Banque Financière de la Cité v Parc (Battersea) Ltd

Restitutionary subrogation is an equitable remedy for unjust enrichment. It does not depend upon a common intention between the payer and the person enriched. The court asks whether the defendant was enriched at the claimant’s expense, whether the enrichment was unjust, and whether a defence or policy reason precludes relief.

A payment made under a mistaken expectation of effective priority may satisfy those requirements. Carelessness by the payer and the recipient’s innocence do not by themselves defeat restitution. The remedy is relational and must be tailored to the enrichment. The court may regulate the parties’ rights as if a discharged security had been assigned, without creating rights against persons who were not enriched or giving the claimant more than it bargained for.

Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 concerned short-term refinancing used to reduce a loan secured by a first charge over development land. The appellant bank advanced DM30 million through an intermediary on the understanding that companies within the borrower’s group would postpone their intra-group claims. The postponement letter proved ineffective against Omnicorp Overseas Ltd, which held a second charge and benefited from the reduction of the first secured debt.

Robert Walker J held that the bank was entitled to restitutionary relief by subrogation. The Court of Appeal, in a judgment delivered by Morritt LJ, allowed Omnicorp’s appeal because it considered that the enrichment was not unjust and that subrogation would confer greater security than the bank had bargained for. The central issue before the House was whether the bank could be treated, as against Omnicorp alone, as having the benefit of the first charge to the extent that its money discharged the secured debt.

1. Disposition. The House unanimously allowed the appeal. Lord Hoffmann delivered the leading speech. Lord Griffiths expressly adopted his reasons, while Lord Steyn and Lord Clyde also relied upon them. Lord Hutton reached the same conclusion. The declaration made by Robert Walker J was restored subject to limiting it expressly to the relationship between the bank and Omnicorp.

2. Unjust enrichment. Per Lord Hoffmann and Lord Steyn, restitutionary subrogation required the court to determine whether Omnicorp was enriched, whether that enrichment was at the bank’s expense, whether it was unjust, and whether a defence or policy reason required relief to be withheld. Omnicorp’s second charge became more valuable when the bank’s money reduced the debt secured by the first charge. The interposition of the immediate borrower did not change the substance of the transaction because the money was paid directly to discharge Parc’s secured debt.

3. Mistake and intention. Per Lord Hoffmann, contractual subrogation founded upon common intention must be distinguished from equitable subrogation granted to prevent unjust enrichment. The latter does not require mutual consent between the claimant and the person enriched. The bank paid under the mistaken assumption that the postponement letter would give it priority over intra-group indebtedness. That priority was an essential condition of the transaction, and its failure made Omnicorp’s resulting enrichment prima facie unjust.

4. No requirement of fault. Per Lord Steyn, Lord Hoffmann and Lord Hutton, restitution is not founded upon wrongdoing by the recipient. Omnicorp’s lack of knowledge, misrepresentation or sharp practice therefore provided no answer. The bank’s failure to verify the authority behind the postponement letter likewise did not prevent restitution. Per Lord Clyde, the remedy was not wholly discretionary once its necessary elements were established, although relief could be refused on an applicable ground of public policy.

5. Nature and scope of relief. Per Lord Hoffmann, subrogation does not literally preserve or transfer a discharged charge. It regulates the claimant’s legal relationship with the enriched defendant as if the benefit of the security had been assigned. The remedy therefore operated only against Omnicorp. It did not affect the first chargee’s priority, confer rights of sale or foreclosure against Parc, or give the bank priority over other creditors. Confined in that way, the remedy gave the bank no more than the priority over intra-group indebtedness for which it had stipulated.

1. House of Lords: Unanimously allowed the appeal in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221. The House restored the first-instance declaration, amended so that the bank was entitled to be treated, as against Omnicorp alone, as if it had the benefit of the first charge.
2. Court of Appeal: Morritt LJ, with Mummery and Beldam LJJ, allowed Omnicorp’s appeal. The court held that its enrichment was not unjust and declined to grant subrogation.
3. High Court: Robert Walker J held that the ineffective postponement arrangement left Omnicorp unjustly enriched and granted the bank relief by subrogation.