Banque Financiere de la Cite v Parc (Battersea) Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judge | LORD STEYN,LORD GRIFFITHS,LORD HOFFMANN,LORD CLYDE,LORD HUTTON |
| Judgment Date | 26 February 1998 |
| Judgment citation (vLex) | [1998] UKHL J0226-1 |
| Date | 26 February 1998 |
| Court | House of Lords |
And Others
[1998] UKHL J0226-1
Lord Steyn
Lord Griffiths
Lord Hoffmann
Lord Clyde
Lord Hutton
HOUSE OF LORDS
My Lords,
The present dispute arose out of the short term refinancing by the appellant ("BFC"), a Swiss bank, of part of an existing bank loan made available by Royal Trust Bank (Switzerland) ("RTB") to Parc (Battersea) Limited ("Parc") for the purpose of buying development land at Battersea Wharf, London, S.W.11. Parc was part of the Omni Group of companies which was controlled by Mr. Werner Rey, a Swiss national. The ultimate holding company was Omni Holding AG ("Holding"). Mr. Markus Herzig was the General Manager of Holding. The refinancing transaction was concluded and completed at the end of September and the beginning of October 1990. The relevant events and circumstances were as follows. (1) The transaction was negotiated by Mr. Rey and Mr. Herzig with officers of BFC. Originally, the parties intended a loan directly from BFC to Parc. That would have brought into operation a disclosure obligation on BFC under Swiss Federal Banking Regulations. In order to avoid this requirement the transaction was restructured by interposing Mr. Herzig as the immediate borrower. (2) BFC lent DM30m. to Mr. Herzig and Mr. Herzig took steps to ensure that the sterling equivalent of this sum was paid directly by BFC to Parc in reduction of the existing loan granted to Parc by RTB. (3) At the request of BFC Mr. Herzig handed a signed letter on the letterhead of Holding to BFC. This letter read as follows:
"This is to confirm that we and all companies of our group will not demand any repayment of loans granted to Parc (Battersea) Ltd., London, until the full repayment of your loan of DM 30,000,000. granted to Mr. M. Herzig, which is secured by a deep discount promissory note amounting to GBP 10,000,000. issued by Parc (Battersea) Ltd."
I will call this letter the postponement letter. (4) On 1 October Parc issued to Mr. Herzig a promissory note for the relevant sum and soon afterwards Mr. Herzig assigned the note to BFC.
In April 1991 the Omni Group collapsed. Parc is insolvent. BFC obtained a judgment for £12m. against Parc representing the sum due on the note, with interest. RTB and Omnicorp Overseas Limited ("OOL"), a company incorporated in the British Virgin Islands, respectively had first and second charges over the Battersea Wharf Property. OOL was a company in the Omni Group and the second charge related to an intra-group debt as it has been described. OOL obtained a judgment for £30m. against Parc. Parc and OOL contended that the debt owed to OOL took priority over the debt owed by BFC by reason of OOL's second charge. BFC asserted that by reason of the letter of postponement and its utilization to obtain the refinancing the rights of BFC took priority over the rights of OOL Parc and OOL had been unaware of the letter of postponement. The judge upheld BFC's contention. The Court of Appeal disagreed and allowed the appeal.
The starting point is the letter of postponement, Robert Walker J. (now Robert Walker L.J.) found that it was not binding on Parc or OOL Although they were "companies of our group" within the meaning of the letter Parc and OOL were not bound by its terms either by agency or estoppel. But Robert Walker J. concluded that properly construed the letter of postponement was intended to be directly binding on all companies in the Omni Group. The Court of Appeal came to the opposite conclusion. Morritt L.J. held that the agreement expressed in the postponement letter was intended to be that of Holding alone. This interpretation does not involve an undertaking on the part of Holding to procure the consent of companies in the group: it takes effect as a warranty by Holding. Morritt L.J. relied strongly on the fact that companies in the group were neither consulted nor informed of the letter. Given Mr. Rey's dominance and control of the Omni Group I do not attach much weight to this factor. The letter was badly drafted, and it is certainly capable of more than one interpretation. But ultimately I take the same view as the judge. The context is important. The letter was requested by BFC, and tendered by Mr. Herzig, as a form of security albeit not security involving rights in rem. Moreover, the letter shows that BFC wanted security not from Parc but in respect of intra-group indebtedness. The letter was the result of a negotiation between commercial men. In my view the commercial construction is one that treats the letter as intended to give effective protection in respect of all companies in the group, i.e. it was intended to be directly binding on all companies in the group. And I am reinforced in this view by the fact that Robert Walker J., who was steeped in the realities of the context of the letter, ultimately favoured it. From this conclusion it follows that the expectation of BFC was that the letter of postponement effectively protected BFC against loans granted by group companies to Parc. In the result that expectation has not been fulfilled. In any event, the important point is that BFC would not have lent had it not mistakenly believed that its priority in respect of intra-group indebtedness was secured effectively against subsidiaries of the group.
My Lords, both the judge and Morritt L.J. invoked the vocabulary of unjust enrichment or restitution. Nevertheless both courts ultimately treated the question at stake as being whether BFC is entitled to be subrogated to the rights of RTB. On the present appeal counsel adopted a similar approach. That position may have seemed natural at a stage when BFC apparently claimed to be entitled to step in the shoes of RTB as chargee with the usual proprietary remedies. On appeal to your Lordships' House counsel for BFC attenuated his submission by making clear that BFC only seeks a restitutionary remedy against OOL. In these circumstances it seems sensible to consider directly whether the grant of the remedy would be consistent with established principles of unjust enrichment. OOL committed no wrong: it cannot therefore be a case of unjust enrichment by wrongdoing. If it is a case of unjust enrichment, it must in the vivid terminology of Prof. Peter Birks be unjust enrichment by subtraction. If the case is approached in this way it follows that BFC is either entitled to a restitutionary remedy or it is not so entitled. After all, unjust enrichment ranks next to contract and tort as part of the law of obligations. It is an independent source of rights and obligations.
Four questions arise: (1) Has OOL benefited or been enriched? (2) Was the enrichment at the expense of BFC? (3) Was the enrichment unjust? (4) Are there any defences? The first requirement is satisfied: the repayment of £10m. of the loan pro tanto improved OOL's position as chargee. That is conceded. The second requirement was in dispute. 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.
That brings me to the third requirement, which was the ground upon which the Court of Appeal decided against BFC. Since no special defences were relied on, this was also the major terrain of debate on the present appeal. It is not seriously disputed that by asking for a letter of postponement BFC expected that they would obtain a form of security sufficient to postpone repayment of loans by all companies in the Omni groups until repayment of the BFC loan. In any event, that fact is clearly established. But for BFC's mistaken belief that it was protected in respect of intra-group indebtedness BFC would not have proceeded with the refinancing. In these circumstances there is in my judgment a principled ground for granting a restitutionary remedy.
Counsel for OOL challenged the view that restitutionary liability is prima facie established by submitting that there was no mutual intention that BFC should have priority as against OOL. Restitutionary liability is triggered by a range of unjust factors or grounds of restitution. Defeated bilateral expectations are a prime source of such liability. But sometimes unilateral defeated expectations may be sufficient, e.g. payments made under a unilateral mistake of fact where the ground of liability is the mistake of one party. I would reject the idea that in a case such as the present a test of mutuality must be satisfied.
It is now necessary to mention the other factors which the Court of Appeal relied on in concluding that BFC was not entitled to succeed. Perhaps in passing Morritt L.J. commented that neither Parc nor OOL was guilty of any misrepresentation. It is sufficient to say that restitution is not a fault-based remedy. Morritt L.J. then pointed out that BFC failed to take elementary precautions to safeguard their interests. Counsel for OOL conceded that this feature is not a self-sufficient answer to the claim. At one stage he argued that this feature is relevant to the exercise of a discretion but I understood him ultimately to concede that the relief sought is not discretionary. In any event, the neglect of BFC is akin to the carelessness of a mistaken payor: it does not by itself undermine the ground of restitution.
On the arguments as presented in the Court of Appeal...
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