Niru Battery Manufacturing Company & Anor v Milestone Trading Ltd & Ors

Equitable subrogation is a restitutionary remedy available where the defendant is enriched at the claimant’s expense, the enrichment is unjust, and no policy reason requires denial of relief. The remedy is not confined to traditional categories and may be fashioned to the circumstances.

A recipient of mistaken funds who pays them away in bad faith cannot improve its position by relying on change of position. Relative carelessness or negligence does not substitute for the recipient’s required good faith. Where one jointly and severally liable defendant satisfies the judgment, the bad-faith recipient may be required to reimburse it in full.

Niru and Bank Sepah obtained judgment against Mr Mahdavi, Credit Agricole Indosuez (CAI) and SGS United Kingdom Limited. The underlying judgment held CAI liable in restitution and SGS liable in negligence. Their appeals against primary liability were dismissed on the first appeal: [2003] EWCA Civ 1446.

In Part 20 proceedings, SGS paid the whole joint and several judgment for principal and interest and sought recovery from CAI by subrogation, recoupment and contribution. Moore-Bick J held that SGS was subrogated to Niru’s claim and could recover the whole sum, but rejected recoupment and held that the Civil Liability (Contribution) Act 1978 did not apply. CAI appealed the subrogation ruling. The central issue was whether SGS could recover the full amount from CAI.

Appeal dismissed. Lord Justice Clarke gave the leading judgment. The President agreed with his reasons. Lord Justice Sedley agreed with the result but expressed separate reservations about the interaction between restitution, recoupment and statutory contribution.

1. Subrogation. Following Banque Financière de la Cité v Parc (Battersea) Ltd, [1999] 1 AC 221, the court applied the restitutionary inquiry: whether CAI was enriched at SGS’s expense, whether the enrichment was unjust, and whether policy reasons justified withholding relief. Subrogation is not confined to traditional categories. It is a remedy, rather than a cause of action, which may be fashioned to prevent unjust enrichment.
2. Unjust enrichment and bad faith. SGS’s payment discharged CAI’s liability under the judgment. CAI had paid away money received under a mistake in bad faith and could not rely on change of position. It was to be treated as if it had retained the money. Relative fault was irrelevant; good faith by the recipient was the relevant requirement, applying the reasoning in Dextra Bank & Trust Co Ltd v Bank of Jamaica, [2002] 1 All ER (Comm) 193. CAI’s conduct was the effective cause of the loss, so full recovery was just.
3. Recoupment. The conditions stated in Moule v Garrett, (1872) LR 7 Ex 101, were satisfied. SGS was compelled by law to pay, its payment discharged CAI’s liability, and CAI was primarily or ultimately liable as between the parties. That question depended on the underlying rights and liabilities, not merely on the form of the judgment.
4. Contribution. It was unnecessary to decide whether the Civil Liability (Contribution) Act 1978 applied between a tortfeasor and a person liable in restitution, or whether restitution was compensation for the purposes of section 6(1). If the Act applied, section 2(1) required CAI to contribute 100 per cent. The same result followed independently through subrogation and recoupment.
5. Additional observations. The rule in Merryweather v Nixan, (1799) 8 TR 186, did not bar relief between a tortfeasor and a person liable in equity. Sedley LJ considered that contribution should, where possible, reflect blameworthiness and causative potency, but agreed that CAI should reimburse SGS in full. The court’s order was that the appeal be dismissed; consequential orders were to be decided on paper.

1. Court of Appeal (Civil Division): The present second appeal was dismissed. The court upheld SGS’s entitlement to recover the whole principal and interest payment from CAI: [2004] EWCA Civ 487 .
2. High Court of Justice, Queen’s Bench Division, Commercial Court: Moore-Bick J held that SGS was subrogated to Niru’s claim and could recover the whole amount paid, but rejected recoupment and held that the Civil Liability (Contribution) Act 1978 did not apply: [2003] EWHC 1032 (Comm) .
3. Court of Appeal (Civil Division): On the earlier appeal, the court dismissed CAI’s and SGS’s challenges to the underlying liability judgments: [2003] EWCA Civ 1446 .