Before: Lord Justice Balcombe
Lord Justice Simon Brown
Mr Justice Peter Gibson
 
 

B E T W E E N

JUDGMENT
 
DATED: 26 February, 1993

Lord Justice Balcombe:

This is an appeal by Mr Francis Rock, the first defendant, from an order made by His Honour Judge Byrt QC, sitting in the Mayor's and City of London Court, whereby on 24th April 1992 he dismissed Mr Rock's appeal against the order of a district judge and made certain further directions relating to costs.

The facts of the matter are conveniently set out in the judgment of His Honour Judge Byrt and I take them directly from the judgment.

"In 1985 the two defendants, then husband and wife, purchased a property known as 57, Tyrell Road, East Dulwich, with the aid of a mortgage provided by the Abbey National Building Society. The title to the property was registered and vested in the husband and wife jointly.

The family arrangement was that, as the husband, a general labourer, was out at work all day, he would give his wife the cash to pay the Building Society's monthly instalments. Unbeknown to him, the wife used the money he gave her for her own purposes, and so the mortgage payments fell into arrears. To cover the situation, the wife purported to re-mortgage their property, using the money thereby raised to discharge their mortgage with the Abbey National. The new lenders were the plaintiffs" -- that is Western Trust and Savings Limited -- "who took what they thought to be a valid first mortgage as security, and another company called Barrie Vanger and Company Limited, who took a second mortgage. The new mortgages were registered on 25th August 1987, and the Abbey National's charge was deleted.

The wife secured the completion of the new mortgages by forging her husband's signature wherever it was required on the relevant documentation. The husband knew nothing of these transactions, as the plaintiffs came to accept, and as the learned judge found. The plaintiffs acknowledged that, because of that forgery, their mortgage was of no legal effect as against the husband.

Again, the instalments, due under the new mortgages, fell into arrears, and on 14 April 1988, the plaintiffs served a notice of default, and on 28 May, called in their mortgage. The wife had left the home twelve days earlier for another man, abandoning her husband and three children. It was only as she left home that the husband learned of the new mortgages and of the impending financial crisis which threatened his home.

In matrimonial proceedings, he secured the custody of the children who had temporarily been placed by the wife in care. He also secured the transfer of his wife's share in the matrimonial home. He gave up work to look after the children, and since then, has been living on Income Support of £72 per week.

In due course, the mortgagees, as I shall call them, took proceedings. Barrie Vanger and Company Limited, then called Atlantic Trust, brought proceedings and secured judgment in default. This was later set aside on grounds which are not material in this appeal, and since then, they have not proceeded with their action. On 21 November 1988, the plaintiffs brought possession proceedings against both the husband and wife as if their mortgage had been valid. On being satisfied of the fact that the wife had committed forgery, they amended their pleadings so as to allege that, by their redemption of the Abbey National mortgage, they had become equitable assignees of that charge and were entitled to have it kept alive for their benefit. Accordingly, besides possession, they claimed payment of all such sums as were due from the defendants under that charge. By his amended Defence the husband admitted, subject to the plaintiffs' proof that they had discharged the Abbey National mortgage, that they had thereby become equitable assignees of that mortgage."

That is a very important point which I stress here.

"At the trial of the action, the wife took no part. The learned Judge accepted that the husband had behaved honestly and honourably throughout, that the plaintiffs had become the mortgagees by subrogation, and so were entitled to possession. He directed the District Judge, in default of agreement, to assess the sums due to the plaintiffs by reason of their subrogated rights. At the assessment hearing, the learned District Judge assessed those sums in the amount of £71,033.47, £44,025.29 of that sum being in respect of the plaintiffs' contribution of 87.7% towards the redemption of the Abbey National's mortgage, and the balance being interest due to them as he found, calculated on a compound basis from the date of the completion of their invalid mortgage till that of the hearing.

In arguing his appeal, Mr Keegan, for the husband, did not challenge his client's liability to repay the plaintiffs the £44,025.29 being that proportion of the redemption figure paid. He contended that that was the full extent of his liability; that the District Judge should not have awarded the plaintiffs any interest at all, or, if he was right to do so, it should have been calculated as simple interest only at the rate of 11.25%, being the Abbey National's rate prevailing at the date their mortgage was redeemed, and not compound interest."

The judge then dealt with the arguments put forward by Mr Keegan, who has also appeared before us in this court, and at the end came to the conclusion that the district judge was right to award the plaintiff interest as part of what was due and owing by the first defendant, the husband, and he was also right to assess the interest on a compound basis and at the rate of 11.25%.

As I have said, the first defendant appeals from that judgment, and the arguments put forward by Mr Keegan echo those which he put before the judge below and which the judge rejected.

Before I turn to the legal issues involved, there are two matters of fact to which I should refer. First, in the terms of the Abbey National mortgage, which are to be found in bundle B at page B3, clause 4 provides for both the payment of interest and for interest in arrear being compounded on an annual basis. I refer also to page B33, which is the completion statement at the time when the Abbey National mortgage was discharged and the two new mortgages taken with the advance from Western Trust & Savings Limited, the present plaintiff, and the second mortgagee, then called Barrie Vanger & Company, which shows that Western Trust & Savings Limited provided £46,081.20 and the second mortgage from Barrie Vanger & Company provided £6,450. Those two sums together amounted to £52,531.20 and they were used to redeem the Abbey National Building Society mortgage, which then stood at £50,199.88, and certain fees, premiums and costs, and it is the ratio of £46,081.20 to £6,450 which leads to the figure of 87.7% to which the learned judge referred in his judgment.

As I have said, the first defendant has at all times acknowledged -- very properly, if I may say so -- that the doctrine of subrogation does apply in this case and that the plaintiff, Western Trust & Savings Limited, became subrogated to the rights of the Abbey National Building Society. That seems to be not merely the action of an honest man, as he undoubtedly is, but in accordance with the law, because although he knew nothing about the circumstances in which his wife had forged his signature to the new mortgage, as is stated by Lord Keith of Kinkel in Orakpo v. Manson Investments Ltd [1978] AC 85 at 119:

"Subrogation may result from agreement, or it may arise by operation of law in a number of different situations. In some circumstances the debtor may know nothing whatever about the transactions which have caused a third party to become subrogated to the rights of his original creditor, as in Brocklesby v. Temperance Permanent Building Society [1895] AC 173, where the forged mortgage had been used, unknown to the debtor, to obtain money to pay off the holder of an existing charge."

Those facts were very similar to those of the present case, as also were the circumstances of Butler v. Rice [1910] 2 Ch 277, a decision at first instance, where again a wife who was the owner of a leasehold house was held to be subject to the subrogated rights of a plaintiff to whom her husband had mortgaged the property without her knowledge or consent and the money was used to pay off an existing mortgage. It was held, on the facts:

"that it must be presumed that the plaintiff" -- that was the new mortgagee -- "'intended to keep the charge alive in his own favour; that the fact that Mrs Rice, the owner of the mortgaged property, had not requested him to make the payment and did not know of the transaction was immaterial; that the fact that he intended to take a different security did not affect the question; and that he was entitled to a charge on the Bristol property for 4501 and interest."

It seems to me that once it is accepted, and, as I have said, correctly accepted in this case, that the doctrine of subrogation applies, then the effect of the operation of that doctrine is as was stated by Lord Jauncey in Esso Petroleum Co Ltd v. Hall Russell & Co Ltd [1989] AC 643 at 672, where he says:

"What is, however, absolutely clear from the authorities is that the rights and remedies to which the indemnifier is subrogated are those which were vested in the person to whom payment has been made, no more and no less ..."

or, as I suggested to Mr Keegan in the course of argument, if you use the analogy that, by subrogation in this case, the plaintiff stands in the shoes of the Abbey National, it stands in both shoes and not in one shoe only.

Mr Keegan has referred us to a number of authorities: to Butler v. Rice itself, which he concedes is effectively against him, but of course it is a decision at first instance by which we would not be bound; to a passage in the judgment of the Privy Council in Ghana Commercial Bank v. DT Chandiram [1960] AC 732 at 745, where Lord Jenkins, in giving the judgment of the board, said this:

"Their Lordships accordingly hold that by paying the amount due to Barclays" -- that was the original mortgagee, the person in the position of the Abbey National in the present case -- "the Ghana Bank" -- that was the person in the position of the plaintiff in the present case -- "became entitled to the benefit of the equitable charge with the same priority for the amount thereby secured as had theretofore been enjoyed by Barclays.

But this conclusion gives rise to consequential questions which were not fully argued before their Lordships, and cannot be adequately dealt with in the present appeal, in view of the form of the proceedings and the absence of evidence as to the amount which can properly be claimed to be due to the Ghana Bank on the security of the equitable charge in priority to the purchaser's interest. For example, it seems to their Lordships open to question whether the equitable charge could rank as security in the hands of the Ghana Bank for any greater sum than the amount owing upon it to Barclays at the date of the attachment or at the date of the payment off of Barclays by the Ghana Bank, whichever was the less."

Mr Keegan submits that he can rely on that passage to establish that interest is not payable in the present case. With all respect to him, it seems to me that that was not an issue to which Lord Jenkins was adverting at all at that point. As he said, there was an absence of evidence as to the amount which was properly due in the sense of how much was due to Barclays at the moment when the Ghana Bank paid off their charge and, for example, insofar as the Ghana Bank claimed only by subrogation, their security would not extend to any further indebtedness that might have been created after they paid off Barclays.

Mr Keegan also relied upon certain passages from the judgments of Buckley and Goff LJJ in Orakpo in the Court of Appeal [1977] 1 WLR 347. I do not propose to refer to all of the passages to which he referred us, because it would take an undue amount of time and I do not think, with all respect to him, that they support his argument. But there is one passage to which I should refer, and that is at page 361, where in the course of his judgment Buckley LJ says this, just below letter G:

"If for example an unpaid vendor were entitled to a lien in a sum of £5,000 unpaid purchase money and the lender were to advance £3,000 to the purchaser towards the payment of this sum, the balance being found by the purchaser from his own, or other, resources, the lender would only be subrogated to the unpaid purchaser's lien to the extent of £3,000. The measure of the extent of his subrogation is the amount of his loan. If he enforces the lien, he does so to recover the amount of his loan. The remedy he exercises does not arise out of the contract of loan, but the relief he obtains is the recovery of the amount of his advance, perhaps with interest."

Mr Keegan, latching on to the words, "perhaps with interest", submits that that is authority for a general proposition that can be used to support his proposition, that the court has generally a discretion whether or not to grant interest if the circumstances of the case, as he submits in this case, would make it unjust to do so. But Buckley LJ in that passage was not, in my judgment, considering such a wide principle as Mr Keegan seeks to derive from that passage. He was considering subrogation arising from an unpaid vendor's lien, which carries with it no right to interest as such, but merely the possibility that the court would in the exercise of its discretion be prepared to award interest. So that does not help him. On the other hand, the passage from Goff LJ at page 370 is in effect directly against his submission, because he says at just below letter C:

"The amounts in respect of which the defendants are subrogated, or would be subrogated if they were not barred, must clearly, in my judgment, carry interest even in the case of the unpaid vendor's lien, because although he is paid, the lien is kept alive for the benefit of the lender. The only question would be as to the rate."

I complete the citations with a passage from the speech of Lord Diplock in the Orakpo case in the House of Lords, [1978] AC 95 at 104, where he says this:

"My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of 'subrogation,' but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances."

I have already explained the reasons why the circumstances of the present case are such that the doctrine of subrogation applies. Thus, under what Lord Diplock says in that last passage, and what Lord Jauncey had said in the earlier passage in Esso to which I have referred, it is all the rights which are transferred, not some particular rights only. The rights of the Abbey National, to which the plaintiff is subrogated, included a right to interest and to compound interest at the rate to which I have mentioned.

In those circumstances, it seems to me that the learned judge was quite right in the judgment he gave and this appeal must be dismissed with costs, costs to be added to the security. Legal aid taxation for the appellant.

Lord Justice Simon Brown:

I agree.

Mr Justice Peter Gibson:

It is not disputed, and cannot be doubted, that the plaintiff bank, in paying Mrs Rock the money it was lending her and taking what it thought was a valid first mortgage as security, became by subrogation the equitable assignee of the building society's charge. In such a case it is presumed that the bank intended to preserve the charge for itself. Cases like Butler v. Rice [1910] 2 Ch 277 show that even if the mortgagor is unaware of the transaction the presumption will nevertheless apply. So in the present case the ignorance of Mr Rock of what his joint tenant Mrs Rock was perpetrating does not affect the question.

If the charge is preserved for the bank as if it were the equitable assignee of the charge, why should not the bank take the benefit of the rights under the charge, including the right to interest? Prima facie, the bank succeeds to the whole security, and that means to all the rights relating to capital and interest. Even without authority, I would have thought it obvious that the assignee would be entitled to that interest, unless of course there were special circumstances which made it inequitable for the assignee to take the same rate of interest as that to which the original owner of the charge was entitled. For example, in Chetwynd v. Allen [1899] 1 Ch 353 the contractual rate of the loan made by the assignee was less than the interest rate which was payable under the original mortgage paid off by the loan and so of course the lower rate was held to be applicable (ibid at p 359).

There is no authority to suggest that interest should not be paid in the circumstances, and my Lord has referred to the authorities which strongly suggest that interest is payable. Mr Keegan, however, suggests that because subrogation is part of the law of restitution and one must find unjust enrichment in order to apply that remedy, Mr Rock ought to be excused from paying interest in the present case because, he says, it cannot be said he would be unjustly enriched. I do not agree. He would be unjustly enriched if his secured debt was paid off by an innocent lender without Mr Rock incurring the like obligations in respect of interest to the lender who has provided the discharge monies as he owed to the original owner of the charge.

It is impossible not to feel sympathy with Mr Rock, but his quarrel is with his dishonest wife and not with the plaintiff bank. For these reasons as well as those advanced by my Lord, Balcombe LJ, I too agree that this appeal should be dismissed.