Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd: Restitution Defence of Change of Position

Wednesday 7 May 2014 @ 12.01 p.m. | Legal Research

In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 (7 May 2014), a full bench of the High Court has held, in a unanimous decision, that the Hills Industries (the first respondent) and Bosch Security Systems Pty Ltd (the second respondent) (the respondents collectively) would not be required to repay monies mistakenly transferred to them by Australian Financial Services and Leasing (the appellant) as a result of the fraud committed by a third party as each respondent had established the defence that they "had changed their position on the faith of the receipt of the payments".

Facts and Background

The appellant was in the business of providing businesses with finance for the purchase of commercial equipment. The respondents were manufacturers and suppliers of such commercial equipment. The respondents were both owed debts by various companies in a corporate group (known collectively as "TCP").

A director and shareholder of TCP created false invoices suggesting that TCP had purchased equipment from each of the respondents and based on these invoices, the first respondent purchased equipment and leased it back to TCP. The appellant then paid the amounts of the false invoices to the second respondent. At a later stage the appellant discovered the fraud and sought repayment from the respondents.

The respondents sought to resist the appellant's claim based on their change of position. In particular, the respondents relied on the application of the appellant's payments to the discharging of TCP's debts, and the circumstances that they had ceased pursuing the recovery of the debts and continued to trade with TCP.

It was not disputed that the respondents had both acted on the faith of the receipt of the appellant's payments.

Initial Proceedings

In the Supreme Court of New South Wales, the primary judge rejected the first respondent's defence of change of position, but held the defence made out in relation to the second respondent.

The appellant and the first respondent both appealed to the Court of Appeal (see - Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd; Australian Financial Services and Leasing Pty Ltd v Bosch Security Systems Pty Ltd [2012] NSWCA 380 (4 December 2012)). The NSW Court of Appeal held that both respondents were entitled to rely on the defence of  change of position in response to the appellant's claim for repayment.

In the High Court

By way of special leave the appellant appealed to the High Court who unanimously dismissed the appeal.

The High Court found that the relevant question was whether the retention of the monies by the respondents would be inequitable in all the circumstances; at paragraphs 157 and 158 Chief Justice French says in the judgment:

157. The defence of change of position is established where a defendant proves the existence of two conditions. The first condition is that the defendant has acted (that is, done something the defendant would not otherwise have done) or refrained from acting (that is, not done something the defendant would otherwise have done) in good faith on the assumption that the defendant was entitled to deal with the payment which the defendant received. The defendant need not for the purpose of meeting this condition have acted on knowledge derived from the payer. Whether the defendant needs also to have acted reasonably is a question which does not now arise for determination. The second condition is that, by reason of having so acted or refrained from acting, the defendant would be placed in a worse position if ordered to make restitution of the payment than if the defendant had not received the payment at all. The detriment constituted by that difference in position need not, in every case, be financial or pecuniary. If financial or pecuniary, it need not, in every case, be established with precision. It can be an opportunity forgone. It must, in every case, be shown by the defendant to be substantial.

158. Where the defence is so established, the prima facie entitlement of the defendant is to maintain the assumption on which the defendant acted and, on that basis, to retain the whole of the payment. That entitlement is qualified to the extent that retention of the whole of the payment can be shown to be disproportionate to the degree of the detriment. Where the detriment is financial or pecuniary, can be quantified, and is less than the amount received, the entitlement of the defendant to retain the payment is reduced pro tanto.

The High Court rejected the approach argued by the appellant, focused on the extent to which the, respondents had been "disenriched" subsequent to the receipt of the payments. The principle of "disenrichment", similar to "unjust enrichment", was found to be inconsistent with the law of restitution as it has developed in Australia. The High Court found that, in the circumstances, the disadvantages that would result to the respondents if they were required to repay the appellants were such that it would be "inequitable" to require repayment.

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Sources:

  • Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 (7 May 2014)
  • Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd; Australian Financial Services and Leasing Pty Ltd v Bosch Security Systems Pty Ltd [2012] NSWCA 380 (4 December 2012)
  • High Court Judgment Summaries