Niru Battery Manufacturing Company & Anor v Milestone Trading Ltd. & Ors

These proceedings arise out of a claim brought by Niru Battery Manufacturing Company (“Niru”) and Bank Sepah Iran against the defendants, all of whom were involved in one way or another in a contract for the sale by Milestone Trading Limited (“Milestone”) to Niru of 10,000 metric tons of lead ingots made in February 1998. The circumstances giving rise to the claim are set out in detail in the judgment which I delivered in the main action on 11 ^th July 2002, [2002] EWHC 1425 (Comm), now reported at [2002] All E.R. (Comm) 705, and need not be repeated here. The brief summary that follows is sufficient to set the present proceedings in context.

The contract between Milestone and Niru provided for payment by letter of credit against presentation of (among other documents) FIATA multimodal transport bills of lading and an inspection certificate issued by the international inspection group, SGS. In due course a letter of credit was opened by Bank Sepah in favour of Milestone. Milestone was one of a group of companies known as the “Woralco” group controlled by the third defendant, Mr. Mahdavi. It had no significant assets of any kind and was used by the Woralco group as a single purpose vehicle for entering into the contract with Niru.

In order to obtain the lead needed to perform its contract with Niru Milestone, acting through Mr. Mahdavi, obtained financing from the fourth defendant, Crédit Agricole Indosuez (“CAI”), against the deposit of the warehouse warrants relating to the goods. The warrants, possession of which gave CAI complete control over the goods, were to be released to Milestone only on repayment of the advance. However, the letter of credit represented Milestone’s only source of funds and it therefore became necessary for Mr. Mahdavi to find a way in which documents could be presented for payment before the warrants had been released by the bank. That was achieved by enlisting the help of the second defendant, Maritime Freight Services Ltd (“Maritime”), which was prepared to issue a FIATA bill of lading stating that it had taken the goods in charge for carriage to Iran at a time when CAI still held the warrants and the goods themselves were still in the warehouse.

Most of the lead that Milestone intended to deliver was held in a warehouse at Gothenburg; the remainder, about 2,000 metric tons, was held in a different warehouse at Helsingborg. By the time Maritime issued its bill of lading the fifth defendant, SGS United Kingdom Ltd, acting on instructions from Milestone, had already inspected, sampled and tested the goods at Gothenburg. On being informed that Maritime had issued a bill of lading recording that it had taken the goods in charge for carriage to Iran, SGS issued an inspection certificate in which it certified, among other things, that the goods were marked with the name of Niru and that the quality, quantity and packing of the goods loaded complied with the contract. The certificate was inaccurate in two respects: the goods were not marked with Niru’s name and had not been put under the control of Maritime, let alone loaded onto any form of transport. I held that SGS was negligent in issuing the certificate and therefore liable to Niru in tort.

The documents, including the bill of lading and the inspection certificate, were presented to Bank Sepah under the letter of credit through CAI. After some minor discrepancies had been corrected the documents were accepted by Bank Sepah, but it was unable to make payment because the authorities in Iran failed to make the necessary foreign currency available. The price of lead began to fall causing CAI to become concerned about the adequacy of its security and eventually it sold the goods to reimburse itself. Then, somewhat to everyone’s surprise, funds were made available to enable Bank Sepah to honour the letter of credit and a sum of about US$5.8 million was remitted to CAI for payment to Milestone. The officer responsible for Milestone’s account, Mr. Francis, knew that the bank had sold the lead that was to have been delivered under the contract and had assumed that the transaction was dead. He was unsure, therefore, how to respond to the receipt of the funds, but having spoken to Mr. Mahdavi he was persuaded to release them to another company in the Woralco group, Nikam Metal Finance Ltd (“Nikam”). Needless to say, they were subsequently lost. I held that CAI had been unjustly enriched by the receipt of the funds from Bank Sepah and that it could not rely on change of position as a defence to a claim in restitution because it had failed to act in good faith when dealing with the funds. I also held that, although the funds had been remitted by Bank Sepah, Niru was entitled in the circumstances of this case to recover against CAI in restitution.

CAI and SGS issued Part 20 proceedings against each other seeking contribution under section 1 of the Civil Liability (Contribution) Act 1978. At the trial it was common ground between them that if they were both liable they could claim contribution from each other under section 1 of the Act even though SGS might be liable in tort and CAI in restitution. That is largely explained by the fact that the leading authority on the construction of section 1 at that time was Friends’ Provident Life Office v Hillier Parker May & Rowden [1997] Q.B. 85 in which the Court of Appeal had accepted that the Act enabled contribution to be claimed in those circumstances. As a result the argument in the Part 20 proceedings was almost entirely directed to the relative responsibilities of SGS and CAI for the loss that Niru had suffered.

After I had handed out my draft judgment, however, my attention was drawn to the decision of the House of Lords in Royal Brompton Hospital NHS Trust v Hammond [2002] UKHL 14, [2002] 1 W.L.R. 1397 in which Lord Steyn, with whom the rest of their Lordships agreed, disapproved the part of the judgment in the Friends’ Provident case that had underpinned the parties’ approach to the question of contribution. I therefore delivered judgment in the main action and adjourned the Part 20 proceedings for further argument in order to allow the parties to address me on the effect of that decision. Unfortunately, it was not possible to hear further argument on the contribution proceedings until the end of the year and by that time there had been two further significant developments. First, the claimants had entered judgment against SGS and CAI jointly and severally pursuant to an order the terms of which were agreed between all parties to the action. Secondly, the claimants had decided to look to SGS alone to satisfy the judgment and it had done so. As things now stand, therefore, SGS has paid the whole of the judgment, including the sum that I ordered to be paid on account of the claimants’ costs, and CAI has paid nothing.

The decision in Royal Brompton Hospital and the satisfaction of the judgment caused SGS to give greater attention to the grounds on which it might seek to recover a contribution or indemnity from CAI. After hearing argument I gave SGS permission to amend its particulars of claim in the Part 20 proceedings to add claims for relief by way of subrogation, recoupment and contribution based on the satisfaction of the judgment to its existing claim for a contribution under section 1 of the 1978 Act.

Before turning to the parties’ submissions on the law it is necessary to say something more about the factual background against which they have to be considered. In my judgment in the main action I found that SGS had been negligent in issuing its certificate, but in the present proceedings Mr. Bloch Q.C. submitted that it was still open to me to find that SGS, in the person of Mr. Carr, the manager of its Minerals Division, had acted fraudulently, or at least recklessly, in authorising its issue.

Although the amendment of the contribution proceedings may have caused CAI to examine SGS’s conduct more critically than before, the fact is that it was always a matter in which the different parties to the action had a close interest. Niru’s case against SGS lay in negligence and no suggestion was made on its behalf that Mr. Carr had acted recklessly or dishonestly. Nonetheless, Niru was concerned to press its case against SGS as strongly as it could in order to ensure as far as possible that it was ultimately successful. CAI’s position was rather different. It was pursuing a claim against SGS for contribution under the 1978 Act. It was therefore very much in its interests to show that SGS’s conduct was more culpable than its own since that could be expected to influence the way in which any liability was apportioned. A finding of fraud, or even recklessness, on the part of SGS could have had a significant effect on the court’s view of the matter. Indeed, in his written closing submissions Mr. Bloch did suggest that the false statements in the certificates could not have occurred by mistake and must have been recognised for what they were, although the point was not pursued in oral argument.

SGS and CAI are, of course, both bound by the findings of fact made at the trial of the main action and I doubt, therefore, whether it is open to me now to make additional findings of the kind suggested by Mr. Bloch. In any event, I should be most reluctant to do so having regard to the way in which the case has proceeded hitherto. Mr. Carr was subject to quite vigorous cross-examination, particularly by Mr. Malek Q.C. on behalf of Niru, but it was not suggested to him that he had acted dishonestly or recklessly. I have looked again at the relevant parts of his witness statement and the transcript of his cross-examination and I have a reasonably good recollection of him in the witness box. I am far from persuaded that Mr. Carr or anyone else at SGS acted dishonestly or recklessly in connection with the issue of the certificate. Mr. Carr honestly believed that the goods at Helsingborg were of the same quality as those at Gothenburg and that the goods would be labelled on leaving the warehouse. He honestly believed that all the goods had been placed under Maritime’s control, thereby entitling Milestone to demand an inspection certificate from SGS. He was familiar with ocean bills of lading under which ‘loading’ means loading on board a vessel, but he was not very sure what it meant in the context of a multimodal bill of lading designed to be issued by a carrier described as a ‘freight forwarder’. For the reasons set out in my previous judgment I have no doubt that SGS was negligent in issuing its certificate, but negligence, however gross, is not the same as fraud or recklessness. Mr. Carr ought to have understood the nature of a FIATA bill of lading and was too easily satisfied that the requirements for issuing the required certificate had been met, but I am not satisfied that when he authorised the issue of the certificate he knew that the contents were false or that he did not care whether they were true or not.

Miss Andrews Q.C. for her part invited me to make further findings in relation to the conduct of CAI in parting with the funds it received from Bank Sepah. One of the grounds on which Niru made a claim against CAI was that the bank was liable to account as a trustee, either because it knew the funds had been received as a result of a mistake, or because it had dishonestly assisted in a breach of trust by Nikam and Mr. Mahdavi. I did not find it necessary to deal with those arguments, but I did make detailed findings about the circumstances in which the bank came to pay the money away and about the state of mind of those who had dealt with the matter. It was necessary to do so because Mr. Bloch had submitted that when considering the defence of change of position a want of good faith was equivalent to dishonesty.

In Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 A.C. 164 the House of Lords held that dishonesty in the context of assistance in a breach of trust has both objective and subjective elements. A person cannot set his own standards of honesty, but in order for him to be held liable on the grounds of dishonesty it is necessary to show not only that his conduct fell short of ordinary standards of honesty, but that he was aware of that fact. In other words, dishonesty involves, “consciousness that one is transgressing ordinary standards of honest behaviour” (per Lord Hoffmann at paragraph 20). It was that element of conscious wrongdoing that I found to be lacking in the present case. Although I was critical of the way in which Mr. Francis dealt with the matter, I did not find that he was dishonest precisely because, having seen him in the witness box, I was not satisfied that he had consciously transgressed the standards to be expected of an ordinary honest banker. I can see no grounds for departing from that conclusion now.

The circumstances giving rise to the claims against CAI and SGS can therefore be summarised as follows. SGS’s negligence in issuing a false inspection certificate caused Bank Sepah on behalf of Niru to transfer US$5.8 million to CAI. As a result Niru suffered loss in that amount and CAI, having obtained a valuable benefit as the result of a mistake, was unjustly enriched. CAI paid the money away to Nikam at the instigation of Mr. Mahdavi, but, having failed to make enquiry of Bank Sepah before doing so, was unable to invoke the defence of change of position. CAI’s decision to pay the money away was entirely independent of any breach of duty by SGS.

I now turn to the various ways in which Miss Andrews submitted that SGS, having satisfied the judgment in full, is entitled to obtain a contribution or indemnity from CAI.

Although it was not Miss Andrews’ primary argument, it is convenient to begin with the claim for contribution under the 1978 Act. Section 1(1) provides as follows:

Section 6(1) provides as follows:

The critical words in section 1(1) are “any damage” and “liable in respect of the same damage”. In the Friends’ Provident case the Court of Appeal held that a claim in restitution and a claim for damages in tort were both claims for compensation for damage within the meaning of sections 1(1) and 6(1) of the Act: see per Auld L.J. at page 102G-H. Thus, in the present case it was said that Niru suffered damage by being deprived of its money and was entitled to recover compensation for that loss from both SGS and CAI whose actions had between them caused it.

This analysis depends, however, on regarding the payment of money under a mistake of fact as “damage” and a right to recover it from the payee as a right to recover compensation in respect of damage. Moreover, in a case where A’s negligence has caused B to make a payment to C under a mistake of fact, it is necessary to regard the damage caused by A, which consists in depriving B of his money, as the same damage as that caused by C in failing to restore the money.

The view that a restitutionary claim to recover money paid under a mistake is a claim for damage and that the claim is one to recover compensation was criticised by the learned editor of Goff & Jones, The Law of Restitution , 5 ^th ed. at page 396 and was specifically rejected by Lord Steyn in the Royal Brompton Hospital case. None of the other members of the House, all of whom agreed with Lord Steyn, referred to the relevant part of the judgment in the Friends’ Provident case in any detail, but I find it impossible to accept that they did not fully agree with his comments. On a matter of such importance any reservation would no doubt have been clearly expressed.

Miss Andrews submitted, however, that Lord Steyn’s comments in the Royal Brompton Hospital case could not be reconciled with their Lordships’ decision in Dubai Aluminium Co. Ltd v Salaam [2002] UKHL 48, [2003] 1 Lloyd’s Rep. 65 and that I should therefore hold that a right of contribution did after all exist in the present case.

In Dubai Aluminium v Salaam B, a partner in a firm of solicitors, was alleged to have knowingly assisted in a fraudulent scheme on the part of the other defendants to steal money from the claimant. B’s part was said to have been the preparation of documents needed to implement the scheme and his partners were alleged to be vicariously liable for his acts on the grounds that they were committed in the ordinary course of the firm’s business. Neither B nor the partnership received any of the proceeds of the fraud apart from the amounts paid to the firm in respect of fees for the work he had carried out. The action against B and the partnership was settled against a substantial payment to the claimant. The allegations against B did not go to trial and no finding of dishonesty was made against him. Having settled the claim against them, the partners sought to obtain a contribution from the other defendants under section 1 of the 1978 Act.

The claimant’s case against the various defendants (other than the firm) was that they had knowingly assisted in a breach of fiduciary duty on the part of its chief executive and, except in the case of B, had knowingly received funds obtained in breach of fiduciary duty. The case does not appear to have been put on the basis of a common law tort such as conspiracy or deceit, although, as Lord Hobhouse pointed out in paragraph 70, the factual allegations in the pleadings upon the basis of which the contribution proceedings fell to be determined provided a sufficient basis for liability in the tort of deceit. The main issue before the House in relation to liability was whether B’s partners were “liable” within the meaning of the Act in respect of the damage suffered by the claimant. That turned on whether they were vicariously liable for the dishonest acts that B was alleged to have committed. It appears to have been accepted without argument that, if they were vicariously liable, they had a right to contribution under the Act.

Miss Andrews drew attention to the passage in Lord Millett’s speech at paragraph 87 in which he pointed out that a claim for dishonest receipt can be based on the receipt rather than the dishonesty, treating it as a restitutionary claim independent of any wrongdoing. She submitted that the defendants’ liability in equity was to account for the proceeds of the fraud and that, in accepting that there could be contribution under the 1978 Act between the partners, none of whom had received any of the proceeds of the fraud, and the other defendants, their Lordships were necessarily accepting that the Act permitted contribution between those liable in damages and those liable in restitution, contrary to what Lord Steyn had said in the Royal Brompton Hospital case.

I am unable to accept that submission. In the first place, although it is not clear from the only report of the case currently available whether the Royal Brompton Hospital case was cited to their Lordships, I find it difficult to imagine that counsel or their Lordships were unaware of the decision and if anyone had thought that it was relevant to the matters then before the House, I am sure it would have been referred to. It would indeed be astonishing if their Lordships had decided the case before them on a basis fundamentally inconsistent with what had been said in the Royal Brompton Hospital case without adverting to the fact in any way.

In my view the explanation lies in the passage in Lord Millett’s speech to which I referred a moment ago in which he pointed out that dishonest receipt gives rise to two forms of liability concurrently, one based on fault, the other simply on receipt. If the claim is based on the defendant’s dishonesty, the receipt is treated as incidental and as reflecting the particular form taken by the defendant’s participation in the breach of fiduciary duty. In such cases the claim is for equitable compensation for the loss caused by the defendant’s breach of duty and all those who participated in it are equally liable for the same damage. It follows that they are entitled to contribution from each other under the 1978 Act.

The present case is not of that kind. CAI did not act dishonestly in receiving payment from Bank Sepah and Niru’s claim against it is based in restitution alone. The case is therefore substantially on all fours with the Friends’ Provident case. That being so, no right to contribution arises under the 1978 Act for the reasons given by Lord Steyn in the Royal Brompton Hospital case.

Miss Andrews’ primary submission was that, having satisfied the judgment, SGS is entitled to be subrogated to Niru’s rights against CAI (except insofar as the judgment relates to costs) and is thus entitled to obtain a full indemnity in respect of the sum it has paid. Her argument can be summarised as follows: SGS has been compelled by law to compensate Niru in full; by doing so it has conferred a benefit on CAI by relieving it from any obligation to pay Niru; CAI was unjustly enriched at the expense of Niru and is now unjustly enriched at the expense of SGS; accordingly, SGS should be granted the remedy of subrogation in order to prevent that unjust enrichment. It will be seen that this argument depends, at least in part, on the proposition that CAI continues to be unjustly enriched as a result of receiving the funds transferred to it by Bank Sepah.

The leading authority on the equitable remedy of subrogation is Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 A.C. 221. Lord Hoffmann, with whom the majority of the other members of the House agreed, drew a distinction between contractual subrogation of the kind most commonly encountered in connection with contracts of insurance and subrogation in equity. He pointed out that the former is founded upon the common intention of the parties whereas the latter is an equitable remedy designed to reverse or prevent unjust enrichment. It does not depend on agreement between the party enriched and the party deprived but upon principles of restitution. He summarised the principles governing the availability of the equitable remedy in the following terms in a passage at page 234C-D of the report:

Despite the general terms in which Lord Hoffmann described the principles on which the remedy depends, Mr. Bloch submitted that there are recognised categories of cases in which subrogation has been permitted, none of which encompasses the present case. In particular, he submitted that there is no reported case in which a tortfeasor has obtained relief by way of subrogation against a party liable only in restitution and that accordingly SGS is seeking to make a far-reaching extension to the existing law. In support of that submission he relied on a passage in the speech of Lord Selborne L.C. in Duncan Fox & Co. v North & South Wales Bank (1880) 6 App. Cas. 1, a case concerning a claim by an indorser of a bill of exchange to be subrogated to securities provided by the acceptor to the holder of the bill. Mr. Bloch submitted that, in the absence of some prior agreement between the party seeking subrogation and the party against whom the claim is made which determines their respective liabilities, it is necessary for the claimant to show that the defendant is primarily liable in respect of the obligation in question.

It is true that for the purposes of dealing with the issues then before the House Lord Selborne at pages 10-11 of the report identified three kinds of cases in which rights of subrogation had been recognised, but I do not think that in doing so he was seeking to restrict the categories of cases in which the remedy of subrogation might be available as much as to identify situations that were broadly analogous to those of the case before him. The law of restitution based on the principle of unjust enrichment has undergone significant development in the intervening period with the result that the principles underlying what were at one time perceived to be different remedies are now capable of being formulated in a simpler and more unified way. Thus the existence of a primary and secondary liability to which Lord Selborne referred can now, I think, properly be regarded as a factor that would render enrichment unjust rather than a separate requirement in its own right. For these reasons I am not persuaded that this case does necessarily involve an extension of existing principles, although it may involve the application in a new context of the principles restated in Banque Financière de la Cité v Parc (Battersea) Ltd .

Mr. Bloch’s next submission was that a claim for relief by way of subrogation cannot be made in the absence of the party to whose rights the claimant seeks to be subrogated. Neither Niru nor Bank Sepah, of course, has ever been a party to the contribution proceedings.

This submission was based on the decision of the House of Lords in Esso Petroleum Co. Ltd v Hall, Russell & Co. Ltd (The ‘Esso Bernicia’) [1989] 1 A.C. 643. In that case the vessel Esso Bernicia was involved in an accident while berthing at Sullom Voe terminal under the control of tugs. The failure of a piece of equipment on board one of the tugs caused the vessel to come into contact with the jetty as a result of which both the vessel and the jetty sustained damage and the foreshore in the area of the terminal was contaminated by fuel oil. Esso paid compensation to the owners of the jetty and to crofters whose sheep had been injured by the pollution of the foreshore and sought to recover from the builders of the tug, Hall, Russell & Co., on the grounds that they had been negligent in its design and construction. Esso contended that it was entitled to be subrogated to the claims of the jetty owners and the crofters against Hall Russell in tort and could pursue those claims in its own name.

The House rejected Esso’s argument, holding that it could pursue the claims of the jetty owners and the crofters only in their names. The reason for that, as Lord Goff pointed out at page 663A-C, was that Esso’s payment did not discharge Hall Russell’s liability, and for the same reason Esso could not make a claim in restitution because Hall Russell had not been enriched at its expense. Lord Jauncey reached the same conclusion after a lengthy analysis of the authorities in the field of insurance. He regarded it as a general rule of both English and Scots law that an indemnifier who is subrogated to the rights of someone whom he has indemnified can only pursue those rights in the name of that person, but his comments must be read in the context of the case then before the House in which Esso was seeking to bring proceedings in its own name to enforce the rights of those whom they had indemnified. It is apparent from Banque Financière de la Cité v Parc (Battersea) Ltd , however, that the pursuit of claims against third parties is not the only manner in which the remedy of subrogation operates and I do not think that his remarks can be understood as applying to every case in which the remedy of subrogation is available, regardless of the manner in which it takes effect.

In Banque Financière de la Cité v Parc (Battersea) Ltd Lord Hoffmann emphasised that subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. Similar statements of principle can be found in the speeches of Lord Clyde and Lord Hutton. The position in The ‘Esso Bernicia’ was essentially indistinguishable from that which arises when an insurer provides an indemnity under a contract of insurance, save for the fact that there was in that case no contract between Esso and the jetty owners or crofters. The payment of compensation did not discharge their claims against Hall Russell which, in the absence of an assignment, could be enforced only in their name. The situation in Banque Financière de la Cité v Parc (Battersea) Ltd was quite different. In that case money advanced by the claimant was used to discharge in part the original loan and the effect of allowing the claimant to be subrogated to the security as against the defendant (though not as against other parties involved) was to regulate the relationship between the two of them in a manner that avoided unjust enrichment. There was no question of pursuing a claim of any kind and it does not appear that the holder of the security to whose rights the claimant was entitled to be subrogated was a party to the proceedings.

It is convenient to digress briefly at this point to deal with Mr. Bloch’s submission that CAI’s liability has not been discharged in the present case because the matter is going to appeal and because Niru has made it quite clear that, if SGS is successful in having the judgment against it set aside, it will seek to recover from the bank. The fact that the judgment is under appeal is in my view irrelevant to the question now under consideration. Unless and until it is set aside or varied by the Court of Appeal it establishes with complete finality the parties’ respective positions in law. This is an elementary principle that provides the foundation for the rule of estoppel by record. Accordingly, SGS’s right to relief must be determined solely by reference to the position as it now stands. Whether steps should be taken to protect the position of CAI in the event of a successful appeal is another matter entirely, but both parties to the contribution proceedings are substantial companies and it has not yet been suggested that there is any practical need for such protection.

In my view the fact that Niru has obtained judgment against both CAI and SGS and that the judgment has been satisfied by the payment made by SGS provides an important distinction between this case and The ‘Esso Bernicia’ . Niru’s rights against CAI merged in the judgment and the satisfaction of the judgment is a bar to any further claim by Niru. It would be impossible, therefore, for SGS now to pursue a claim against CAI in the name of Niru. It does not necessarily follow, on the other hand, that the legal relationship between CAI and SGS cannot be regulated in a way that prevents unjust enrichment. If subrogation is available as a remedy, this is a case in which, in the words of Romer J. in Chetwynd v Allen [1899] 1 Ch. 353, Niru’s claim against CAI is “kept alive in equity” in favour of SGS. In other words, as Lord Hoffmann explained in Banque Financière de la Cité v Parc (Battersea) Ltd , the legal relations between SGS and CAI can be regulated as if the benefit of Niru’s judgment against CAI had been assigned to SGS. I am unable, therefore, to accept that the claim for subrogation must fail simply because Niru is not a party to the contribution proceedings.

I turn then to consider the first of the three questions posed by Lord Hoffmann in Banque Financière de la Cité v Parc (Battersea) Ltd , namely, if subrogation were refused, would CAI be enriched at SGS’s expense? In my view it clearly would. That follows simply from the fact that by satisfying the judgment in full SGS has relieved CAI of liability to Niru. That is undoubtedly a benefit to CAI and one that it has received at the expense of SGS.

The second, and more difficult, question is whether such enrichment would be unjust. This raises a number of questions relating to the nature of the parties’ conduct and the basis of their liability to Niru, but perhaps the first question to consider is whether it is permissible for this purpose to look behind the judgment at the grounds on which the parties incurred liability to Niru. Mr. Bloch was inclined to suggest that it is not, but in my view that is not borne out by the decided cases. Thus in both Merryweather v Nixan (1799) 8 T. R. 186 and Palmer v Wick and Pulteneytown Steam Shipping Co. Ltd. [1894] A.C. 318, both of which featured largely in another aspect of Mr. Bloch’s argument, the fact that judgment had been entered against two defendants jointly and severally did not prevent the court from considering the underlying grounds of liability when deciding whether one could recover a contribution from the other. The decision in In re EWA [1910] 2 K.B. 642 to which he referred me does not seem to me to suggest otherwise, being concerned only with the question whether a compromise made with one of two judgment debtors liable jointly and severally discharged them both.

In the present case SGS incurred liability to Niru in negligence, but Miss Andrews submitted that that of itself did not prevent it from obtaining a remedy by way of subrogation, drawing my attention to the passage in Lord Hoffmann’s speech in Banque Financière de la Cité v Parc (Battersea) Ltd at page 235E-G. I accept, of course, that a failure on the part of a claimant to take proper care of his own interests is not a ground for holding that the consequent enrichment of a third party is not unjust. In the present case, however, the carelessness of SGS did not involve a failure to protect its own interests; rather, it involved a failure to perform a duty which by law it owed to Niru. It was that which rendered it liable as a tortfeasor and which in the submission of Mr. Bloch is sufficient to preclude it from obtaining relief.

There were really two separate strands to this part of Mr. Bloch’s argument: one based on the narrow application of the rule in Merryweather v Nixan prohibiting contribution between tortfeasors; the other on a wider rule of public policy that a person cannot profit from his own wrong.

The development of the rule in Merryweather v Nixan is interesting in itself. Lord Kenyon’s judgment appears to provide a slender basis for the development of a general rule prohibiting contribution between tortfeasors and from an early stage attempts were made to limit its application to cases where the person seeking contribution or indemnity was, or was presumed to be, a conscious wrongdoer: see Adamson v Jarvis (1827) Bing. 66 and Betts v Gibbins (1834) 2 A. & E. 57. It was heavily criticised by Lord Herschell L.C. in Palmer v Wick and Pulteneytown Steam Shipping Co. Ltd [1894] A.C. 318 (a case of negligence) and the judgments in Burrows v Rhodes [1899] 1 Q.B. 816 in which the case was cited seem to me to reflect the development of the wider principles of public policy underlying the second strand in Mr. Bloch’s argument: see the comment of Lord Dunedin in Weld-Blundell v Stephens [1920] A.C. 956 at page 976. However that may be, by the time of the decisions in The Drumlanrig [1911] A.C. 16 and The Koursk [1924] P. 140 it was accepted as an established rule of the common law that there could be no contribution between tortfeasors. This eventually led to the passing of the Law Reform (Married Women and Tortfeasors) Act 1935 by which the rule was effectively abrogated. The general rule of public policy which prevents a person from relying on his own criminal or immoral act as a basis for relief remained in place, however - see Clunis v Camden Health Authority [1998] Q.B. 978 - but it does not prevent a wrongdoer from recovering a contribution under the statutory provisions even where he has been guilty of fraud: see K v P [1993] Ch. 140 and Dubai Aluminium v Salaam .

The position at common law found no parallel in equity which did not apply a general rule prohibiting indemnity or contribution between wrongdoers in cases where the wrongdoing did not amount to a tort at common law. For example, in Moxham v Grant [1900] 1 Q.B. 88 the directors of a company distributed part of the capital to the shareholders without the court’s approval. After an order had been made for the winding up of the company the liquidator obtained an order for the repayment of the money by the directors. The directors were held to be entitled to an indemnity from the shareholders who were also liable to the company and who had been relieved of that liability by the directors’ payment. The rule in Merryweather v Nixan was held to have no application because the directors were not tortfeasors.

Section 7 of the 1978 Act expressly preserves contractual and other rights to indemnity that would be enforceable apart from the Act and these in my view include rights of subrogation and recoupment whether arising under contract or the general law. Mr. Bloch submitted that outside the Act the rule in Merryweather v Nixan still applies. Accordingly, because SGS is a tortfeasor it is precluded from obtaining relief by way of subrogation even if it is able in other respects to satisfy all the necessary requirements.

In my view the rule prohibiting contribution between tortfeasors ceased to have any significance once Parliament had passed the Law Reform (Married Women and Tortfeasors) Act 1935. Thereafter the courts were able to develop the principles of public policy under which a person is prohibited from relying on his own wrong free of the artificial constraint of treating every tortfeasor as one whose wrongdoing was to be equated with criminal or immoral acts. The result is that established rules of public policy may still deny a claimant a remedy, but only in those cases where it is necessary for him to rely in support of his claim on conduct of a kind that is criminal or immoral. The possibility that public policy might in some cases preclude a remedy by way of subrogation was, of course, expressly recognised by Lord Hoffmann in Banque Financière de la Cité v Parc (Battersea) Ltd . However, I do not think that the conduct of SGS in the present case was of such a kind as would require the court to refuse it assistance on the grounds of public policy and accordingly I am unable to accept that it is precluded on those grounds from obtaining relief by way of subrogation.

I return then to the question whether CAI will be unjustly enriched if SGS does not obtain the relief it seeks. In Banque Financière de la Cité v Parc (Battersea) Ltd Lord Clyde described the principle of unjust enrichment in the following terms at page 237E:

Mr. Bloch submitted that in this case even if SGS were to bear the whole of the burden CAI would not be unjustly enriched for two main reasons: first, because CAI has not retained the funds it received from Bank Sepah and has therefore not been enriched at all as between itself and SGS; secondly, because as between a tortfeasor and a person liable in restitution there can be no unjust enrichment if the whole loss is borne by the tortfeasor.

The second of these arguments appears to proceed on the assumption that where a person has committed a tort of any kind that fact of itself is invariably sufficient to outweigh the injustice of any resulting benefit to a third party. In substance it amounts to little more than a return to the rule in Merryweather v Nixan and I do not find it persuasive. In this context it is interesting to note that in Dubai Aluminium v Salaam their Lordships had little difficulty in reaching the conclusion that it was just and equitable that those who had retained the benefit of the fraud should bear the burden rather than those who had not. The mere fact that SGS’s wrongful act caused Bank Sepah to transfer funds to CAI does not mean that there can be no unjust enrichment of CAI if SGS makes good the full amount of Niru’s loss. One can easily test the argument by considering what the position would be if CAI still retained the funds. If SGS had satisfied the judgment, it would be difficult to conclude that, as between itself and SGS, CAI had not been unjustly enriched at the expense of SGS.

The first of Mr. Bloch’s points is more powerful and the present case gives rise to greater difficulty for the very reason that CAI has not retained the benefit of the funds it received. Nonetheless, it was unjustly enriched by their receipt and that unjust enrichment provided the basis of its liability to Niru. The loss of the funds, for which SGS was not in any way responsible, did not provide CAI with a defence to a claim by Niru and it therefore remained liable to repay the full amount it had received.

In this context Mr. Bloch made two further submissions which it is convenient to consider together. The first was that it would be unjust to require a defendant whose liability was based on receipt of funds rather than any wrongdoing to bear the whole of the loss in circumstances where that would have the effect of relieving the wrongdoer from liability altogether. The second was that it would be wrong to hold CAI liable to indemnify SGS in full in the face of a finding in the draft judgment that the two of them were equally responsible for Niru’s loss.

The passage in the draft judgment on which Mr. Bloch sought to rely formed part of my provisional decision on the contribution claim. In the event it did not find its way into the judgment delivered in the main action for the reasons I have already mentioned. My conclusion reflected the assumption, following the decision in the Friends’ Provident case, that the parties were liable for the same damage to Niru within the meaning of section 1(1) of the 1978 Act and were entitled to obtain a contribution from each other in accordance with their responsibility for that damage. The argument was almost entirely directed to the relative culpability of the two defendants rather than to the question of unjust enrichment, although it is fair to say that Miss Andrews did touch very lightly on that point in the course of her final submissions.

One can now see that the assumption that SGS and CAI were both liable for the same damage was wrong, but it nonetheless coloured the approach of the parties and the court to the whole question of their individual responsibilities for Niru’s loss. In the light of Lord Steyn’s speech in the Royal Brompton Hospital case and the helpful arguments of counsel in the course of these proceedings it has become clear that insufficient attention was previously paid to the question of unjust enrichment and the different nature of the defendant’s liability in each case. It may be that in a broad sense SGS and CAI were equally to blame for the loss suffered by Niru, but it does not follow that there is no distinction to be drawn between them in terms of the benefit they received. In these circumstances I do not feel constrained by the views I expressed in my draft judgment to hold that considerations of justice and equity preclude relief by way of subrogation in this case.

The argument that equity should not intervene to relieve a wrongdoer of liability at the expense of a person liable only in restitution is one that I have already considered. For the reasons I have given I am unable to accept that a wrongdoer is precluded from obtaining relief by way of subrogation, except in those cases in which the courts would ordinarily decline to entertain a claim on the grounds of public policy.

If SGS were denied relief in the present case CAI would in my view be unjustly enriched at its expense. CAI was unjustly enriched by the receipt of the money from Bank Sepah and as a result became liable to restore it. CAI did not cease to be liable when it parted with the money; on the contrary, it remained liable because it had received a benefit which it was bound to restore. That liability merged in the judgment and came to an end only when, and by reason of the fact that, the judgment was satisfied in full by SGS. SGS was not responsible for CAI’s decision to part with the money; that was the result of a combination of Mr. Mahdavi’s insistence that the bank follow his instructions and its own failure to act in good faith. CAI has been relieved of liability at the expense of SGS and as a party liable to make restitution on the grounds of unjust enrichment I do not think that in relation to SGS it can be treated as if it did not receive the benefit on which its liability was based, any more than it could in relation to Niru.

This conclusion can be tested by reference to the position that would have arisen if CAI had returned the money it received from Bank Sepah rather than paying it away to Nikam or the judgment had been satisfied by CAI rather than SGS. If the money had been returned, Niru would have been unable to pursue a claim against SGS because it would have suffered no loss and CAI would have had no claim against SGS either. Thus, although in one sense SGS would have benefited by the repayment, it could not be regarded as having been unjustly enriched because it was only liable to pay the amount of the loss actually sustained by Niru: see Receiver for the Metropolitan Police District v Croydon Corporation [1957] 2 Q.B. 154. Similarly, if CAI had satisfied the judgment rather than SGS, SGS would have been relieved of any further liability to Niru. In one sense, of course, that would have been a benefit to SGS, but I do not think that SGS could be said to have been unjustly enriched as a result; the damage suffered by Niru would simply have been made good from other sources. All this supports the conclusion that as between SGS and CAI the burden ought to fall on CAI which has been unjustly enriched as a result of the satisfaction of the judgment by SGS.

I am satisfied, therefore, that SGS is entitled to be subrogated to the rights of Niru under the judgment so as to enable it to recover from CAI the amount it has paid in satisfaction of the claim. The position in relation to the amount paid in respect of the costs of the action is different, however, since that element of the judgment represents a liability arising out of the action itself. I shall return to it after I have considered the other argument advanced by Miss Andrews in support of SGS’s claim for an indemnity.

As an alternative to seeking a remedy by way of subrogation Miss Andrews submitted that SGS was entitled to recover from CAI under the doctrine of recoupment. The leading authority on recoupment is Moule v Garrett (1872) L.R. 7 Exch. 101 in which the principles were succinctly summarised by Cockburn C.J. as follows:

The principle depends on the compulsory discharge by the claimant of a liability that rested primarily on the defendant: see Goff & Jones , op. cit. para. 15-001. In the present case there is no difficulty with proving the element of compulsion: the payment made by SGS was made under compulsion of the judgment entered against it. However, as is pointed out in paragraph 15-015 of Goff & Jones , compulsion alone is not enough; the claimant must have discharged the defendant’s liability to a third party.

In the present case the satisfaction of the judgment by SGS discharged CAI’s liability under the judgment, but I do not think that of itself can be enough since the judgment was simply the means by which SGS was compelled to pay. The question whether SGS was compelled to discharge a liability that rested primarily on CAI is one that can only be answered by reference to the underlying rights and liabilities.

The underlying liabilities of SGS and CAI were, however, quite different in nature: SGS incurred liability in tort and CAI liability in restitution. I do not think that the payment by SGS of damages for negligence would have discharged CAI’s liability to restore the benefit it had received any more than the payment by Esso to the crofters in The ‘Esso Bernicia’ discharged the liability of Hall Russell. In those circumstances Niru would have been unjustly enriched for the reasons explained by Lord Goff in that case and SGS would have been subrogated to its claim against CAI. The fact that SGS has been sued to judgment does not in my view alter the position; that is simply the means by which SGS has been compelled to satisfy its own liability to Niru. For these reasons I do not think that the present case can be brought within the principles of recoupment.

Finally Miss Andrews submitted that if all else failed SGS was entitled to recover a contribution from CAI in accordance with established principles of common law and equity by virtue of being jointly and severally liable for the same judgment debt. The principle of contribution is described by Lord Bingham in the Royal Brompton Hospital case and was not in dispute: in summary, all those liable to a common demand should bear an equal share of the burden. However, this principle will give way to other considerations, for example, where it can be shown that the parties agreed to bear the liability in some other proportions or where it can be shown that one of them was primarily liable for the debt in question, and where the common liability arises under a judgment the circumstances giving rise to the judgment must be taken into account. Thus, prior to the passing of the Law Reform (Married Women and Tortfeasors) Act 1935, contribution between tortfeasors was prohibited by the rule in Merryweather v Nixan despite the fact that judgment had been entered against them jointly and severally. Similarly, in the present case rights to contribution and indemnity fall to be decided by reference to the underlying circumstances rather than by reference to the judgment itself. I am unable to accept, therefore, that if SGS were unable to obtain relief by way of subrogation or recoupment in relation to the satisfaction of the judgment on the claim it would have been entitled to obtain a contribution on this ground.

The position is different, however, in relation to the judgment for costs since that represents a liability arising out of the proceedings themselves. The basis for that liability is the fact that each of the defendants contested the claim against it and, having done so, was held liable to the claimants. In this case the only underlying matters on which the judgment debt is based is the manner in which the case was conducted and its eventual outcome. In principle, therefore, I think that Miss Andrews is right in saying that SGS is entitled to recover a contribution from CAI in respect of what it has paid in satisfaction of this part of the judgment.

I have said little so far about the position of Mr. Mahdavi, although he is also liable under the judgment jointly and severally with SGS and CAI. Mr. Bloch submitted that any apportionment of the judgment debt for the purposes of contribution should proceed on the basis that Mr. Mahdavi can and should bear one third. I do not think that there has yet been any formal investigation into the state of Mr. Mahdavi’s finances, but such indications as there are do not suggest that he is well-placed to make a substantial payment. His solicitors ceased to act for him in January 2002 because he was unable or unwilling to put them in funds and he subsequently appeared at the trial in person. In his evidence he stated that the funds received from Bank Sepah, which eventually found their way back into companies within the Woralco group, had been lost when the group collapsed.

It is unnecessary for present purposes to decide whether Mr. Mahdavi could meet any significant part of the judgment on the claim because neither SGS nor CAI has made a Part 20 claim against him. As far as the judgment for costs is concerned, however, I start from the position that he too should contribute his proportionate share, but on the limited evidence before me doubt whether he could meet any significant part of it. I think that the right course, therefore, is to disregard him for present purposes and direct that CAI pay SGS half of the amount it has paid Niru to satisfy the judgment for costs without prejudice to the rights of either of them to seek an appropriate contribution from Mr. Mahdavi if they consider it appropriate to do so.

For these reasons I have reached the conclusion that SGS is entitled to recover from CAI the whole of the sum it has paid in satisfaction of the judgment on the claim and half of the amount it has paid in satisfaction of the judgment for costs.