Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd

• Jurisdiction: Australia Federal only
• Court: High Court (Australia)
• Judge: French CJ.,Hayne,Crennan,Kiefel,Bell,Gageler,Keane JJ.,Gageler J.
• Judgment Date: 07 May 2014
• Neutral Citation: [2014] HCA 14
• Docket Number: S163/2013
• Date: 07 May 2014

[2014] HCA 14

HIGH COURT OF AUSTRALIA

French CJ, Hayne, Crennan, Kiefel, Bell, Gageler and Keane JJ.

S163/2013

Australian Financial Services and Leasing Pty Limited

Appellant

and

Hills Industries Limited & Anor

Respondent

Representation

C J Birch SC with M P Cleary and R L Gall for the appellant (instructed by Hilliard & Berry Solicitors)

I M Jackman SC with T M Thawley SC for the first respondent (instructed by King &Wood Mallesons)

B W Walker SC with L Gor for the second respondent (instructed by HWL Ebsworth Lawyers)

Australian Financial Services and Leasing Pty Limited v Hills Industries Limited

Restitution — Payments made under mistake of fact — Defence of change of position — Where appellant made mistaken payments to respondents as result of fraud committed by third party — Where respondents applied payments to discharge third party's debts, ceased pursuing recovery of debts and continued to trade with third party — Whether retention of monies inequitable in all the circumstances.

Words and phrases — ‘change of position’, ‘detriment’, ‘detrimental reliance’, ‘disenrichment’, ‘unjust enrichment’.

ORDER

Matter No M3/2013

Appeal dismissed with costs.

French CJ.

Introduction

1 When money is paid under a mistake of fact, the person paying the money may recover it from the recipient in a common law action for money had and received. Recovery depends upon whether it would be inequitable for the recipient to retain the benefit. Retention may not be inequitable if the recipient has changed its position on the faith of the receipt and thereby suffered a detriment. The circumstances under which the ‘change of position’ defence may be invoked as a complete defence are in question in this appeal from the Court of Appeal of the Supreme Court of New South Wales.

2 The facts of the case 1, the reasoning of the primary judge 2, that of the Court of Appeal 3, and the arguments of the parties 4, are set out in the joint reasons 5. Two suppliers of equipment, Hills and Bosch, the respondents to the appeal, received payment from the appellant, AFSL, a finance company, which they had been led to expect, by a common commercial client, Mr Skarzynski, was in reduction of the indebtedness to them of companies controlled by that client (referred to collectively as ‘TCP’). The payments, having been received, were treated by the suppliers as reducing that indebtedness. The first respondent, Hills, withdrew a threat of legal action and recommenced trading with TCP. The second respondent, Bosch, agreed to file consent orders setting aside default judgments supporting garnishee orders against TCP and TCP's directors, and resumed trading. However, the payments had been made by AFSL under a mistake of fact induced by Mr Skarzynski's fraud. He had supplied AFSL with forged invoices, apparently issued by Hills and Bosch, for goods to be acquired by AFSL from them and rented to TCP. Rental agreements were entered into by AFSL on the basis of those invoices.

3 The fraud having been discovered and TCP being insolvent, AFSL brought an action against the suppliers in the Supreme Court of New South Wales for recovery of the money it had paid to them. It obtained judgment

against Hills at first instance, but its claim against Bosch was dismissed 6. On appeal by AFSL and by Hills, the Court of Appeal held that AFSL could recover from neither supplier 7. AFSL now appeals by special leave to this Court 8

4 The appeal should be dismissed. The respondents suffered an irreversible detriment when they decided, on the faith of the receipt of the payments made to them by the appellant, not to pursue their legal remedies against their fraudulent client and TCP. Change of position may apply as a pro tanto defence where the detriment can readily be quantified. This is not such a case. Contrary to the submissions of the appellant, change of position applies in this case as a complete defence to the appellant's claim.

The change of position defence

5 In Moses v Macferlan 9, Lord Mansfield pointed to the simplicity of the common law action for money had and received from the perspective of the plaintiff, who could declare generally ‘that the money was received to his use’ 10. The defendant could defend himself ‘by every thing which shews that the plaintiff, ex æquo & bono, is not intitled to the whole of his demand, or to any part of it.’ 11 In the latter proposition lay the seeds of the general change of position defence, although they were not to germinate for more than 230 years.

6 The class of cases in which an action for money had and received would lie was not closed in Moses v Macferlan and the decisions in the decades that followed, albeit it did not extend to recovery of money paid under mistake of

law 12. The remedy was ‘available in any case in which money had been paid in circumstances where it was unjust for the defendant to retain it’ 13. The grounds upon which a defendant might contend that retention of the benefit would not be ‘unjust’ were left open. Money ‘payable in point of honor and honesty, although it could not have been recovered … [by the plaintiff] by any course of law’ would not be recoverable 14. Examples in that category included payment of a debt outside the Statute of Limitations, a debt contracted in infancy, principal and legal interest due on a usurious contract, and money fairly lost at gambling 15. Lord Mansfield declared in Sadler v Evans 16 that a claim could be defended by ‘any equity that will rebut the action.’ 17

7 Payment to an innocent recipient on forged bills of exchange was held irrecoverable in Price v Neal 18. The rationale of the decision was not clear, although it was thought to be the progenitor of a special change of position defence 19. Whether that was so is debatable 20. Nor was the rationale much

clearer in those decisions which held that a payment received by an agent and paid over to the principal was not recoverable from the agent 21. Lord Mansfield imported a change of position dimension into such cases in Buller v Harrison 22 when, holding that money paid to an agent and credited against the principal's indebtedness to the agent was recoverable, he said 23:

‘In this case, there was no new credit, no acceptance of new bills, no fresh goods bought or money advanced. In short, no alteration in the situation which the defendant and his principals stood in towards each other’. (emphasis added)

Lord Atkinson, 130 years later in Kleinwort, Sons, and Co v Dunlop Rubber Co 24, cited Buller v Harrison and intervening authorities for the proposition that the liability of an agent depended upon 25:

‘whether, before the mistake was discovered, he had paid over the money which he received to the principal, or settled such an account with the principal as amounts to payment, or did something which so prejudiced his position that it would be inequitable to require him to refund.’

The last disjunctive circumstance appeared to foreshadow a distinct change of position defence.

8 It was accepted in Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation 26 (‘the ANZ Case’) that if the defence of payment over by an agent to his principal had to be justified in terms of detriment or

change of position, ‘the payment by the agent to the principal of the money which he has received on the principal's behalf, of itself constitutes the relevant detriment or change of position.’ 27 Some academic writing has supported, or at least acknowledged, the proposition that payment over by an agent can be treated as an aspect of the change of position defence. Professor Virgo, commenting on Lord Atkinson's observation in Kleinwort, wrote 28:

‘Essentially, the defence will only be available to the extent that the agent's circumstances have changed because the principal has effectively received the benefit from the agent.’

In so saying, Professor Virgo acknowledged that ‘[t]he rationale of the agent's defence is a matter of some uncertainty.’ 29

9 Meagher JA, in the Court of Appeal, referred to the ‘payee agent's defence’ as one ‘which rested on notions of change of position’ 30. He cited the Restatement Third, Restitution and Unjust Enrichment for the proposition that it is a ‘specific application of the general defense [of change of position] differing from the ordinary rule only by its more generous definition of the acts by the agent/recipient that constitute a change of position’ 31. However, as his Honour found, the appellant did not pay the respondents on the basis that they were agents for their client or TCP. Nor did the appellant intend that the respondents might pay or apply the moneys received as directed by their client or TCP 32.

10 An obscure invocation of change of position was also made in Brisbane v Dacres 33, in which a payment was held irrecoverable as made under a mistake of

law. Chief Justice Mansfield, reflecting the sweeping language of Lord Mansfield 50 years earlier in Moses v Macferlan, said 34:

‘it would be most contrary to æquum et bonum, if he were obliged to repay it back. For see how it is! If the sum be large, it probably alters the habits of his life, he increases his expences, he has spent it over and over again; perhaps he cannot repay it at all, or not without great distress: is he then, five years and eleven months after, to be called on to repay it?’

11 It has been suggested that in formulating this broad legal standard for restitution, Lord Mansfield was informed variously by Roman law, by the writings of Lord Kames and by Chancery practice 35. Its origin has been the subject of judicial and academic contention 36. Associate Professor Swain has suggested that the roots of English hostility to an equitable explanation of Moses v Macferlan go back to the nineteenth century and can be related to sensitivities about the relationship...