Neutral Citation Number: [2013] EWCA Civ 1960
Case No: A3/2012/2052
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR DAVID DONALDSON QC SITTING AS A DEPUTY HIGH COURT JUDGE
[2012] EWHC 1991 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 02/07/2013
Before :

LORD JUSTICE MOSES 
LORD JUSTICE TOMLINSON
and
LORD JUSTICE FLOYD
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Between:

	MELISSA MENELAOU	Respondent/Claimant	
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	BANK OF CYPRUS UK LIMITED	Appellant/
Defendant	

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TIMOTHY POLLI (instructed by Matthew Arnold & Baldwin LLP) for the Appellant
MARK WARWICK QC (instructed by Jeffrey Green Russell Ltd) for the Respondent
The Third Party did not appear on the appeal

Hearing date: April 23 2013
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Judgment

Lord Justice Floyd: 

1.	This appeal raises questions about the law of unjust enrichment, and one of the remedies which may be granted to reverse the effect of unjust enrichment, namely subrogation to an unpaid vendor’s lien.  The appellant, the Bank of Cyprus UK Limited (“the Bank”), claims to be entitled by subrogation to a charge over a house owned by the respondent Melissa Menelaou, (“Melissa”).  Although Melissa now accepts that the Bank expected to obtain a charge over her property, she knew nothing of it at the time.   She was 18 years old when the house was purchased, and believed it was a gift from her parents.  As explained below, it now appears that the signature on the charge was not hers or was otherwise defective.  In consequence, the legal charge was void.  The Bank’s case is that Melissa has been unjustly enriched at its expense, and it asks the court to grant the remedy of subrogation, so as to make it an equitable chargee of Melissa’s property by subrogation to the unpaid vendor’s lien.     
2.	Parris and Donna Menelaou (“the Menelaou parents”) had a property business.  In 2008 they lived with three of their children including Melissa at Rush Green Hall, a property owned by the Menelaou parents.  The Menelaou parents were indebted to the Bank in the sum of £2.2m, an indebtedness which was secured by two legal charges on Rush Green Hall.   In 2008 the Menelaou parents decided to sell Rush Green Hall in order to purchase a further, smaller property as the family home as well as to provide funds to allow their eldest daughter Danielle to pay the deposit on a house which she wanted to buy with her future husband.  A purchaser for Rush Green Hall was found who agreed to pay a purchase price of £1.9m, a sum which would have been inadequate to discharge the Menelaou parents’ indebtedness to the Bank.  A deposit of 10% (£190,000) was payable on exchange of contracts, which took place on 15 July 2008. 
3.	Boulter & Co (“Boulters) were the solicitors acting for the Menelaou parents in connection with the sale of Rush Green Hall.  Paul Cacciatore, a legal executive at Boulters, was Mr Menelaou’s brother-in-law. On the date of exchange of contracts Boulters wrote to the Bank setting a completion date of 12 September 2008.  
4.	Mr Menelaou located a suitable new property, 2 Great Oak Court (“Great Oak Court”).  On 24 July 2008 contracts were exchanged with the vendors of Great Oak Court at a purchase price of £875,000.  The purchaser was to be Melissa.  A 10% deposit (£87,500) was paid out of the larger deposit which had been received from the purchasers of Rush Green Hall.  Melissa was told that Great Oak Court was being bought in her name as a gift for her and for her two younger siblings, on the basis that she would hold the property for herself and for them.  Nothing turns on the fact that Melissa held the property subject to these other interests.
5.	The Bank was approached in connection with these arrangements.  After some deliberation, on 9 September 2008 the Bank confirmed by letter that it would release its charges over Rush Green Hall provided that, on completion, £750,000 of its indebtedness was repaid to it and provided further that it was granted a new charge over Great Oak Court.  As is often the case, the Menelaou parents’ solicitors, Boulters, were also instructed by the Bank to act for it in connection with the discharge of the Bank’s charges over Rush Green Hall and the obtaining of the new charge over Great Oak Court.  These two linked transactions obviously required the co-operation of the Bank.   
6.	The Bank’s letter of 9th September 2008 to Boulters included the following:
“We confirm that upon receipt of £750,000 we will release our charges over [Rush Green Hall] subject to a 3rd party legal charge over the property known as 2 Great Oak Court which is registered in the name of Melissa Menelaou.” 
7.	On 10 September 2008 Boulters provided the Bank with a certificate of title in standard form in which they undertook, prior to the use of “the mortgage advance”, to obtain in the form required by the Bank, the execution of a mortgage by Melissa over Great Oak Court. 
8.	In order to create a valid charge over Great Oak Court, it was necessary for Melissa to sign it.  Melissa’s case was that she did not sign the charge, and that the signature on the charge was not hers.  She was supported in this version of events by her younger brother Max, who said that Mr Cacciatore had asked him to sign it, and he had done so without any explanation of what it was. The absence of Melissa’s signature, if true, was not the only thing wrong with the charge.  The charge identified Melissa as “the customer” of the Bank, which she was not.  Of course it was the Menelaou parents who were the customer, as it was their indebtedness to the Bank that the charge was intended to secure.  The Bank pointed out this error after the charge was sent to them on 11 September.  Mr Cacciatore dealt with the error by simply changing names in manuscript to identify the Menelaou parents instead of Melissa as the customer. 
9.	Completion of both sales took place on 12 September 2008.  On that day Boulters received into its client account the balance of the proceeds of sale of Rush Green Hall.  From those funds, as had been agreed, Boulters sent £750,000 to the Bank to repay part of the indebtedness of the Menelaou parents and £785,000 to the vendor of Great Oak Court to meet the balance of the purchase price on that property. They also sent the necessary forms to the Bank to be completed by them for the purpose of releasing the charges on Rush Green Hall.  These forms were returned by the Bank on 13 October 2008, approximately a month after completion.  Following completion, the Menelaou parents moved into Great Oak Court with Melissa and the two younger children. 
10.	In the spring of 2010 the Menelaou parents’ property business was experiencing difficulties. They proposed that Great Oak Court be sold and a smaller property purchased.  The conveyancers pointed out that there was a charge dated 12 September 2008 over Great Oak Court securing the indebtedness of the Menelaou parents to the Bank.
11.	These proceedings were commenced by Melissa on 2 November 2010 seeking rectification of the register to remove the charge dated 12 September 2008.  There were two limbs to her case.  The first was that she had not signed the charge.  The second was that the deed had been altered by Mr Cacciatore without Melissa’s authorisation.  The Bank defended the proceedings on the basis of what they were told by Boulters, about the validity of the charge, and joined Boulters as a third party.  It also launched a counterclaim, which I explain further below.  The position adopted by Boulters, as put forward by Mr Cacciatore, was that Melissa had signed the charge in front of a witness.  They further argued that the alteration to the deed did not invalidate it, as it had occurred before delivery.
12.	At an early stage of the trial Boulters and the Bank abandoned the allegation that the charge was enforceable against Great Oak Court as security for the indebtedness of the Menelaou parents to the Bank.  Boulters and the Bank entered into an agreement, the terms of which were in substance that:
i)	in failing to obtain for the Bank an enforceable charge over Great Oak Court as security for the debts of the Menelaou parents, Boulters were in breach of duties which they owed to the Bank in contract and in tort;
ii)	it was thereby liable to the Bank for the loss it had suffered in consequence of the invalidity of the charge as security for those debts.
13.	It followed that the invalidity of the charge, but not the reason or reasons for its invalidity, was now common ground between Melissa and the Bank.  What was left in the proceedings was the Bank’s counterclaim against Melissa.   By its counterclaim the Bank sought, first, a declaration that Melissa held Great Oak Court on trust for the Bank.  That contention was no longer pursued before us.  Alternatively the Bank sought a declaration that it was entitled to an equitable charge arising as a result of subrogation to an unpaid vendor’s lien over Great Oak Court.  
14.	The judge, Mr David Donaldson QC sitting as a deputy judge in the Chancery Division, rejected the Bank’s counterclaim.  He held that whether one applied what he described as a “narrow or traditional approach” to the doctrine of subrogation to the unpaid vendor’s lien, or a “wider approach” based on the law of unjust enrichment, the fact that the monies provided for the purchase were not paid by and did not belong to the Bank was fatal to the counterclaim.  The Bank appeals, with the permission of Sir Stanley Burnton, from his judgment and order. 
“Subrogation to an unpaid vendor’s lien”
15.	Although well known to those who specialise in the field, the concept of subrogation to an unpaid vendor’s lien is not a particularly straightforward one to understand.  In terms of the present case, what the Bank seeks to achieve is to be placed in a position equivalent to that of the vendor of Great Oak Court at the point where the purchase money has not been paid.  At that point the vendor would be able to refuse to convey the title to Great Oak Court, unless the purchase money is paid to him.  The lien itself was explained by Millett LJ in Barclays Bank PLC v Estates & Commercial Limited [1977] 1 WLR 415 at 419, in this way (omitting citation):
“As soon as a binding contract for sale is entered into, the vendor has a lien on the property for the purchase money and a right to remain in possession of the property until payment is made.  The lien does not arise on completion but on exchange of contracts.  It is discharged on completion to the extent that the purchase money is paid. … Even if the vendor executes an outright conveyance of the legal estate in favour of the purchaser and delivers the title deeds to him, he still retains an equitable lien on the property to secure the payment of any part of the purchase money which remains unpaid.  The lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money.
The lien arises by operation of law and independently of the agreement between the parties.  It does not depend in any way upon the parties’ subjective intentions.  It is excluded where its retention would be inconsistent with the provisions of the contract of sale or with the true nature of the transaction as disclosed by the documents.”
16.	The remedy of subrogation, so far as relevant in this type of case, was explained by Walton J  in Burston Finance Limited –v- Speirway Limited (in liquidation) [1974] 1 WLR 1648 at 1652B-C: 
"What is the basis of the doctrine of subrogation? It is simply that where A's money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B's rights as a secured creditor …. It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided by him."
17.	A third party who provides some or all of the purchase money for a purchaser, thereby discharging the obligation to the vendor, can claim the benefit of the unpaid vendor’s lien by subrogation.  This is so even after the lien has been, as between vendor and purchaser, extinguished.  It is not intuitively clear how, or why, this should be the case.  How is the unpaid vendor’s lien transferred from the vendor to the third party? It might be thought that once the obligation in question has been extinguished, there is nothing which the vendor could transfer.  Even if there was something to transfer, by what legal mechanism does the transfer take place?  There has been no assignment.  Conceptual problems such as these gave rise to the notion that the vendor’s lien was “kept alive” for the benefit of the subrogated third party.  However, as Lord Hoffmann has explained in Banque Financière de la Cité v Parc (Battersea) Limited [1999] 1 AC 221 at 236 (“the Banque Financière case”), the phrase “keeping the charge alive” was a metaphor or analogy:
“In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all.  It is discharged and ceases to exist.”
18.	Lord Hoffmann went on to explain:
“It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched.  It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment.  When judges say the charge is “kept alive” for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if  the benefit of the charge had been assigned to him.” 
19.	In the same case Lord Hoffmann dealt with an argument that the absence of common intention between the parties defeated a claim to subrogation.  Having reviewed five authorities, Chetwynd v Allen [1899] 1 Ch. 353, Butler v Rice [1910] 2 Ch. 277, Ghana Commercial Bank v Chandiram [1960] AC 732, Paul v Spierway [1976] Ch. 220 and Boscawen v Bajwa [1996] 1 WLR 328, he said this:
“These cases seem to me to show is that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust and thirdly, whether there are nevertheless reasons of policy for denying a remedy.”
20.	Lord Steyn put the test in four rather than three propositions, but they are to the same effect: see page 227 between A and C.  
21.	The Banque Financière case was subject to analysis in this court in Cheltenham & Gloucester PLC v Appleyard [2004] EWCA Civ 291. At paragraph [31], Neuberger LJ, who gave the judgment of the court, rejected the notion that the Banque Financière case had introduced new concepts into the law of subrogation.  Whilst it represented an important development of the law in more than one respect, it did not establish new principles.  In so saying he echoed what Millett LJ had said in Boscawen v Bajwa at 335 D:
“Subrogation is not a remedy which the Court has a general discretion to impose whenever it is just to do so.  The equity arises from the conduct of the parties on well settled principles and in defined circumstances.”
The judgment
22.	The judge considered first what he called the narrow or traditional approach using the “well-known and long-established route of subrogation to an unpaid vendor’s lien”.  He said that the premise of the argument was that the monies used to pay the purchase price of Great Oak Court were beneficially owned by the Bank.  He rejected the Bank’s argument that it had any interest in the proceeds of sale of Rush Green Hall.  Accordingly the Bank did not provide or advance the monies used to pay for Great Oak Court.  The position in relation to the deposit, to which he gave separate consideration, was even clearer.  
23.	The judge then considered what he described as “the wider approach”, based on the decision of the House of Lords in the Banque Financière case.  He held that this approach also failed because the Bank could not establish the first of Lord Hoffmann’s propositions, namely that Melissa had been enriched at the expense of the Bank.  Having held that the second and third propositions were satisfied (that is to say that Melissa’s enrichment was unjust, and there was no policy reason for denying a remedy), he said this at paragraph [22]:
“The detriment to the Bank relied upon is its release of two charges over Rush Green Hall (worth £1.9 million) securing indebtedness of £1.45 million (£2.2 million less £750,000).  The benefit to [Melissa] is her gratuitous acquisition of Great Oak Court … The existence of both detriment and benefit does not however establish the further element that the latter should have been at the expense of the Bank.  Whether a causal link between detriment and benefit is required or sufficient, and of what nature, remains little explored by both courts and academic commentators, and even less resolved.  I do not intend to make a contribution to that debate beyond expressing my endorsement of the helpful examination of this area by Henderson J in Investment Trust Ltd v HMRC  [2010] EWHC 458, and it would serve no purpose if I were to attempt to do so.  It is sufficient for me to say that there must be something in the nature of, to use the formula proposed in Burrows, the Law of Restitution 3rd ed. p.66, a transfer of value from the Bank to the claimant.  But here, the claimant’s benefit enured and was complete on 12 September 2008, while the Bank’s detriment through mistaken release of its charges occurred a month later.  Whether or not time’s arrow must always and with full rigour be respected in the law of unjust enrichment, I am clear that this is not a case in which economic or any other kind of reality calls for its wholesale rejection”
24.	Thus, because Melissa was already enriched on 12 September 2008, the date on which the acquisition of Great Oak Court was completed subject only to the invalid charge, and because at that date the Bank still had in place its charges over Rush Green Hall (although it had agreed to release them, and did so a month later) there was nothing in the nature of a transfer of value.  Accordingly, the enrichment was not at the Bank’s expense.
The arguments of the parties
25.	Mr Timothy Polli, who argued the case for the Bank on this appeal, divided his submissions in this court into three questions.  The questions, and his suggested answers were these:
i)	Is a proprietary interest in the funds advanced necessary in order to claim the remedy of subrogation in an unjust enrichment case? His primary submission was that a proprietary interest in the funds advanced was not necessary.
ii)	If a proprietary interest is necessary, did the Bank here have such an interest? He submitted that the Bank had a sufficient interest in the proceeds of sale of Rush Green Hall to support the claim.  This aspect of the Bank’s case involved reliance on the decision of this Court in Barclays Bank v Buhr [2001] EWCA Civ 1223.
iii)	Was the link between detriment to the Bank and the enrichment of Melissa sufficiently close to say that she was enriched at the Bank’s expense?  He submitted that there was a sufficient link to support the claim.
26.	The principal point taken on behalf of Melissa by Mr Mark Warwick QC was that the remedy of subrogation to prevent unjust enrichment is, notwithstanding the decision in the Banque Financière case, still only granted in defined circumstances by the principled application of rules.  All the decided authorities involved claimants who had advanced money of their own.  He supported the judge in his conclusion that the Bank had no interest in the monies advanced.  
27.	Given that it is now well recognised that subrogation is not a cause of action, but a remedy imposed in equity to reverse unjust enrichment, it seems to me that the logical and correct approach is to consider first whether Lord Hoffmann’s three part test is satisfied on the facts of this case.  If the test is satisfied, it will still be necessary to go on to consider whether the remedy of subrogation is appropriate in this class of case.
28.	Adopting that approach, the judge held that Melissa had been enriched, and that her enrichment was unjust. He was undoubtedly right to do so and his judgment is not challenged on appeal.  For Melissa to take Great Oak Court free of the Bank’s charge would be an uncovenanted windfall for her and for the Menelaou family.  The judge also held that there was no reason of policy to deny a remedy.  This left the question of whether the established unjust enrichment was at the expense of the Bank. I propose therefore to consider, firstly, whether this is a case in which it can be said that Melissa was enriched at the Bank’s expense and, secondly, if the answer to that question is in the affirmative, whether it is appropriate to grant the remedy of subrogation to reverse her unjust enrichment.  
Was the enrichment at the expense of the Bank?
29.	As is pointed out in Goff & Jones The Law of Unjust Enrichment (8th Edition) at 6-01, the term “at the claimant’s expense” 
“signifies that the claimant must have suffered a loss that was sufficiently closely linked to the defendant’s gain for the law to hold that there was a transfer of value between the parties.  This rule reflects the principle that the law of unjust enrichment is not concerned with the disgorgement of gains made by defendants, nor with the compensation of losses sustained by claimants, but with the reversal of transfers of value between claimants and defendants.”
30.	Mr Polli submits that, even if the Bank had no proprietary interest in the monies used to discharge the purchase price of Great Oak Court, he nevertheless can make good the Bank’s claim for a remedy based on unjust enrichment.  The Bank relies on the fact that, had it not agreed to release its charges over Rush Green Hall, the purchase monies could not have been used to purchase Great Oak Court.  The economic reality is that it provided or released the money, which it could otherwise have recalled in satisfaction of the indebtedness of the Menelaou parents.  There was accordingly a sufficiently close causal connection between a loss to the Bank and the unjust enrichment of Melissa to hold that there was a transfer of value between them. 
31.	In his submissions Mr Polli invited us to have regard to the economic reality, as was done for example in Banque Financière and Filby v Mortgage Express Express [2004] EWCA Civ 759. 
32.	Banque Financière de la Cité (BFC) was a Swiss Bank.  In order to circumvent the disclosure obligations of the Swiss Federal Banking Regulations, the money advanced by BFC had been loaned first to a Mr Herzig who was the general manager of the holding company of the group.  Mr Herzig had in turn lent the money to Parc who used it to discharge a loan from RTB, another bank. Mr Herzig was thus an intermediate borrower and lender. It was argued on behalf of the defendants in the House of Lords that the money paid to RTB was not BFC’s money, but Mr Herzig’s.  This was dealt with shortly by Lord Steyn at 227 AC as follows:
“Stripped to its essentials the argument of counsel for OOL was that the interposition of the loan to Mr. Herzig meant that the enrichment of OOL was at the expense of Mr. Herzig. The loan to Mr. Herzig was a genuine one spurred on by the motive of avoiding Swiss regulatory requirements. But it was nevertheless no more than a formal act designed to allow the transaction to proceed. It does not alter the reality that OOL was enriched by the money advanced by BFC via Mr. Herzig to Parc. To allow the interposition of Mr. Herzig to alter the substance of the transaction would be pure formalism.”
33.	Lord Hoffmann was also unimpressed by the fact that Mr Herzig was interposed as borrower and lender, particularly when it is appreciated that the payment was made directly in any event:
“The result of the transaction is that BFC's DM30m. has been used to reduce the debt secured by RTB's first charge and that this reduction will, by reason of OOL's second charge, enure wholly to the latter's advantage.  …
It is true that the transaction was structured to pass the money through the hands of Mr. Herzig in order to avoid disclosure under Swiss banking law. But there is no difficulty in tracing BFC's money into the discharge of the debt due to RTB: the payment to RTB was direct. In this respect, the case is stronger than in Boscawen v. Bajwa [1996] 1 W.L.R. 328. Since the money can be traced, the differences in the terms of the loans by BFC to Mr. Herzig and by Mr. Herzig to Parc do not seem to me to matter, although of course on the principle of Paul v. Speirway Ltd. [1976] Ch. 220, BFC could not, on the basis of any terms agreed between Mr. Herzig and Parc, assert by way of subrogation greater rights than they bargained for.”
34.	In Filby v Mortgage Express, Mr and Mrs Filby’s matrimonial home was subject to a mortgage in favour of the Halifax.  They also had an unsecured development loan account with the Midland Bank. Mr Filby sought to remortgage the matrimonial home with Mortgage Express. The mortgage advance was paid to solicitors who used part of it to redeem the Halifax mortgage and another part in the reduction of the debit balance on the development loan account with the Midland. However Mrs Filby had not signed the mortgage, and so, as against her, it was void. Mortgage Express claimed to be subrogated, amongst other things, to the rights of the Midland Bank against Mrs Filby to the extent that the joint debt to them had been discharged with their money. 
35.	Mr Polli relies on the Court of Appeal’s admittedly obiter consideration of the case at [37] and following. Those paragraphs contain an analysis of the reasoning in the Banque Financière case.  In a number of passages May LJ refers to “reality” e.g. at [50], [52] and [54].  At [62] May LJ says this:
“Accordingly so far as is relevant to this appeal, the remedy of equitable subrogation is a restitutionary remedy available to reverse what would otherwise be unjust enrichment of a defendant at the expense of the claimant. The defendant is enriched if his financial position is materially improved, usually as here where the defendant is relieved of a financial burden – see Peter Birks, An Introduction to The Law of Restitution page 93. The enrichment will be at the expense of the claimant if in reality it was the claimant's money which effected the improvement. Subject to special defences, questions of policy or exceptional circumstances affecting the balance of justice, the enrichment will be unjust if the claimant did not get the security he bargained for when he advanced the money which in reality effected the improvement, and if the defendant's financial improvement is properly seen as a windfall. The remedy does not extend to giving the claimant more than he bargained for. The remedy is not limited to cases where either or both the claimant and defendant intended that the money advanced should be used to effect the improvement. It is sufficient that it was in fact in reality so used. The remedy is flexible and adaptable to produce a just result. Within this framework, the remedy is discretionary in the sense that at each stage it is a matter of judgment whether on the facts the necessary elements are fulfilled.”
36.	Those passages show that the court will look to economic reality when deciding whether the defendant was enriched by money advanced by the claimant.  
37.	So, submits Mr Polli, the Menelaou parents were in negative equity, the proceeds of sale of Rush Green Hall were not in reality their money.  Had the Bank insisted on the repayment of all the outstanding indebtedness, and re-lent the sums required to purchase Great Oak Court, they would have been entitled to security by subrogation to the unpaid vendor’s lien.  To refuse a remedy in present circumstances was mere formalism of the kind rejected in Banque Financiere and Filby.
38.	In the passage from his judgment I have quoted in paragraph [22] above, the judge said that there was no transfer of value between the Bank and Melissa.  He did so on the basis of an analysis of the chronology, and relied in particular on the fact that the charges remained in place at the time that the proceeds of sale of Rush Green Hall were applied to the purchase of Great Oak Court.  Mr Polli attacked this finding on the basis that by the time the Bank had agreed to the terms of the 9 September 2008 letter, the Bank was not able to resile from its agreement to release its charges. It was therefore wrong to attach significance to the fact that the charges were not immediately released.  I think, with respect, there is force in that criticism.   The transfer of value in the present case starts with the agreement by the Bank to give up its interest or estate in Rush Green Hall.  That agreement released the funds to pay for Great Oak Court. The fact that the charges remained in place whilst the bank signed the forms is not significant. 
39.	I observe that the view that this delay is not a significant factor is supported by Professor Charles Mitchell in an academic comment on the present case in the All England Annual Review 2012 at 28.29-28.31.  In that passage Professor Mitchell contrasts the chronological approach adopted by the judge in the present case, with which he disagrees, with that of Henderson J in Investment Trust Companies (in liquidation) v HMRC [2012] EWHC 458 (Ch).   That case contains a thoughtful and valuable analysis of what is meant by the requirement that the enrichment be at the expense of the claimant.    The claimant investment trust companies employed managers to whom they paid fees which were subject to VAT.  After the VAT had been paid, a decision of the Court of Justice of the European Union held that, contrary to what had been previously believed, the services in question were exempt.  The claimants sought repayment of the sums which they had paid in the belief they were lawfully charged. One of the issues Henderson J addressed was whether, assuming HMRC was enriched, that enrichment was at the expense of the investment trusts. The payments had, of course, passed through the managers, and were not direct. 
40.	At [51] to [54] of his judgment Henderson J outlines the positions adopted by academic writers as to the question of what is a sufficiently direct link between payer and receiver, which show “a wide divergence”.  Next he considers the decision of the Court of Appeal in Kleinwort Benson v Birmingham City Council [1997] QB 380 in which the Court of Appeal adopted a relatively strict approach to the requirement.  Morritt LJ said at 400F that the words “at the expense of the plaintiff” pointed to the requirement that the claimant be the “immediate source”.  Evans LJ said at 393A that it had to be interpreted by reference to “the payer/payee relationship alone”.  Saville LJ said at 395A that the expression was a convenient way of describing the need for the payer to show that his money was used to pay the payee. Against these (also obiter) statements were to be placed the obiter observations in Filby to which I have already referred. At [67] to [68] Henderson J concluded:
“I must now draw the threads together, and state my conclusions on this difficult question. In the first place, I agree with Mr Rabinowitz that there can be no room for a bright line requirement which would automatically rule out all restitutionary claims against indirect recipients. Indeed, Mr Swift accepted as much in his closing submissions. In my judgment the infinite variety of possible factual circumstances is such that an absolute rule of this nature would be unsustainable. Secondly, however, the limited guidance to be found in the English authorities, and above all the clear statements by all three members of the Court of Appeal in Kleinwort Benson Ltd v Birmingham City Council, suggest to me that it is preferable to think in terms of a general requirement of direct enrichment, to which there are limited exceptions, rather than to adopt Professor Birks' view that the rule and the exceptions should in effect swap places (see "At the expense of the claimant": direct and indirect enrichment in English law, loc.cit., at page 494). In my judgment the obiter dicta of May LJ in Filby, and the line of subrogation cases relied on by Professor Birks, provide too flimsy a foundation for such a reformulation, whatever its theoretical attractions may be, quite apart from the difficulty in framing the general rule in acceptable terms if it is not confined to direct recipients. 
The real question, therefore, is whether claims of the present type should be treated as exceptions to the general rule. So far as I am aware, no exhaustive list of criteria for the recognition of exceptions has yet been put forward by proponents of the general rule, and I think it is safe to assume that the usual preference of English law for development in a pragmatic and step by step fashion will prevail. Nevertheless, in the search for principle a number of relevant considerations have been identified, including (in no particular order): 
a) the need for a close causal connection between the payment by the claimant and the enrichment of the indirect recipient; 
b) the need to avoid any risk of double recovery, often coupled with a suggested requirement that the claimant should first be required to exhaust his remedies against the direct recipient;
c) the need to avoid any conflict with contracts between the parties, and in particular to prevent "leapfrogging" over an immediate contractual counterparty in a way which would undermine the contract; and
d) the need to confine the remedy to disgorgement of undue enrichment, and not to allow it to encroach into the territory of compensation or damages.” 
41.	Henderson J found a sufficiently close causal connection to hold that HMRC were enriched at the expense of the managers in that case, notwithstanding the fact that (see [71]):
“it cannot even be said that that the VAT was paid or accounted for to HMRC out of the money paid by the claimant to the Managers, or that the VAT would not have been paid but for the payments by the claimants to the Managers”.
42.	Mr Polli submitted that Henderson J’s analysis applied to the present case.  I understood Mr Warwick’s position to be that the judge’s chronological point meant that there was an insufficiently close causal connection (Henderson J’s factor (a)).  Whilst the precise range of relevant factors which are relevant may require consideration in other cases, for my part I would hold that there was a sufficiently close causal connection in the present case between the Bank’s agreement to part with its estate in Rush Green Hall and the enrichment of Melissa to hold that Melissa was enriched at the Bank’s expense.
Should the court grant the Bank subrogation to reverse Melissa’s unjust enrichment?
43.	The unusual feature of the present case is that the Bank provided the value which they transferred by agreeing to release a security interest rather than by advancing specific funds.  No case was cited to us in which a lender had been entitled to a remedy of subrogation when that lender had not advanced funds.  
44.	Walton J’s classic formulation of the remedy of subrogation in Burston Finance is expressed in terms of the claimant’s (A’s) money being used to pay off the claim of a creditor (B).  There are numerous other cases where the remedy is applied in factual situations where the claimant has advanced its own money with the expectation that he would obtain security over some property, and is treated as subrogated to the rights of another person who at the relevant time had security over the same property.  No case was cited to us in which the claimant did not advance money of his own, but was nevertheless granted the remedy of subrogation. 
45.	Mr Warwick submitted that, even following the analysis of the House of Lords in the Banque Financière, it remained an essential requirement for the remedy of subrogation to be granted that the claimant should have advanced money of his own.  He relied also on Neuberger LJ’s analysis in Cheltenham & Gloucester  PLC v Appleyard [2004] EWCA] Civ 291 in which he pointed out that Banque Financière had not introduced any new principles into the law of subrogation. 
46.	The case which most supported Mr Warwick was Bankers Trust Company v Namdar (14 February 1997; 1997 NPC 22; [1997] EGCS 20).  That case was decided before the decision of the House of Lords in Banque Financière.  In 1987 Mr and Mrs Namdar charged a property at Ormonde Gate in London to Bankers Trust in return for a loan used to purchase it. A year later, a restructuring of Mr Namdar’s loans from Bankers Trust (of which the Ormonde Gate loan was one) was proposed by Bankers Trust.  Mr Namdar had business interests in Germany and had deposited money with a bank in Germany as collateral for various transactions.  The proposed refinancing involved Bankers Trust giving its own guarantee to the German bank, Deutsche Westminster Bank (“DWB”), so as to release the funds held as collateral. These funds were then to be applied to repay the outstanding loan to Bankers Trust.  The security for the guarantee was to be a first charge on Ormonde Gate.  Mr Namdar’s signature on all the refinancing documentation was forged. Nevertheless the original mortgage on Ormonde gate was discharged by the release of the funds from DWB.  A new charge was executed on Ormonde Gate.  Mrs Namdar’s signature on this document was forged. She knew nothing of the refinancing. Subsequently Bankers Trust transferred its guarantee from DWB to Dresdner Bank and the guarantee to DWB was discharged. The Dresdner Bank subsequently demanded payment under the guarantee from Bankers Trust. Bankers Trust claimed to be subrogated to the original charge on Ormonde Gate which had been paid off with the money released from DWB. Their argument was that the giving of the guarantee to DWB “released the funds intended by all parties to be used to discharge” the Ormonde Gate charge. Peter Gibson LJ, with whom Buckley J and Kennedy LJ agreed, said this, following a reference to some authorities:
“But in that case, as in every other case in this particular area of subrogation to which we have been referred, the person entitled to be subrogated was a lender providing the money used to discharge original secured creditor’s debt.  I cannot see how the Bank can be afforded the remedy of subrogation in circumstances which, as I see it in agreement with the Judge, the Bank cannot properly be said to be the provider of the money used to discharge the debt owed to it by Mr and Mrs Namdar.”
True it is that without the guarantee given by the Bank to DWB, DWB would not have released the money deposited with it.  But it is not suggested that the bank owned that money in DWB’s hands or that it was derived from the Bank… [counsel for the bank] submitted that “it was possible to trace from the guarantee to the monies released by DWB to the Bank”.  But I do not see how that can be done.  The guarantee is not an asset of the Bank but a continuing obligation assumed by the Bank.  I do not follow how the creation of a continuing obligation owed by the Bank, not giving rise to an asset of the Bank, can be traced into what is asserted to be an asset of the Bank, viz, the monies paid to it to discharge the secured debt. No authority on tracing has been cited to us that supports what, I have to say, seems to me to be a misconceived proposition.  In Lipkin Gorman v Karpale Ltd [1991] 2 AC 548 at p 573 Lord Goff said:
“It is well established that a legal owner is entitled to trace his property into its product, provided that the latter is indeed identifiable as the product of his property … Of course, ‘tracing’ or ‘following’ property into its product involves a decision by the owner of the original property to assert his title to the product in place of his original property”.
Here there is no “original property” of the Bank, but only the creation of a contingent liability and it cannot be said that the Bank decided to assert title to the monies paid to it in place of any original property of the Bank.  In no meaningful sense can it be said that the guarantee is represented by the monies paid to it.” (emphasis added)
47.	Peter Gibson LJ concluded that:
“… reason and justice do not demand that the Bank which did not pay and was not otherwise the source of the monies used to discharge its secured debts should by subrogation retain its security.”
48.	If the arguments in Namdar were analysed by reference to Lord Hoffmann’s three questions in Banque Financière it would be hard to see how the Bank’s provision of a guarantee could have been described as a transfer of value.  The mere fact that the claimant does some act, in reliance on which there is a transfer of value between different parties is not sufficient. Other difficulties might have arisen on the facts, such as the interposition of a further bank.  No such difficulties arise in the present case.  When the Bank gave its undertaking to release its charges on Rush Green Hall, and thus release the purchase monies for the purchase of Great Oak Court, there was, as I have held, a transfer of value from the Bank to Melissa.  Moreover, if one asks Peter Gibson LJ’s question, namely whether it can properly be said that the Bank “is the provider of the money used to discharge the debt”, the answer in the present case is that it is. Certainly that is true if one asks whether the Bank is the source of the monies used as a matter of economic reality. I therefore see no reason in principle or justice why the Bank should not be entitled to the remedy of subrogation.
Did the bank have a proprietary interest in the funds used to buy GOC?
49.	It follows that it is not necessary to decide whether Mr Polli is correct when he submits that the Bank had a security interest in the proceeds of sale which were used to buy Great Oak Court.  He bases that submission essentially on the decision of this court in Buhr v Barclays Bank [2001] EWCA Civ 1223 (“Buhr”). Mr and Mrs Buhr had granted a second legal charge over a property to Barclays.  Barclays gave notice of their charge to the holders of the first charge, and purported to register their own charge.  However an error in the registration meant that the charge would be of no effect against third parties.  A sale of the property took place and the purchase price was paid into the account of the solicitors acting for the Buhrs.  After discharge of the first charge there remained a surplus which Barclays claimed was held on trust for them, and ranked ahead of unsecured debts.
50.	Arden LJ with whom Tuckey LJ and Lord Woolf LCJ agreed, held at [45] that where a mortgagor makes a disposition of the mortgaged property in a manner which destroys the mortgagee’s estate in the mortgaged property, a security interest in the property which represents the mortgaged property automatically arises by operation of law.  However such a security interest did not arise in every case.  If the property were to be sold with the consent of all parties and subject to the mortgage, the mortgagee cannot elect to have a charge over the proceeds of sale (see [46]).
51.	On the basis of Buhr, Mr Polli submits that there was, on the facts of the present case, a disposal of Rush Green Hall without the mortgagee’s consent which involved the destruction of the mortgagee’s estate.  He further submitted that in any event, neither lack of approval of the sale nor destruction of the mortgagee’s estate were essential to this Court’s decision in Buhr.  Mr Polli’s submissions were challenged at every stage by Mr Warwick in his written submissions.  I do not think it necessary to become embroiled in this debate about the true ratio of Buhr.  I would prefer to leave that debate for a case in which it can be said to affect the outcome more directly.
Should the deposit be treated separately?
52.	The judge held that the Bank’s position was weaker in relation to the deposit, which was paid over before the Bank’s letter of 9th September.  I do not think that can be correct.  A deposit is no more than an earnest for performance.  As Lord Browne-Wilkinson explained in Workers Trust and Merchant Bank Limited v Dojap Investments Limited [1993] AC 573 at 578-9:
“... in the event of completion of the contract it is applicable towards the payment of the purchase price.”
53.	Accordingly the whole of the purchase price is to be regarded as being applied to satisfaction of Melissa’s obligation on the date of completion, and not merely the 90% paid on that date.  There is accordingly nothing in this point.
Disposition
54.	I would accordingly allow this appeal and grant the declaration sought by the Bank.  
Lord Justice Tomlinson: 

55.	I entirely agree, and in particular I agree that Bankers Trust v Namdar is not an obstacle to our reaching the result advocated by my Lord.
56.	Without the Bank promising to release its charges over Rush Green Hall, the funds realised on its sale could not have become available to be used in the purchase of Great Oak Court.  The situation is thus distinguishable from that in Namdar, in which Bankers Trust had no control whatever over the use of the funds deposited by Mr Namdar with DWB as collateral.  The fact that it was Bankers Trust which supplied the guarantee which induced DWB to release its charges over those funds does not alter the nature of the control hitherto exercised over those funds.  The involvement of Bankers Trust was unnecessary.  Another financial institution could equally have supplied the guarantee.  Bankers Trust was in this sense a gratuitous intervener in the transaction.  It may be that the transfer of value as between DWB and Bankers Trust would not have taken place without Bankers Trust, or some other financial institution, assuming a contingent obligation to DWB, but that does not alter the identity of the transferor of value.
57.	In the present case, the Bank was to receive £1.9M upon the sale of Rush Green Hall in circumstances where it was owed £2.2M and had charges over Rush Green Hall to secure that indebtedness.  The Bank had agreed that it would release its charges over Rush Green Hall upon receipt of £750,000 out of the sale proceeds, in return for a charge over Great Oak Court to secure what would be the remaining indebtedness, £1.45M, thereby enabling the Menelaou parents on the strength of that undertaking by the Bank to use £875,000 out of the sale proceeds of Rush Green Hall for the purchase of Great Oak Court in the name of Melissa.  I do not see how this can sensibly be described as anything other than a transfer of value between the Bank and Melissa in whose name the purchase of Great Oak Court was made.
58.	I am glad to be able to reach this conclusion.  It gives effect to the reality of the transaction, whereas the conclusion of the judge, in my respectful view, amounts to that pure formalism which Lord Steyn has in this context deprecated, see paragraph 32 above.  Accordingly I, too, would allow the appeal.
Lord Justice Moses:
59.	I agree with both judgments.  There seems to me one essential question for the court to answer, namely, whether the Bank had the right to be subrogated to the former rights of the vendors of Great Oak Court against Melissa, that is to say, the right to take over the vendors’ extinguished lien.  The benefit to Melissa, and to her parents, was the discharge of her liability to the vendors of Great Oak Court, which extinguished their lien.    The Bank may be treated as having taken over those extinguished rights if it can show that the discharge of Melissa’s liability was at its own expense.  There is, as Professor Burrows suggests (The Law of Restitution 3rd Edition p.147), no need to duplicate the reasoning in relation to both unjust enrichment and subrogation; the answer should be the same (see per Lord Steyn in Banque Financière page 228).
60.	It is agreed that the Bank did not directly provide the benefit.  But even if the court subscribes to the view that the general rule is that only the direct provider is entitled to restitution and that the general rule is subject to limited exceptions (Investment Trust Companies (in liquidation)), subrogation, by definition, is an exception to that rule (see A Restatement of the English Law of Unjust Enrichment, Burrows et al 2012, 8(2)).  This appeal turns on the question whether the discharge of the liability to the vendors of Great Oak Court was at the Bank’s expense. 
61.	The respondent and the judge focussed on the proposition that the bank had no interest in, nor any security over, the sums paid to discharge the liability.  But like Floyd LJ, I take the view that it was not necessary to show that the Bank had a beneficial interest or security in the money deployed to pay for Great Oak Court.  A sufficiently close causal connection has been established by showing that but for the Bank’s agreement to release its charges over Rush Green Hall in return for receipt of a proportion of what it was owed, and for a charge over Great Oak Court, Great Oak Court would never have been purchased and the obligation to pay its vendors would never have been satisfied.
62.	I agree that the judge’s reliance on the fact that the charges over Rush Green Hall remained in place at the time of completion of the sale of Rush Green Hall and the purchase of Great Oak Court, was misplaced.  Everyone knew, as a result of the Bank’s agreement on 9 September 2008, that the Bank’s security in Rush Green Hall would be released and, provided that the terms of that agreement were satisfied, the Bank was bound to release its charge.  The delay was, we were told, only the result of delay between completion and the registration at the Land Registry.  The agreement of the bank on 9 September 2008 triggered the discharge of the purchaser’s liability to the vendors of Great Oak Court.  There is no need to invoke the somewhat fuzzy concept of economic reality, which, like reliance on common sense (see Lord Hoffmann Common Sense and Causing Loss 1996), sometimes suggests that the author knows the result he seeks to achieve but is unable to articulate his reasons.  Not so in the instant appeal: Floyd LJ amply demonstrates that the discharge of the liability to the vendors of Great Oak Court was at the Bank’s expense.