|HIGH COURT OF AUSTRALIA
HAYNE, CRENNAN, KIEFEL, BELL, GAGELER AND KEANE JJ
AUSTRALIAN FINANCIAL SERVICES AND
LEASING PTY LIMITED APPELLANT
HILLS INDUSTRIES LIMITED & ANOR RESPONDENTS
Australian Financial Services and Leasing Pty Limited v Hills Industries Limited
 HCA 14
7 May 2014
Appeal dismissed with costs.
On appeal from the Supreme Court of New South Wales
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)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
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".
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.
The facts of the case1, the reasoning of the primary judge2, that of the Court of Appeal3, and the arguments of the parties4, are set out in the joint reasons5. 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.
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 dismissed6. On appeal by AFSL and by Hills, the Court of Appeal held that AFSL could recover from neither supplier7. AFSL now appeals by special leave to this Court8.
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
In Moses v Macferlan9, 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.
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 law12. 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 recoverable14. 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 gambling15. Lord Mansfield declared in Sadler v Evans16 that a claim could be defended by "any equity that will rebut the action."17
Payment to an innocent recipient on forged bills of exchange was held irrecoverable in Price v Neal18. The rationale of the decision was not clear, although it was thought to be the progenitor of a special change of position defence19. Whether that was so is debatable20. 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 agent21. Lord Mansfield imported a change of position dimension into such cases in Buller v Harrison22 when, holding that money paid to an agent and credited against the principal's indebtedness to the agent was recoverable, he said23:
"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 Co24, cited Buller v Harrison and intervening authorities for the proposition that the liability of an agent depended upon25:
"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.
It was accepted in Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation26 ("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, wrote28:
"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
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 TCP32.
An obscure invocation of change of position was also made in Brisbane v Dacres33, 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, said34:
"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?"
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 practice35. Its origin has been the subject of judicial and academic contention36. 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 between law and equity37.
Whatever the combination of influences upon Lord Mansfield, his concepts of "ex æquo & bono", "unjust" retention, and "equity that will rebut the action", were not confined to equitable doctrines. Nevertheless, equitable principles played their part in this, as in other areas of his jurisprudence. As Gummow J observed in Roxborough v Rothmans of Pall Mall Australia Ltd38:
"With varying degrees of success, Lord Mansfield sought to translate equitable principles, doctrines, and procedures into the trial of actions at law; this reflected his appreciation of equitable doctrine for its flexibility and adaptability to modern needs, particularly in commercial law. Then, as today, 'equity is the spur to new thought and further remedy, and ... provides a means of introducing new policies'." (footnotes omitted)
His Honour gave emphasis to the way in which "notions derived from equity have been worked into and in that sense have become part of the fabric of the common law."39 In the light of that observation, Ashburner's metaphor of the common law and equity as two streams of jurisprudence which run side-by-side in the same channel and "do not mingle their waters"40 seems at odds not only with commonsense41, but also with the reality of equity's influence on the common law42.
The general application of equitable considerations to restitutionary actions, and with them the availability of a general change of position defence, were denied by Lord Mansfield's judicial descendants43. Restitutionary remedies were linked to the fiction of an implied contract44. In 1914, Lord Sumner in Sinclair v Brougham said45:
"There is now no ground left for suggesting as a recognizable 'equity' the right to recover money in personam merely because it would be the right and fair thing that it should be refunded to the payer."
Earlier, in Baylis v Bishop of London46, as Lord Justice Hamilton, his Lordship had spoken disparagingly of the vague jurisprudence "which is sometimes attractively styled 'justice as between man and man.'"47 On that question, conflicting views were expressed in academic writings. Professor Hanbury wrote dismissively in 1924 that "equity in the mouth of a common lawyer is apt to mean equity in its ethical and somewhat nebulous sense."48 Professor Winfield, writing in 1937, observed sceptically that the implied contract theory then underlying restitution was itself based on "compensation upon equitable principles"49. It was not the foundation of liability in this area of the law but "only the facade of it."50 At least in appearance, however, the tide was running the other way. In 1957, Professor Jones wrote, referring to Baylis v Bishop of London and other decisions51:
"Moses v Macferlan and its equitable offspring of change of circumstances were regarded as the excesses of the fertile mind of Lord Mansfield, and delicately forgotten."
A detrimental change of position could support a defence of estoppel if other necessary elements were present. In Holt v Markham52, the plaintiffs, seeking recovery of money paid under mistake, were held to be estopped from asserting mistake of fact53. Scrutton LJ, after referring to Sadler v Evans, adopted the "very pungent criticisms which Lord Sumner has made upon that now discarded doctrine of Lord Mansfield"54. Little room was left for a general change of position defence, which, outside the framework of estoppel, would necessarily depend upon Lord Mansfield's equity. The incompatibility of the change of position defence with the implied contract theory of restitutionary claims was pointed out in the decision of the Supreme Court of Canada in 1975 in Rural Municipality of Storthoaks v Mobil Oil Canada Ltd55. Martland J, delivering the judgment of the Court, observed that if the claim for recovery of the money was founded upon Moses v Macferlan, then the recipient could "defend himself by everything which shows that the plaintiff ex æquo et bono is not entitled to the whole of his demand, or to any part of it."56 Martland J added57:
"If, however, the obligation to repay is contractual, it does not depend upon whether the requirement to repay is just and equitable."
In the event, the disparaging references, sceptical rejoinders, pejorative dismissals and pungent criticisms were soon to retire onto the well-populated field of "old, unhappy, far-off things, And battles long ago". New contentions arose about the theory, bases and limits of restitutionary recovery and defences against it. Professor Burrows, writing in 2004, described the law of restitution as "the most debated subject in English private law over the last ten years."58
The latter part of the twentieth century saw the rejection of the implied contract as the foundation for such claims and the rise of "unjust enrichment". In 1988, this Court in the ANZ Case held that the basis of the common law action of money had and received for recovery of money paid under "fundamental mistake of fact" should be recognised as lying not in implied contract, but in restitution or unjust enrichment59. That followed upon the rejection of implied contract as a basis for the action on quantum meruit in Pavey & Matthews Pty Ltd v Paul60.
While legal principles of restitution or unjust enrichment can be equated with seminal equitable notions of good conscience, the action for money had and received was described in the ANZ Case as "a common law action for recovery of the value of the unjust enrichment"61. The change of position defence was recognised in that case in the context of recovery of money paid under a mistake of fact. The law imposed a prima facie liability on the recipient of a mistaken payment to make restitution and62:
"[b]efore that prima facie liability will be displaced, there must be circumstances (eg, that the payment was made for good consideration such as the discharge of an existing debt or, arguably, that there has been some adverse change of position by the recipient in good faith and in reliance on the payment) which the law recognizes would make an order for restitution unjust."
So a concept of injustice, redolent of Lord Mansfield's equity, informed the right of recovery and, at the same time, qualified and limited it. That normative concept resembled what Professor Stone called a "legal standard" in a "category of indeterminate reference"63, albeit a standard informing guiding criteria for particular classes of case.
Recognition of a general change of position defence for restitutionary claims, also rooted in a broad concept of "equity", followed in the United Kingdom in 1991 in the judgment of Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd64. That recognition had been foreshadowed in his Lordship's judgment as Robert Goff J in Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd65. In that case he held, as a matter of deduction from previous authority, that a claim for money had and received may fail if the payee "has changed his position in good faith, or is deemed in law to have done so."66 In Lipkin Gorman, he formulated the defence broadly so as not to inhibit its development on a case-by-case basis67:
"At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full."
He was there dealing with change of position as a defence to restitutionary claims generally, albeit he accepted that the claim for recovery of money paid under a mistake of fact was a prominent example of a case in which the defence could be invoked68. That defence provided what Professor Burrows called69:
"the normative balance to the strict liability imposed by unjust enrichment: the defendant can have no objection to the reversal of the enrichment provided it is left no worse off than if it had not been enriched in the first place."
Consistently with the flexibility of its foundation standard, the defence could be applied pro tanto. Relevantly to the present appeal, that flexibility is not constrained by a global limitation based on a quantitative or pseudo-quantitative concept of disenrichment. As explained below, disenrichment, as propounded by the late Professor Birks, is at best a circumstance which may define a class of case in which recovery could be held to be inequitable. It is not a unifying rule for the change of position defence.
In Australia, the principle enunciated in Barclays Bank was quoted with approval in David Securities Pty Ltd v Commonwealth Bank of Australia70. This Court decided in that case that the rule precluding recovery of a payment made under a mistake of law, enunciated in Bilbie v Lumley71, was not part of the common law in Australia72. As that "rule" had not been much debated in the earlier stage of proceedings in the Federal Court, the change of position defence, raised for the first time in this Court, was not supported by relevant findings of fact. The question of its application in the particular case was remitted to the Federal Court. However, in holding that change of position was available as a defence to a claim for money paid under mistake of law (and also under mistake of fact), the plurality referred to Lipkin Gorman and to academic support for the defence, particularly in light of the inflexibility of estoppel, which it was thought could not operate pro tanto73. The plurality relied also upon support for the defence in Canada74 and the United States75 and its statutory recognition in Western Australia and New Zealand76. In the event, their Honours held that77:
"the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt." (emphasis in original) (footnote omitted)
This Court has subsequently held restitutionary claims against governments in respect of overpayments of tax or tax paid under an invalid law to be subject to the same general principles and has discussed those principles in that context78. In Roxborough, Gleeson CJ, Gaudron and Hayne JJ quoted with approval the observation of Mason CJ in Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd that79:
"Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched."
In discussing so-called "unjust enrichment theory" in Roxborough, in the context of claims for money had and received, Gummow J referred to Lord Mansfield's observation that80:
"General rules are ... varied by change of circumstances. Cases arise within the letter, yet not within the reason, of the rule; and exceptions are introduced, which, grafted upon the rule, form a system of law."
Unjust enrichment came to be seen not as a principle of "direct application in a particular case"81 but rather as a taxonomical concept82. It was not at large. As this Court said in Farah Constructions Pty Ltd v Say-Dee Pty Ltd83, it was not to be determined84:
"by reference to a subjective evaluation of what is unfair or unconscionable: recovery rather depends on the existence of a qualifying or vitiating factor falling into some particular category." (footnote omitted)
That being said, the equitable norm underlying the concept of unjust enrichment is to be found in Moses v Macferlan. Neither that case nor subsequent authority precluded the emergence of "novel occasions of unjust enrichment supporting claims for restitutionary relief."85
Change of position as a pro tanto defence
In his writings on the topic of restitution over many years, Professor Birks argued against a wide application of the change of position defence by reference to whether recovery would be "inequitable". That criterion he regarded as "a wholly unanalysed conception of justice."86 He proposed instead that the defence should be limited by a concept of "disenrichment", which "ties the defendant's liability to the amount of his extant gain"87. He proposed that every unjust enrichment claim should be subject to the defence of disenrichment, unless for some specific reason the defendant was deprived of its protection88. That strict approach, as he acknowledged, did not find support in the English authorities.