A. Introduction: Menelaou V Bank of Cyprus
A. Introduction: Menelaou V Bank of Cyprus
A. Introduction: Menelaou V Bank of Cyprus
A. Introduction
In Menelaou v Bank of Cyprus UK Ltd,1 the Supreme Court granted the remedy of
subrogation to the unpaid vendor’s lien where the lender had not advanced its own monies
for the purchase of a property with defective security. The controversial questions faced by
the Supreme Court were: (1) whether a pre-existing property right is required for a claim of
subrogation through unjust enrichment; and (2) applying the principles, whether the Bank
could recover on the facts. The case also raised interesting questions as to the wider debate
concerning restitution from indirect recipients and the availability of proprietary remedies
for unjust enrichment claims. Lord Clarke, Lord Neuberger and Lord Carnwath gave three
separate judgments,2 where they adopted distinct approaches. All three judgments deserve
careful examination.
This Comment will first briefly summarise the facts and then examine the Supreme
Court’s decision in depth, paying particular attention to the court’s reasoning as regards
(i) the formulation of an unjust enrichment claim; (ii) the necessary causal link for the “at
the claimant’s expense” requirement; (iii) the proprietary link required for subrogation;
and (iv) the debate whether the case can be read as a vindication of property rights.
B. The facts
The case was one of “unusual” facts.3 Mr and Mrs Menelaou (the “Parents”) owed to the
Bank of Cyprus (the “Bank”) debts in the sum of £2.2 million which were secured by two
charges on their family home, Rush Green Hall. In 2008, the Parents decided to sell Rush
Green Hall with the aim of downsizing to a further and smaller property, Green Oak Court.
Their daughter, Melissa, was told that Green Oak Court would be purchased under her
name as a gift. The Bank agreed to release its charges over Rush Green Hall and allowed
the Parents to use £875,000 out of the sale proceeds of Rush Green Hall to acquire Great
Oak Court, subject to a lump sum payment of £750,000 and a new third-party charge over
Great Oak Court, which was registered in Melissa’s name. However, owing to negligence
of the solicitors, the charge on Great Oak Court was void; and the Bank had already
released the charge on Rush Green Hall at the time of discovery. Melissa was not aware of
the charge and subsequently sought rectification of the register, arguing that she had not
signed the charge and that the deed had been altered without her authorisation. The Bank
did not dispute the invalidity of the charge but counterclaimed that Melissa was unjustly
enriched at its expense, as a result of which it was entitled to an equitable charge arising
from subrogation to an unpaid vendor’s lien over Great Oak Court.
1. [2015] UKSC 66; [2015] 2 Lloyd’s Rep 585; [2016] AC 176 (hereafter “Menelaou”).
2. Lord Kerr and Lord Wilson agreed with both Lord Clarke and Lord Neuberger.
3. [2013] EWCA Civ 1960; [2013] Lloyd’s Rep Plus 70, [43].
In the Court of Appeal, Floyd LJ held that there was a “sufficiently close causal
connection” between the Bank’s loss (parting with its estate in Rush Green Hall without
the benefit of the intended charge) and Melissa’s enrichment (taking Great Oak Court
unencumbered by the intended charge) such that, “had it not agreed to release its charges
over Rush Green Hall, the purchase moneys could not have been used to purchase Great
Oak Court”.4 This justified the finding of a “transfer of value” from the Bank to Melissa
and thus the finding that Melissa was enriched at the Bank’s expense.5 Furthermore, the
Court of Appeal held that the Bank was entitled to subrogation to the unpaid vendor’s
lien even though it did not advance the funds for the purchase of Great Oak Court. It was
sufficient that the “at the claimant’s expense” requirement was satisfied for the Bank to
be treated as having taken over the extinguished rights of the vendor of Great Oak Court.
As Moses LJ observed, there was “no need to duplicate the reasoning in relation to both
unjust enrichment and subrogation”.6
4. Ibid, [30]. The way it was put seems as if the judge were applying a “but-for” test.
5. Ibid, [42].
6. Ibid, [59].
7. [1999] AC 221, 227 (Lord Steyn).
8. [2012] EWHC 458 (Ch); [2012] STC 1150.
9. Ibid, [39]; Menelaou, [19].
of security of transactions demands that these transactions should not be undone without
good reason.10 The four-stage test thus provides the needed certainty and predictability as
to when transactions might be undone. Departure from it would give excessive discretion
to the judges and increase the risk of decisions being reached on arbitrary grounds.11
The question of enrichment was not in dispute, as Melissa clearly received Green
Oak Court free of the intended charge.12 More problematic, however, was whether the
enrichment was unjust. Given the limited attention the court gave to this issue, it is
difficult to discern from the judgment what their Lordships thought the unjust factor in
the case was. Lord Clarke merely stated that “the unjust factor or ground for restitution
is usually identified in subrogation cases as being either (1)… mistaken assumption… or
(2) failure of consideration”, without identifying the factor which applied to the present
case. Similarly, Lord Neuberger suggested, without further elaboration, that the enrichment
was unjust simply because “Melissa received the freehold as a gift from her parents”.13 He
further concluded that the bona fide purchaser defence was inapplicable and thus did not
defeat the injustice.14
With respect, the court’s analysis of the unjust factor was deficient, even though the issue
was not in dispute. First, the Banque Financière test was fashioned to ensure a principled
approach in the analysis of unjust enrichment and its importance has been repeatedly
emphasised by academics and the judiciary. Secondly, the precise identification of the
unjust factor also has significant implications when it comes to establishing proprietary
restitutionary claims. As some commentators have argued, it is unnecessary in a proprietary
claim to show that the defendant has been unjustly enriched, for such a claim is based on
the “vindication of property right” and belongs to the realms of property law. The glossing
over of the unjust factor in this case might well feed into the argument in favour of this
“vindication of property right” analysis, which will be further discussed below.
10. See G Virgo, The Principles of the Law of Restitution, 3rd edn (OUP, Oxford, 2015) (hereafter
“Virgo”), 42.
11. Ibid, 56.
12. Menelaou, [20].
13. Ibid, [70].
14. Ibid, [69].
15. Ibid, [24] (Lord Clarke) and [73] (Lord Neuberger).
16. Ibid, [25] (emphasis added).
17. Ibid, [27].
essentially “one scheme”.18 Further, it was held that, since the Bank’s agreement to let the
Parents use the £875,000 to purchase Great Oak Court was conditional on its obtaining
a valid charge, “the bank could have prevented the purchase proceeding until it had been
granted a charge”.19 In this regard, his Lordship quoted Lord Oliver of Aylemerton in
Abbey National Building Soc v Cann:20 “the acquisition of the legal estate and the charge
are not only precisely simultaneous but indissolubly bound together”.
One will notice that both Lord Clarke and Lord Neuberger were rather reluctant to lay
down causal principles or general tests to be applied and were instead content with an
impressionistic characterisation of the Bank’s dealing with the Parents and Melissa as one
massive conglomeration of events. Much like the “economic reality” rhetoric, the “single
composite transaction” language seems at times more conclusionary than it is explanatory
and does not provide much insight as to what it is that makes these events belong to such
a causal scheme. To be fair, Lord Neuberger did make an effort to unpack the language
of “single composite transaction”, but at the end this seems somewhat indistinguishable
from the counterfactual “but-for” test—“so the bank would have had the right to prevent
the £875,000 being used to purchase the freehold if it had not been provided with a valid
charge”.21 One might retort that it is not clear whether Lord Neuberger intended this to be a
causal enquiry for the purpose of establishing enrichment “at the claimant’s expense”, and
that Lord Neuberger was simply saying that the bank would retain its rights in the event
of misapplication of the funds. But, if that is true, it only serves to show that the treatment
of the “at the claimant’s expense” test is unclear and unsatisfactory. In this regard, Lord
Clarke was more explicit:22
“It was thus thanks to the bank that Melissa became owner of Great Oak Court, but only subject to
the charge. Unfortunately the charge was void for the reasons set out above … She was therefore
enriched at the expense of the bank because the value of the property to Melissa was considerably
greater than it would have been but for the avoidance of the charge …”
It is unclear what Arden LJ’s vision of this preliminary filter is, because a genuine “but-
for” could not be and was not demonstrated on the peculiar facts in Relfo. The finding of
the relevant transactional link was reached through judicial inference. The more difficult
question is whether a proprietary link is required in an unjust enrichment claim for
proprietary remedies by an indirect recipient. As argued in the next section, the Supreme
Court in Menelaou seems somewhat divided on this issue.
Finally, it may be noted that Lord Clarke was not completely oblivious to the academic
debate on what the proper causal test should be. As his Lordship duly recognised, there
is, on the one hand, the view that there remains a general “direct providers only” rule
requiring direct enrichment subject to certain exceptions.25 There is, on the other hand, the
view that a broader and more liberal approach be taken.26 Nonetheless, his Lordship felt
that there was no need to rule on this point, not least because “the result is likely to be the
same” under the two approaches and because the facts were clear in the case. With this in
mind, his Lordship’s next remark must be strictly obiter:27
“In a case in which more such considerations [as were identified by Henderson J in ITC] were
relevant, it would be necessary to have regard to a number of different factors, probably with no
presumption one way or the other where the starting point is.”
The dictum seems to suggest that there exist circumstances under which the “direct
providers only” rule will lose its presumptive force. Yet, to all intents and purposes, it
seems that this whole “general rule v exceptions” debate is nothing more than a semantic
and pedantic disagreement which will probably not make much of a difference in real life.
There is much force in this thinking, given that the court has readily found exceptions to
the “general rule” in cases such as ITC and Relfo v Varsani. After all, some of the most
trenchant criticisms of the “direct providers only” rule are merely directed against the
rule’s normative obscurity, the fact that it tends to overwork a threshold enquiry and its
potential danger of over-protecting security of receipts.28 So, if the Supreme Court were to
be criticised for failing to take the opportunity to clarify the law on this very point, it would
at most be a strategic failure, not a fatal one.
That said, the judgment did create some difficulties in so far as the double recovery
exception is concerned. One potential problem was Patten LJ’s remarks in ITC,29 that
indirect enrichment should be permitted only when the claimant had exhausted all other
remedies in order to eliminate the risks of double recovery. In Menelaou the Bank had,
however, already acquired damages for breach of fiduciary duties and an indemnity from
the negligent solicitors;30 thus, the risk of double recovery is real, as the Bank could in
25. See eg Investment Trust Companies (in liq) v HMRC [2012] EWHC 458 (Henderson J); Relfo v Varsani [2014]
EWCA Civ 360; Investment Trust Companies (in liq) v HMRC [2015] EWCA Civ 82; [2015] STC 1280 (Patten LJ).
26. See eg Investment Trust Companies (in liq) v HMRC [2012] EWHC 458, [60–69]. For the proposal of a
“but-for” test, see S Watterson, “‛Direct Transfers’ in the Law of Unjust Enrichment” (2011) 64 CLP 435. For the
proposal of a “but-for” test qualified by reasons of legal policy, see Eli Ball, “At the claimant’s expense” (2014)
130 LQR 13. See also C Mitchell, P Mitchell & S Watterson, Goff and Jones, The Law of Unjust Enrichment, 8th
edn (Sweet and Maxwell, London, 2011) (hereafter “Goff & Jones”), [6.40–6.46].
27. Menelaou, [32] (emphasis added).
28. Watterson (2011) 64 CLP 435; Goff & Jones, [6.18–6.24].
29. [2015] EWCA Civ 82; [2015] STC 1280, [43]; approved in Menelaou, [29–31]; see also Relfo Ltd v
Varsani [2014] EWCA Civ 360.
30. Menelaou, [10].
theory recover the same losses from both the solicitors and Melissa. It is regrettable that
the issue of double recovery had not been addressed by their Lordships.
39. R Cohen, “A Victory for Substance Over Form” (2015) 159(46) Sol J 28.
40. Menelaou, [107].
41. Ibid, [108].
42. [1996] 1 WLR 328.
43. Menelaou, [128]; see Goff & Jones, [7.02] and [37.10].
44. Goff & Jones, [7.02].
45. Boscawen v Bajwa [1996] 1 WLR 328, 334–335 (Millett LJ); affirmed in Foskett v McKeown [2000]
Lloyd’s Rep IR 627; [2001] AC 102.
46. Menelaou, [92].
47. Ibid, [96].
48. Ibid, [97].
49. Boscawen v Bajwa [1996] 1 WLR 328, 333.
50. Ibid.
stages of the same process.51 This implies that only if the prior stages were satisfied could
subrogation be granted. Finally, in relation to Lord Neuberger’s second argument, it is
submitted that Millett LJ’s dictum was concerned with the very nature of subrogation and
tracing, and so the principles governing them should remain static regardless of context. It
is for these reasons that Lord Carnwath’s “equitable proprietary claim under subrogation”
approach should be preferred, as it echoes with long-established authorities. His Lordship
noted that the unjust enrichment approach is attractive, but nonetheless “this is not how the
case has been argued”.52 Thus, there is no good reason to extend the decision in Banque
Financière where a conventional approach could be used to reach the same decision.
Besides, there is an additional uncertainty to the majority’s approach, namely, how
far the approach of Lord Neuberger and Lord Clarke should be extended. Following
the majority, does it mean that the requirement of proprietary link is now abolished
absolutely? The majority in Menelaou seemed to have substituted the proprietary link
requirement with the “at the expense of” requirement to the effect that subrogation
could be granted as long as the enrichment was at the expense of the bank.53 The
substitution is troublesome, as the two tests are founded on different justifications. The
“at the expense of” test is concerned with establishing a sufficient proximate nexus
between the parties.54 The required nexus would not normally be found if there were
third-party involvement.55 This echoes the fundamental principle that restitution is a
gain-based remedy.56 On the other hand, the proprietary link requirement is concerned
with a different matter. It is a requirement that “the plaintiff [trace] what has happened
to his property… and [justify] his claim that the money… can properly be regarded
as representing his property”.57 In other words, it is the claimant’s pre-existing
proprietary right which enables him to recover—unless the defendant is a bona fide
purchaser.58 With all these in mind, it is clear that, on a doctrinal level, the two tests
are not interchangeable. It follows the majority’s approach should not be preferred, as
their Lordships have confused the fundamental justifications of the two tests. It may
be true that, in practice, the distinction would make little difference, but the doctrinal
implications should not be overlooked. It is this question, and the surrounding debate,
which will be addressed in the following section.
following a claim under unjust enrichment.59 This view also seems to be consistent with
Relfo, which appears to suggest that the proprietary claim in equity exists alongside the
unjust enrichment claim. On the other hand, it has been argued, most notably by Virgo, that
proprietary remedies are not available in unjust enrichment claims. If proprietary remedies
are available, it is argued, it must be due to the nature of the claim as a vindication of the
claimant’s property right.60 If the first view is correct, then Virgo’s argument that there “is
no case which explicitly recognises that property rights can derive from the defendant’s
unjust enrichment”61 seems to have met its ultimate demise. Indeed, it is tempting to
conclude that Menelaou had put an end to the debate. However, there are two reasons
which suggest that Menelaou might not be the final word on it.
First, both Lord Clarke and Lord Carnwath expressly endorsed the distinction
established in Foskett v McKeown62 between a claim to enforce property rights and a claim
for unjust enrichment. Although Lord Clarke cited Foskett as supporting authority for the
assertion that “a claim in unjust enrichment does not need to show a property right”63 and
granted subrogation as a proprietary remedy for the present unjust enrichment claim, his
endorsement could be read as creating a general rule that a proprietary remedy should not
be granted for unjust enrichment with subrogation as an (and possibly the only) exception.
Furthermore, Lord Carnwath’s more orthodox approach would also suggest that the
subrogation principles should not be extended too readily, and that a prior property right is
still required for a proprietary claim to be established.
Secondly, as argued above, the Supreme Court did not clearly identify the ground
on which Melissa’s enrichment was said to be unjust. Lord Neuberger suggested that
the enrichment would not have been unjust had Melissa been a bona fide purchaser.64
Commentators such as Virgo will probably argue that Menelaou is therefore a claim to
vindicate property rights. This is consistent with how Virgo analysed Lipkin Gorman (A
Firm) v Karpnale Ltd.65 Arguably, the approach of the Supreme Court in Menelaou is
similar to that in Lipkin Gorman in that both Lord Clarke and Lord Neuberger focused on
showing how Melissa was enriched at the expense of the Bank but did not really address
the question how the enrichment was unjust. It is for these reasons that the “vindication of
property rights” analysis may still be used to explain Menelaou, namely that the remedy
of subrogation operated under principles of property law to vindicate the Bank’s equitable
property rights. Other commentators such as Burrows and the editors of Goff & Jones
will disagree and this is where one will find criticisms of the “fiction of persistence” of
property rights and argument that the “vindication of property rights” analysis represented
the “categorical error” of failing to distinguish between the source of the property right
and the event triggering it.66
59. Burrows, ch.8; Goff & Jones, [8.4].
60. Virgo, 559.
61. Ibid, 563.
62. Menelaou, [37–38] (Lord Clarke), [108–109] (Lord Carnwath).
63. Ibid, [38].
64. Ibid, [70].
65. [1991] 2 AC 548. Virgo argued that the reason why Lord Goff did not identify a ground of restitution but
“focused on showing that the defendant had received money which belonged to the firm” was that “the claim
turned on the vindication of a property right”: see Virgo, 560.
66. See Burrows, ch.8; R Chambers, “Tracing and Unjust Enrichment”, in J Neyers et al (eds), Understanding
Unjust Enrichment (Hart, Oxford, 2004).
As to the current state of the law, it should be admitted that Menelaou is not as clear
an authority as both sides may have wanted it to be, although on an evaluative level Lord
Carnwath’s orthodox approach in this case has much to commend it. There are also two
remaining issues which are not fully answered. First, even though the equitable lien on the
facts is aimed at securing repayment of the debts, the court has reserved its opinion on the
availability of a personal claim against Melissa.67 Secondly, the extent of the subrogation
remedy in Menelaou is unclear and needs to be sorted out. One can only hope that the
pending appeal of ITC to the Supreme Court and future subrogation cases will shed some
light on these issues.