European Review of Private Law

Volume 20 (2012)

Volume 20 (2012) / Issue 4

Johann Andreas Dieckmann, 'The Province of Subrogation Determined: Some Corrections—A Functional Analysis of the Guarantor's Right to Derivative Recourse, Comprising a Critique of the Restitutionary Thesis' (2012) 20 European Review of Private Law, Issue 4, pp. 989–1043

Abstract

Abstract: The doctrine of subrogation is a creature of English equity jurisprudence. It permits a surety to obtain the creditor's rights (securities, claims, and remedies) against the principal debtor for recourse purposes. The guarantor derives his position vis-à-vis the principal from the creditor.

Why is subrogation granted? There are different answers. According to the traditional view in the English case law, the purpose of subrogation is that equity will correct a decision of the creditor who of his debtors to exact payment from. If the surety as the party liable secondarily is forced to pay, equity will allocate the creditor's rights against the party primarily liable to him. Derivative recourse is the technical means of correction. Subsequent correction of the result of the inequitable choice of the creditor is the function of subrogation. Lately, it has been argued that subrogation is a remedy directed against the unjust enrichment of the principal debtor gained at the guarantor's expense.

Derivative recourse is also known in civil law jurisdictions. A comparative survey shows a very peculiar phenomenon: The two prominent English explanations do not find an equivalent in the civil law, and the explanations in civil law jurisdictions do not find an equivalent in English law either. This discrepancy is good enough a reason to have a closer look at the doctrine of subrogation and its province.

The article critically discusses the different arguments advanced. As a result of the analytical and comparative discussion, the article determines the justification and the province of the guarantor's right to derivative recourse.

The article refutes the restitutionary thesis on subrogation. Its stress on the relationship between guarantor and principal debtor is incompatible with the fact that the case law sees the basis of subrogation in the suretyship relationship. The rights afforded to the surety by subrogation are all directed against the creditor. The creditor comes under an obligation to the guarantor. This is overlooked by the enrichment theorists. Several important details of the law of subrogation cannot be explained in terms of restitution (e.g., the full payment rule, the rule of discharge through loss of securities, and right to pay off and sue). A theory that does not include these rules is not capable of giving a proper qualification of derivative recourse. Only a functional analysis of subrogation renders determination of its province possible. Derivative recourse gives easier and more effective recourse to a guarantor, enabling him to get indemnification for his loss. It supports a contractual claim to reimbursement. Derivative recourse is based on equitable considerations, taking into account the interests of the involved persons (principal, creditor, and surety). By making judgments available, the efficacy of the legal system is supported. The facilitating of recourse is beneficial to the guarantor, without prejudicing the interests of the creditor. The guarantee is upheld as an effective personal security, by withholding the principal an incentive not to pay himself. Neither the principal nor his other creditors are affected. The subsidiarity of the guarantee is restored. Equity corrects the creditor's decision to burden the subsidiary debtor and thus orders the ranks of liability.

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ISSN: 0928-9801
ID: ERPL2012063