Before:
LORD JUSTICE DILLON
LORD JUSTICE NOLAN
LORD JUSTICE ROCH
 
 

B E T W E E N

JUDGMENT
 
DATED: 8 November 1993

DILLON LJ

This is an appeal by the first defendant in these proceedings, Mr John Roberts, against an order of His Honour Judge Hugh Jones made in the Cardiff County Court on 13 August 1993, in favour of the plaintiffs, the National Guardian Mortgage Corporation Ltd.

The plaintiffs brought their action to enforce what appeared to be a legal charge on a property known as 7 West End Avenue, Nottage, Porthcawl, in mid Glamorgan, executed by the first defendant and his wife (Mrs Roberts), the second defendant, to secure an advance of £25,000. It appears, however, that the first defendant (Mr Roberts) had no knowledge of that charge. The second defendant, who managed the financial affairs of the family as well as looking after the children, had forged the first defendant's signature on it. The plaintiffs therefore claim "rights of subrogation", as it is called, on the footing that they are entitled to stand in the shoes of a previous second mortgagee of the property, whose charge was paid off and discharged out of the £25,000 advance made by the plaintiffs.

The Judge accepted that submission of the plaintiffs, and accordingly, by his order, he directed that there be judgment against the first and second defendants in the sum of £42,265, and that there be an order for possession within 42 days in respect of the property, 7 West End Avenue. He then made provisions as to costs and a provision for a stay of the order.

The position is that there was a first mortgage on the property, at the time it was bought, in favour of a building society. That does not directly come into the story, except that certain arrears owing to the building society were paid off by the plaintiffs out of their £25,000 advance. Behind that advance there was a second legal charge, dated 14 December 1988, in favour of a company called "Greyhound Credit Ltd". That was undoubtedly validly executed by both defendants. Then there was the £25,000 advance by the plaintiffs which purported to be secured by the legal charge dated 27 February 1990. Nothing was ever subsequently paid under that legal charge.

The first defendant, who is a driver of HGV vehicles, said that he left all financial matters in the hands of his wife. He was busy in employment, earning the money to keep the family going, since she did not work, and she looked after the finances.

The position under the 1988 mortgage, in favour of Greyhound Credit Ltd., was that it was for an advance initially of £13,500, but arrears built up and the total amount, which was paid off to Greyhound Credit by the plaintiffs in May 1990, was £23,346.29. It appears that the plaintiffs had had an estimate from Greyhound Credit Ltd. of the amount that would be required to redeem them, but subsequently Greyhound Credit insisted on an additional £1,600 to cover various costs which had not been included in the first estimate. Nothing turns on the precise state of account on this appeal.

The essence of the argument that is put forward for Mr Roberts (the appellant) is founded on a passage in the speech of Lord Diplock in the case of Orakpo v. Manson Investments Ltd. [1978] AC 95. That was a case which was concerned with the Moneylenders Acts (now, happily, no longer with us), and it is important to bear in mind it was particularly involved with s 6 of the Moneylenders Act 1927, which provided that:

"No contract for the repayment by a borrower of money lent to him by a moneylender, and no security given by the borrower in respect of any such contract, shall be enforceable unless a note or memorandum in writing of the contract be made. The note or memorandum aforesaid shall contain all the terms of the contract".

The passage in Lord Diplock's speech which is particularly relied on is at page 105 D to F. He said this:

"In the first place the origin of the right of subrogation is the contract between the borrower and the moneylender for the loan of money by the moneylender to the borrower. The contract either will or will not incorporate a term that the moneys lent shall be applied in discharging a security on the property of the borrower in favour of a third party. If it does, the term that the moneys shall be so applied must be included in the note or memorandum under section 6. If it does not and there is no contractual obligation upon the borrower to apply the moneys in this way (as was held to be the case in Hanyet Securities Ltd v. Mallet [1968] 1 WLR 1265), the expectation of the parties that the money will in fact be used by the borrower for his purposes does not give rise to any right of subrogation in the moneylender even if the money is so applied".

The Hanyet Securities case was not concerned with subrogation, but was concerned with the adequacy of the memorandum of the terms of the moneylenders contract, and it was held that it was not necessary to include in that, as a term of the contract, a particular proposal that the money should be used for a particular purpose, when that proposal was not the subject of any written or oral agreement but was merely something that might or might not happen, and could have been overridden if money had been provided from some other source for the purpose envisaged. That is a long way from the present case.

At the start of his argument Mr. Davies, for Mr. Roberts, draws attention to a paragraph in the standard form of unregulated credit agreement which was signed by Mrs. Roberts, and on which the signature of Mr. Roberts was forged. That had provided that the loan would be secured by a legal charge in a form annexed on the property on the security of a first or second mortgage.

In paragraph 7 it stated:

"If this facility is being secured by a second mortgage the creditor may use part of the loan facility to repay any existing mortgage or encumbrance on the property other than the capital outstanding on the first mortgage. If this facility is being secured by a first mortgage the creditor may use any part of the loan facility to repay any existing encumbrance or mortgage on the property".

However, on the oral evidence that was given at the trial, it was said ultimately, by the witness called for the plaintiffs, that the purpose of the loan would be for consolidation of debts.

She had said that the plaintiffs knew that the defendants were under pressure from Greyhound when the cheque was sent, and they knew earlier of arrears with the Bradford and Bingley Building Society and other debts. The purpose of the loan would be for the consolidation of debts.

Therefore, while Mr. Davies' initial submission was that the only contract was that there was power reserved to the plaintiffs to pay off the Greyhound loan, and to pay the outstanding instalments under the building society mortgage, at some point before the money was paid out the purpose of Mrs. Roberts to pay off the other debts became known to the plaintiffs and accepted by them. Accordingly, when the money was paid to discharge the Greyhound mortgage, and the other instalments were paid, that was in accordance with the common intention of Mrs. Roberts and the plaintiffs.

In those circumstances it is in easy accord with the law, as stated by the Privy Council in Ghana Commercial Bank v. Chandiram [1960] AC 732, to hold that as against Mrs. Roberts it was the common intention that the Greyhound mortgage would be discharged out of the new advance by the plaintiffs, and as the charge granted purportedly by Mr. and Mrs. Roberts to the plaintiffs is a nullity and ineffective to create any charge on the legal estate of the property, the plaintiffs should be entitled to claim subrogation to the Greyhound company.

It may be added that in Orakpo Lord Keith, at page 120, refers to the common intention of the parties that the money lent should be used to pay off existing charges. He regarded that common intention as forming one of the terms of the contract which might, in certain circumstances, have important legal consequences, and was required to be set out expressly in the note or memorandum. (That is at 120 A to B). Even if, therefore, there was merely a common intention, it was sufficiently important to be one of the terms that should be set out in the note or memorandum under the 1927 Act.

The particular ground for holding that there was no subrogation in the Orakpo case depends on the provisions of the Moneylenders Act.

It was held, and one can see this particularly from the speeches of Lord Salmon, Lord Edmund Davies and Lord Keith, that a charge which was affected by invalidity in the memorandum of terms was not void, but unenforceable. Therefore the House of Lords' decision in Thurstan v. Nottingham Permanent Benefit Building Society [1903] AC 6, was distinguishable.

In considering whether subrogation arose, it was necessary to see that the doctrine would be applied only when the courts were satisfied that reason and justice demanded that it should be, but reason and justice did not so demand. On the contrary, they were strongly against any implication of a right of subrogation in favour of a moneylender where the invalidity of the intended legal charge was due solely to a breach of the provisions of the Moneylenders Act on the part of the moneylender.

That is not this case, because there is no statutory provision which has been infringed by the plaintiffs in this case. The most that Mr. Davies says is that if the plaintiffs had taken greater precautions they would not have had a legal charge which was a forgery palmed off on them before they parted with their money. They suffer from that in that by subrogation they can only recover what was due under the valid prior charge and not any more that they may have advanced.

In my judgment, it does not follow, as a matter of reason and justice, that they ought to be deprived of the power to recover any of their expenditure.

There are cases which were mentioned in the skeleton arguments, such as Paul v. Spierway [1976] Ch 220, where it has been pointed out that there was an intention to make an unsecured loan, and it was consequently held that in such a case there was no scope for subrogation, but no one has suggested that the plaintiffs ever had any intention of making an unsecured loan to either of these defendants.

I do not regard, therefore, Lord Diplock's speech as necessarily going further than Lord Keith's. In the present case it is not necessary to satisfy the particular difficulty of the memorandum as to terms.

As I see it, therefore, all the requirements that are necessary to establish a right of subrogation as against Mrs. Roberts are made out.

So far as Mr. Roberts is concerned, the position is different in that he had no intention whatever in relation to an advance by the plaintiffs, because he did not know that there was any advance by the plaintiffs being made. But so far as he is concerned the position is covered, in my judgment, by the two decisions at first instance of Butler v. Rice [1910] 2 Ch. 277, decided by Mr. Justice Warrington, and Chetwynd v. Allen [1899] 1 Ch. 353 decided by Romer J. These found, on the position which is referred to as a "well-known equitable doctrine", that if a stranger pays off a mortgage on an estate he presumably does not intend to discharge that mortgage but to keep it alive for his own benefit.

Warrington J considers the questions that have to be dealt with.

"Is it material that the owner of the property, the mortgagor, had not requested the person who paid the money to make the payment"?

And is the plaintiff's right affected by further differences between the proposals for the new charge, which was ineffective, and the terms of the previous charge which was paid off?

Warrington J continues:

"Here there was an existing charge, and the only question is whether it has been paid off or kept alive. On such a question as that it appears to me that the concurrence of the mortgagor is immaterial. Her position is not affected. The only alteration in her position is that instead of owing the money to A she will in future owe it to B".

He refers then to Chetwynd v. Allen and expresses the view that the judgment there is consistent with the view he had expressed.

As I see it, Mr. Roberts cannot claim to have achieved the windfall that the debt he owed to Greyhound, which was charged on the property, has been discharged so that the only charge on the property, so far as he is concerned, is the first charge in favour of the building society, and he has no responsibility for the monies paid out by the plaintiffs to discharge the debt to Greyhound.

It follows, in my judgment, that this appeal must be dismissed, and I would dismiss it.

I agree.

So far as the plaintiffs' claim against the first defendant is concerned, it seems to me that they need look no further for authority than the proposition which has been most recently, so far as the cases before us are concerned go, stated by the Privy Council in Ghana Commercial Bank v. Chandiram [1960] 2 All ER 865, where, at page 871, Lord Jenkins, giving the judgment of the Privy Council, said:

"It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit".

As authority for that proposition he cites Butler v. Rice and, on the same page, makes favourable reference to Chetwynd. In Butler v. Rice [1910] 2 Ch. 277, at page 283, Warrington J concludes the passage to which my Lord Dillon LJ, has referred, by saying:

"I have read the judgment of Kay J in Patten v. Bond and of Romer J in Chetwynd v. Allen, and in my opinion both those judgments are consistent with the view I have expressed, and in particular that of Romer J; for in the case before him, as in this, the material payment was made without the knowledge and without any communication with the person who was the real owner of the mortgaged property, and, notwithstanding that, Romer J held that the charge was still on foot".

Therefore, as it seems to me, it helps Mr. Roberts not at all to maintain, as indeed was the case, that he was unaware of his wife's transactions with the plaintiffs and took no part in it.

The governing principle is that he should not suffer as a result, in the sense of being worse placed before than he was afterwards as regards the obligations contracted by him and by his wife under the previous and valid mortgage. But his situation in that respect has been safeguarded in the present case. No more is claimed from him than was claimable under the earlier mortgage.

So far as Mrs. Roberts is concerned, as it seems to me, there one is concerned with the principle of subrogation in its normal sense.

I fully agree with what has been said upon that aspect of the matter in the judgment of my Lord Dillon LJ. I shall simply be repeating his words if I added further words of my own upon it.

I, too, would dismiss this appeal.

I agree that the appeal should be dismissed.

The issue in this case is whether the doctrine of subrogation is unlimited, as might be suggested by the Shorter Oxford English Dictionary of the definition of the word; namely "the substitution of one party for another as a creditor; the process by which a person who pays a debt for which another is liable succeeds to the rights of the creditor to whom he pays it", or whether it is circumscribed by the requirement that a person relying upon the doctrine must show that he comes within one of the recognised categories and, in this particular case, whether it can be shown that as between the claimant and the borrower a contractual basis existed for the claimant being allowed to assume the rights of the earlier mortgagee.

The problem was stated in Goff and Jones on the Law of Restitution, 3rd Edition, page 550 in this way:

"It has been said that it is not enough for A to show that his money has been used to pay off B's debt to C. There must be something more".

Unfortunately, it is not clear from the case law what that "something more" must be. Some judges have regarded the intention of the parties as a matter of paramount importance. Others have not. It appears that two situations must be distinguished.

First, A pays off C's mortgage without having made any agreement with B to do so. Here, there is a presumption that A intends that the mortgage should be kept alive for his own benefit. He is therefore subrogated to C's mortgage.

Secondly, A lends money to B and the money is used to pay off C's mortgage or to buy C's land. In this case the real intention of the parties seems to be critical. The older authorities are in favour of the submissions made on behalf of the respondents by Mr. Hoskins.

In the case of Chetwynd v. Allen [1899] 1 Ch 353, Romer J held that an equitable mortgage arose where Mr. Chetwynd had requested a man called Mynors to lend him £1,200 on land belonging to Mrs. Chetwynd, without disclosing that the land belonged to Mrs. Chetwynd, to pay off an existing mortgage for a greater sum, that mortgage being on Mrs. Chetwynd's property, and a further property which belonged exclusively to Mr. Chetwynd. Mr. Mynors advanced £1,200 and Mr. Chetwynd applied £1,000 of that in paying off part of the existing mortgage. Romer J found that there was an equitable mortgage which bound Mrs. Chetwynd.

At page 357 of the report the Judge pointed out that Mrs. Chetwynd was not prejudiced so long as no extra cost was thrown on to her property, and provided that as between her and her husband it was the husband's property that remained primarily liable for the debt.

At the end of his judgment, at page 359, Romer J made it clear that he did not consider the case to be a case of subrogation because he said that his decision that an equitable mortgage had been created, rendered it unnecessary for him to consider whether Mr. Mynors could have been entitled on other grounds, such as that based on the principles of subrogation.

In Butler v. Rice [1910] 2 Ch 277, Warrington J at page 282, said this:

"As to the honesty of the case there is no question, and I cannot but say that I think that the defendants Mr. and Mrs. Rice have by their pleadings endeavoured to take advantage of their own deceitfulness to defraud the plaintiff and to get the property discharged from this debt".

That passage in the judgment makes me doubt whether the statement in the headnote, that Mrs. Rice did not know of this transaction, is in fact a correct statement of the facts in that case. Nevertheless, Warrington J followed the decision of Romer J in Chetwynd v. Allen and he said, at page 282:

"Here there was an existing charge, and the only question is whether it had been paid off or kept alive. On such a question as that it appears to me that concurrence of the mortgagor is immaterial. Her position is not affected. The only alteration in her position is that instead of owing the money to A she will in future owe it to B".

The point taken by Mr. Davies, on behalf of the appellant, is that the opinion of Lord Diplock in Orakpo v. Manson Investments [1978] AC 95, in a passage already cited by my Lord Dillon LJ, indicates that, for there to be subrogation in a case such as the present, there must be a contract, or implied contract, between the borrower and the lender, that the lender will pay off the earlier mortgage and will be subrogated to the rights of the earlier mortgagee.

The passage in Lord Diplock's opinion has to be read in the light of the other opinions in the Orakpo case. It is clear, from the opinion of Lord Salmon at page 110 D, that Lord Salmon considered that the doctrine of subrogation was not confined to cases where it could be said that there was a contract or implied contract between the borrower and the lender. Lord Salmon said:

"The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be".

Then Lord Salmon went on to set out some typical cases.

Lord Keith, in whose opinion Lord Salmon expressly concurred, at page 119 pointed out at letter A:

"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 had caused a third party to become subrogated to the rights of his original creditor".

Lord Keith refers to an authority in [1895] AC at page 173.

Lord Edmund Davies expressed a similar view at page 112 letter E of his opinion.

It is significant in my judgment that their Lordships, in the Orakpo case, did not cast doubt on the old authorities of Chetwynd v. Allen and Butler v. Rice.

Lord Diplock, in his opinion at page 104 E, said this:

"Some rights by subrogation are contractual in their origin as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent these have been expended on discharging the company's lawful debts are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment".

What, in my view, is clear is that it has been held, particularly in the two cases of Chetwynd and Butler, that a lender may be put in the position of an earlier mortgagee in circumstances similar to the circumstances which exist in the present case.

Again, those two authorities were cited with approval by Lord Jenkins in Ghana Commercial Bank v. Chandiram [1960] 2 All ER 865, the reference to the authorities being at page 871. In my judgment the important fact in this case is that the plaintiffs did pay money directly to Greyhound Credit Ltd. to discharge that company's charge on the defendant's property.

The conclusion I would reach is that, on the facts of this case, that conduct created an equitable mortgage in favour of the plaintiffs. The terms of the equitable mortgage will be such that the innocent mortgagor (in this case Mr. Robinson) is in no worse position than he would have been under the mortgage which had been discharged.

For those reasons I, too, would dismiss the appeal.