Case No CHANI 97/0343/3
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF HIS HONOUR JUDGE LEVY QC

Royal Courts of Justice
Strand
London WC2

Date: Friday, 6th February 1998

B e f o r e:

LORD JUSTICE HENRY

LORD JUSTICE ALDOUS

SIR CHRISTOPHER STAUGHTON

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FAIRCHARM INVESTMENTS LTD
Respondents
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CITIBANK INTERNATIONAL PLC
Appellants

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(Computer Aided Transcript of the Palantype Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 831 3183
Official Shorthand Writers to the Court)
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MR J R T RYLANCE (Instructed by Clarke Caplin & Co of London) appeared on behalf of the Appellant

MR M WARWICK (Instructed by Bude Nathan Iwanier of London) appeared on behalf of the Respondent
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J U D G M E N T
LORD JUSTICE HENRY:  I will ask Sir Christopher Staughton to give the first judgment.

SIR CHRISTOPHER STAUGHTON:
An overview
In June 1983 Mr Gordon Frost became the owner of property in Harpenden.  He mortgaged it to Citibank, as security for repayment of a loan of £23,000.  By way of further security he also assigned to Citibank a life insurance policy with Norwich Union.

Nearly ten years later, in April 1993, Faircharm Investments Ltd obtained judgment against Mr Frost in the sum of £39,119.40.  Later they obtained a charging order on the property in Harpenden and an order for sale.  Of course they had to pay off the amount due to Citibank if they were to sell free of encumbrances.  By that time there was £30,858 due to Citibank, as there had been a further advance in May 1990.

Faircharm obtained the redemption figure from Citibank.  At the same time their solicitors wrote on 3rd October 1994:
"In view of the fact that our clients will be effecting payment of the mortgage, we require that the mortgage over the life policy be  assigned to our clients on redemption.  We should be grateful if you would confirm your agreement so that we can prepare the appropriate deed of assignment in order to avoid application to court."
It is said by Faircharm's solicitors that Citibank agreed orally to that proposal in terms that the surrender proceeds of the policy (or policies, for there are said to be more than one) would be paid to the solicitors.

Later in the story we shall see that a Deputy Master found that there was such an agreement.  Even if there had not been, the same result would in my judgment have followed as a matter of law, for if a subsequent encumbrancer pays off the debt of someone who has  priority over him, he is surely entitled to take over any right or remedy which would have been available to the prior encumbrancer.

The sale took place on 20th October 1994, for a gross sum of £66,000.   That left Faircharm with a significant shortfall.    They hoped to recoup part of it from the proceeds of surrender of the insurance policy, which eventually amounted to £7,788.99.  At or  about that time Faircharm's solicitors paid what was due to Citibank, and received from them the deeds of the property and the life insurance policy itself.  That was accepted by counsel for  Faircharm in this court.  Faircharm's solicitors wrote to Citibank on 20th October -
"The redemption moneys are being paid on the basis that the surrender proceeds of the life policies of Mr Frost are paid to us.  You confirmed that this would be done and we look forward to receiving the surrender proceeds as soon as possible."

On the same day solicitors for Mr Frost were speaking to Citibank.  Apparently they said that Faircharm's solicitors were not entitled to the surrender value and were trying to get it illegally.

There is then an apparent gap until 21st November 1994.  Citibank on that date wrote to Norwich Union:
"With reference to the above life policy would you please note the following:
The mortgage account redeemed on 21st October 1994 and we have no further interest in the above policies.  Trust this is of assistance."

Faircharm's solicitors wrote to Citibank on 22nd November and on 2nd December about the surrender proceeds of the life policies which, they said, "are due to us".  There was no reply to those letters or to another dated 21st December.  Also in this period there was a letter of 2nd December from Citibank to Norwich Union.  We only came to see it after the close of the hearing and it raised a number of queries about itself.  For my part, I feel that we should pay no attention to it.  On 11th January 1995 a writ was issued on behalf of Faircharm against Citibank.  I shall return to the detail of that later.

Then on 6th February Citibank wrote to Mr Frost's solicitors:
"Further to your recent letter, please accept this as confirmation that Norwich Union policy nos A3774556N and 11571488 have been sent for surrender to Norwich Union.  We no longer hold the original policy documents here."
The second sentence of that letter was true, but the first was not.  
On 27th March Mr Frost's solicitors wrote to Norwich Union:
"As requested for administrative purposes we enclose an original letter from Citibank confirming that they no longer hold the policy documents.  We look forward to receiving your cheque at your earliest convenience."
The reference to an original letter of Citibank was, I infer, to the letter of 6th February.  On 29th March Norwich Union paid the surrender value to Mr Frost or his solicitors.  They said later that they believed the policy to have been sent to them by Citibank but lost in the post.

That, in outline, is the story.  Some important points in it were not known at the time to one or both of Faircharm or Citibank, or if known were not present to their minds.  Nobody suggests that Norwich Union, having paid Mr Frost through his solicitors, are obliged to pay a second time to Faircharm.  So the policy moneys have gone to Mr Frost and not to Faircharm.

The Proceedings (1) the first hearing
The Statement of Claim endorsed on the writ, so far as material, provided as follows:
"2. [The sum of £30,858 was paid to Citibank] in consideration of the Defendant's agreement to discharge the Legal Charge dated 13th June 1983 and the Deed of Variation dated 18th May 1990 and that they would also remit the proceeds of the life policies that they held in name of Mr Gordon Raymond Frost."
Paragraph 3 alleged that Citibank had "failed to fulfil their side of the contract".
"4  The Plaintiffs have suffered loss and damage by not being able to complete the terms of their own contract and inter alia have not been able to deliver up the discharge of mortgage to their purchasers and have suffered increased legal costs in relation thereto and the loss of the moneys arising therefrom."
In the prayer Faircharm claim -
"(i) Damages
(ii) Specific performance or damages in lieu thereof."

It seems to me that Faircharm were making two complaints:  first, they had not received a discharge of the mortgage of the property in Harpenden, which was needed to satisfy their purchasers;  secondly, they had not received the proceeds of the life policy.  It is not clear whether the loss and damage referred to in paragraph 4 included the policy moneys, and if so under what description.  Nor is it clear whether the claim for specific performance related only to the discharge of the mortgage on the Harpenden property, or also comprised some claim for specific performance in respect of the life policy.  I think it should be read as referring only to the   Harpenden property.

There was a summons under Order 14 and Order 86 issued on 20th   February 1995.  It asked in paragraph 1 (a) for an order that Citibank hand over the legal charge dated 13th June 1983 and the Deed of Variation dated 18th May 1990.  Those documents both related to the Harpenden property, and the requirement in the summons was evidently satisfied before it came to be heard before Deputy Master Wall on the 11th April 1994.  There remained paragraph 1 (b) of the summons which sought an order that the defendant do forthwith hand over to the plaintiff "the surrender proceeds of the life insurance policy no. A3774556N dated 18th April 1983 with the Norwich Union Life Assurance Society the benefit of which was assigned to the defendant on 13th June 1993."
The evidence before the deputy master included an affidavit of an employee of Citibank in which she said:
"10  The life policy has not been surrendered to the Defendant."
What she did not say was that the policy had been sent to Faircharm as long ago as 20th October 1994 or thereabouts.  I would suppose that she did not know or had forgotten that fact, although there is a question mark which I need not answer as to what she may have been told by another employee.  It seems very probable that Faircharm too or their solicitors had forgotten that the policy was  in their possession.

Another misapprehension existed at the hearing before the deputy master.  It would seem that neither party knew that Norwich Union had paid the policy proceeds to Mr Frost fourteen days before on 29th March.  However, counsel for Citibank did mention at the hearing that Citibank had told Norwich Union that their mortgage had been redeemed and that they had no further interest in the  policy.  This was a reference to the letter of 21st November 1994 which was exhibited to her client's affidavit.  What was not exhibited was Citibank's letter of 6th February 1995 to Mr Frost's solicitors.

The order made on that occasion was as follows:
"(1) that the Plaintiff be at liberty to amend paragraph 1 (b) of the summons so as to ask for an assignment of the policy.

(2) that the Defendants do on or before 25th April 1995 execute assignment in favour of the Plaintiff all the beneficial interest in Norwich Union Life Insurance Policy number A3774556N.

(3) that the Defendant do pay the Plaintiff's costs of this application ....."
The specific performance thus ordered was not, for the reason already mentioned, the same specific performance as appeared to be sought in the writ.

No record exists of the Deputy Master's reasons, if he gave any.  But on a later occasion he said this:
"My recollection is that I decided that the Plaintiff was entitled to its order on the agreement, but if that was wrong they would win anyway on subrogation."

More of the truth then emerged.  Norwich Union wrote on 27th April  1995 to Faircharm's solicitors as follows:
"Citibank have confirmed to us that they no longer have any interest in these policies and that the documents had been sent to us for surrender. These were never received by us and in the circumstances we assumed that they were lost in the post. In the absence of any other notice the ownership of the policies were transferred back to Mr Frost."
Faircharm's solicitors wrote to Citibank's solicitors protesting.  They said that Citibank -
"improperly arranged for the policies to be surrendered and untruthfully stated that the documents had been sent to Norwich Union when in fact they knew we were holding the documents."
Those two complaints seem in some degree self-contradictory, but we can let that pass.  It was now for the first time present to the mind of both Faircharm and Citibank or their respective solicitors that the policy was held by Faircharm.  The solicitors for Faircharm said that, if all the beneficial interest in the policy  could not be transferred to their clients, there would be a claim for damages for the loss which their client had suffered.

Finally, Faircharm's solicitors discovered from a letter dated 10th July from Norwich Union that the moneys had been paid to Mr Frost's  solicitors on 29th March.  They redirected their claim for damages against Citibank.

(2)  The Second hearing
This followed a judgment entered by Faircharm on 18th January 1996 as follows:
"No defence having been served by the Defendant herein and the Plaintiff being unable to enforce his claim for specific performance, it is this day adjudged the Defendant to pay the Plaintiff damages and interest to be assessed."
It is now conceded that the judgment was irregular.  There had been no default of defence since no leave to defend had been given, which is a necessary requirement after Order 14 proceedings have failed or been only in part successful.

Citibank applied for the judgment to be set aside;  and that application came on inter partes before Deputy Master Wall on 27th February 1996.  He (i) refused the set aside the default judgment,  and (ii) refused an extension of time for Citibank to appeal against his order of the 11th April 1995.  He concluded in his reasons first (with some doubt) that the judgment was regular, and he saw no reason to set it aside.  But if the judgment was irregular, secondly, whilst normally Citibank would be entitled to have it set aside as of right -
"if the Defendants are bound to lose on a subsequent application for summary judgment, as I believe they are, it would seem pointless to me to set aside the judgment."

(3) The judge's decision
There was then an appeal to Judge Levy QC, sitting as a High Court judge, from both the decisions of the master.  Both appeals were dismissed.  I need not deal with the judge's refusal of an extension of time to appeal against the decision of 11th April 1995 since that application is not renewed in this court. 

As to the other appeal, against refusal to set aside the default judgment, in point of form the judge's reason for dismissing it was that the summons did not specify the irregularity relied on (indeed it did not allege irregularity), and the judge was not inclined to give leave to amend.  However, he also said that he very much echoed what the master had said as to it being pointless to set aside the judgment if Citibank were bound to lose on a subsequent application for summary judgment.  And he added later:
"It is clear to me that there is a case of subrogation by the Citibank to the Plaintiff and it would be sad, especially considering the relatively small sum, if this litigation were to continue much longer."

Leave to appeal was refused on paper by Mummery LJ, but granted ex parte by Saville and Morritt LJJ.

Conclusion
It is now accepted that the judgment is irregular.  Furthermore, it  is submitted on behalf of Citibank that the error involved, in entering judgment in default of defence before the time for service of defence had even begun, was so fundamental that no exercise of the court's discretion could uphold the judgment.  In support of that we were referred to an unreported decision of Russell LJ and Hollis J in this court in Charlesworth v Focusmulti Ltd, (17th February 1993).  That decision has been criticised;  it is said that it was based on the old law to be found in Anlaby v Pretorius (1888) 20 QB 764 and In re Pritchard (1963) Ch 502, and not on the revised Ord.2,r.6 and Harkness v Bell's Asbestos and Engineering Ltd (1967) 2 QB 792.

However that may be, I am impressed by what both the deputy master and the judge said, that if Citibank are bound to lose on a subsequent application for summary judgment, it would be pointless to set aside the existing judgment.  Lex non cogit ad inutilia.  I would not go so far as to say that no irregularity could be so fundamental that the judgment in such a case would have to be set aside, whatever the other circumstances.  But if indeed Citibank would be bound to lose I do not, in the circumstances of this case, consider that there is such a degree of fundamental error to require that the judgment be set aside.  After all the tortured misunderstanding on both sides in this case and the regrettable imprecision in the pleading and court documents, it is time that justice is done once and for all in relation to this sum of £7,788.99.  As was said over 100 years ago, "We are not here to punish people for their mistakes in procedure but to do justice."

I do consider that Citibank would be bound to lose on an application for summary judgment based on the true facts and properly argued, on two grounds.  First, it has now been held by the master in a decision from which there is no longer any attempt to appeal that Citibank contracted to remit the proceeds of the life policy to Faircharm.  It must be an implied term of that agreement that Citibank would not destroy their right to those proceeds by writing as they did to Mr Frost's solicitors, a letter which was passed on to Norwich Union.  That was the cause why the proceeds of the policy were paid to Mr Frost and not made available to Faircharm.

Secondly, even in the absence of such agreement Faircharm would be  subrogated to the rights of Citibank in the policy if they chose to call for it, as they did.  It is a feature of the doctrine of subrogation in insurance law that the subrogator is under a duty not to destroy or prejudice any right or remedy to which the subrogatee becomes entitled;  or at any rate, he will be liable to compensate the subrogatee if he does so:  see McGillivray on Insurance Law (9th edn para 22.55).  The same principle must apply to conduct of a prior encumbrancer who is paid off by a subsequent encumbrancer.

The only doubt I have had on this point is as to whether it could be said that Faircharm were themselves at fault in failing to notify Norwich Union of their claim between October 1994 and April 1995.  But on reflection I do not consider that Faircharm are to be reproached for what they did or did not do during that period.   They were seeking, at first by correspondence and thereafter by action, to obtain an assignment of the beneficial interest in the policy.  And any delay on their part pales into insignificance when compared with the delay, discourtesy and unbusinesslike behaviour of Citibank, only part of which is set out in this judgment.

Even as late as 22nd March 1995 their deponent was saying that the  policy had not been surrendered, but failed to add (i) that they had told Mr Frost's solicitors that they had sent the policy to  Norwich Union for surrender, or (ii) that they had in fact sent the policy to Faircharm.

In my judgment the appeal should be dismissed.  The so-called default judgment should stand as a judgment for damages in the amount of the insurance proceeds, on the ground that Citibank destroyed - and therefore could not make available to Faircharm - their right to the surrender proceeds of the policy.  It is, in my opinion, too late for Faircharm to claim that they could have obtained a larger sum by sale of the policy.

LORD JUSTICE ALDOUS:  I agree.

LORD JUSTICE HENRY:  I also agree, and the appeal therefore stands dismissed.

Order:  Appeal dismissed with costs.