Lloyd's Maritime and Commercial Law Quarterly
THE LAW OF SUBROGATION
By Charles Mitchell*
I. INTRODUCTION
Subrogation is literally “substitution”.1 The word is used in the context of English and Commonwealth law to denote a process by which one party is substituted to the position of another, that he may pursue that other’s rights against a third. Rights of subrogation may be conferred by contract.2 It is also possible for two parties to form a contract to exclude or modify the application of subrogation arising by oper-
* Faculty of Laws, University College London.
An earlier draft of this article was presented as a paper to the Restitution Section of the Society for Public Teachers of Law, at the S.P.T.L. Conference in Aberdeen in September 1991. I should like to thank the members of the Section for their comments. I should also particularly like to thank Professor Peter Birks for his guidance and encouragement, Mr Niall Whitty of the Scottish Law Commission for the benefit of his knowledge of the Scots law of cession, and Messrs Andrew Burrows, Ewan McKendrick, Richard O’Dair and William Swadling for their various helpful remarks and suggestions.
The following abbreviated citations are used here: Beatson (J. Beatson, The Use and Abuse of Unjust Enrichment, Oxford, 1991, Chap. 7); Birks (P. Birks, An Introduction to the Law of Restitution, Oxford, 1985); Birks & Beatson (P. Birks & J. Beatson, “Unrequested Payment of Another’s Debt” (1976) 92 L.Q.R. 188); Derham (S. R. Derham, Subrogation in Insurance Law, Sydney, 1985); Goff & Jones (Lord Goff of Chieveley & G. Jones, The Law of Restitution, 3rd edn., London, 1986); Meagher, Gummow & Lehane (R. P. Meagher, W. M. C. Gummow & J. R. F. Lehane, Equity—Doctrines & Remedies, 2nd edn., Sydney, 1984).
1. See generally The Compact Edition of the Oxford English Dictionary (Oxford, 1987), Vol. 2, p. 3126, s.v. “Subrogate” and “Subrogation”, and p. 3177, s.v. “Surrogate” and “Surrogation”.
2. Orakpo v. Manson Investments Ltd. [1978] A.C. 95, 112, per Lord Edmund-Davies, 119, per Lord Keith of Kinkel.
Subrogation clauses are frequently inserted into contracts of insurance, e.g., to allow an insurer which has paid its insured under the policy to take over the insured’s rights against third parties in respect of the loss. See J. Birds, “Contractual Subrogation in Insurance” [1979] J.B.L. 124; Derham, Chap. 13. Where an insurer has acquired its insured’s rights via contractual subrogation, it may bring its subrogated action in the insured’s name. In contrast, an insurer which has taken an assignment of its insured’s rights must pursue the assigned right of action in its own name.
Another example of a third party acquiring rights of subrogation under contract can arise when a mortgagor agrees with some third party that he will exercise his power, conferred by the Law of Property Act 1925, s. 95, to compel the mortgagee to transfer his charge to the third party on receiving payment of the secured debt. See the discussion infra, at p. 508.
Rights of subrogation can also be conferred by contract under subordinated debt agreements. These typically provide for a subordinated (junior) creditor to forgo his right to enforce principal and interest payments on his debt until the senior creditor’s debt is repaid in full. Subordinated debt agreements commonly contain a provision that, after payment in full of the senior creditor, the junior creditor shall be subrogated to the senior creditor’s rights against the debtor (including such securities as the senior creditor may possess against the debtor), until the subordinated debt is paid in full. See P. R. Wood, The Law of Subordinated Debt (London, 1991), 85–86; R. Cranston, “Subrogation and Contribution: Some Debtor-Creditor Implications”, at the International Banking Law Conference (Faculty of Law, National University of Singapore, 1989), 159, 161; D. G. Carlson, “A Theory of Contractual Debt Subordination and Lien Priority” (1985) Vanderbilt L.R. 975, esp. 987–989.
An interesting question is whether the ability of parties to confer rights of subrogation by contract is curtailed by the courts’ policy towards maintenance and the champertous transfer of rights of action. The position briefly stated seems to be that a party will generally be allowed to take over another’s rights by contractual subrogation provided that he can show that he has a legitimate commercial interest in doing so. See Y. L. Tan, “Champertous Contracts and Assignments” (1990) 106 L.Q.R. 656. Insurers are said to have a legitimate commercial interest in recouping the payments they have made under a policy: Compania Columbiana de Seguros v. Pacific Steam Navigation Co. [1965] 1 Q.B. 101, 121, per Roskill J. But quaere whether this rule should extend to the case where an insurer has made a voluntary payment to its insured? See the discussion in Derham, Chap. 10.
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