by Sonja Meier
1. Subject and purpose; terminology
If a creditor receives payment not from the debtor, but from a third party, the question of whether the debtor is discharged is answered differently in the various European legal systems. In cases where the creditor is no longer able to claim performance from the debtor because of the third party’s payment, the question arises whether the third party can take recourse against the debtor. In principle, there are two types of recourse. First, the third party may have his own personal right of recourse against the debtor. Second, the third party may avail himself of the creditor’s claim against the debtor. The second approach is called ‘subrogation’ in English and French legal terminology. Other legal systems, in particular German law, distinguish between a right of the third party against the creditor for assignment of his claims (beneficium cedendarum actionum), and a transfer of the creditor’s claim to the third party by law (cessio legis). The term subrogation will hereafter be used in a functional sense, encompassing all these techniques.
Recourse by way of subrogation differs from an independent right of recourse in various aspects. The third party can take advantage of all the privileges and securities that the creditor’s claim entails. In addition, he can use any judgment against the debtor that the creditor had previously obtained. On the other hand, the debtor can employ all defences he had against the creditor’s claim against the claim of recourse now brought against him.
If the third party does not already have an independent claim for recourse, subrogation serves as a means to make such recourse possible. The existence and terms of recourse are then dependent on the existence and the terms of the creditor’s claim. The position of the debtor is similar to the position of a debtor after an assignment. In other cases, the third party will have an independent right of recourse against the debtor anyway (eg if he, in agreement with the debtor, paid as surety, or where the third party and the debtor are solidary debtors); subrogation then serves to strengthen that right. In these cases the third party can choose whether he wants to rely on the creditor’s claim (and the securities associated with it), or on his own right of recourse. However, recourse by subrogation is usually limited by the extent of the third party’s right of recourse: if the surety has no recourse because he acted with the intention to make a gift, he cannot benefit from subrogation either.
2. Scope of application
Subrogation often takes place where the third party pays the creditor in order to fulfil an obligation he himself owed to that creditor. A surety paying the creditor is subrogated into the creditor’s rights against the main debtor and against the co-sureties (suretyship). In most countries, subrogation is also recognized for the recourse between solidary debtors (solidary obligations). Other common areas of application include the law of insurance (eg the indemnity insurer’s recourse against the wrongdoer, indemnity insurance), the law of bills of exchange and the recourse between maintenance debtors of different ranks (maintenance). Furthermore, there are cases where an injured person has both a delictual claim against the wrongdoer and a non-delictual compensation claim against a third party, eg for social security benefits or for a payment of wages during illness. The wrongdoer and the compensation debtor are usually not regarded as solidary debtors. Instead, the compensation debtor paying to the injured person is subrogated into his rights against the wrongdoer.
If a third party pays another’s debt although he was not obliged to do so, subrogation against the debtor is usually granted if the third party acted in furtherance of his own valid interest. This is the case where he had provided security for the debt (security rights in movable assets; real property security), where he is at risk of losing an interest in the debtor’s property in respect of which the creditor has initiated execution proceedings, or where he is a security holder of lower priority paying off a higher priority security holder. However, where there is no such interest, the third party may have a personal right of recourse (often through the law of unjustified enrichment), but not necessarily a right to subrogation. If he pays another’s debt in the interests of the creditor, he can ask the creditor for an ordinary assignment. In some legal systems, however, assignment requires the consent of the debtor; here, a subrogation (whether through a contract with the creditor or by law) is allowed instead. If the third party pays in the interests of the debtor and the creditor refuses to assign his claim, only a minority of legal systems are willing to assist the third party by allowing him subrogation (by law or by means of a contract with the debtor).
3. Different techniques
Under Roman law, when paying the creditor, sureties and, in some cases, solidary debtors had a right to demand that the creditor surrender his action against the (other) debtor(s) (beneficium cedendarum actionum). As Roman law did not recognize an assignment of claims, the creditor would authorize the third party to sue the debtor in his own name (as a procurator in rem suam) and to keep whatever he received. A similar technique has been used in English law, which also originally did not recognize the assignment of rights. The rules of subrogation were developed from the 17th century onwards by the Court of Chancery (ie by judges usually trained in Roman law, equity) in favour of paying sureties. The surety has both the right to have the creditor’s (usually independent) securities transferred to him and also the right to bring the creditor’s claim (which nominally remains with the latter) against the debtor in the creditor’s name. Under the ius commune, the beneficium cedendarum actionum was increasingly regarded as a right of the third party against the creditor for assignment of his claim against the debtor. The requirements for the declaration of assignment were relaxed over time. First, the requirement for the creditor to make an explicit declaration of assignment was dropped; this resulted in the claim being transferred when the third party demanded its assignment. The codifications eventually also dropped the requirement that the third party demand the transfer, thus implementing an automatic transfer by law of the creditor’s claim.
Two regulatory techniques can be distinguished in this context. Under the subrogation in French law, or the Eintrittsrecht of the Prussian and Austrian codifications, the third party immediately takes over the creditor’s position in toto. This subrogation can be created through contract or by law and is kept strictly separate from the contractual assignment of claims. In contrast, the German Bürgerliches Gesetzbuch (BGB) usually employs a cessio legis, which is a kind of statutory assignment for which the rules on contractual assignment apply by analogy. The differences in practice seem to be minimal. Subrogation by contract with the creditor is often used to circumvent particular requirements for an assignment (such as the debtor’s consent), whereas under German law, which does not have such requirements, the same effect can be achieved through ordinary assignment. The features which differentiate subrogation from assignment under French law (ie transfer of rights only allowed to the extent of the payment by the third party, no requirement of the debtor’s consent, no obligation of the creditor to give warranties for the claim and the creditor’s priority in case of partial performance) are also applicable to a cessio legis under German law, as long as it occurs for the purposes of recourse.
The question as to which particular rights are automatically transferred by law and which have to be transferred through a special transaction between the creditor and the third party is answered differently throughout Europe. Under English law, the third party merely seems to have a right against the creditor for a transfer of the dependent and independent securities. Even the right to sue the debtor himself, if necessary, has to be wrested from the creditor; the requirement that the third party then bring the claim in the creditor’s name leads to procedural problems. Under the German model, the claim and its dependent (accessory) securities are automatically transferred to the third party. This solution was adopted by the Principles of European Contract Law (PECL) in relation to recourse between solidary debtors. However, the automatic transfer does not apply to independent securities, which have to be transferred separately by the creditor. The third party wanting to use the independent securities may therefore have to sue the creditor in order to achieve the transfer. It is questionable whether this requirement can be justified by the fiduciary nature of independent securities. In contrast, the model of a subrogation in toto, putting the third party into the shoes of the creditor, entails the automatic transfer even of independent securities. This solution has been chosen by the PEL Personal Security and the Draft Common Frame of Reference (DCFR) in respect of the recourse of the surety and between solidary debtors.
4. Problems of construction
All cases of subrogation face the problem that the third party’s payment may not only have discharged the debtor, but also extinguished the creditor’s claim against the debtor, so there seems to be no remaining claim that can be transferred to the third party. In some types of subrogation cases, such as the recourse of an indemnity insurer against the wrongdoer, it is usually assumed that the third party’s payment merely discharged his own obligation towards the creditor, whereas the creditor’s claim against the debtor remains unaffected by the payment and can therefore be transferred to the third party. Roman law employed this construction in respect of the recourse of a mandator (who had asked the creditor to give credit to the debtor, thereby creating a contract of mandate that obliged him to repay the creditor if the debtor did not do so) against the debtor. Under English law, this is sometimes referred to as ‘simple subrogation’.
However, in other types of cases, the question of whether there is still a claim against the debtor that can be transferred to the third party has caused problems. These include not only cases in which a third party pays directly on another’s debt (thereby seemingly extinguishing the debt), but also payments by sureties and solidary debtors. It is true that the surety or solidary debtor may be regarded as merely paying on his own obligation and not on the obligation of the principal debtor or his fellow solidary debtor. But the general rule under Roman law and the ius commune was that a discharge by performance of one of these obligations also led to the extinction of the other concurring obligations. In order to make subrogation possible, a legal fiction had to be introduced, according to which the third party’s payment was not a performance (on his own or on the other debtor’s obligation), but a purchase payment for the assignment of the creditor’s claims. This required that the third party had at least to request the assignment from the creditor before paying, a requirement that was eventually abolished by the codifications. These were exactly the same problems that made the common law judiciary exclude the surety’s subrogation in respect of dependent securities for a time, until the legislature intervened in 1856 and, regardless of any questions of construction, granted a right to the transfer of any type of security.
The problem of how a claim that seems to have been discharged by the third party can nevertheless be transferred to the third party is still the subject of some debate. In France, the accepted explanation is that subrogation is a special institution between performance and assignment, ie, a special type of performance that does not cause the creditor’s claim to expire, but transfers it to the performing party. In England, there is the notion of a ‘reviving subrogation’: the creditor’s claim, which has actually expired, is brought back to life for the sake of recourse. Under German law, subrogation is simply an assignment by law. The third party’s performance does not cause the creditor’s claim against the debtor to expire. Sureties and solidary debtors are regarded as paying merely on their own obligation. If a third party had no obligation vis-à-vis the creditor, he is regarded as paying not on the debtor’s obligation, but in respect of a security provided by him or, like under the ius commune, in order to take over the claim.
However, subrogation is not simply an assignment by law. If the surety’s or solidary debtor’s performance does not affect the concurrent liability, why does he usually have his independent (eg contractual) right of recourse against the debtor? Why does the creditor’s claim against the debtor, if the surety has no right of recourse, not remain with the creditor, but expire instead? After payment by the third party, the claim against the debtor is no longer an ordinary, freely assignable claim, but is only kept alive for the sake of recourse. Furthermore, even German legal doctrine accepts that the rules of assignment are only partially applicable to a subrogation. Whereas, for example, an agreement between debtor and creditor can exclude a contractual assignment, it cannot necessarily exclude a cessio legis. An institution called subrogation, kept strictly separate from assignment, might be better able to explain the rules of recourse against a debtor via the creditor’s claim than the idea of an ordinary assignment-like transfer of a claim.
5. Plurality of subrogees
The basic idea of subrogation is that the third party acquires the creditor’s claim to the extent of his own payment to the creditor. This, however, can cause problems in cases of a plurality of debtors. If the third party is a solidary debtor or a co-surety paying the full amount to the creditor, it would mean that he is able to demand full payment from any of his fellow debtors with the help of the creditor’s claim, which may be inappropriate. Under the ius commune, there was much debate as to whether an independent co-surety paying the creditor acquired the creditor’s claims against the other co-sureties in total or in part, and how the latter solution could be explained. Nowadays, there are statutory rules providing for only partial subrogation in cases concerning co-sureties and solidary debtors. Apart from that, statutory rules for the apportionment between different security providers for the same debt are mostly lacking. A full subrogation of a paying security provider into the creditor’s rights against all other security providers might lead to an undue advantage for the first payer. Another solution is to prefer the provider of personal security by subrogating him into the creditor’s rights against providers of real security, but not vice versa. A third solution, increasingly employed and also used by the DCFR, is to provide for an equal apportionment by partial subrogation, following the model of the apportionment between solidary debtors.
6. Nemo subrogat contra se
Under Roman law and the ius commune, the beneficium cedendarum actionum of the paying surety or solidary debtor was based on the exceptio doli: the creditor was considered to be in breach of good faith if he refused to assign a claim that was no longer of use to him as he had already been satisfied. This meant that the creditor could refuse the assignment if he had good reasons to do so, eg because he still needed the action or the securities. This was the case when he had only been partially satisfied by the third party or when a pledge was involved that secured a further obligation not yet performed. English law protects the creditor by the ‘full payment rule’, according to which subrogation requires complete performance of the creditor’s claim. On the continent, and in the PECL and DCFR, a different rule can be found: subrogation does not require full payment but cannot work to the detriment of the creditor. Therefore, where the creditor is only satisfied in part, the third party acquires the claim and its securities in part, but the creditor’s remaining securities enjoy precedence over the transferred securities in case of execution. There is no agreement on whether the partly-satisfied creditor enjoys precedence in cases not concerning the ranking of securities, eg whether his position in insolvency proceedings is diminished by the third party’s participation. Some countries explicitly reject the creditor’s precedence and provide for equal treatment with the subrogated third party. Under private and social insurance law, questions of ranking between the partly-indemnified insured and the subrogated insurer (should the claim against the wrongdoer not cover the damage) are often regulated by statute.
7. Unification projects
Model rules on subrogation can be found in Art 10:106(2) PECL, concerning solidary debtors, in Arts 1:108-109, 2:113 PEL Personal Security concerning recourse of sureties, in Art 10:101 PEICL (Principles of European Insurance Contract Law) concerning indemnity insurance, as well as in Art 79 of the Code Européen des Contrats (Avant-projet), concerning performances by third parties. The rules on sureties’ and solidary debtors’ rights of subrogation have been, with some modifications, adopted by the DCFR (Arts III.-4:107(2), IV.G.-1:106-107, IV.G.-2:113). Conflict of law rules are contained in Art 15 of the Rome I Regulation (Reg 593/2008) and, for non-contractual obligations, in Art 19 of the Rome II Regulation (Reg 864/2007).
John Fleming, ‘Collateral Benefits’ (1970) in IECL XI (1986) ch 11; Uwe Hüffer, Der Rückgriff gegen den deliktisch handelnden Schädiger bei Entschädigungsleistungen Dritter (1970) 19 ff, 44 ff; Daniel Friedmann and Nili Cohen, ‘Payment of Another’s Debt’ in IECL X (1991) ch 10; Charles Mitchell, The Law of Subrogation (1994); Peter Schlechtriem, Restitution und Bereicherungsausgleich in Europa. Eine rechtsvergleichende Darstellung, vol II (2001) ch 7, nn 153 ff; Johann Andreas Dieckmann, Der Derivativregreß des Bürgen gegen den Hauptschuldner im englischen und deutschen Recht (2003); Johann Andreas Dieckmann, ‘Scots Influence on English Law—The Guarantor’s Right to Derivative Recourse (Subrogation)’ (2004) 8 Edinburgh Law Review 329; Jens Kuhlmann, Rückgriffsgrundlagen bei Gesamtschuld, Bürgschaft und Schadensversicherung in Deutschland, England und Schweden (2005) 287 ff; Study Group on a European Civil Code and Ulrich Drobnig (eds), Principles of European Law—Personal Security (PEL Pers Sec) (2007) 302 ff.