By Sri Y.SRINIVASA RAO, Principal Senior Civil Judge, Tirupati, Andhra Pradesh. ——-
TABLE OF CONTENTS:—
- Introduction
- Subrogation- Meaning
- Right of Subrogation – Sec. 79 of the Marine Insurance Act, 1963
- Section 140 of Contract Act, 1872
- Section 92 of Transfer of Property Act.
- Classification of Subrogation
- Transfer of actionable claims U/sec.130 of Transfer of Property Act
- Principles relating to Subrogation
- Subrogation and assignment
- Conclusion
Introduction:— The term `subrogation’ in the context of insurance, has been defined in Black’s Law Dictionary thus : “The principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.” See. Economic Transport Organization v. Charan …, (2010) 4 SCC 114.
Subrogation— Meaning:— Black’s Law Dictionary also extracts two general definitions of `subrogation’. The first is from Dan B. Dobb’s Law of Contract (2nd Edn. – 4.3 at 404) which reads thus : “Subrogation simply means substitution of one person for another; that is, one person is allowed to stand in the shoes of another and assert that person’s rights against the defendant. Factually, the case arises because, for some justifiable reason, the subrogation plaintiff has paid a debt owed by the defendant.”
The second is from Laurence P. Simpson’s Handbook on Law of Suretyship (1950 Edn. Page 205) which reads thus : “Subrogation is equitable assignment. The right comes into existence when the surety becomes obligated, and this is important as affecting priorities, but such right of subrogation does not become a cause of action until the debt is duly paid. Subrogation entitles the surety to use any remedy against the principal which the creditor could have used, and in general to enjoy the benefit of any advantage that the creditor had, such as a mortgage, lien, power to confess judgment, to follow trust funds, to proceed against a third person who has promised either the principal or the creditor to pay the debt.”
The doctrine in the law of insurance whereby, as between insurer and insured, the insurer is entitled to the advantage of every right of the insured, connected with the insurance which was effected.
Right of Subrogation – Sec. 79 of the Marine Insurance Act, 1963:-
`Right of Subrogation’ is statutorily recognized and described in section 79 of the Marine Insurance Act, 1963 as follows:
(1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject- matter insured, the thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.
(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured and in respect of the subject matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss”.
Section 140 of Contract Act, 1872:—
Section 140 of Contract Act, 1872, deals with the principle of subrogation with reference to rights of a Surety/Guarantor. It reads :
“140. Rights of surety on payment or performance : Where a guaranteed debt has become due, or default of the principal – debtor to perform a guaranteed duty has been taken place, the surety, upon payment or performance of all that is liable for, is invested with all the rights which the creditor had against the principal – debtor.”
The concept of subrogation was explained in the following manner by Chancellor Boyd in National Fire Insurance Co. vs. McLaren – 1886 (12) OR 682 :
“The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In cases of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss. Being an equitable rights, it partakes of all the ordinary incidents of such rights, one of which is that in administering relief the Court will regard not so much the form as the substance of the transaction. The primary consideration is to see that the insured gets full compensation for the property destroyed and the expenses incurred inmaking good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company.”
In Banque Financiere de la Cite vs. Parc (Battersea) Ltd. [1999 (1) A.C.221], the House of Lords explained the difference between subrogations arising from express or implied agreement of the parties:
“….there was no dispute that the doctrine of subrogation in insurance rests upon the common intention of the parties and gives effect to the principle of indemnity embodied in the contract. Furthermore, your Lordships drew attention to the fact that it is customary for the assured, on payment of the loss, to provide the insurer with a letter of subrogation, being no more nor less than an express assignment of his rights of recovery against any third party. Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other part of the law of restitution.”
Section 92 of the Transfer of Property Act:—
Section 92 of the Transfer of Property Actconfers a right of subrogation on the redeemer of a mortgage under certain circumstances…, See. Alliance Assurance Co., Ltd. v. Union of …, 1957 SCC OnLine Cal 150. In Deonarayan Prasad Bhadani vs Bank Of Baroda Ltd. : (1956) 58 BOMLR 1056, 1957 27 CompCas 223 Bom, it was held that the law relating to subrogation is to be found in section 92 of the Transfer of Property Act. Paragraph 3 of that section is as under :
“A person who has advanced to a mortgagor money with which tthe mortgage has been redeemed shall be subrogated to the rights of the mortgagee whose mortgage has been redeemed, if the mortgagor has by a registered instrument agreed that such person shall be so subrogated,”
Our law of subrogation enacted in section 92 quoted above requires a loan by a person to a mortgagor and an agreement in writing and registered to the effect that the lender shall be subrogated to the rights of the mortgagee. There must be a loan and there must be an agreement to subrogate. This presupposes that on the part of the mortgagor there must be the capacity to borrow and the capacity to enter into the agreement. But if the transaction itself is ultra vires, no debt is created and the loan is entirely void. It is extremely difficult to see how in such a case the quasi-lender can claim to exercise the rights of the mortgagee by enforcement of the security created in favour of the mortgagee. If permitted that would in some cases have the effect of placing the quasi-lender in a better position than he would have been if the transaction were valid. The learned Solicitor-General did not seriously attempt to support the bank’s alternative case sought to be founded on the doctrine of subrogation.
Classification of Subrogation:—
The Supreme Court in Economic Transport Organisation … vs M/S Charan Spinning Mills (P) (Supra), classified subrogations under three broad categories:
(i) subrogation by equitable assignment;
(ii) subrogation by contract; and
(iii) subrogation-cum- assignment.
In the first category, the subrogation is not evidenced by any document, but is based on the insurance policy and the receipt issued by the assured acknowledging the full settlement of the claim relating to the loss. Where the insurer has reimbursed the entire loss incurred by the assured, it can sue in the name of the assured for the amount paid by it to the assured. But where the insurer has reimbursed only a part of the loss, in settling the insurance claim, the insurer has to wait for the assured to sue and recover compensation from the wrongdoer; and when the assured recovers compensation, the assured is entitled to first appropriate the same towards the balance of his loss (which was not received from the insurer) so that he gets full reimbursement of his loss and the cost, if any, incurred by him for such recovery. The insurer will be entitled only to whatever balance remaining, for reimbursement of what it paid to the assured. 15.2) In the second category, the subrogation is evidenced by an instrument. To avoid any dispute about the right to claim reimbursement, or to settle the priority of inter-se claims or to confirm the quantum of reimbursement in pursuance of the subrogation, and to ensure co-operation by the assured in suing the wrongdoer, the insurer usually obtains a letter of subrogation in writing, specifying its rights vis-`-vis the assured. The letter of subrogation is a contractual arrangement which crystallizes the rights of the insurer vis-`-vis the assignee. On execution of a letter of subrogation, the insurer becomes entitled to recover in terms of it, a sum not exceeding what was paid by it under the contract of insurance by suing in the name of the assured. Even where the insurer had settled only a part of the loss incurred by the assured, on recovery of the claim from the wrongdoer, the insurer may, if the letter of subrogation so authorizes, first appropriate what it had paid to the assured and pay only the balance, if any, to the assured.
In the second category, the subrogation is evidenced by an instrument. To avoid any dispute about the right to claim reimbursement, or to settle the priority of inter-se claims or to confirm the quantum of reimbursement in pursuance of the subrogation, and to ensure co-operation by the assured in suing the wrongdoer, the insurer usually obtains a letter of subrogation in writing, specifying its rights vis-`-vis the assured. The letter of subrogation is a contractual arrangement which crystallizes the rights of the insurer vis-`-vis the assignee. On execution of a letter of subrogation, the insurer becomes entitled to recover in terms of it, a sum not exceeding what was paid by it under the contract of insurance by suing in the name of the assured. Even where the insurer had settled only a part of the loss incurred by the assured, on recovery of the claim from the wrongdoer, the insurer may, if the letter of subrogation so authorizes, first appropriate what it had paid to the assured and pay only the balance, if any, to the assured.
The third category is where the assured executes a letter of subrogation-cum-assignment enabling the insurer retain the entire amount recovered (even if it is more thanwhat was paid to the assured) and giving an option to sue in the name of the assured or to sue in its own name. In all three types of subrogation, the insurer can sue the wrongdoer in the name of the assured. This means that the insurer requests the assured to file the suit/complaint and has the option of joining as co-plaintiff. Alternatively the insurer can obtain a special power of Attorney from the assured and then to sue the wrongdoer in the name of the assured as his attorney.
The assured has no right to deny the equitable right of subrogation of the insurer in accordance with law, even whether there is no writing to support it. But the assured whose claim is settled by the insurer, only in respect of a part of the loss may insist that when compensation is recovered from the wrongdoer he will first appropriate the same, to recover the balance of his loss. The assured can also refuse to execute a subrogation-cum-assignment which has the effect of taking away his right to receive the balance of the loss. But once a subrogation is reduced to writing, the rights inter-se between the assured and insurer will be regulated by the terms agreed, which is a matter of negotiation between the assured and insurer.
If a letter of subrogation containing terms of assignment is to be treated only as an assignment by ignoring the subrogation, there may be the danger of document itself becoming invalid and unenforceable, having regard to the bar contained in section 6 of the Transfer of Property Act, 1882 (`TP Act‘ for short). Section 6 of Transport of Property Act, 1882, provides that property of any kind may be transferred except as otherwise provided by that Act or by any other law for the time being in force. Clause (e) of the said section provides that mere right to sue cannot be transferred.
Transfer of actionable claims U/sec.130 of Transfer of Property Act:—
Section 130 provides the manner of transfer of actionable claims. Section 3 defines an `actionable claim’ as : (i) any debt (other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property) or (ii) any beneficial interest is movable property not in the possession, either actual or constructive of the claimant, which the civil courts recognizes as affording grounds for relief. A `debt’ refers to an ascertained sum due from one person to another, as contrasted from unliquidated damages and claims for compensation which requires ascertainment/assessment by a Court or Tribunal before it becomes due and payable. A transfer or assignment of a mere right to sue for compensation will be invalid having regard to section 6 (e) of the TP Act. But when a letter of subrogation-cum-assignment is executed, the assignment is interlinked with subrogation, and not being an assignment of a mere right to sue, will be valid and enforceable.
Principles relating to Subrogation:—
The principles relating to subrogation can therefore be summarized thus :
(i) Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire loss. When there is an equitable subrogation in favour of the insurer, the insurer is allowed to stand in the shoes of the assured and enforce the rights of the assured against the wrong- doer.
(ii) Subrogation does not terminate nor puts an end to the right of the assured to sue the wrong-doer and recover the damages for the loss. Subrogation only entitles the insurer to receive back the amount paid to the assured, in terms of the principles of subrogation.
(iii) Where the assured executes a Letter of Subrogation, reducing the terms of subrogation, the rights of the insurer vis-`-vis the assured will be governed by the terms of the Letter of Subrogation.
(iv) A subrogation enables the insurer to exercise the rights of the assured against third parties in the name of the assured. Consequently, any plaint, complaint or petition for recovery of compensation can be filed in the name of the assured, or by the assured represented by the insurer as subrogee-cum-attorney, or by the assured and the insurer as co-plaintiffs or co-complainants.
(v) Where the assured executed a subrogation-cum- assignment in favour of the insurer (as contrasted from a subrogation), the assured is left with no right or interest. Consequently, the assured will no longer be entitled to sue the wrongdoer on its own account and for its own benefit. But as the instrument is a subrogation- cum-assignment, and not a mere assignment, the insurer has the choice of suing in its own name, or in the name of the assured, if the instrument so provides. The insured becomes entitled to the entire amount recovered from the wrong- doer, that is, not only the amount that the insured had paid to the assured, but also any amount received in excess of what was paid by it to the assured, if the instrument so provides.
Subrogation and assignment — Subrogation does not terminate nor put an end to the right of the assured to sue the wrongdoer and recover the damages for the loss. Subrogation only entitles the insurer to receive back the amount paid to the assured, in terms of the principles of subrogation. When a letter of subrogation-cum-assignment is executed, the assignment is interlinked with subrogation and not being an assignment of a mere right to sue, will be valid and enforceable. If a letter of subrogation containing terms of assignment is to be treated only as an assignment by ignoring the subrogation, there may be the danger of the document itself becoming invalid and unenforceable, having regard to the bar contained in Section 6 of the Transfer of Property Act, 1882. An “assignment” refers to a transfer of a right by an instrument for consideration. When there is an absolute assignment, the assignor is left with no title or interest in the property or right, which is the subject-matter of the assignment, Economic Transport Organisation v. Charan Spg. Mills (P) Ltd., (2010) 2 SCC (Civ) 42.
The difference between subrogation and assignment was highlighted by the Court of Appeals thus in James Nelson &Sons Ltd. Vs. Nelson Line (Liverpool) Ltd. (No.1) – 1906 (2) KB 217 :
“The way in which the underwriters come in is only by way of subrogation to the rights of the assured. Their right is not that of assignees of the cause of action; ….. Therefore, they could only be entitled by way of subrogation to the plaintiffs’ rights. What is the nature of their right by way of subrogation? It is the right to stand in the shoes of the persons whom they have indemnified, and to put in force the right of action of those persons; but it remains the plaintiffs’ right of action, although the underwriters are entitled to deduct from any sum recovered the amount to which they have indemnified the plaintiffs, and although they may have provided the means of conducting the action to a termination. It is not a case in which one person is using the name of another merely as a nominal plaintiff for the purpose of bringing an action in which he alone is really interested; for the plaintiffs here have real and substantial interest of their own in the action.”
The difference between assignment and subrogation was also explained by the Madras High Court in Vasudeva Mudaliar vs. Caledonian Insurance Co. – [AIR 1965 Mad. 159] thus :
“In other words arising out of the nature of a contract of indemnity, the insurer, when he has indemnified the assured, is subrogated to his rights and remedies against third parties who have occasioned the loss. The right of the insurer to subrogation or to get into the shoes of the assured as it were, need not necessarily flow from the terms of the motor insurance policy, but is inherent in and springs from the principles of indemnity.
Where, therefore, an insurer is subrogated to the rights and remedies of the assured, the former is to be more or less in the same position as the assured in respect of third parties and his claims against them founded on tortuous liability in cases of motor accidents. But it should be noted that the fact that an insurer is subrogated to the rights and remedies of the assured of the assured does not ipso jure enable him to sue third parties in his own name. It will only entitle the insurer to sue in the name of the assured, it being an obligation of the assured to lend his name and assistance to such an action. By subrogation, the insurer gets no better rights or no different remedies than the assured himself. Subrogation and its effect are therefore, not to be mixed up with those of a transfer or any assignment by the assured of his rights and remedies to the insurer. An assignment or a transfer implies something more than subrogation, and vests in the insurer the assured’s interest, rights and remedies in respect of the subject matter and substance of the insurance. In such a case, therefore, the insurer, by virtue of the transfer or assignment in his favour, will be in a position to maintain a suit in his own name against third parties.”
Conclusion:— The law relating to subrogation to securities in case of ultra vires transactions of borrowing may be taken as laid down by the Court of Appeal in England in Wrexham, Mold and Connah’s Quay Railway, In re 1. It was held in that case that where a company borrows money ultra vires, the lender, so far as the money is applied in the discharge of legal debts and liabilities of the company, is entitled to have the loan treated as valid, but he is not subrogated to any securities or priorities of the creditors who are paid by the means of his moneys. In that case a bank having advanced moneys for payment of interest on debentures issued by the railway company claimed priority as the assignee of the debenture holders, by invoking the doctrine of subrogation. In rejecting this claim RIGBY L J. stated (page 455) : “I think that the great preponderance of authority shews that the doctrine of subrogation has very little, if anything at all, to do with the equity really enforced in the cases, and that there is, at any rate, no authority for any subrogation to the securities or priorities of the creditors paid off. Dealing with this case independently of the authorities, I see no reason why the parties to an illegal lending should have anything more than bare justice dealt out to them; and this they get if they are allowed, as they have hitherto been allowed, to have that portion of the advance actually expended in payment of debts of the company treated as a valid advance. If the advance had been within the borrowing powers of the company, the bank could have had no right to the securities or priorities of the creditors that a fiction should be invented for the purpose of making an invalid loan more valuable than a valid one.”
Section 92 of T.P.Act requires a loan by a person to a mortgagor and an agreement in writing and registered to the effect that the lender shall be subrogated to the rights of the mortgagee. There must be a loan and there must be an agreement to subrogate. This presupposes that on the part of the mortgagor there must be the capacity to borrow and the capacity to enter into the agreement. But if the transaction itself is ultra vires, no debt is created and the loan is entirely void. It is extremely difficult to see how in such a case the quasi-lender can claim to exercise the rights of the mortgagee by enforcement of the security created in favour of the mortgagee. If permitted that would in some cases have the effect of placing the quasi-lender in a better position than he would have been if the transaction were valid. The learned Solicitor-General did not seriously attempt to support the bank’s alternative case sought to be founded on the doctrine of subrogation. Under sec.140 of Contract Act, where a guaranteed debt has become due, or default of the principal – debtor to perform a guaranteed duty has been taken place, the surety, upon payment or performance of all that is liable for, is invested with all the rights which the creditor had against the principal – debtor.”
As is stated above, substitution of one person for another; that is, one person is allowed to stand in the shoes of another and assert that person’s rights against the defendant. Factually, the case arises because, for some justifiable reason, the subrogation plaintiff has paid a debt owed by the defendant.