#6841 - Niru Battery Manufacturing Co. V. Milestone Trading Co. - Restitution of Unjust Enrichment BCL

Niru Battery Manufacturing Co. v. Milestone Trading Co.

Facts

These proceedings arise out of a contract for the sale by Milestone Trading Ltd. ("Milestone") to Niru of 10,000 metric tonnes of lead ingots made in February, 1998 which 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 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 Mr. Mahdavi.

In order to obtain the lead needed to perform its contract with Niru, Milestone, acting through Mr. Mahdavi, obtained financing from 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.

Inaccurate certification by SGS: 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 on to any form of transport. The Judge held that SGS was negligent in issuing the certificate and therefore liable to Niru in tort.

CAI Sold the Goods, and appropriated the mistaken payment: The documents, including the bill of lading and the inspection certificate, were presented to Bank Sepah under the letter of credit by CAI, which presented them as a principal. 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, after consulting Mr. Mahdavi but without telling Bank Sepah or Niru, 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 U.S.$5.8 m. 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. Needless to say (as the Judge put it) they were subsequently lost.

In the result no goods were delivered to Niru by Milestone, or by any other company under the Mahdavi umbrella. Niru was, however, out of pocket because, pursuant to its counter-indemnity, Bank Sepah had debited its account with the full amount of the payment. In short, Niru had been induced to part with the sum of U.S.$5.8 m. and received nothing in return other than the sum of U.S.$116,760 which was paid under a performance guarantee provided by Milestone under the contract.

The Judge 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.

Mr. Francis of CAI knew that the payment was mistaken: Mr. Francis did not know that a false bill of lading had been presented to Bank Sepah in order to obtain payment under the letter of credit but he knew that CAI had sold the warrants (and thus the lead) which formed the basis of the transaction and that the transaction could not therefore be completed. He therefore realised that Bank Sepah must have paid by reason of a mistake… In these circumstances, having realised that Bank Sepah had paid by mistake, to my mind, good faith required Mr. Francis to enquire of Bank Sepah before paying the money away in accordance with Mr. Mahdavi's instructions and the Judge was correct so to hold.

Holding

CAI was not acting in good faith in paying away the money

On the other hand, the Judge concluded that good faith required a person in Mr. Francis' position who realised that the money had been paid by mistake to make enquiries of Bank Sepah to ascertain the position and not to pay the money away in the meantime. I have reached the clear conclusion that he was correct so to hold.

In all these circumstances the Judge was in my opinion correct to hold that CAI did not act in good faith in paying the money away and that it would be inequitable or unconscionable to deny Bank Sepah a right to restitution by repayment of the monies paid under the letter of credit. I would dismiss CAI's appeal under this head.

Subrogation Claim

Argument: Having satisfied the judgment, SGS was entitled to be subrogated to Niru's rights against CAI (except in so far as the judgment related to costs) and was thus entitled to obtain a full indemnity in respect of the sum it had paid. SGS had been compelled by law to compensate Niru in full; by doing so it conferred a benefit on CAI by relieving it from any obligation to pay Niru; CAI was initially unjustly enriched at the expense of Niru and was now unjustly enriched at the expense of SGS; accordingly, SGS should be granted the remedy of subrogation in order to prevent that unjust enrichment.

Before considering these particular situations, it is appropriate to refer to what I agree with the Judge is the leading modern authority on the equitable remedy of subrogation, namely the Banque Financière case. In that case, as the Judge observed in paragraph 29 of his judgment, 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.

(1) Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and CAI satisfies the judgment; (2) Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and SGS pays the judgment debt in circumstances in which CAI still holds the money received from Bank Sepah; (3) Niru sues both SGS and CAI and obtains judgment against them both jointly and severally and SGS pays in circumstances in which CAI had paid money away and has no change of position defence (this case); and (4) Niru sues SGS but not CAI and obtains judgment against SGS which SGS satisfies.

It is common ground that in the first of the examples CAI would not be entitled to stand in Niru's shoes and sue SGS in order to recover the amount it had paid to Niru by exercising a right of subrogation. There would in those circumstances be no question of SGS being unjustly enriched by CAI's payment. Indeed, if CAI had paid back the money in the first place instead of paying it away on the instructions of Mr. Mahdavi, as it ought to have done and as it would have done if it had been acting in good faith, Niru would have suffered no loss and SGS would not have been liable to Niru.

In the second example, where CAI retains the money in circumstances in which it should have repaid it, but SGS discharges a joint and several liability with CAI by paying the whole judgment debt to Niru, I do not think that there can be any doubt but that SGS would be entitled to recover the whole of the amount that it had paid from CAI. Any other solution would leave CAI holding monies which, if acting in good faith, it would have repaid to Bank Sepah and thus to Niru.

Thus I see no distinction in principle...