Subrogation

Nature

Subrogation is an equitable principle (and remedy) which arises where a person has conferred a benefit on another in circumstances where that person has received an unjust enrichment. It most commonly creates an entitlement by operation of law, for a party who discharges another’s debt or obligations, to enforce the rights and interests held by a third person in respect of that obligation against that other.

Subrogation may arise where a person lends money to another outside of its power to borrow where that other uses the monies to pay off a mortgage owed to a third party. Subrogation will cause the first party to stand in the shoes of the third part. The subrogation may be in respect of the personal rights of the creditor whose debt has been discharged and by way of succession to his proprietary security rights.

Subrogation has a wider application than in debtor-creditor relationships. It extends beyond the field of unjust enrichment. In its broadest sense, it is a general equitable remedy, which may be employed by the courts. It may be provided for or regulated by the terms of a contract. It may apply by statute. It may be a granted by contract.

Nature of Remedy

Subrogation is an equitable remedy and may be employed by the courts in a flexible manner. However, subrogation is not permitted to circumvent clear statutory prohibitions.

Where funds were lent to pay down a secured creditor on the understanding/pretext that another lender was to subordinate its claim, but failed to do so, it was held that the lender who was believed to have subordinated his claim had been unjustly enriched due to the lender’s mistake. Subrogation was applied to the extent required to rectify the injustice.

The concept of subrogation overlaps with other restitutionary remedies. In a broad sense, it is based on the prevention of unjust enrichment. It is part of the armoury of somewhat ad hoc principles and remedies that are used to make restitution.  It may be ultimately that case that a more general right and remedy of unfair/unjust enrichment will eclipse subrogation.

In the Place of the Other

It is often said that the person receiving the benefit of subrogation, stands in the shoes of the third-party, whose debt or rights have been discharged. It is akin to an equitable assignment of both personal and proprietary rights.

However, subrogation does not operate as a complete assignment of rights. It operates only to the extent necessary to undo the unjust enrichment. It is not to provide a windfall.

Subrogation allows the claimant to exercise the rights available to the third party against the others in cases where the debts or obligations owed to the third party have been paid or discharge. The claim remains in the name of the third party, but the first party at his own expense has the right to direct the claim and is entitled to the recovery of the amounts concerned.

The first party may discharge the obligations of the other to the third party in full. This may happen on payment in full of the sum due on a guarantee by the first party (guarantor) to the third party (lender/bank) , in respect of the other’s obligations (loan) owed to the third party. In this case, the guarantor succeeds to and revives the rights. Otherwise, the debtor is unjustly enriched e the rights of the creditor against the other (the debtor). He succeeds to the security.

Loans and Mortgages

Subrogation may be available where monies are used, unjustly taken or unjustly received by another and are used to buy another asset or to pay off a mortgage. There is a line of cases which have held that where a corporate body borrows monies outside of its power and uses the monies to pay down its loans, the putative lender is subrogated to the personal and security rights of the secured creditors whose loans were discharged.

It is not necessary that the money be used specifically for the purpose of redemption or remortgage. It is sufficient that the money is used to pay down the third party mortgage. The principle may give allow the first party to succeed to a proportionate part of the right to the third party against the other party. However,  this will not operate to the prejudice of the third party creditor/mortgagee.

The principle applies in the case of monies borrowed by a minor. The minor’s obligations are unenforceable, but the lender may be subrogated to the rights of others whose debts are paid down or redeemed with the loaned money. For example,  where the minor uses the loan monies to buy necessaries, the lender may recover monies to the extent used to buy those necessaries, if the claimant was the party who provided the necessaries.

Substitute Asset

Where a surety or guarantor pays off another ’s debt, he is subrogated to the rights of the creditor against the principal debtor. He succeeds to the securities. He need not necessarily have had knowledge of them, when in paying off the debt. The right applies to secondary parties to bills of exchange who are liable where the primary party defaults.

The principle of subrogation applies where a new mortgage is invalid, in circumstances where the proceeds of the new loan are used to pay off the loan secured by the older valid mortgage. The new lender may be subrogated to, and thereby enabled to exercise the rights under the new loan with the benefit of the older valid mortgage.

There must be some element of unjust enrichment involved. The mere lending of monies which are used to pay off a third-party secured creditor. does not create the right of subrogation. A failure of the new mortgage which has been required will suffice. It may be enough that the new monies are lent, specifically for the purpose of paying off the existing mortgage monies.

There is authority for the proposition that a lender who advances money for the express purpose of being applied in payment of the purchase price of a property, is entitled to the unpaid vendor’s lien, which the vendor would have been entitled to, if the purchase price had not been paid. This is at least provided that there is no contract between the lender and borrower which is inconsistent with the intention that such right should be acquired.

Insurance

Subrogation arises in the context of the insurance. The insurer is subrogated to the rights of the insured. See generally the section on insurance. The application of the equitable principle of subrogation follows from the indemnity given by the insurer to the insured. The subrogation is necessarily restitutionary in itself, although, in the broadest sense, it prevents the unjust enrichment of double recovery.

Some types of insurance policy are interpreted as not having rights of subrogation, including, in particular, life insurance policy and investment type policies.

Subrogation in the insurance context arises largely from the expressed or implied terms of the contract.