Developments – Mistaken payments due to fraud – change of position defence

1. Citibank v NAB 

In October 2011 I reported on the decision of Hammerschlag J of the NSW Supreme Court in William Co-Buchong v Citigroup Pty Ltd & National Australia Bank Ltd [2011] NSWSC 1199 (link). This was an interesting contest between two banks, neither of which had acted negligently or outside of standard banking practices, and both of which had been the victim of fraud.

In that case, the customers involved were joint account holders with both Citibank and the NAB. 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 Transfer Application Forms, and paid out the money in three tranches to accounts held in various names at HSBC Hong Kong Ltd.

Citibank’s claim was put 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 to its detriment by paying away the funds on the faith of the receipt.

Briefly, NAB won; its defence of change of position succeeded. His Honour considered the earlier decisions of the NSW Court of Appeal in State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350 and in Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2000] NSWCA 84; (2009) 76 NSWLR 195 and held in favour of NAB. 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. His Honour remarked 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.”

For a more detailed discussion of the analysis, see my earlier post here.

I did not report on this at the time, but on 4 December last year the NSW Court of Appeal (a five judge bench) unanimously dismissed Citibank’s appeal, upholding his Honour’s decision that NAB had established its change of position defence. NAB, as the recipient of the funds from Citibank, had acted in “detrimental reliance” on the receipt “in good faith”, and had thereby displaced Citibank’s prima facie right of recovery for mistaken payment – Citigroup Pty Ltd v National Australia Bank Limited [2012] NSWCA 381.

It is to be noted that in his judgment Barrett JA discusses Hammerschlag J’s view as to three interconnected requirements emerging from State Bank of NSW Ltd v Swiss Bank Corporation (outlined in my earlier post). At [101] his Honour observes that if Hammerschlag J’s formulation limits the information upon which the relevant recipient (here the NAB) can rely to information received from the payer, it is too narrow. It is true that a payer who instructs that the transferred funds be placed to the credit of a particular customer’s account does not expressly sanction subsequent payment out to that customer. But as Barrett JA observes, such payment out is a natural corollary; and sanctioning of it comes from the context in which the transfer is made and the instruction is given, which must recognise that the customer will have resort to the funds in the customer’s own account. As his Honour then says at [102] –

“This emphasises the point that matters of context already known to the recipient may properly be taken into account. As recognised in Port of Brisbane Corporation v ANZ Securities Ltd, action by the recipient that is inconsistent with the payer’s instruction will not be action taken in reliance on or on the faith of the receipt. But as explained in Perpetual Trustees Australia Ltd v Heperu Pty Ltd, the causal link between the receipt and the subsequent action will exist if that action has a foundation of information obtained in connection with the receipt considered in the attendant circumstances.”

Bathurst CJ, Allsop P and Meagher JA agreed (at [5]).

Citibank was left solely liable to bear the whole loss of repaying the funds to its customers. It is not yet clear whether or not Citibank has lodged an application for special leave to appeal to the High Court of Australia.

Interestingly, of the five judge bench of the NSW Court of Appeal who delivered judgments in that case, Macfarlan JA and Barrett JA (who wrote the initial draft judgment to which the others referred) delivered individual judgments, and there was a joint judgment of the remaining three judges – Bathurst CJ, Allsop P and Meagher JA. Those three judges also delivered judgment on the same day, in the next case I discuss below, and refer to it in their joint judgment in Citigroup v NAB.

2. Hills Industries v Australian Financial Services and Leasing 

On the same day, 4 December last year, the NSW Court of Appeal also handed down its judgment in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380. This was another case where the Court had to choose between two innocent parties, as to who would bear the loss resulting from mistaken payments due to fraud on the part of a third party.

In order to avoid the collapse of the Total Concept Projects group of companies (TCP) a director sought finance from the Australian Financial Services and Leasing Pty Ltd (ASFL). The TCP director in question approached ASFL and fraudulently claimed to be seeking finance for the acquisition of goods from two suppliers. In fact, TCP already owed those suppliers (Hills Industries Ltd and Bosch Security Systems Pty Ltd) considerable sums of money, and the finance was really sought to pay the debts, in order to stave off liquidation. The director Mr Skarzynski created false invoices and AFSL was convinced to pay the money directly to the suppliers for the non-existent goods. The suppliers had been told by TCP that their old debts were being paid by funds obtained from a third party, and processed the payments accordingly.

On the evidence, it was clear that AFSL had made the payments to the suppliers under a mistake (ie that the money was paid to acquire goods TCP sought to purchase) and that the threshold requirements for restitution for mistaken payment existed. For a useful and learned discussion of the relevant principles of restitution for mistaken payment in Australia, I commend you to read the judgment of Allsop P at [66]-[75], and the passages which follow at [76]-[166], discussing the potential defences to such claims and reviewing the authorities in some depth.

The question on appeal was whether relief should be denied, on the basis that the suppliers had established the change of position defence such that they were entitled to retain the money paid to them by ASFL.

The Court of Appeal held that both suppliers had. Although only Bosch had succeeded on this defence at first instance, their Honours held that the payments were received by the suppliers Hills and Bosch in good faith and in the ordinary course of business as moneys owed to them by the TCP companies. They both gave up, to their detriment and on the faith of the receipt, both the debts owing by the TCP companies, and a real and potentially valuable opportunity to enforce or secure payment from them. Having received the moneys, Hills refrained from taking proceedings it would otherwise have taken against Mr Skarzynski and his companies. It also continued to trade with those companies, albeit at a lower credit limit. Bosch, when it received the funds, consented to the setting aside of default judgements that it had already obtained against the TCP companies and abandoned other proceedings then on foot. It refunded certain overpayments to the TCP companies and continued to trade with them, on a COD basis. Those circumstances were such as to make it unjust to order restitution.

It is rumoured that AFSL may be seeking special leave to appeal to the High Court from this judgment, however that is not yet confirmed on the High Court’s website. I will endeavour to keep an eye on the lists.

3 thoughts on “Developments – Mistaken payments due to fraud – change of position defence

  1. Dear Ms. Rome-Sievers Thanks for the informative posts

    kind regards

    Jon Lelleton

    On Fri, Jun 7, 2013 at 1:28 PM, Carrie Rome-Sievers, Barrister wrote:

    > ** > carrieromesievers posted: “1. Citibank v NAB In October 2011 I > reported on the decision of Hammerschlag J of the NSW Supreme Court > in William Co-Buchong v Citigroup Pty Ltd & National Australia Bank > Ltd [2011] NSWSC 1199 (link). This was an interesting contest between two > b”

  2. Pingback: Heads up – High Court to deliver two important decisions on Wednesday | Carrie Rome-Sievers, Barrister

  3. Pingback: Newsflash – High Court judgments today in Newtronics and Hills Industries | Carrie Rome-Sievers, Barrister

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