and Lord Neuberger were both attracted by the view that the bank s case could be justified on this alternative, orthodox, basis of a proprietary claim, rather than unjust enrichment. The unorthodox approach of the majority, however, which decided the case on the basis of unjust enrichment and subrogation, nevertheless ruled the day. 18. Be that as it may, and returning to the unjust enrichment claim, once the claim had been established, the next question was: what remedies are available? a. Lord Clarke and Lord Neuberger both recognised that the standard response to an unjust enrichment claim is a monetary restitutionary award, in order to reverse the unjust enrichment. Lord Clarke nevertheless said that the remedy of subrogating the 6

7 bank to the unpaid seller s lien - a proprietary remedy - simply reverses the unjust enrichment which [Ms Menelaou] would otherwise enjoy by ensuring that the bank not only has a personal claim against her but also has an equitable interest in [the second property] ; Lord Neuberger said that it was an appropriate remedy ; and Lord Carnwath that it was arguably justified. It is, however, difficult to see why a proprietary remedy was more appropriate than a monetary award, not least if the monetary award were to be limited to the value of the second property (consistent with the value of Ms Menelaou s enrichment), then to be enforced, perhaps by way of charging order. b. Lord Clarke said that the bank was subrogated to the unpaid seller s lien, without having to show any property rights. His Lordship recognised that the concept of subrogation to an unpaid vendor s lien is not a concept which is particularly straightforward. His Lordship referred to dicta of Lord Hoffman in an earlier case, in which he had said that the subject of subrogation is bedevilled by problems of terminology and classification which are calculated to cause confusion : i. One must, for example, distinguish subrogation in the context of insurance. There, it rests on the common intention of the parties, and gives effect to the indemnity and assignment provisions embodied in the contract. In that sense, subrogation is no more than a contractual assignment of rights. ii. That contractual subrogation is different from the doctrine of subrogation to reverse or prevent unjust enrichment. That is an equitable remedy. Both involve transfers of rights, but are radically different institutions. iii. There are also statutory (as well as equitable) rights of a surety who pays the creditor. These were not referred to in the judgment, but should be mentioned. c. Being subrogated to the unpaid vendor s lien, however, involves a particular difficulty. The vendor has already been paid, and the security thereby extinguished. d. That difficulty is demonstrated by section 5 of the Mercantile Law Amendment Act That was specifically enacted to protect the rights of a surety who pays a secured creditor. It is entitled A surety who discharges the liability to be entitled to 7

8 assignment of all securities held by the creditor. It overcomes the logical problem that, on payment by the surety, the principal debtor s debt is discharged, and the creditor s rights under the security are otherwise thereby extinguished. Statute, effectively, resurrects the security for assignment. e. The 1856 Act is not referred to by any of their Lordships. Lord Clarke, Neuberger and Lord Carnwath each referred to the subrogation of rights of a surety in equity, but not to the statutory mechanism under the Act which resurrects the security for assignment to a surety. f. In so doing, their Lordships endorsed a previous decision of Lord Hoffman, to the effect that (restitutionary) subrogation is an equitable remedy against a party who has otherwise been unjustly enriched to reverse or prevent unjust enrichment; and that the charge is not so much extinguished as kept alive for the benefit of the claimant, in that his legal relations with the defendant (who would otherwise be unjustly enriched) are regulated not so much by the extinguished charge, but as if the benefit of the charge had been assigned to the claimant. g. Lord Carnwath explained this, inter alia, by reference to a quotation in the following terms: if the debt was secured by a charge over the defendant s property, then equity can treat the debt and the charge, by a legal fiction, as though as though they were not extinguished by the payment, thereby enabling the beneficiaries to trace the value inherent in their money into the value inherent in the creditor s fictionally subsisting chose in action against the defendant (emphasis supplied). h. That approach nevertheless assumes that their money, the claimant s money, had been used for the purchase: which is the essence of a proprietary claim. But, on the analysis of the unjust enrichment claim (as opposed to the orthodox proprietary claim) the bank s money had not been used: it was the proceeds of sale of the first property. The assumption that it was the bank s money therefore builds on a fiction, to overcome a logical problem that, in a different context, has been addressed by statute. i. Be that as it may, in looking at restitutionary subrogation as an equitable remedy, Lord Neuberger, for example, held that Given that the bank has a claim based on unjust enrichment against [Ms Menelaou] to the extent described above, it is hard to 8

9 identify a more appropriate remedy for the bank to obtain against [Ms Menelaou]. Subrogation to the lien would accord to the bank, and impose on [Ms Menelaou], a right very similar to, although rather less in value than, that which the bank should have had. It would give the bank a lien instead of a formal charge (my emphasis); albeit limited to the amount of the unpaid vendor s lien (of 875,000, the price for the second property), rather than the larger debt, of over 1 million, that the parents owed the bank at the time of the purchase. j. Whether or not the perceived justice of the claim warranted the remedy, it is difficult, immediately, to see why the bank should effectively get not only a judgment in respect of a personal claim for unjust enrichment but also a security interest, that would take priority over her other creditors. (On the grant of a charging order, the court would have to consider Ms Menelaou s other creditors, if any; but the Supreme Court did not consider them in subrogating the bank to the unpaid vendor s lien). k. Lord Carnwath also took the view that it is surely time for the principles of restitution or unjust enrichment to be allowed to stand on their own feet. A proprietary remedy may arguably be justified because, as Lord Neuberger says such a remedy, rather than a personal remedy, is the most appropriate response to the unjust enrichment found in this case (my emphasis). But why should something that may arguably be justified, be granted? Why not enter judgment on the personal claim, and leave it to the bank, if it considered it appropriate, to seek a charging order? 19. Lord Neuberger did say that the bank s claim to be subrogated to the unpaid vendor s lien could in fact be justified by a simpler and less potentially controversial route. At least on the basis of the arguments we have heard, I am very sympathetic to the notion that the bank had a proprietary interest in the 875,000 which was used to purchase [the second property] and if that is right, its subrogation claim becomes relatively uncontroversial. 20. In his judgment, Lord Carnwath found in the bank s favour, adopting the basis of a proprietary claim, rather than unjust enrichment. He held that there was a Quistclose trust impressing the 875,000 that was used to buy the second property, when it was in the solicitors client account, and held that It follows in my view that there is no difficulty in this case in finding the necessary tracing link between the bank and the money used to purchase the new property The bank s interest in the purchase money was clear and 9

10 direct. He therefore found that the subrogation remedy was readily available, in respect of a proprietary claim to the money used to buy the second property. 21. The claim for subrogation to the unpaid vendor s lien might, therefore, be justified on a more orthodox basis, regardless of the claim for unjust enrichment. A different approach? 22. One might have thought that, given the apparent liberalisation in allowing the bank s claim for unjust enrichment, and more particularly in allowing subrogation to grant an equitable lien over the property, other similar claims might receive similar, favourable treatment. That would be wrong. 23. In a different, but similar context, Lord Sumption (with whom Lord Neuberger, Lord Clark and Lord Carnwath agreed) has recently said that The exact circumstances in which a restitutionary proprietary claim may exist is a controversial question which has given rise to a considerable body of judicial comment and academic literature : Angove s case, at para 30. There had been cases which indicated, for example, that a constructive trust might be imposed if it would be unconscionable for a company, as agent, to receive money as agent knowing that it could not account for it to its principal, because the company then went in to liquidation. Given the approach in Menelaou, one might have assumed wrongly, it transpires - that the Supreme Court would be more amenable to endorsing those cases: a. Although the point was obiter in Angove s case, the Supreme Court indicated that, absent an express trust or a Quistclose trust (or, as happened in Angove s case, the earlier termination of the agent s authority), a claimant who had paid money to a company after the commencement of an administration, in the belief that that would discharge their liability to pay for wine provided by the company s principal, could not rely on a restitutionary constructive trust in order to get a full refund; and would, instead, have had to prove as unsecured creditors. b. Lord Sumption added that, to establish a restitutionary constructive trust, essentially a proprietary remedy for a personal claim, For present purposes it is enough to point out that where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that that intention was vitiated, for example because the money was paid as 10

11 a result of a fundamental mistake or pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party. One or other of these is a necessary condition, although it may not be a sufficient one. The right to the restitution of money paid on a consideration which has wholly failed [because of the insolvency of the company] is simply a process of contractual readjustment, giving rise like the contract itself to purely personal obligations (para 30). 24. It is perhaps surprising that the Supreme Court, in Menelaou, was prepared to grant a proprietary remedy, by way of subrogation, in an unjust enrichment case; and then, in Angove s case, seek to curtail the operation of the proprietary remedy of a constructive trust in cases where it would be unconscionable for a company to receive money as an agent, in light of its impending liquidation. Comment 25. My principle concerns with the decision in Menelaou are: a. The criteria for establishing a claim for unjust enrichment are by reference to broad headings set out for ease of exposition. These may overlap. b. There is little (detailed) guidance as to how one must assess what is unjust. c. A claim for unjust enrichment is not necessarily a claim for a proprietary remedy. Why did the bank not simply pursue a personal claim for unjust enrichment against Ms Menelaou, and then seek to enforce that judgment by way of a charging order over the second property? Why should a proprietary remedy, of an equitable charge, be granted where the claim was essentially a personal one? The remedy of restitutionary subrogation to an equitable charge (by way of an unpaid vendor s lien) was granted on the grounds that it was an appropriate remedy, which was arguably justified : but those are incredibly difficult criteria to apply in practice. The grant of a proprietary remedy took no account of the interests of any other creditors that Ms Menelaou might have had, as one would expect (by analogy) if the court had been considering whether to make a charging order. 11

12 d. It is difficult to predict how a court will deal with a particular case; and perhaps all the more so in the light of the more restrictive approach taken in Angove s case. 26. These concerns are reinforced by the dicta of Lord Salmon in an earlier case, which Lord Clarke endorsed in Menelaou, to the effect that it is impossible to formulate any narrower principle, as to whether the courts will apply the doctrine of subrogation to the facts of any particular case, than to say that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be applied. The court can therefore take a flexible approach to the remedies in a particular case but how flexible? Concluding thoughts: a case that benefits insurers? 27. In Menelaou, there has been a blurring of the distinction between the remedies properly available for personal claims for unjust enrichment, and proprietary claims. Lord Canwarth s decision, adopting a more orthodox approach, to a proprietary claim, is much less controversial. 28. I find it difficult to see why the bank, in practice, considered that it needed to be subrogated to an equitable charge. It had a personal claim for unjust enrichment, and a judgment could have been enforced by obtaining a charging order. Why not simply do that? 29. The answer may lie in an aside from Lord Neuberger. He said that, if the bank had recovered damages from [the solicitors], then [the solicitors] would be subrogated to the bank s unjust enrichment claim against Ms Menelaou. The bank s solicitors (who had sent the bank a form of legal charge that was not in fact signed by Ms Menelaou), or their insurers, would then enjoy the benefit of the equitable charge. Lord Clarke also noted that the bank had an indemnity for its losses from the solicitors (in reality their indemnity insurers), which had been agreed during the trial. 30. If the bank s solicitors, or their insurers, were in fact behind the litigation, that begs the question as to whether it would be, or was, just for the bank s solicitors, who had been acted in breach of duty, to enforce the equitable charge by way of sale, and then evict a wholly innocent Ms Menelaou from her home. Unfortunately, that point is not addressed in the judgments. 31. On that note, one might close with the more general question, what is just? 12

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