Last week’s decision by Hammerschlag J of the NSW Supreme Court in William Co-Buchong & Anor v Citigroup Pty Ltd & National Australia Bank Ltd [2011] NSWSC 1199 was an interesting contest between two banks, both of which had been the victim of fraud.

The plaintiffs were customers of both Citibank and NAB. Both banks were parties to the SWIFT international clearing house system of international funds transfers which facilitates electronic bank to bank fund transfers.

Citibank had transferred money via the SWIFT system from its customers’ account on the basis of a fraudulent faxed instruction, to those customers’ account at the NAB. The NAB then also received fraudulent instructions, by way of three International Telegraphic Transfer Application Forms, and paid out the money in three tranches to accounts held in various names at HSBC Hong Kong Ltd.

The plaintiffs from whose accounts at Citibank the funds had originally been drawn, sued claiming damages from both banks on the basis that moneys were paid out of their accounts without their knowledge or authority. As between the plaintiffs and the banks, those proceedings were settled, with the plaintiffs being made whole.

What remained on foot was the cross claims between the banks. Each claimed relief against the other on the basis that the other should bear the loss. The question became whether Citibank is entitled to be paid back the money it had paid over to NAB.

Cibitank’s claim was put exclusively as one for restitution. It had paid the money to NAB on the fundamentally mistaken belief that it had been so instructed by its customers. Absent restitution, claimed Citibank, NAB would be unjustly enriched.NAB’s defence was that it changed its position by paying away the funds on the faith of the receipt.

It became a significant point, that neither party asserted the other acted negligently or failed to meet any relevant standard of banking practice such as checking signatures against a signature verification system or checking that there were cleared funds in the relevant account.

From paragraph [19], his Honour discusses the change of position defence as considered by the NSW Court of Appeal in State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350, and more recently again by the NSW Court of Appeal in Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; (2009) 76 NSWLR 195. (Incidentally, I note that the High Court granted special leave in Heperu, and heard the appeal in May 2010, but the September 2010 High Court Bulletin disclosed that as at that month the case was either not proceeding or had been vacated.)

Hammerschlag J then considers these two Court of Appeal decisions. He discusses State Bank, and notes that at p355 of their judgment, the Court of Appeal held that to succeed in its defence of change of position in that case, the bank needed to show that it paid the money away “on the faith of the receipt”. His Honour then identifies three requirements from the Court of Appeal’s decision in State Bank, see p 356 of that judgement in particular, that NAB in this case would need to establish to succeed in their argument that their payment away of the funds was “on the faith of the receipt”, namely –

(a) it must have known or thought it knew more than the fact of the receipt standing alone;

(b) the information must have come from Citibank; and

(c) the information must be information which, if true, would have entitled NAB to deal with the receipt as it did [at 27].

Together with the mere fact of the payment, NAB received a SWIFT message which included information that the transaction was at the behest of its customers, the plaintiffs, and involved a transfer from their account at Ctitbank to their NAB account [at 30]. This was treated by his Honour as information from Citibank to NAB that it could treat the funds as being available for disbursement at the behest of the plaintiffs. However, were his Honour to have followed State Bank, Citibank would succeed because the NAB meets only two of the three requirements (i.e. it meets (a) and (b) but not (c) – see [28-31].

His Honour then discusses the NSW Court of Appeal’s decision in Heperu, decided 14 years after State Bank [from 32]. The Court of Appeal observed there that care should be taken not to overextend what was said in State Bank beyond the facts of that case. Hammerschlag J highlighted a passage from paragraph [133] of Heperu, to the effect that the payments there were taken to be on the faith of the receipts because they would not have been made unless the receipts had been recognised as valid…The payments would not otherwise have been made, the change of position being thereby causally linked to the receipt [at 37].

Applying that here, his Honour said at [38] that although the occasion for the withdrawal was the fraud of the imposter, NAB nevertheless undoubtedly recognised the receipt as valid. The receipt from Citibank was credited to the plaintiffs’ account as a consequence of the information in the SWIFT communication. Had it not recognised this validity, it would not have then paid away the money. His Honour found it significant, as mentioned above, that there was no assertion of any negligence or failure by NAB to meet banking practice [at 38].

Thus the necessary causal link, as articulated in Heperu is met though, as his Honour observed, not requirement (c) of the State Bank formulation. Hammerschlag J recognises that the two decisions by the same court are irreconcilable and, as Heperu is the later in time, finds he is bound to follow Heperu [at 40].

His Honour concludes that applying Heperu, Citibank must fail as NAB has succeeded in making out its defence of change of position [at 41].

His Honour refers finally to the 2010 article by the Hon Justice W M C Gummow Moses v Macferlan: 250 years on (2010) 84 ALJ 756, where Gummow J considers the change of position defence and expresses the view at p 762 that “Over-definition and dissection of the phrase ‘change of position’ may only serve to divert attention from what is the central question, whether it would be an inequitable result for the claimant to require repayment.”

Hammershclag J takes the view that also on this approach, NAB would succeed in its defence. Both banks were duped. However Citibank paid first without the customers’ authority as a result of which NAB credited the customers’ account rendering it vulnerable to the fraud to which it succumbed [at 43]. His Honour remarks that: “In these circumstances and where neither party criticises the other for falling for the fraud, it would lead to an inequitable result were Citibank to be made whole at the expense of NAB.”