5. Recoupment & Contribution Notes

Recoupment & Contribution X (creditor) Liability Recoupment & Contribution C (payer) 1. Introduction D (debtor) o Context of the Claims o Recoupment and contribution claims involve three parties. o The normal situation is one in which a debtor owes money to a creditor; the claimant pays off the creditor rather than the defendant debtor; the issue that arises is in what circumstances does the claimant have a direct claim against the defendant. Both recoupment and contribution address this issue. o The claims are not far from unjust enrichment, the consequences of the claimant's conduct is to enrich the defendant, although the cases do not expressly invoke such reasoning. o General Principle o Lord Wright MR: "The essence of the rule is that there is a liability for the same debt resting on the plaintiff and the defendant and the plaintiff has been legally compelled to pay, but the defendant gets the benefit of the payment, because his debt is discharged either entirely or pro tanto, whereas the defendant is primarily liable to pay as between himself and the plaintiff." ? Authority - Brook's Wharf & Bull Wharf v Goodman Bros 1937 - ? Imported rabbit skins, bailed to a warehouse. The defendant was liable to the Crown for tax for importing the rabbit skins. But the liability was deferred by storing the goods in a bonded warehouse until they left the warehouse. So when they came out of the warehouse, the claimant became also liable for the import tax. The Crown demanded that the tax be paid, the claimant did so and succeeded in recoupment against D. o Underlying Principle of Legal Compulsion o Recoupment is founded on the principle of compulsion - the claimant is being compelled to transfer a benefit where, if he does not transfer, it would be taken from him by legal process. o The pressure is derived from explicit or implicit threat to resort to litigation, so the claimant has no choice. o As between C and X, the pressure to resort to legal process is not unjust therefore there can be no restitution from X, but where there are three parties, C discharges D's liability to X, therefore D will receive a negative incontrovertible benefit (i.e. saving him money he would otherwise be bound to pay). o Contrast subrogation - in recoupment C is suing D whilst relying on his own rights, in suborgation C is suing D by relying on the rights of the third party. o Common Example 1 o D borrows money, from a lender for example, X then takes a guarantee from party C, X seeks to recover the primary debt from D, but the borrower is unable to pay so the lender seeks recovery from the guarantor C, and C can recoup this from party D. 2. Main Requirements Four Requirements (1) Both C and D are legally liable to X o Authority - Bonner v Tottenham & Edmonton Permanent Investment Building Sociary 1899; Fortis Bank v India Overseas Bank 2011 (Need for D's liability). o In both cases the defendant did not owe any sort of legal obligation to X, therefore the claimant's claim in recoupment ended up failing. This makes sense, little justification to make D pay C, if D did not have a liability in the first place that was discharged by the payment. o Two ways for C to be directly liable: ? (i) Direct pre-existing legal liability (e.g. guarantor for D as against X) ? Authority - Brook's Wharf & Bull Wharf v Goodman Bros 1937; (See facts above) Gebhardt v Saunders 1892 - ? Tenant occupier was C, and landlord was D. The sanitary authority X served notice on either the occupier or landlord to abate a nuisance from a blocked pipe- it was served upon both. Not clear which would be primarily liable. In accordance with their agreement, it was on the landlord. The tenant did the necessary work to satisfy the obligation for the sanitary authority then sued the landlord, as he should have been responsible between the two parties. ? (ii) Compulsion to pay for other reasons ? Authority - Exall v Partridge 1799 - ? Repair of a carriage in a garage - claimant was the owner of the carriage, left it at D's garage to be fixed at the defendant's request. But he did not own the garage but held it under a lease from the landlord - therefore was under an obligation to pay rent. But had not been paying the rent to the landlord consistently. The landlord took action against D whilst the carriage was on the premises, meant that the landlord could claim any property on the tenanted property, no matter who it belonged to. In so paying to get his carriage back he discharged the legal liability on D, he was able to bring a claim in recoupment. ? Note that Virgo argues there is no difference between paying money to recover goods and paying to discharge a debt, in both cases the claimant pays because he has a lack of gree choice, and D's liability is discharged. ? Relevance of causation? o Virgo argues that to be consistent with other areas of unjust enrichment and 2 duress, the "but for" causation ought to apply, so that C cannot recover if he would have paid even without X creating the legal compulsion. (2) As between C and D, D is primary liable to X o Defendant must be the one who is primarily liable as between C and D, although both are liable. o Easy to establish in a case similar to Exall v Partridge (second class of case). But in the first class of case, this could be a harder question, but the court have developed ways to work this out. o Generally speaking, they say that the one who is benefiting is the one who is primarily liable. o Authority - Moule v Garrett 1872 - o C was a tenant who had covenanted with his landlord X that he would keep the leased property in repair. C assigned the lease to Y who assigned it to D, who failed to keep the property in repair. X sued C for breach of covenant. C then sued D for what he had paid under the covenant. He could not use implied covenant as there was no privity. But D was required to reimburse him as his payment had discharged D's liability to X. He had the immediate obligation to keep it in repair and it was his covenant.(3) C does not act voluntarily o Claimant must not have voluntarily paid X. Technical idea behind this is that in older cases, recoupment was based on fictional idea that defendant had requested the claimant to pay the third party. Became implied and fictional, but some remnants of this idea remained, such that where C paid entirely voluntarily, it would be impossible to pretend there had been a request, therefore a claim in recoupment would fail. o Goff & Jones describe this requirement as the claimant must not have officiously exposed himself to the liability to make the payment. o Authority - AL Smith CJ in Bonner v Tottenham & Edmonton 1899 - o C was a tenant who assigned the lease to Y who then mortgaged it to D. D took possession when Y went bankrupt but failed to pay rent to landlord X. X sued C for the rent but C could not sue D for the payment. D was only a sub-lessee and he was not liable to the landlord to pay rent. C had not discharged any liability of D and it could not be shown that he had received a benefit. o When is one acting voluntarily? o Clearly not voluntary when under legal obligation o But what about if the legal obligation was voluntarily undertaken? o Authority - England v Marsden 1866 - ? Claimant entitled to take some machinery he owned away from the premises of the defendant, but he chose to leave it there on the defendant's leased property. But the defendant did not pay his rent and the machinery was distrained by D's landlord. He had to pay to recover the machinery and then sued in recoupment, but it failed, as he was deemed to have acted voluntarily by leaving his machinery there for his own convenience. He 3 o o chose to do this, therefore voluntarily put your goods on the land for distraint. ? But this was subsequently doubted... Authority - Edmunds v Wallingford 1885; Owen v Tate 1976 - ? Defendant borrowed PS350 from bank X, D therefore under obligation to repay this loan, secured by way of mortgage on Miss L's house. Claimant was her former employer who wanted to help Miss L. C approached the bank and said he would personally guarantee D's debt if the charge over the house was relieved. C thus owed a duty to the bank and Miss L was free. Crucially the borrower, D had no idea about the arrangement - for some reason it was against his wishes, would have preferred for it to be secured by mortgage rather than personal guarantee. D defaulted on the loan, X sued the guarantor X, then C sued D in recoupment. ? Court of Appeal held that this would fail ? Scarman LJ said, purporting to assert a general principle, that "[t]he true principle of the matter can be stated very shortly ... [I]f without an antecedent request a person assumes an obligation or makes a payment for the benefit of another, the law will, as a general rule, refuse him a right of indemnity [recoupment]. But if he can show that in the particular circumstances of the case there was some necessity for the obligation to be assumed, then the law will grant him a right of reimbursement if in all the circumstances it is just and reasonable to do so." ? Stephenson LJ recognised that there can be cases where it would be unjust that the debtor should be enriched by accepting the benefit even though he had not asked for it. The law may be able to compel the debtor to make restitution to the guarantor. But there is no sufficient reason to impose an obligation to indemnify in this case. Wrongly decided? ? Yes: o Virgo, Goff &Jones, Burrows and Birks all believe this was wrongly decided. ? Goff and Jones argue that while the conduct of the volunteer is officious vis-a-vis the debtor, it was not against the creditor. So restitution by subrogation should be awarded. (Per Lewison LJ in Ibrahim v Barclays Bank plc 2012). ? Birks considered the restitution should have been granted but because the volunteer should be entitled to restitution on normal grounds and there is no policy objection to recovery as the creditor was not deceived into thinking that he would not seek reimbursement from the debtor. So the volunteer should not be left in an indefensibly isolated position of disadvantage. ? Burrows said the question lies in the unjust factor and whether the distinction between a volunteer who pays straightway and a volunteer surety can be justified. He argued that the surety hopes that he will not be required to pay. So if he is called upon, there can be legal compulsion. 4 ?? No:??o o But if the volunteer chooses to pay straightaway, legal compulsion is irrelevant. So the volunteer in Owen v Tate could get restitution because he was caused by the legal compulsion to pay. The legal compulsion is supplemented by a failure of consideration. The surety has contractually bound himself to pay under the assumption that he will be able to recover the payment from the debtor. If the debtor then refuses to pay, he can get restitution for failure of basis. Summary -Wrongly decided because - o (1) Legal compulsion justifies distinguishing voluntary sureties from volunteer who pays straightaway o (2) Legal compulsion does not distinguish between a voluntary and a requested surety. o (3) Subrogation allows the volunteer to be subrogated to the bank's rights against the debtor. o (4) Contribution allows a surety to seek reimbursement from his co-surety whether or not he is requested to be a surety. But if the argument is that C cannot become the defendant's guarantor behind their back, there I another way in which this might arise. Under s.136 LPA, allows assignment benefit of debt without consent from creditor. Under this Act, X could assign the benefit of the obligation to C behind D's back by giving him notice but not seeking consent. Arguably therefore, this policy argument may fall away. Also - may be a subrogation claim that can succeed on these facts, and if these are part of the same area of law, they should be consistent. Goymour favours this, advocating replacing it with a narrower rule, where you do recover except if there was some malice or harassment involved. Current law ? Owen v Tate does currently appear to represent English law, was mentioned obiter recently. ? Authority - Lewison LJ in Ibrahim v Barclays Bank Plc 2012 ? However, the rule that a volunteer who pays on behalf of another cannot obtain repayment has been subject to exceptions such as implying a request from the circumstances in which the payment was made. ? Authority -Exall v Partridge ? The question in practice becomes: whether it is just and reasonable for the right of reimbursement to arise in the circumstances. Importance of voluntariness ? Virgo argues that C acting voluntarily should not be relevant to the objective value to the benefit, so it should not be relevant to determining whether the debt has 5 been discharged, instead it should only be relevant in identifying the relevant ground of restitution. (4) D's debt to X is discharged o Why is this required? o There must be some normative reason to make the defendant liable to the claimant, this can only be justified if the defendant has actually received a benefit from the claimant's actions. o When is an obligation discharged? o (i) D requested C to discharge and X accepted payment o (ii) D accepted that C's payment discharged the debt (i.e. X must accept the payment , C must not intend to make a gift, and X must know that C does not intend it to be a gift). o (iii) C performed an (irrevocable) act which D is liable to perform o (iv) Automatic discharge (controversial!) ? Goff & Jones state that there is only automatic discharge by an unrequested payment if it is paid under legal compulsion or if C has a proprietary interest in D's property which C wishes to protect.Authority - Exall v Partridge ? Beatson and Birks assert that payment does not discharge the debt unless C is not a volunteer and has no immediate right to recover against X. ? Burrows argues that there is automatic discharge as long as C's payment was acceped by X. o Unauthorised interveners o When an unauthorised intervener pays the creditor, this may be sufficient to discharge the debt but not always. ? If the unauthorised intervener makes a payment by mistake this discharges the liability.Authority - B Liggett (Liverpool) v Barclays Bank ? Unauthorised intervener owes only secondary liability - where C and D owe a common liability to the creditor, who is forbidden from accumulating recoveries from both. The question in this case is whether C or D is the proper person to pay the creditor or whether they should share the burden. If C pays more than his share, he can recover the excess on the basis that D bears the primary liability to pay that excess and C only a secondary liability ? If the unauthorised intervener acted voluntarily in paying the creditor, the debtor's obligation is not discharged unless it is authorised or ratified. o Key Exception o Where the claimant is an indemnity insurer (i.e. insures against property damage) - there are slightly different rules on the discharge of debts. If D negligently destroys property of X, if X sues the indemnity insurer, even if they pay up, the liability of D will survive, it will not be discharged. Recoupment cannot apply. Therefore must rely on subrogation. o Mitchell argued that it is because the court wants the third party wrongdoer to bear the whole of the liability rather than the insured. But they had wrongly assumed that this could only be done by making the liability un-discharged. Another way of achieving this is to give the insurer a claim in unjust enrichment. ? Authority - Cf. Caledonia North Sea v British Telecommunications plc 6 

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