Fraud and mistake: the change of position defence to a
restitutionary claim
Susan Cirillo reports on Citigroup Pty Limited v National Australia Bank Limited [2012] NSWCA 381
This was a case in which a five-member bench of the
Court of Appeal unanimously upheld a change of
position defence to a restitutionary claim.
Background
Two customers maintained a joint bank account with
each of Citibank and NAB, on the basis that either
customer’s signature could operate both accounts.
On 15 November 2010 Citibank received a faxed
instruction, purportedly signed by one of the
customers to transfer US$500,000 from the
customers’ Citibank account to the customers’ NAB
account.
Citibank transferred US$500,000 to NAB via the
‘SWIFT system’, a system of secure messaging
enabling one participating bank to make payments
to another. The accompanying information included
the amount transferred, the name of the Citibank
account holders from which the funds were being
drawn and details of the NAB account to which they
were being credited.
Citibank debited the customers’ Citibank account to
the extent of the sum transferred and NAB credited
the customers’ NAB account in an equivalent sum.
On 19 November 2010 NAB approved three
international telegraphic transfer applications,
apparently signed by one of the customers and
faxed by him to NAB. In accordance with the
applications, NAB transferred A$465,090 to a Hong
Kong bank and debited the customers’ NAB account
accordingly.
The faxed instruction of 15 November 2010 and the
applications of 19 November 2010 were fraudulent
in that neither customer had signed them or given
their authorisation for the transfers. The money
transferred to the Hong Kong bank was dissipated
and was not recoverable.
The customers settled proceedings against NAB and
Citibank on the basis that the banks made whole
their losses.
Citibank claimed against NAB that it had paid money
to NAB pursuant to the mistaken belief that it had
been given a genuine and valid instruction and that,
in the absence of restitution to it by NAB, NAB would
be unjustly enriched. The parties agreed that neither
bank had acted negligently or had failed to meet
any standard of banking practice. NAB’s defence
was that (inter alia) it had irrevocably changed its
position to its detriment in faith of the receipt of the
funds from Citibank, by paying away the money to
the Hong Kong bank.
At trial
Hammerschlag J found in favour of NAB.
His Honour opined that according to the criteria
enunciated by the Court of Appeal in State Bank
of New South Wales v Swiss Bank Corporation1,
the information conveyed by Citibank did not
contemplate payment at the direction of the
imposter, and therefore, NAB’s subsequent payment
out made at the imposter’s direction was not made
‘in reliance on’ or ‘on the faith of’ NAB’s receipt from
Citibank. On this view, NAB was not ‘entitled’ to deal
with the receipt as it did.
Instead, his Honour followed the later Court of
Appeal decision in Perpetual Trustees Australia Ltd v
Heperu Pty Ltd2 paying attention to what his Honour
regarded as the less demanding criteria in that case
in which the recipient’s ‘entitlement’ to act was
held not to be explicitly prescribed by information
received from the payer. On this view, NAB would
not have made the payment unless the receipt from
Citibank had been regarded as valid (which was
a consequence of the information in the SWIFT
message), and therefore, NAB’s payment was made
‘in reliance on’ or ‘on the faith of’ the receipt from
Citibank. Therefore, NAB established a change of
position defence.
Court of Appeal
The plurality (Bathurst CJ, Allsop P and Meagher
JA) and Macfarlan JA agreed with Barrett JA in
dismissing Citibank’s appeal from the finding that
NAB had established a change of position defence.
According to Barrett JA, the context of NAB’s
receipt from Citibank, including the SWIFT message
and NAB’s knowledge of its customers’ account,
reasonably engendered in NAB a state of mind that
the moneys should be credited to the customers’
account and then dealt with in the ordinary course
of prudently administering the customers’ account.
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The payment to the Hong Kong bank was consistent
with the basis of the receipt from Citibank.3
The test advanced by Barrett JA to determine
whether a recipient had changed their position
was to consider whether the circumstances of the
receipt induced in the recipient a ‘rationally formed’
‘state of mind as to the status of the moneys and the
consequences that should properly flow from the
receipt’.4
Notwithstanding its agreement with Barrett JA’s
conclusion, to the extent that it intended to differ,5
the plurality also formulated a test; being that the
recipient acts on the faith of, or in reliance on, the
receipt if it acts within a context of knowledge
including ‘knowledge of the receipt and of facts that
support reliance upon the stability of the receipt
and an entitlement to treat the receipt as able to
be dealt with’. Whether this test is made out is a
factual question and whether there is reliance in the
particular circumstances will be a matter of fact and
degree.6
The plurality clarified that the decision of State
Bank of New South Wales v Swiss Bank Corporation
was not to be understood as limiting consideration
of whether the recipient acted on the faith of,
or in reliance on, the receipt of the payment to
information that the recipient received from the
payer.7 Therefore, Perpetual Trustees Australia Ltd
v Heperu Pty Ltd in advancing the consideration of
attendant circumstances, including matters already
known to the payee, was not to be regarded as
superseding State Bank of New South Wales v Swiss
Bank Corporation.8
A ‘but for’ test?
Barrett JA also concluded that NAB’s payment to
the Hong Kong bank would not have occurred but
for NAB’s receipt of the payment from Citibank.9
His Honour relied on David Securities Pty Ltd
v Commonwealth Bank of Australia10 for the
proposition that a cause and effect relationship is
contemplated between the receipt of a mistaken
payment and subsequent expenditure or financial
commitment.11 The plurality agreed with this
‘approach to causation’.12
Though it is not made express in any of the reasons,
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presumably, the ‘but for’ test is to operate as the
threshold factual question to establish what has
happened to any amount that is being traced. This
will determine whether the change of position
defence is engaged. Then the plurality’s ‘facts that
support reliance’ test, (or Barrett JA’s ‘rationally
formed’ ‘state of mind’ test) is to be applied to
answer the legal question of whether the defendant
to a restitutionary claim has changed their position in
accordance with the defence.
A broad ‘general’ defence?
NAB raised two alternative defences by way of
contention, being that:
1.
Citibank’s claim to recover the payment was
lost because NAB received the payment as
an intermediary and fulfilled its obligation to
account to its customers for the payment by
crediting its customers’ account (a ‘payment
over’ defence); and
2. Citibank was estopped from recovering the
payment because in making the payment via the
SWIFT transfer system, it induced NAB to alter
its position to its detriment.
The plurality found it unnecessary to decide the
alternative defences, and that there would be ‘no
useful purpose in doing so because neither would
be available in the circumstances of this case if the
more general change of position defence was not
available’.13
It would appear that the plurality’s reference to the
‘general’ defence related to their Honours’ assertion
that in respect of a payment that is made by mistake
giving rise to a restitutionary right to recover the
payment from the recipient, the change of position
‘defence’ operates ‘conformably with the broad
underlying principle enunciated in David Securities
Pty Ltd v Commonwealth Bank of Australia…and
Lipkin Gorman (a firm) v Karpnale Ltd’.14 This being,
to consider whether the recipient has changed his or
her position in such a way that it would be inequitable
in all the circumstances to require restitution.15
Macfarlan JA would have decided the notice of
contention by upholding only the estoppel defence.
Barrett JA would have dismissed both alternative
defences.
Endnotes
1.
2.
3.
(1995) 39 NSWLR 350.
(2009) 76 NSWLR 195.
Citigroup [2012] NSWCA 381 at [103]. The plurality and
Macfarlan JA agreed respectively at [2] and [15].
4. Citigroup [2012] NSWCA 381 at [83].
5. The plurality at [2012] NSWCA 381 [2] and [6] expressed its
agreement with certain paragraphs in Barrett JA’s reasons,
and paragraph [83] in which Barrett JA formulated his test
was not included.
6. Citigroup [2012] NSWCA 381 at [6].
7. Citigroup [2012] NSWCA 381 at [4] per the plurality.
8. Citigroup [2012] NSWCA 381 at [104] per Barrett JA.
9. Citigroup [2012] NSWCA 381 at [103]. The plurality and
Macfarlan JA agreed respectively at [2] and [15].
10. [1992] HCA 48; 175 CLR 353 at 385.
11. Citigroup [2012] NSWCA 381 at [86].
12. Citigroup [2012] NSWCA 381 at [6].
13. Citigroup [2012] NSWCA 381 at [7].
14. Citigroup [2012] NSWCA 381 at [5].
15. Contrast Barrett JA’s distinction between a ‘narrow version’
and a ‘wide version’ of the defence and adopting the
‘narrow version’ in Citigroup [2012] NSWCA 381 at [61]–[65]
(Macfarlan agreeing at [15]). The plurality’s approach appears
consistent with the observation by Justice Gummow in
‘Moses v Macferlan: 250 years on’ (2010) 84 ALJ 756 at 762
that ‘[o]ver-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’, even though the
plurality did not cite this extract. But Hammerschlag J did and
observed that ‘on this approach the result would be the same.
Both parties were duped…it would lead to an inequitable
result were Citibank to be made whole at the expense of
NAB’: William Co-Buchong [2011] NSWSC 1199 at [42]–[43].
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