Banque Financière de la Cité agreed to lend money to Parc (Battersea) Ltd (Parc) in reliance on a "postponement letter" saying claims by companies in the same group as Parc would be subordinate to BFC's loan. BFC was mistaken in making the loan on this basis as this letter was not binding on OOL, a company in the same group as Parc, as given without authority of that company. OOL were owed a large sum by Parc secured by a second charge over Parc's main asset, a plot of land. Parc used the money BFC has paid it to pay off a bank with a first charge over the land. Parc subsequently went into insolvency.

BFC successfully argued that its mistake in making the loan had left OOL unjustly enriched. If the loan had never been made, OOL would only have had a second charge over the land, but the discharge of the first secured loan had improved their position To prevent this, the House of Lords allowed BFC to be subrogated to the first charge over the land that the money it lent has been used to discharge, but only as against OOL and not other creditors.

If the contract of loan had been induced by misrepresentation, then it could have been set aside, and there could have been a claim based upon an equitable entitlement to the proceeds paid over, which have been used to discharge a secured loan, which BFC should then be subrogated to. I think that is what happened in Butler v Rice and Chetwynd v Allen. However, the contract under which the money was lent was never set aside. It was not a condition of the loan to Parc that there was a valid subordination agreement with other lenders, the “postponement letter” being collateral to the loan. No trust over the proceeds paid could possibly therefore have arisen as the money was paid under a valid loan agreement.

I now think the doubts about this in the High Court of Australia in Bofinger are right.

It should not be enough that C's mistakenly making an unsecured loan to X that leads to D being left better off entails D being unjustly enriched. If C’s money is used to discharge X’s debt, the law may allow C to be subrogated to the debt (Burston v Speirway). Here however, the money used to pay off the secured loan was Parc’s, not the claimant’s.

There was no payment by BFC to OOL, no money in relation to which BFC had any entitlement was used to discharge the secured loan to the bank, and no obligation that ought to have been borne by OOL was discharged. It looks wrong, especially in the light of the (correct) rejection of any "but for" causal test for enrichment in ITC.

In Lowick Rose v Swynson a a company (Swynson) lent a large sum of money to another company (EMSL) on the basis of a negligent accountant's report. The controlling owner of Swynson (Hunt)  lent the debtor company money with which to repay the loan. Which they did. Swynson brings a claim against the negligent accountant's, who argue (successfully) that Swynson have no loss as the loan has been (luckily for them) repaid. Hunt argues that this leaves the accountant;s unjustly enriched at his expense, and that he should have a claim by way of equitable subrogation to the value of the liability discharged.

Now the correct answer should be (I think, as presently advised) that Hunt's money was never used to discharge any liability of the defendants. He lent money to EMSL, and they then used their money to pay Swynson, which relieved the defendants of their liability. (Even if the money he paid them was subject to a trust as paid on the condition that it discharged the loan, it was not paid to discharge any liability of the defendants). He made a mistake, that has left the defendants better off and him worse off, but that isn't enough. See ITC handed down this very day.

But that analysis requires saying BFC v Parc is wrong. 

So, instead Lord Sumption says at [34]

"Unless the claimant has been defeated in his expectation of some feature of the transaction for which he may be said to have bargained, he does not suffer an injustice recognised by law simply because in law he has no right."

Mance says at [89] the result is justified 

"either on the basis that there was no sufficiently direct transfer of value from Mr Hunt to HMT, or on the basis that there is no relevant unjust factor

"

Lord Neuberger says

"Mr Hunt got precisely what he thought he was getting from the transaction in question, namely repayment to Swynson of the original loan, and a right to recover the new loan from EMSL. It is of course true that he did not appreciate that he was indirectly relieving HMT of a substantial liability to Swynson (without replacing it with some equivalent claim in his favour against HMT), but that cannot be characterised as a defect in the transaction."

So a majority of the judges seem to be saying that there is no 'unjust factor' because the mistake Hunt made was not of the right kind. But why are the relevant mistakes different in subrogation cases from other unjust enrichment case? A majority don't seem to base their decision on the necessary connection between C and D being missing (cf ITC). 

I think we need to start again and re-visit BFC v Parc.

Rob

From: Robert Stevens