Doctrine of Subrogation: Meaning, Case laws and Provisions

Subrogation can be defined as a legal doctrine in which one person takes away the rights of a creditor against his debtor. In India, the right of Subrogation has been discussed under section 140 and 141 of the Indian Contract Act, 1872.

Definition of Doctrine of Subrogation

Subrogation can be defined as a legal doctrine in which one person takes away the rights of a creditor against his or her debtor. The right of subrogation usually arises in 2 conditions that is, either it will arise automatically because of matter of fact or it will arise due to the law of contract. Most often the doctrine of subrogation arises in contract which is related to insurance. Subrogation as a matter of law is a wider part of law and is usually denoted as the unjust enrichment.[1]

Importance

Doctrine of subrogation is most commonly seen in the contracts of insurances and sureties. So in each case, the main essence is that, when a particular person makes a payment on an obligation then according to the law it is the prime responsibility of the other party, the person who is making the payment is subrogated to the claims of that particular person to whom they made the payment with respect to claims or remedies which are exercisable against the primarily responsible party.[2] The term subrogation has been derived from the Latin word sub (under) and rogare (to ask).

In the case of, Morgan v Seymore, it was held that a surety who has performed the obligations of the principal which are the subject of his guarantee is entitled to stand in the shoes of the creditor and to enjoy all the rights that the creditor had against the principal. Hence, this is an equitable right. It is in fact a right that arises out of the relationship between of surety and creditor itself.

The doctrine of subrogation confers upon the insurer the right to benefit of such rights against the third parties which is regard to the loss and which has been indemnified. Thus, the insurer is entitled to exercise any rights so as to recover the compensation for the loss, but one thing has to be remembered that, it must be done in the name if the assured. So, under the Law of Contracts, the right of subrogation arises when a contract puts an obligation on the person who breaches the contract to compensate to the other person who has been aggrieved by the breach of contract.

In India, the right of Subrogation has been discussed under section 140 and 141 of the Indian Contract Act, 1872. In the case of, State Bank of India v Fravina Dyes[3], High court of Bombay held that, the guarantor by invoking the doctrine of subrogation can apply for a temporary injunction against the debtor if he apprehends that the debtor threatens or is about to remove or dispose of his property with intent to defraud the creditor.

Whereas, Section 141 of The Indian Contract, 1872 talks about the surety’s right to benefit out of creditor’s security. In the case of State of M.P v Kaluram[4], Supreme Court held that, the term ‘security’ in Section 141 of the Indian Contracts, 1872 is not used in any technical sense, in fact it includes all the rights which the creditor had against the property of the principal at the date of contract.

Conclusion

In all, while considering the applicability of the equitable principles of subrogation, it is critical to look carefully at the manner in which the insured party is reimbursed for the loss suffered. The existence or otherwise of rights of subrogation may significantly affect the profile of a given exposure, particularly in relation to large and complex risks involving multiple insured. The party taking control of proceedings after a loss has occurred has to take care in respect of any settlement and to ensure that it complies with its duty of good faith. The settlement will need to be consistent with legal advice so as to the merits of the overall claim.

Where a subrogated claim includes losses, which are not covered under the policy, there remains some uncertainty as to who is entitled to control the proceedings and is in how the proceeds of any recovery should be distributed between them. The rights provided by the law states that, all the securities to the surety so that they can get their claim in full amount.

[1] The doctrine of substitution, http://www.allens.com.au
[2] Subrogation,scholar.valpo.edu/
[3] AIR 1989 Bombay 95
[4] AIR 1967 SC 1105

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Author Details: Rakshandha Darak (2nd year student of B.A. LL.B. (Hons.) at Alliance University, Chandapura)