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Australia – Recovery Of A Fraudulently Induced Payment: The High Court’s Decision In AFSL v Hills Industries.

15 May, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

What You Need To Know

 

  • The High Court of Australia has pronounced on the nature of the action for restitution of a mistaken payment and the defence of change of position. 
  • According to the Court, the action and defence have equitable roots, with the result that equitable notions of conscience inform their application. 
  • The case is of general significance to commerce in Australia given its affirmation of a broad defence to a claim for restitution of a payment made by mistake, including a mistake induced by fraud. 

 
The Facts And Case History

 
On 7 May 2014, a seven member bench of the High Court of Australia handed down judgment in Australian Financial Services and Leasing Pty Limited v Hills Industries Limited & Anor [2014] HCA 14.

 
The facts may be simply stated. AFSL, a finance company, had been induced by TCP’s fraud to make payments to Hills and Bosch, trade creditors of TCP. TCP then induced Hills and Bosch to apply those payments in discharge of trade debts owed by TCP to Hills and Bosch. In doing so, Hills and Bosch refrained from (in the case of Hills) and discontinued (in the case of Bosch) recovery action against TCP. Both companies then continued to trade with TCP, as did AFSL.

 
TCP subsequently became insolvent. AFSL then discovered the fraud and sued Hills and Bosch for restitution of the money paid to them.

 
AFSL was partially successful at first instance, in the Supreme Court of New South Wales. The NSW Court of Appeal subsequently held that AFSL was not entitled to restitution from Hills and Bosch because those companies had changed their position on the faith of their receipt of the payments.

 
AFSL then applied for and was granted special leave to appeal to the High Court. The High Court dismissed AFSL’s appeal.

 
The Judgments

 
Justices Hayne, Crennan, Kiefel, Bell and Keane delivered a joint judgment and each of Chief Justice French and Justice Gageler delivered a separate judgment. There are nuances in the reasoning in the separate judgments—some, but not all, are noted below.

 
All of the justices affirmed earlier decisions of the Court that emphasised the equitable roots of the action for restitution of “money had and received”. They said that the question of whether restitution should be ordered involved asking whether it would be inequitable in all the circumstances to require Hills and Bosch to make restitution. But the answer, according to their Honours, does not involve balancing competing equities as between the parties based on fault.

 
Thus, the phrase “unjust enrichment” is not a legal principle that supplies the basis for restitution. Instead, it is necessary to find a recognised “vitiating factor” that founds the right to recovery—in this case, mistake infecting the payment.

 

It should be noted that the case in the High Court appears to have been conducted on the basis that AFSL was presumptively entitled to restitution of the payments. Hills and Bosch relied, however, on the proposition that, by refraining from taking enforcement action against TCP and by subsequently continuing to trade with TCP, they had changed their position and therefore had a complete defence to AFSL’s claim.

 
The defence of change of position in Australia was outlined by the High Court more than a decade ago in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. In that case the High Court said that a defendant to a claim for restitution of money paid by mistake has a defence of “change of position” if the defendant “acted to his or her detriment on the faith of the receipt”.

 
Materially for present purposes, a defence of change of position is generally recognised to operate “pro tanto”, that is to say, according to the detriment. AFSL contended that the loss of chance claimed by Hills and Bosch, that is to say the opportunity to take enforcement action should be assessed to determine how much better off they would have been if that had occurred. The order for restitution should then be reduced accordingly.

 
The High Court disagreed. The change of position defence, while operating pro tanto, is equitable in origin and is similar to estoppel. In this case, all of the Justices considered that each of Hills’ and Bosch’s change of position operated as a complete defence to the claim.

 
In the words of the joint judgment, “the receipts had consequences for Hills and Bosch beyond the simple fact of the receipt and these consequences were irreversible as a practical matter of business. Moreover, neither Hills nor Bosch was able to reverse the consequences of its decision to continue trading with TCP and the commercial risks that decision entailed”.

 
But the practical difficulty with the joint judgment is that it does not provide much guidance as to when the change of position defence is a complete defence and when it is only a partial defence. And their Honours declined to define the defence more closely, leaving it for development in later cases.

 
The Chief Justice also emphasised that the detriment suffered by the change of position must be irreversible at the time demand for repayment is made of the recipient. But his Honour did venture a view on how the defence could operate pro tanto. His Honour said that a recipient faced with a demand for repayment must be able, properly advised, to decide within a reasonable time and at a reasonable cost whether it is obliged to do so. Some decisions might be straightforward, such as where the change of position is constituted by a gift to charity of AUD 2,000—in that case, a recipient of a mistaken payment of AUD 100k would be obliged to refund AUD 98k. Thus, the question of whether the defence operates pro tanto “depends upon the extent to which the detriment suffered by the recipient is quantifiable when demand is made”.

 
Justice Gageler’s judgment is perhaps the most doctrinally interesting, but in respects which are beyond the scope of this update. It is sufficient for present purposes to note that his Honour said that the change of position defence requires two things to be satisfied:

 

  • The payee must act or refrain from acting in good faith and on the assumption that the payee was entitled to deal with the payment. In so acting the defendant was not confined to acting only on knowledge derived from the payer. His Honour then left open the question of whether the payee also needs to have acted reasonably. 
  • By reason of so acting (or refraining from acting) the payee must be placed in a worse condition than if the payment had not been received. The detriment need not be financial. If financial, it need not be established with precision. But it must be substantial.

 
Justice Gageler then went on to say that if the defence is made out then the payee has a prima facie entitlement to retain the whole of the payment. That assumption may be negatived if the whole of the payment can be shown to be disproportionate to the detriment suffered. Where the detriment can be quantified and is less that the whole of the payment, the defence only operates pro tanto.

 

Comment

 
The case is of broad application to Australian business given the prevalence of payments made by mistake. It defines when such payments must prima facie be repaid and seeks to balance that by clarifying when repayment would be inequitable.

Significantly, the High Court has maintained flexibility in the way the defence will operate and has declined to define its boundaries, leaving more precise definition to future cases.

 

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For further information, please contact:

 

Wen-Ts’ai Lim, Partner, Ashurst 
wentsai.lim@ashurst.com

 

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