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 unsecured.
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.