Thinking | 8 May 2014
The High Court reconsiders the change of position defence
When money is paid under a mistake of fact, the person paying the money may recover it from the recipient if it would be inequitable for the recipient to retain it. This describes an action for ‘money had and received’. It is a defence to that action for the recipient to show that it has changed its position believing that the money was paid correctly (that is, on the faith of the receipt).
In the recent case of Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd1, the High Court considered the proper application of the change of position defence.
The appellant was a business financier and the respondents were manufacturers and suppliers of commercial equipment. A third party had created false invoices suggesting that it had purchased certain equipment from the respondents. It approached the appellant with these invoices who agreed to buy the equipment and lease it back to the third party. To that end, the appellant paid the amounts of each invoice to the respondents believing that it was satisfying the third party’s debts in relation to the equipment referred to in the invoices. On the advice of the third party, the respondents credited the appellant’s payments to the third party’s accounts.
In reality, the equipment referred to in the invoices did not exist. The appellant did not realise its mistake until six months after it had agreed to purchase the fake equipment. Upon becoming aware that the third party’s invoices were fraudulent, the appellant demanded repayment of the money paid under the invoices from the respondents. The respondents resisted the appellant’s demands, arguing that they had changed their positions on faith of the payments. In particular, they argued that it would be inequitable to require them to repay the money in the circumstances that they had applied it towards the third party’s debts and that, as a result, they had ceased pursuing the recovery of those debts and had continued trading with the third party. Further, the third party had since gone into liquidation, ending any opportunity the respondents may have had of recovering or securing their debts.
The critical issue in the litigation was: would it be inequitable for the appellant to demand repayment of the money mistakenly paid to each respondent given each respondent’s change of position? (It was not in dispute that each respondent had acted on the payments they received from the appellant in good faith).
At first instance in the NSW Supreme Court,2 Einstein J held that one of the respondents had proved its change of position defence but that the other had not. Accordingly, the latter respondent was ordered to repay the money the appellant had mistakenly paid it.
The trial judge drew a distinction between the two respondents on the basis that, whereas one could demonstrate a real detriment in the extinguishment of a legal claim against the third party, the other could not demonstrate any such detriment as it could not prove that it would have been able to recover its debts from the third party. Both the appellant and the unsuccessful respondent appealed.
The NSW Court of Appeal dismissed the appellant’s appeal and allowed the appeal brought by the initially unsuccessful respondent.3 The Court of Appeal held that, in assessing what each respondent had lost in its change of position, the trial judge had erred by focussing on monetary losses only. By applying the money mistakenly paid to them towards the third party’s debts, both respondents were giving up a “potentially valuable commercial opportunity to enforce or secure payment” 4 and thus both were entitled to rely on the change of position defence. The Court of Appeal emphasised that, in a commercial context, a change of position sufficient to attract the defence may only be subtle. The appellant was granted special leave to appeal to the High Court.
High Court decision
In the High Court, the appellant argued that the defence of change of position on the faith of the receipt can only operate where the party seeking to raise it has lost an opportunity with a proven monetary value by reason of its change of position. Far from having a proven value, it argued that the respondents had not lost anything: the debts against the third party were worthless as the third party was never able to repay them; therefore, any opportunity to recover or secure those debts before the third party went into liquidation was of minimal value.
The High Court unanimously dismissed the appeal.
The Court held that the basis of restitutionary relief in Australia was the equitable principle of unconscionability and not any notion of unjust enrichment. This is in keeping with the law as decided in David Securities Pty Ltd v Commonwealth Bank of Australia (David Securities).5 Following that case, the Court rejected the notion that the good faith change of position defence was only open to “a recipient who was able to demonstrate monetary disenrichment”.6
The question of whether the respondents had actually changed their positions within the meaning of the defence was resolved by way of analogy with the concept of ‘detrimental reliance’ in estoppel. To that end, “detriment has not been considered to be a narrow or technical concept”.7 It is sufficient that the recipient of money paid by mistake would suffer a net loss or disadvantage if the mistake was corrected at some later date. The defence does not rely on a “mathematical assessment of enduring economic benefit”.8
Finally, the Court held that the disadvantage each respondent would suffer if forced to repay the appellant must be considered “as a practical matter of business”.9 They had forgone the opportunity to secure their debts and had continued trading with the third party, decisions which entailed significant commercial risk in the circumstances. This was enough of a detriment to make it inequitable for the appellant to demand repayment of the money.
This decision re-affirms the approach to restitutionary claims adopted in David Securities. The concept of unjust enrichment should not be considered part of Australian law in this regard.
Moreover, it makes clear that the defence of good faith change of position will be open to a recipient of money mistakenly paid where that recipient would suffer some practical disadvantage if forced to repay the money; it extends beyond pure monetary disadvantage.
1 HCA 14
2Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd  NSWSC 267.
3Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd (2012) 295 ALR 147;  NSWCA 380.
4Ibid (2012) 295 ALR 147 at 184.
5(1992) 175 CLR 353;  HCA 48.
6 HCA 14 at .
7Ibid at .
8Ibid at .
9Ibid at .
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