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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Filby v Mortgage Express (No 2) Ltd. [2004] EWCA Civ 759 (18 June 2004) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2004/759.html Cite as: [2004] EWCA Civ 759

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS COUNTY COURT
HIS HONOUR JUDGE BEHRENS
Rg 401828

		Royal Courts of Justice Strand, London, WC2A 2LL
		18th June 2004

Lord Justice May:

Introduction

1. This appeal against part of the judgment and order of HH Judge Behrens sitting in the Leeds County Court on 6^th August 2003 concerns the equitable remedy of subrogation. The label subrogation has been recognised as confusing. Some of the cases relating to the remedy show a tension between two approaches. One approach sees the remedy as flexible and adaptable to reverse what would otherwise be seen as unjust enrichment. The other approach may be more confined by formal equitable principles beyond which flexibility may perhaps not go. On one view, the present appeal is at the margin of these approaches. A similar tension was described by Lord Goff of Chieveley in Westdeutche Bank v Islington Borough Council [1996] AC 669 at 685, in which, in considering the ambit of resulting trusts, he referred to the anxiety of equity lawyers that underlying equitable principles should not be distorted by the legitimate ambition of restitution lawyers.

Facts

2. Mr and Mrs Filby were married in 1977. On 7^th December 1984, they bought a house in Berkshire, 52 Gainsborough in Bracknell, for £59,000. This was subject to a mortgage in favour of Halifax Building Society to secure a loan of £35,000.
3. In about 1988, Mr Filby started to carry on a business of property development. Mrs Filby had some involvement in this business. By 5^th April 1990, they had two accounts in their joint names with Midland Bank. A business account had a debit balance of £43,188. A development loan account had a debit balance of £194,586. Mr Filby was then in the process of arranging to remortgage 52 Gainsborough with the claimants.
4. On 15^th May 1990, a mortgage deed was apparently executed between Mr and Mrs Filby as mortgagors and the claimants as mortgagee. It appeared to effect a first legal charge on 52 Gainsborough as security for a loan of £106,138. After certain deductions, a net amount of £104,054 was transferred by the claimants to their solicitors, Davies Donovan & Co, who thought they were acting also for Mr and Mrs Filby on instructions received from Mr Filby. The solicitors paid £40,859 to the Halifax to discharge the then outstanding Halifax debt and thereby redeem the Halifax mortgage. After deduction of smaller amounts for the Land Registry fee, an insurance premium and the solicitors' costs, there was a balance of £60,801. They paid this amount on Mr Filby's instructions to Midland Bank in reduction of the debit balance on the joint development loan account.
5. In 1992, Mr and Mrs Filby signed a second charge on the property in favour of Midland Bank. Midland Bank are now HSBC. They are not parties to these proceedings and questions relating to them have not been judicially determined. However, a statement of account which was before the judge in the present proceedings indicates that on 24^th September 2002 HSBC wrote off a then outstanding debit balance on the business development loan account of £28,062. This appears to indicate that the amount outstanding in 1990 after the payment of £60,801 had been reduced over the years. We understand that HSBC claim that the amount which they wrote off in September 2002 is secured by their second charge on the property.
6. Payments due under the claimant's mortgage were paid from time to time over the years after 1990. From May 1995, payments were paid to the claimants by the Department of Social Security. Some of these payments were paid by or on behalf of Mrs Filby. But from as early as September 1991, payments under the mortgage were in arrears.
7. In September 1994, the claimants issued possession proceedings. On 3^rd November 1994, a possession order was made in favour of the claimants. The amount then outstanding under the mortgage was £132,248. The claimants did not then enforce the possession order. Much happened between November 1994 and October 2000 which was relevant to issues which the judge decided on which there is no appeal to this court. Mr and Mrs Filby divorced in June 1995. She had not lived at the property during parts of this period. She finally moved out in August 2000.
8. On 23^rd October 2000, the claimants were given permission to enforce their possession order. A subsequent application to set aside the possession order was abandoned. The claimants discovered that the property had been abandoned by Mrs Filby. So they took possession voluntarily. They subsequently sold the property for £190,416 on 18^th May 2001. The questions which Judge Behrens had to decided related to the distribution of the proceeds of sale.
9. The trouble was that Mrs Filby never signed the claimants' mortgage application form nor the mortgage deed. Her apparent signature on these documents was forged, presumably by or at the instigation of Mr Filby. Historically there may have been an issue about this, but it did not survive into the proceedings. Mrs Filby contends that the mortgage is a nullity and that she is not bound by it. Her counterclaim in the proceedings was that she is beneficially entitled to a full half share in the proceeds of sale.
10. The claimants eventually accepted that her signature had been forged, but contended that she had ratified the charge or that she was estopped from denying that she signed it. They did not pursue to trial their ratification case, but they did maintain their estoppel case. The judge accepted Mrs Filby's evidence that she did not know of the mortgage application to the claimants and was not aware of the borrowing from them at the time that it was made. He also accepted that she did not appreciate that there was a mortgage in favour of the claimants until late 1994 and that she did not know of the forgery until November 1994. She told her then solicitors about the forgery on the 25^th November 1994. For reasons which it is not necessary to go into, the claimants were not notified of the forgery until 10^th May 1999. The judge considered evidence relevant to the issue of estoppel, which he decided in favour of Mrs Filby. There is no appeal against this decision nor the findings of fact on which it was based.

The subrogation claims

11. The claimants contended that they were entitled to be subrogated to the rights of Halifax Building Society under their 1984 mortgage. They so claimed because £40,859 of the loan which they advanced in 1990 upon an expected security which had failed was used to discharge the Halifax mortgage. This claim was conceded on behalf of Mrs Filby before the hearing. The principle on which this concession was correctly made is shortly stated by Millett LJ (as he then was) in Boscawen v Bajwa [1996] 1 WLR 328 at 335B; and in more extended terms by Walton J in Burston Finance Limited v Speirway Limited [1974] 1 WLR 1648 at 1652B-C:

"… where A's money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B's rights as a secured creditor … [subrogation] finds one of its chief uses in the situation where one person advances money on the understanding that he is to have a certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged, in whole or in part, by the money so provided by him, but of course only to the extent to which his money has, in fact, discharged their claim."

That principle applied exactly to the discharge in the present case of the Halifax mortgage with money provided by the claimants in expectation of obtaining a first legal charge over 52 Gainsborough which they did not obtain because of the forgery.

12. The judge accordingly ordered that the claimant was entitled against Mrs Filby to be subrogated to the Halifax mortgage dated 7^th December 1984 to secure the amount of £40,859.70 as at 15^th May 1990, Mrs Filby to be credited with an agreed percentage of all payments subsequently credited to the claimant's mortgage account. All issues of quantification were reserved.
13. The claimants also claimed to be entitled to be subrogated to the rights of Midland Bank (now HSBC) against Mrs Filby to the extent that and because her joint debt to them was discharged by the payment of £60,801 on 15^th May 1990. The claimants contended that there was no relevant distinction between the discharge of the Halifax loan and the reduction of the Midland Bank debt and that an equivalent consequence should follow in law. Mrs Filby resisted this contention. Differences of fact were that the Halifax loan was secured on the property, but the Midland Bank loan was not; and that the claimants' advance was made on condition that the Halifax loan was discharged but there was no such condition relating to the Midland Bank loan. The claimants contend that the Midland Bank loan was discharged with money in which they retained a legal and beneficial interest until it merged with the Midland Bank debt. Mrs Filby contends that the claimants retained no legal or beneficial interest in the balance of their advance after the discharge of the Halifax loan; that the money belonged to Mr Filby pursuant to a voidable agreement which was never rescinded; that he could have disposed of it as he wished; and that the fact that he chose to use it to reduce the joint loan account does not entitle the claimants to a remedy of subrogation against Mrs Filby. The judge decided this issue in favour of the claimants. He gave Mrs Filby permission to appeal on this issue. This is the appeal now before the court.

The judge's decision

14. The judge regarded as important that Mr and Mrs Filby were jointly liable to Midland Bank in a sum substantially in excess of £60,000. £60,801 of the remortgage money was paid to Midland Bank and had the effect of reducing the joint liability to the bank. The claimants, as well as Mrs Filby, were victims of a mortgage fraud. The claimants could not be criticised for assuming the mortgage was validly executed. Their payment was made under a mistake that they had a valid mortgage application and a valid mortgage. If Midland Bank had held a charge over the property, there was little doubt that the claimants would be entitled to be subrogated to the rights of Midland Bank under that charge.
15. The judge held that the threefold test propounded by Lord Hoffmann in Banque Financière v Parc [1999] 1 AC 221 at 234C, to which I refer later in this judgment, was satisfied. Mrs Filby had been enriched at the claimants' expense. Her liability to Midland Bank had been reduced. This enrichment was unjust in that it was a windfall for Mrs Filby. It seemed to the judge that there were no policy reasons to deny a remedy to the claimants. The judge found it difficult to see why the claimants' right to a restitutionary remedy should depend on whether Midland Bank had security in support of their loan. He pointed to passages in Banque Financière and Boscawen which suggested that there could be subrogation to an unsecured debt. He distinguished the case of Re Cleadon Trust [1939] Ch. 286, relied on by Mr Marshall on behalf of Mrs Filby. He regarded the principles set out in Liggett v Barclay's Bank [1928] 1 KB 48 as of more relevance to the facts of this case. As to the contention that the payment to Midland Bank was made by Mr Filby and not the claimants, the judge considered that it was possible to trace the payment from the claimants directly to the reduction of the Midland Bank overdraft. He noted that Millett LJ had said in Boscawen that subrogation is a flexible remedy which can be adapted to novel situations.

Grounds of appeal and submissions

16. Mrs Filby's written grounds of appeal contend that the judge's decision as to subrogation was wrong in law. He was wrong to say that it was possible to trace the payment of £60,801 from the claimants to Midland Bank. The money was both beneficially and legally Mr Filby's money. None of Lord Hoffmann's questions in Banque Financière at page 234C should be answered in favour of the claimant.
17. Mr Marshall, on behalf of Mrs Filby, did not pursue with any vigour submissions that Mrs Filby was not enriched or that there were policy reasons why an order should not be made. Mrs Filby plainly was enriched. The debit balance of her joint account was reduced by the amount of the payment.
18. Mr Marshall submits that the loan by the claimants to Mr Filby was induced by his fraudulent misrepresentation. The contract was voidable, not void. The claimants did not seek to avoid the contract by rescission after they were aware that Mrs Filby's signature was forged. If a representee does not elect to avoid a voidable contract, the representor is not a constructive trustee of property transferred under the contract, and no fiduciary relationship exists between him and the representee. Mr Marshall refers to Lonrho v Fayed (No. 2) [1992] 1 WLR 1 at 11-12; Daly v Sydney Stock Exchange [1986] 160 CLR 371 at 387-390; and the analysis of authorities by Rimer J in Shalson v Russo [2003] EWHC 167 (Ch). Mr Marshall submits accordingly that the £60,801 which the solicitors paid to Midland Bank was by then Mr Filby's money. If Mrs Filby is to be regarded as having been enriched, this was not at the claimants' expense. The claimants cannot trace a proprietary right to or into the Midland Bank account. The judge was wrong to find that they could. They need to do so to establish their equitable claim. Mr Marshall relies on the judgment of Millett LJ in Boscawen at page 334D-E. Millett LJ there said that tracing is the process by which a plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received can properly be regarded as representing his property.

"He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. Unless he can prove this he cannot (in the traditional language of equity) raise an equity against a defendant or (in the modern language of restitution) show that the defendant's unjust enrichment was at his expense."

Mr Marshall makes essentially the same point by saying that since, as he contends, Mrs Filby's enrichment was not at the claimants' expense, she was not unjustly enriched.

19. Miss Sandells, for the claimants, emphasises that the claimants did not get what they bargained for. They offered a joint loan to be secured by a properly executed first legal charge. They did not obtain this and the deed which they thought they had entered in to was void, not voidable, for want of proper execution and for want of consideration. Accordingly property in the money did not pass to Mr Filby. The money used to reduce the Midland Bank overdraft was the claimants' money. Further, the solicitors parted with money in (admittedly unintentional) breach of contract and breach of trust. The terms of the solicitors' Report on Title stipulated that:

"The Advance will only be made when the Property has been vested in the Borrowers and the Mortgage Deed, Mortgage of Life Policy and any other necessary documents have been properly executed."

The solicitors accordingly held the money on trust, one of the terms of which was that they would not part with it before the mortgage deed had been properly executed. It was not. In consequence, the claimants remained beneficial owners of the money until its identity was lost upon payment into the Midland Bank loan account which was in overdraft. The tracing requirements described by Millett LJ in Boscawen at page 334 were accordingly fulfilled. Mrs Filby was unjustly enriched at the claimants' expense. The claimants are entitled by equitable subrogation to rights against Mrs Filby equivalent to those of Midland Bank under the loan account in respect of the payment in May 1990 of the £60,801.

20. Mr Marshall accepted that the term of the Report on Title imposed an absolute contractual obligation on the solicitors of which they were unknowingly in breach. He did not accept that they were in breach of trust. He submitted that in circumstances such as these a solicitor cannot be unknowingly in breach of trust. It is a precondition of a breach of trust that the solicitors' conscience should be affected. He relied on Westdeutsche Landesbank v Islington London Borough Council [1996] AC 669 and Bristol and West Building Society v Mothew [1998] Ch 1. Miss Sandells submitted that, just as this was an absolute contractual obligation, it was an absolute trust obligation. She submitted that section 61 of the Trustee Act 1925 indicates that a trustee can commit a breach of trust without knowing anything about it. She relied on Perrins v Bellamy [1899] 1 Ch 797 to show that the court can relieve trustees from liability for inadvertent breach of trust and on Whittaker v Bamford [1974] 1 Ch. 1. She seeks to distinguish the cases relied on by Mr Marshall.

Discussion and decision

21. In the Westdeutsche Landesbank case, the bank claimed repayment of the balance of a lump sum paid to the borough council under an interest rate swap agreement which was void because such agreements by local authorities were held to be beyond their power to enter into. The issue in the House of Lords was whether the bank was entitled to compound interest. That issue was affected by the question whether the council was in a fiduciary position vis-à-vis the bank. It was held that they were not. In that context, Lord Browne- Wilkinson at page 705 stated the relevant principles of trust law to include:

"(i) Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).

(ii) Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience.

(iii) …

(iv) Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforced in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice."

22. This passage does not address any question of breach of trust or of payment made contrary to the terms of the trust: but of the existence of a trust in the first place. This can also be seen also from other passages in the opinions in the case. Lord Goff of Chieveley said at page 690 that there was no basis for holding that a resulting trust arises in cases where money has been paid under a contract which is ultra vires and therefore void ab initio. There is a further passage in the opinion of Lord Browne-Wilkinson at page 714 where he disagrees with the reasoning of Goulding J in Chase Manhattan Bank v Israel-British Bank [1981] Ch. 105 that the receipt of money paid under a mistake without more constituted the recipient a trustee. Lord Browne-Wilkinson could not understand how the recipient's conscience could be affected at a time when he was not aware of any mistake – see also Lord Woolf at 738B.
23. In the present case, the solicitors were in a fiduciary position, not because the money was paid to them under a void contract, but because of the circumstances and terms upon which they held it. The void contract was not a contract to which they were (or would have been) a party. Their retainer by the claimants was valid. There is no doubt but that under that retainer the solicitors held the money upon trust, one of whose express terms was the stipulation in the Report on Title to which I have referred. Mr Marshall does not contend otherwise. His submission relates to possible breach of trust, not to the existence of the trust. In my view, the Westdeutche Landesbank case does not help his submission.
24. In Bristol and West Building Society v Mothew [1998] Ch 1, the defendant solicitor acted for purchasers of a house and also for the plaintiff building society, who offered to advance money upon a mortgage. The offer was on an express condition that the balance of the purchase price was to be provided by the purchasers without further borrowing. The plaintiff instructed the solicitor to report before completion any proposal that the purchasers might create a second mortgage or otherwise borrow in order to finance part of the purchase price. The solicitor knew that the purchasers were arranging for an existing bank debt to be secured by a second charge on the new property. Due to an oversight, he stated in his report to the plaintiff that the balance of the purchase price was being provided by the purchasers without resort to further borrowing. The plaintiff advanced the loan and the purchase was completed. When the purchasers defaulted, the plaintiff enforced its security and the house was sold at a loss. The plaintiff claimed to recover from the solicitor the whole of its loss on the transaction, alleging breach of contract, negligence and breach of trust. The claim in negligence and breach of contract succeeded subject to damages being assessed. There was an acknowledged possibility that these damages might be less than the full amount of the plaintiff's loss. For this reason, the claim for breach of trust or of fiduciary duty was also pursued on the basis that this claim could cover the full loss. The Court of Appeal held that the solicitor's conduct in providing the plaintiff with the wrong information, although a breach of duty, was neither dishonest nor intentional but due to an oversight; and that his conduct and subsequent application of the money advanced by the plaintiff to complete the purchase was not a breach of trust or of fiduciary duty.
25. Millett LJ treated the oversight as an unconscious breach of duty. The solicitor was unaware of the fact that he had committed a breach of his instructions

"… and if this means that his subsequent application of the mortgage money constitutes a breach of trust then it will be a breach of trust of which he is unaware. I would not willingly treat such conduct as involving a breach of trust or misapplication of trust money unless compelled by authority to do so, and in my judgment neither principle nor authority compels such a conclusion." (page 16)

26. Section 61 of the Trustee Act 1925 gives the court a discretionary power to relieve a trustee from personal liability for an established or arguable breach of trust if the trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust. The two authorities to which Miss Sandells refers (see paragraph 20 above) both concerned section 3 of the Judicial Trustees Act 1896, which was the statutory predecessor of section 61 of the 1925 Act. They show that the section may apply, not only to an executive or administrative blunder by a trustee, but also to payments made on an erroneous understanding, based on legal advice, of the legal effect of the document which constituted the trust. In each of the cases, the trustee was held to have acted honestly and reasonably and was relieved from personal liability. In each of the cases, there was no question but that there had been a breach of the trust. The logic is that there may be breaches of trust which are inadvertent and where the trustee has acted both honestly and reasonably. The explicit purpose of section 61 of the 1925 Act is to relieve trustees from the consequences of such breaches.
27. It is not, in my view, necessary for present purposes to seek to reconcile this logic with what Millett LJ said in Bristol and West Building Society v Mothew for reasons which I shall shortly explain.
28. In my judgment, Miss Sandells is correct to submit that the court is not concerned in the present case with a contract which was merely voidable for misrepresentation. There was, of course, a misrepresentation as to the genuineness of Mrs Filby's signature, but this was not a contract which, subject to an alleged misrepresentation, was validly entered into and duly performed, as in Lonrho v Fayed (No. 2). The effect of the forged signature was that the claimants simply did not get what they bargained for. The contract was void and no proprietary interest in the money ever passed to Mr Filby. Mrs Filby herself correctly contends that the contract was a nullity as against herself. It was also in my judgment void as between the claimants and Mr Filby. The money which the solicitors paid on Mr Filby's instruction to Midland Bank was not Mrs Filby's money, since, as she herself contends, the contract under which it was advanced was a nullity as against her. It was not Mr Filby's money either, since he had obtained it fraudulently under a void contract. It remained the claimants' money until it reached Midland Bank and disappeared into the overdraft. That is so, irrespective of any analysis derived from the fact that the solicitors received and held the money as trustees.
29. As to that analysis, the solicitors held the money upon an express trust. The question is not whether the solicitors were in breach of fiduciary duty or breach of trust. No claim is made against them in these proceedings. It is not necessary or appropriate to decide whether the solicitors acted in breach of trust, nor whether, if they did, they would be relieved from personal liability under section 61 of the 1925 Act. The question is whether the claimants' beneficial interest in the money continued when the money was paid by the solicitors to Midland Bank and until it reached the Midland Bank account in overdraft. In my judgment, it did so continue. Whether or not the solicitors would be personally liable for breach of trust, the fact remains that the money was paid contrary to the terms of the trust upon which the solicitors held it. For this reason, the claimants retained their beneficial ownership.
30. For these reasons, in my judgment the claimants remained both the legal and beneficial owners of the £60,801 paid to Midland Bank until Midland Bank received it. Miss Sandells is correct that the tracing requirements described by Millett LJ in Boscawen at page 334 were fulfilled so that Mrs Filby was unjustly enriched at the claimants' expense. I reject Mr Marshall's submission to the contrary, which was I think his main submission on this appeal. I note that he opened the appeal saying that it raised a narrow point relating to the solicitors.
31. It follows, in my view, subject to one gloss that the judge's decision on the point in issue in this appeal should be upheld upon a straight application of the orthodox analysis of the remedy of equitable subrogation by Millett LJ in Boscawen.
32. The gloss concerns the fact that the Midland Bank loan account was not secured at the time the £60,801 was paid.
33. As to this, Miss Sandells submits that there is no question of the claimants seeking greater rights than they bargained for. They bargained for a first legal charge, which they did not get. This is not a case where the claimants set out to make an unsecured loan with the intention that it should be used to discharge a particular debt. In relation to the Midland Bank loan, the claimants, having bargained for a first legal charge, are seeking to be subrogated to HSBC's lesser unsecured rights under the loan account. She submits with reference to the Banque Financière case that there is no reason in principle why the claimants should not be treated as if HSBC's lesser rights were assigned to them to the extent of the amount paid using their money in reduction of the loan. I agree. Mr Marshall accepts that the Banque Financière case shows that the rights to which a claimant may be subrogated do not have to be secured rights and that equitable subrogation is a flexible remedy.
34. Before the judge and to a lesser extent before this court Mr Marshall relied on In re Cleadon Trust [1939] Ch. 286. In considering this submission the judge quoted at length from the judgment of Pill LJ in Crantrave Ltd v. Lloyd's Bank plc [2000] QB 917. In Crantrave, the defendant bank made a payment from the plaintiff company's account to a judgment creditor of the plaintiff company in the mistaken belief that it was obliged to do so under a garnishee order which had not been made absolute. This court upheld the claim of the company's liquidator that the company was entitled to repayment by the bank of the amount so paid on the basis that the bank had wrongfully and without authority debited the company's account. The bank contended that the company had suffered no loss since the payment had partially discharged an existing debt. Pill LJ referred to In re Cleadon and Liggett v Barclay's Bank at some length. He said at page 923:

"Applying the Cleadon case to the present facts, I regard it as authority for the proposition that, in the absence of authorisation or ratification by the company of the bank's payment to the third party, the "mere fact" that the bank's payment enured to the benefit of the company does not establish an equity in favour of the bank against the company. Moreover, even upon Wright J's formulation in the Liggett case, in order to establish the equity, the bank would have to show that the payment discharged (at least partially) a legal liability of the customer. In the absence of evidence that the bank's payment has been made on the customer's behalf or subsequently ratified by him, the payment to the creditor will not of itself discharge the company's liability to the creditor. … it is not established in this case the company's legal liability to the company's creditor had been discharged by the voluntary payment by the bank."

Mr Marshall sought to rely on this principle in the present case. The mere fact that Mr Filby's payment to Midland Bank of money deriving from the claimants enured for Mrs Filby's benefit does not, he submits, establish an equity in favour of the claimant against Mrs Filby.

35. The judge distinguished the present case from In re Cleadon. First, this was not a case of one party deliberately paying off a debt to a third party. It concerns two innocent victims of a mortgage fraud. Second, although Mrs Filby knew nothing of the transaction at the time, she clearly authorised Mr Filby to deal with the joint account. The payment did indeed discharge part of her liability to Midland Bank. In addition, the entire submission is premised on the contention, which I have rejected, that Mr Filby was using his own money to discharge in part the Midland Bank loan. In my view, the judge correctly rejected this submission.
36. For these reasons, in my judgment this appeal should be dismissed. It was part of the judge's reasoning that it was possible to trace the payment from the claimants directly to the reduction of the Midland Bank overdraft. Mr Marshall's challenge to this part of the reasoning fails. But the judge's reasoning went further than the orthodox analysis to which I have referred and relied on the Banque Financière case. It is appropriate therefore to consider that authority. A necessary prelude to that is a more detailed consideration of Boscawen, "which contains a valuable and illuminating analysis of the remedy of subrogation by Millett LJ" – Lord Hoffmann in Banque Financière at 233F.
37. In Boscawen, a building society made an advance for the purchase of a property to be secured by a first legal charge. The purchase fell through after the vendor's solicitors, to whom the purchasers' solicitors had transferred the money, had used it to discharge a mortgage on the property. The building society claimed to be entitled by way of subrogation to the rights of the mortgagee. The first instance judge upheld that claim and this court dismissed an appeal against that decision. It was held that the money used by the vendor's solicitors to discharge the mortgage had been held by the purchasers' solicitors as trust money for the building society and by the vendor's solicitors to the purchase solicitor's order pending completion of the purchase. The money could be traced into the payment and the vendor's solicitors in making it had to be taken to have intended to keep the mortgage alive for the benefit of the building society. The building society was therefore entitled, by way of subrogation, to a charge on the proceeds of sale of the property.
38. The judgment of Millett LJ is of interest for present purposes in a number of respects. I have already referred to his analysis at page 334 of the process of tracing. He said at page 334H that if the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant's behalf he is entitled to a remedy. The remedy will be fashioned to the circumstances. He will generally be entitled to a personal remedy and in a variety of circumstances may be entitled to a proprietary remedy. Millett LJ gave a number of examples, including that which corresponds with the facts relating to the discharge in the present case of the Halifax Mortgage. He explained that subrogation is a remedy, not a cause of action. It is available in a wide variety of different factual situations in which it is required in order to reverse the defendant's unjust enrichment. He said at page 335C:

"Equity lawyers speak of a right of subrogation, or of an equity of subrogation, but this merely reflects the fact that this is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other."

39. Millett LJ considered submissions relating to subrogation at page 338. It was submitted that the mere fact that the claimant's money was used to discharge someone else's debt did not entitle him to be subrogated to the creditor whose debt was paid. The claimant had additionally to prove that he intended that his money should be used to discharge the security in question and that he intended to obtain the benefit of the security by subrogation. Millett LJ did not accept that formulation as a rule of general application. The cases relied on were all cases where the claimant intended to make an unsecured loan to a borrower who used the money to discharge a secured debt. In such a case the claimant is not entitled to be subrogated to the creditor's security since this would put him in a better position than he bargained for. Millett LJ then referred to a passage in the judgment of Oliver J in Paul v Speirway [1976] Ch. 220 at 232 which, he said, plainly related to a claim to be subrogated to the creditor's security. The mere fact that the payer of the money intended to make an unsecured loan would not preclude his claim to be subrogated to the personal rights of the creditor whose debt is discharged if the contractual liability of the original borrower proved to be unenforceable. He referred as examples to In re Wrexham Mold and Connah's Quay Railway [1899] 1 Ch 440 (where the borrowing was ultra vires) and Liggett v Barclay's Bank [1928] 1 KB 48 (where the borrowing was unauthorised).
40. Putting to one side for the moment the question of tracing, in Boscawen the building society set out to make out a secured loan and its money was used to discharge a debt which was secured. In the present case, the claimants set out to make a secured loan and its money was used, in the case of the payment to the Midland Bank, to discharge in part an unsecured debt. Miss Sandells is plainly correct to submit that in the present case the claimants are not seeking to be put in a better position than they bargained for. If a person intending to make an unsecured loan is not precluded by that fact from claiming to be subrogated to the personal rights of the creditor whose debt is discharged if the contractual liability of the original borrower proves to be unenforceable, a person intending to make a secured loan should be in no worse a position.
41. In Banque Financière, the first and second defendants were companies within the same group. Mr Herzig was General Manager of the group's holding company. In 1988, the first defendants had obtained a bank loan to purchase development property. The loan was secured by a debenture containing a first legal charge over the property. The second defendants had a second legal charge over the property as security for another debt. In 1990, Mr Herzig negotiated a refinancing loan with the plaintiff bank to enable the first defendants to reduce the outstanding balance on the 1988 loan. In order to circumvent Swiss banking regulations as to disclosure, the transaction was effected by the plaintiffs making their loan to Mr Herzig, who took steps that an equivalent sum was paid directly by the plaintiffs to the first defendants. The first defendants provided no security for the loan, but the plaintiffs obtained an assignment from Mr Herzig of a promissory note given to him by the first defendants. Mr Herzig also signed a letter at the request of the plaintiffs which confirmed that the holding company and all companies of the group would not demand any repayment of loans to the first defendant, until there had been full repayment of the plaintiffs' loan to Mr Herzig.
42. Robert Walker J at first instance held that the letter was intended to be directly binding on all companies in the group. The Court of Appeal disagreed with this, but Lord Steyn in the House of the Lords was of the same view as the judge. However, neither the first nor second defendants knew of the letter and, whatever the intention, it was not binding on them. In 1991, the group of companies collapsed and the first defendants became insolvent. The plaintiffs obtained judgment against them for the sum due on the promissory note plus interest. The second defendants also obtained judgment against them and contended that their debt took priority by reason of the second charge. The plaintiffs relied on the postponement letter to claim priority over the second defendant.
43. Robert Walker J found in favour of the plaintiffs that they were entitled to rely on the remedy of subrogation to prevent the second defendants being unjustly enriched at the plaintiffs' expense. The Court of Appeal reversed that decision on grounds which included that subrogation would give the plaintiffs the rights of a first mortgagee for which they had never bargained and would place them in a more favourable position than if the letter had been binding. The House of Lords allowed the plaintiffs' appeal and reversed the decision of the Court of Appeal.
44. As Lord Steyn explained at page 226F, at first instance and in the Court of Appeal the plaintiffs had claimed to be entitled, by a remedy of equitable subrogation, to step into the shoes of the 1988 debenture holder. In the House of Lords, the plaintiffs only sought a restitutionary remedy against the second defendants. Lord Steyn therefore considered it to be sensible to consider directly whether the grant of the remedy would be consistent with established principles of unjust enrichment. He said at page 227A:

"Four questions arise. (1) [have the second defendants] benefited or been enriched? (2) was the enrichment at the expense of [the plaintiffs]? (3) was the enrichment unjust? (4) are there any defences?"

45. Addressing these four questions, Lord Steyn said that it was conceded that the second defendants had benefited or been enriched. The part repayment of the loan had to that extent improved their position as chargee. The same applies in the present case to the reduction of the overdraft on the joint Midland Bank loan account. Mrs Filby has benefited to the extent of that reduction.
46. As to Lord Steyn's second question, it was contended that the enrichment was not at the expense of the plaintiffs because the interposition of Mr Herzig meant that the enrichment was at his expense. Lord Steyn rejected this contention, saying that directing the money through Mr Herzig did not alter the reality that the second defendants were enriched by the money advanced by the plaintiffs via Mr Herzig to the first defendants. To allow the interposition of Mr Herzig to alter the substance of the transaction would be pure formalism. Much the same applies in the present case. The reality was that the claimants' money was used to reduce the Midland Bank loan. In the Banque Financière case, the formal ability to trace in traditional equitable terms the legal or beneficial interest in the money from the plaintiffs to the first defendants via Mr Herzig does not seem to have troubled Lord Steyn. A difference between that case and this is that the plaintiffs' payment in that case was made in order to reduce the loan to the first defendants. In the present case, the claimants' advance was not made specifically to reduce the Midland Bank loan account, although it was in reality so used.
47. As to the question whether the second defendants' enrichment in the Banque Financière case was unjust, the plaintiffs expected to obtain a form of security sufficient to postpone repayment of loans by other companies in the group. The plaintiffs would not have proceeded with the refinancing but for their mistaken belief that they were protected in respect of intra-group indebtedness. Lord Steyn considered that in these circumstances there was a principled ground for granting a restitutionary remedy. He rejected a submission that restitutionary liability has to depend on a mutual intention.
48. In the present case, the claimants mistakenly believed that their advance was to be secured by a first legal charge. They would not otherwise have proceeded. There is a principled ground for granting a restitutionary remedy. Since restitutionary liability does not have to depend on mutual intention, the fact that the claimants' advance was not made specifically to reduce the Midland Bank loan account is not by itself a principled reason for denying a restitutionary remedy.
49. Lord Steyn concluded that, on an application of established principles of unjust enrichment, the plaintiffs were entitled to succeed to the extent of having their claim placed in priority to that of the second defendants. He would have reached the same conclusion in terms of the principles of subrogation.

"And there can be no conceptual impediment to the remedy of subrogation being allowed not in respect of both rights in rem and rights in personam but only in respect of rights in personam."

50. In my judgment, the claimants are entitled to succeed in the present case on the application of Lord Steyn's reasoning. The only material difference of fact between the two cases is that the present claimants did not make their advance specifically so that the Midland Bank loan account would be reduced. Importantly, however, the present claimants expected to obtain the security of a first legal charge and would not otherwise have made the advance. They would have no difficulty in establishing the reality that their money was used to reduce the joint Midland Bank loan account, even if, contrary to my view expressed earlier in this judgment, Mr Marshall's submission as to tracing were correct.
51. Lord Hoffmann addressed the remedy of equitable subrogation at length explaining its relationship with concepts of unjust enrichment. He considered at page 234C that the case before the House concerned a restitutionary remedy. He explained the appropriate questions in substantially the same terms as the first three of Lord Steyn's questions, adding a question whether there were nevertheless reasons of policy for denying a remedy. Judge Behrens in the present case asked the questions in Lord Hoffmann's terms answering them in favour of the claimant.
52. Lord Hoffmann considered the issues in Banque Financière by reference to the equitable remedy of subrogation which he classified (at page 231G) as an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. He referred to authorities which show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely on the question of intention, whether common or unilateral. Equitable subrogation is part of the law of restitution. He stated what are the appropriate questions for the restitutionary remedy. He considered that, in the absence of subrogation, the second defendants would be enriched at the plaintiffs' expense and that on the face of it the enrichment would be unjust. His reasoning was essentially the same as Lord Steyn's. The plaintiffs advanced the money upon the mistaken assumption that they were obtaining a postponement letter which would be effective to give them priority over intra-group indebtedness. The payment enured wholly to the second defendants' advantage. Although the transaction was structured to pass the money through the hands of Mr Herzig, there was no difficulty in tracing the plaintiffs' money into the debt due under the 1988 mortgagee. Since the money could be traced, differences in the terms of the loans by the plaintiffs to Mr Herzig and by him to the first defendants did not seem to Lord Hoffmann to matter. As with Lord Steyn, Lord Hoffmann appears to refer to tracing the reality, untroubled by a traditional analysis of the passage of legal or beneficial interests in the money.
53. Having disposed of other points not material to the present appeal, Lord Hoffmann examined more closely what is involved in subrogation to a security. This was in the context of a submission that "keeping the charge alive" for the benefit of the plaintiff would give them more than they were entitled to expect. "Keeping the charge alive" for the benefit of a plaintiff is a metaphor or analogy. It means that the plaintiffs' legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It followed that subrogation against the second defendants would not give the plaintiffs greater rights than they had bargained for.
54. Lord Griffiths agreed with Lord Hoffmann. Lord Clyde also agreed with Lord Hoffmann. He said that the plaintiffs' claim was to be found in the equitable principle of unjust enrichment, which seeks to secure fair and just determination of the rights of the parties. It is not a principle which is entirely discretionary. The remedy may vary with the circumstances of the case, the object being to effect a fair and just balance between the rights and interests of the parties concerned. The obligation to provide the remedy does not rest on any contractual basis but on the general principle of the common law. Lord Clyde agreed that in the case before the House the second defendants had been enriched by the plaintiffs' payment. The structural arrangements made with Mr Herzig in order to avoid a breach of the Swiss banking regulations did not seem to him to prevent recognition of the reality of the granting of the funds by the plaintiffs to the 1988 mortgagee for the first defendants' account.
55. Lord Hutton also addressed at page 239D the submission that the second defendants had not been unjustly enriched at the plaintiffs' expense because the money had been channelled through Mr Herzig. He too considered that the reality was that the second defendants were enriched at the expense of the plaintiffs. The intention was that the loan was to enable the first defendants to make partial repayment of a debt owed by them. In the present case, there was no equivalent intention that the claimants' money should be used in part to reduce the Midland Bank loan. But the reality is that the money was so used and, as Lord Hoffmann explained, mutual or unilateral intention is not essential to the remedy of equitable subrogation to prevent unjust enrichment. At page 241, Lord Hutton agreed with Lord Hoffmann's view that the concept of mutual intention, whether actual or presumed, can be artificial in a case where the claim to subrogation arises because the security intended by the lender has proved to be defective. In Lord Hutton's opinion, in such circumstances the doctrine of subrogation is to be applied unless its application will produce an unjust result. Addressing the submission that the court had no jurisdiction to grant the plaintiffs' new rights especially created for the purpose, Lord Hutton said at page 245E:

"In my opinion this submission is invalid because it fails to take account of the consideration that the doctrine of subrogation applies in a variety of different circumstances where the defendant has been unjustly enriched at the expense of the plaintiff, and where equity considers that it would be unconscionable for the defendant to retain that enrichment. In such a case, as Goff and Jones say, the remedy is fashioned to the facts of the particular case. In the Orakpo case [1978] AC 95, 104E Lord Diplock stated that some rights by subrogation "appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment."

And in Boscawen v Bajwa [1996] 1 WLR 328, 335 Millett LJ referring to subrogation, said:

"It is available in a wide variety of different factual situations in which it is required in order to reverse the defendants' unjust enrichment."

Therefore, in the present case, where [the second defendants were] enriched at the expense of [the plaintiffs], where it would be unconscionable to permit [the second defendants] to retain that enrichment, and where [the plaintiffs] had expected to receive the form of security constituted by the postponement of the demands of [the second defendants] and the other companies in the group, I consider that [the plaintiffs are] entitled in the circumstances to … [an order] … the effect of which is that its loan will be repaid in priority to the payment claimed by the [second defendants]."

56. The Banque Financière case was considered in detail in the judgment of this court, given by Neuberger LJ, in Cheltenham and Gloucester plc v Appleyard [2004] EWCA 291. The detailed issues in that complicated case are not directly relevant to the present appeal. It appeared that the first instance judge had considered that the House of Lords had introduced entirely new concepts into the law of subrogation.

"Indeed, that may also have been the view of Jonathan Parker LJ in Halifax v Omar at paragraphs 70-76, and of Arden LJ in Eagle Star Insurance Co Limited v Karasiewicz [2002] EWCA civ. 940 at paragraph 13. We believe that, on analysis, while the decision of the House of Lords in Banque Financière does represent an important development of the law relating to subrogation in more than one respect, it does not establish any new principles. Nor does it appear to us that there is anything in the speech of Lord Hoffmann, with whom the other members of the House of Lords agreed, in Banque Financière, which conflicts with any of the established principles relating to subrogation. Indeed, much of Lord Hoffmann's speech was expressly based on an analysis of the previous authorities: see the discussion at 231C-234G." (Paragraph 31)

57. Neuberger LJ then summarised twelve propositions relating to equitable subrogation, including at paragraph 36:

"Fifthly, although the classic case of subrogation involves a lender who expected to receive security (in the proprietary sense – e.g. a mortgage) claiming subrogation to another security, it can apply to personal rights. In Re Wrexham, Mold and Connah's Quay Railway Co [1899] 1 Ch 440 at 458, Vaughan Williams LJ referred to the claim for subrogation being to "the rights of the creditor who has been paid off", and does not appear to have limited those rights to proprietary rights."

58. At paragraph 49, Neuberger LJ said:

"The facts of Banque Financière were without precedent. They are unlikely to be repeated. We doubt if reference to that decision is likely to be of assistance in a conventional case, such as that with which we are concerned. … Banque Financière demonstrates the flexibility of the doctrine of subrogation, but it would be a mistake to attempt to apply the decision like a straightjacket."

59. It is not, I think, necessary to debate whether the present case is, in Neuberger LJ's terms, a conventional case, except to repeat that in the present case the rights of Midland Bank to which the claimants claim to be subrogated were not secured, and that the advance was not made specifically so that the Midland Bank loan should be reduced. Whether or not Banque Financière advances the frontiers of principle, it says what it says and is binding on this court to the extent that its principles are relevant.
60. Lord Steyn expressed his analysis in terms of a restitutionary remedy based on the principles of unjust enrichment and distinguished those from the principles of subrogation (see pages 226F-G and 228C). Lord Hoffmann, with whom Lord Griffiths agreed, considered the scope of the equitable remedy of subrogation (page 228G), but said that "one is here concerned with a restitutionary remedy" (page 234C). Lord Clyde said that the basis of the appellant's claim was to be found in the principle of unjust enrichment (page 237D), and that the obligation to provide a remedy rests on the general principle of the common law (237G). Lord Hutton expressed the appellant's case in terms of an equitable principle (page 238E), but also referred to it as a claim based on unjust enrichment (page 239D).
61. It must be recognised that the origins of restitutionary and equitable remedies may be separate, and that Lord Goff of Chieveley had perceived a tension between the anxiety of equity lawyers and the legitimate ambition of restitution lawyers (see paragraph 1 of this judgment). Nevertheless, in my view the legal principles underlying the varying shades of expression in Banque Financière are the same. The questions posed by Lord Steyn (at page 227A) and by Lord Hoffman (at page 234C) are in essence the same questions and the same questions emerge from the two other substantial opinions.
62. Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant's money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant's financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result. Within this framework, the remedy is discretionary in the sense that at each stage it is a matter of judgment whether on the facts the necessary elements are fulfilled.
63. The label "subrogation" is unhelpful, as has been frequently recognised (see for example Orakpo v Manson Investments [1978] AC 95 at 104, 110; In re Byfield [1982] Ch. 267 at 272; Banque Financière at 231D). The essence of the remedy is that the court declares the claimant to have a right having characteristics and content identical to that enjoyed, in this instance, by Midland Bank (see Birks, at page 95), subject to any modification (for example as to rates of interest) necessary to ensure that the claimant does not get more than he bargained for.
64. Applying these principles, for reasons which I have expressed in the course of this judgment, I consider that the judge reached the correct decision in the present case for the correct reasons. The claimants are entitled to a right against Mrs Filby equivalent to the unsecured personal rights of Midland Bank against her arising under the joint loan account. No security in law arises from the fact that, as things happened, the claimants sold the property and realised the proceeds of sale.
65. I have considered whether the effect of the judge's order that the claimants are entitled, in his terminology, to be subrogated to the rights of Midland Bank against Mrs Filby which were discharged by the payment of £60,801.30 to Midland Bank on 15^th May 1990 and credited to the joint loan account would be so harsh against Mrs Filby that the order should not be made, or that some less harsh order should be fashioned. The harshness might be seen to arise because the rights of Midland Bank will include rights as to interest which would accumulate over a period in excess of 13 years – see Castle Phillips Finance v Piddington [1996] 1 F.S.C.R 269 at 280D. As against that, no doubt credit should be given (as the judge's order provided in relation to the Halifax mortgage) for relevant payments made to the claimants' mortgage account, although we did not hear detailed submissions on this point nor on other points relating to quantification. I note that the claimants do not seek to recover (nor should they recover) more interest than would have been payable under their contract had it been valid, and that they would proceed against Mr Filby's half share of the proceeds of the sale of the property before resorting to their claim against Mrs Filby.
66. General points which might be made in support of or opposition to the suggestion that the order should be modified or not made would include, on the one hand, that the Midland Bank loan account was essentially Mr Filby's business loan account and that Mrs Filby did not know about the mortgage in favour of the claimants or the forgery until late 1994; and, on the other hand, that Mrs Filby did not tell the claimant that her signature had been forged for some 4½ years after she knew that it had been.
67. However, Mr Marshall made no sustained submission on these lines and he was, in my view, right to refrain from doing so on the evidence in this case. As I have said, it is a matter of judgment at each stage whether on the facts the necessary elements to support the remedy are fulfilled. If, as I consider in the present case, they are fulfilled, there is no residual general discretion to withhold the remedy nor to modify it simply to avoid harsh reality. The flexibility applied in Banque Financière was to fashion a remedy that did not give the plaintiffs on unusual facts more than they bargained for. It did not extend, and should not extend, to an unrestrained palm tree discretion. The harsh realities in the present case include that, if you borrow money from a bank, the bank will charge interest; and that the Midland Bank account was a joint account for which Mrs Filby was severally liable to the bank. To the extent that the payment of £60,801 reduced the Midland Bank loan, Mrs Filby was relieved from a liability for interest and to that extent also she was enriched.

Conclusion

68. For these reasons, I would dismiss this appeal.

Hooper LJ: I agree.

Kennedy LJ: I also agree.

Order: Appeal dismissed; agreed minute of order; leave to appeal refused. (Order does not form part of the approved judgment)