Members may be interested in the decision of Zacaroli J in Croxen v Gas and Markets Authority [2022] EWHC 2826 (Ch) from earlier this month. Lots of discussion of various aspects of unjust enrichment, subrogation, discharge of another’s obligation and passing on.

 

Its quite a complicated case, but essentially it deals with the consequences of the failure of a number of smaller energy suppliers due to the spike in UK wholesale prices earlier this year. In each case, the regulator withdraws the licence of the failed supplier and puts in place a “supplier of last resort” (SOLR). Unlike in the banking or (at least in the UK) railways context, the SOLR is not a public entity but one of a number of larger private suppliers appointed by the regulator. This is not done as an act of public spiritedness however - as Zacaroli J explains at [101], it is a condition of their licence that the regulator can impose an obligation to act as a SOLR upon a solvent supplier, although it seems many companies are only too happy to gain new customers. One of the factors the regulator will consider when choosing a SOLR is whether existing credit balances of customers would be honoured, and in practice would never choose a SOLR who did not intend to honour credit balances.

 

In each case, the SOLR had honoured the credit balances of the customers of the failed supplier, having confirmed with the regulator they would do so before being appointed. The standard terms permitted a SOLR, with the permission of the regulator, to charge the cost of honouring onto distributors and overall the cost would be passed on to UK consumers as a whole. However, the regulator would only consent to the extent the SOLR could not recover from the failed supplier. At [108], the judge explains he was asked to assume that, while in some cases there had been an express agreement between the administrators and the  SOLR about honouring credit balances, in others there had not been. The SOLRs therefore sought to prove a claim in “unjust enrichment” in the insolvency procedure for the failed suppliers.

 

Zacaroli J starts by summarising the familiar four stage test from BFC v Parc (at [117]), as explained by Lord Reed in ITC v HMRC. He further noted that the UKPC in Samsoondar [2020] UKPC 33 noted that it was important to identify the “unjust factor” in play. This is unfortunately where the confusion potentially creeps in, because of the nature of the claim being brought – i.e. subrogation to a debt discharged on behalf of another – makes it difficult to analyse through the traditional ‘three stage test with a mix and match unjust factor’ framework (I return to this below). The failed suppliers, in effect, argued that the claim failed to meet each of the components of the three stage test (at [124]). However, Zacaroli J concluded that they were wrong, and that there was a claim for subrogation to the discharged credit balances (esp. at [197]-[213] [238]). He rejected any general defence of passing on (at [196]) and it couldn’t have applied anyway ([213]).

 

The discussion on whether a third party to a contract can discharge an obligation owed under that contract will be of interest to those discussing last week about vicarious performance (see esp. [214]-[220]). Ultimately, I think Zacaroli J is correct in his conclusion that this is a matter of request or ratification by participating in the statutory gas supply scheme, or (assuming it is a standalone ground, compulsion) (annoyingly though, this is another citation of Owen v Tate [1976] QB 402 where no question of whether it was per incuriam was raised (cf. [148])). This section doesn’t really engage with unjust enrichment except that it views the test of the validity of the discharge as the test of an “enrichment”.

 

For my part, difficulty starts to creep in at [173] onwards. In essence, Zacaroli J accepted that the discharge of the failed supplier’s obligations was “at the expense of” the SOLR because . He rejected the various analogies with cases cited in ITC, including the famous “rising heat” example of Lord President Dunedin in Edinburgh and District Tramways. He concluded at [203], [208]-[209]:

 

The circumstances of this case are far removed from those in any of the cases in which the enrichment has been found not to be at the expense of the claimant because it was incidental or collateral to their reason for providing the benefit. In each of those cases, or the examples provided in them, it was the very benefit provided by the claimant, at the claimant's cost, which produced the incidental benefit to the defendant.

 

In this case, in contrast, the enrichment of the Failed Supplier (the discharge of its debt to customers) is the essential consequence of the thing done by the SoLR at its cost (the honouring of customers' credit balances). It is far from incidental to the SoLR's expenditure. Nor is it merely collateral to the reason why the SoLR incurred the expenditure.

 

The most that could be said is that the SoLR's decision (made prior to its appointment) to commit to incurring the expenditure was an incidental factor in its decision making process when it agreed to be appointed as SoLR. That does not make, however, the enrichment of the Failed Supplier incidental to its reason for incurring the expenditure, and would be a significant extension beyond Lord Reid's analysis. It is one which I do not think as a matter of principle is warranted.

 

I think this reasoning is contestable. The SOLR is not discharging the debt owed to the failed supplier’s customers because that is the very thing it set out to do (at least on the view that this case involves compulsion, rather than a request or ratification).  It is doing it because it is required to do so under the terms of the licence with the regulator, and therefore wishes to comply with its legal obligations. Whether its objective is to enrich the debtor or some other objective is surely not an important question - it will generally be of no concern to the discharger that the debtor was ultimately, globally, worse off because of the discharge (except perhaps as a practical matter where solvency is in issue, as in this case). The test applied, whether it an “essential consequence”  (at [209]) is not a sound one. For example, if A heated his flat extra hot, mistakenly believing he had a contract with B upstairs to warm his flat too, he will surely have no claim against B, despite the fact that the enrichment was the “essential consequence” of his actions.

 

However, perhaps what that example (and this case shows) is the limitation of the free standing prohibition against incidental benefits as restated in ITC. What counts as incidental is largely a matter of degree, and it was always possible to find edge cases where an enrichment was arguably not incidental (of which this might be one). As has been observed elsewhere, unlike the concept of “transaction” (e.g. Edelman) or “performance” (Stevens) ITC doesn’t really provide a rationale for the rule, so a judge is unable to test his conclusion against that as a cross check.

 

But even more fundamentally, the issue in this case is trying to fit claims based on discharge of another’s debt into the BFC framework. I have argued elsewhere ((2021) 137 LQR 537, 541), building of the work of Dr Gregson ((2020) 136 LQR 481), that discharge claims cannot fit into the ITC framework for a number of reasons, but in particular because many (if not all) discharge cases appear to involve an “incidental benefit” to the debtor, and that doesn’t matter – the discharger can (and frequently does) still succeed.

 

I don’t consider that to be a particularly controversial matter, because even on the law as it stands there is in fact no need for a claim based on discharge to correspond to the three stage test. In each of ITC, Swynson v Lowick Rose [2018] AC 313 and Prudential Assurance v HMRC [2019] AC 929 the Supreme Court has recognised the distinctiveness of “subrogation” claims (i.e. claims based on the discharge of another’s obligation). In the latter, the SC went as far as to say that it was “arguably based on a different principle” (at [68]).

 

Similarly, it seems to me passing on could be rejected at a more fundamental level – even if it were a defence to “unjust enrichment”, it could not apply here. If C has discharged a debt which ought to have been borne by D, D cannot argue that C’s customers (X, Y, Z etc.) should in fact ultimately bear it. D should bear it. That is the whole rationale of the cause of action (as I have said elsewhere, the same applies to change of position).

 

It is therefore unfortunate that the judge appears not to have been taken to the relevant parts of the SC authorities, as it appears he felt constrained to fit his analysis into an unsuitable framework. There was, I think, no need to go beyond the question of request/ratification/compulsion, and if he had concluded that the enrichment was incidental that should not have affected the outcome.

 

I’d be interested to know what others think.

 

Best,

 

Matthew

 

Matthew Hoyle Barrister www.oeclaw.co.uk Switchboard: +44 (0)20 7583 2000         One Essex Court, London Temple London EC4Y 9AR United Kingdom Tel +44 (0)20 7583 2000 clerks@oeclaw.co.uk One Essex Court, Singapore #04-14 Maxwell Chambers Suites 28 Maxwell Road Singapore 069120 Tel +65 6634 1363 singapore@oeclaw.sg           Information in this message is confidential and is likely to be subject to legal professional privilege. If you have received this message in error, please notify me immediately and do not disclose, copy, distribute or retain either the whole or any part of the message or any attachments. If you are not the intended recipient, please telephone (020) 7583 2000 immediately. Regulated by the Bar Standards Board.