The 2015 decision of the UK Supreme Court in Bank of
Cyprus UK v Menelaou highlights the utility of subrogation
as a remedy where traditional mechanisms (damages, injunction)
are inadequate. The case also highlights the developing role of
the law of restitution. Subrogation and restitution are
well-established doctrines in Irish law.
In brief, the case concerned the failure by a firm of
solicitors to comply with the bank's instruction to ensure that
it received a properly executed charge over real estate. The
claimant's parents sold their family home (which was charged in
favour of the bank) to trade down to a smaller property and
purchase a house for the claimant (their daughter) and her
siblings. It was intended that the bank should obtain from the
claimant a charge over the new property. The claimant never
executed a charge over the new property and the bank was left
The bank claimed that it should be subrogated to the
position of an unpaid vendor so that it enjoyed a lien over the
new property. This complex doctrine is rarely employed but is
apt to solve situations, such as arose in Bank of
Cyprus, where a lender does not receive the security to
which it is entitled. It is sometimes referred to as a purchase
money security interest. In simple terms, the law will imply a
lien over an asset in favour of a lender who has advanced money
to enable the acquisition of the asset by the borrower.
The Supreme Court's approach
The Supreme Court unanimously held that the bank was
entitled to a charge over the new property. Some of the judges,
however, took different conceptual approaches to the question.
Lords Clarke and Neuberger held that the claimant was unjustly
enriched at the bank's expense thereby entitling the bank to a
subrogation remedy. However, Lord Carnwath took a more
conventional approach to the subrogation remedy effectively
holding that that the bank had a proprietary interest in the
money used to buy the new property.
In any event, all of the judges considered that the trial
judge had taken an unduly formalistic approach in holding that
the bank had not lost any money, and that there was no
connection between the banks' consent to a release of the
charge over the family home and the intention that it should
get a charge over the new property. The decision is a triumph
of substance over form.
The case highlights the flexibility of the law of unjust
enrichment, and the subrogation remedy, in dealing with
difficult fact patterns. However, it might be helpful if the
courts in due course move away from the fiction of the unpaid
vendor's lien. Instead, they should characterise the
subrogation remedy in terms which are perhaps less arcane;
namely, a remedy to reverse an unjust enrichment.