Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd - [2011] NSWSC 267

Supreme Court

New South Wales

Medium Neutral Citation: Australian Financial Services and Leasing Pty Ltd v Hills Industries Limited & Ors [2011] NSWSC 267
Hearing dates: 28/3/2011 - 31/3/2011, 1/4/2011
Decision date: 05 April 2011
Jurisdiction: Equity Division - Commercial List
Before: Einstein J
Decision:
Verdict for the plaintiff as against the first defendant. Verdict for the second defendant as against the plaintiff. Verdict for the plaintiff as against the third defendant

Catchwords: Equity
Perpetration of a fraud by outside party
Plaintiff carrying on finance business
Fraudulent invoices
Unjust enrichment
Elements of unjust enrichment claim
Which of a number of entities should bear the cost of the fraud
Fraudulent invoices
Alternative claims for knowing receipt of trust property
Change in position
Recognized elements of establishing change of position defence
Contractual allocation of risk
Barnes v Addy
Cases Cited: Australia & New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662
Baden Delvaux & Lecuit v Socit Gnrale pour Favoriser le Dvelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509
Barnes v Addy (1874) LR 9 Ch App 244
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239
Black v S Freedman & Company (1910) 12 CLR 105
Briginshaw v Briginshaw (1938) 60 CLR 336
Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444
David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22
Hancock Family Memorial Foundation Limited v Porteous [1999] WASC 55
Kalls Enterprises Pty Ltd (In Liq) v Baloglow [2007] NSWCA 191
Lipkin Gorman v Karpnale Pty Ltd [1991] 2 AC 548
Lumbers v W Cook Builders Pty Ltd (in liquidation) (2008) 232 CLR 635
Magafas v Carantinos [2007] NSWSC 917
Malouf v MBF Australia Ltd [2007] NSWSC 1020
Menzies v Perkins [2000] NSWSC 40
Orix Australia Corporation Ltd v Moody Kiddell & Partners [2005] NSWSC 1209
Palmer v Blue Circle Southern Cement Ltd (1999) 48 NSWLR 318
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84
Port of Brisbane Corporation v ANZ Securities Limited [2003] 2 Qd R 661
Robb Evans of Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75
Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025
Sweeney v Howard [2007] NSWSC 852
Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Texts Cited: Mason & Carter's Restitution Law in Australia, Keith Mason; J.W. Carter; G.J. Tolhurst; 2nd edition, 2008, LexisNexis Butterworths
Category: Principal judgment
Parties: Australian Financial Services and Leasing Pty Ltd (Plaintiff)
Hills Industry Limited (First Defendant)
Bosch Security Systems Pty Limited (Second Defendant)
Jetobravo Pty Limited (Third Defendant)
Representation: Counsel:
Mr A Moses SC, Mr M Cleary (Plaintiff)
Mr T Thawley (First Defendant)
Mr L Gor (Second Defendant)
Mr R Marshall (Third Defendant)
Solicitors:
Berry Buddle Wilkins Lawyers (Plaintiff)
Cosoff Cudmore Knox (First Defendant)
HWL Ebsworth (Second Defendant)
Lee Hourigan & Brooks (Third Defendant)

File Number(s): 2010/0133256

Judgment

The proceedings

The proceedings before the Court concern the perpetration of a fraud by an outside party and a determination as to which of a number of entities should bear the cost of that fraud.

Overview

The plaintiff carries on a finance business. It provides customers with finance to purchase commercial or industrial equipment for use in the customer's business. Typically this involves the plaintiff purchasing equipment from a supplier, upon the presentation of an invoice and then entering into a rental agreement with a customer. Under the rental agreement the customer pays an agreed monthly rental payment but the equipment remains the property of the plaintiff.

In late 2009, two companies controlled by a person known as Mr Richard Skarzynski perpetrated a fraud on the plaintiff. The companies were called Total Concept Projects (Australia) Pty Ltd (TCP) and Total Concept Productions (Australia) Pty Ltd (TCP2). In late 2009 Mr Skarzynski approached the plaintiff purportedly to obtain finance to purchase equipment for the business operated by TCP and TCP2.

Invoices purportedly created by the first and second defendants were provided to the plaintiff. These invoices identified:

(a) the first and second defendants as the equipment suppliers;

(b) the plaintiff as the purchaser; and

(c) TCP as the entity who would take delivery of the equipment.

The invoices were dated respectively 25 August 2009 and 3 September 2009. The invoices contained particulars of equipment that was to be supplied by the first and second defendants. These invoices also set out the cost of the equipment. This was the amount the plaintiff would pay for the equipment, which would then be rented to TCP under a rental agreement with the plaintiff. The invoices also contained the bank account details for the first and second defendants so payment could be made by the plaintiff by direct bank transfer to them.

A further invoice was provided to the plaintiff, which identified the supplier to be a company called 'Ironmark Engineering Pty. The invoice identified:

(1) the plaintiff as the purchaser; and

(2) TCP as the entity who would take delivery of the equipment.

The invoice contained the bank details of the third defendant so payment for the equipment specified in the invoices could be made by the plaintiff by direct bank transfer to the third defendant.

At about this time, TCP and TCP2 entered into rental agreements with the plaintiff. There is no dispute in these proceedings that the plaintiff believed at the time it entered into those agreements that the invoices it had been provided with were genuine and legitimate.

Under terms of the first class of rental agreements entered into between TCP, TCP2 and the plaintiff, the plaintiff was to:

(1) finance and pay for the purchase of the equipment; and

(2) own the equipment.

Under the terms of the second class of rental agreements entered into between TCP, TCP2 and the plaintiff, TCP and TCP2 were to:

(1) rent the equipment from the plaintiff; and

(2) make periodic rental payments to the plaintiff in respect of the equipment.

The plaintiff made payments by direct bank transfer to the bank accounts of the defendants detailed in the invoices, and emailed to the first and second defendants a remittance advice for the payments referring in those advices to the particular invoice number on each invoice to which the payment related. Thereafter (until March 2010) the plaintiff assumed (wrongly as it turned out) that TCP and TCP2 had taken delivery of the equipment particularised in the invoices from the defendants.

From the time of entry into the rental agreements with TPC and TPC2 the plaintiff received various rental payments. By February 2010 TCP and TCP2 were in default under their rental agreements with the plaintiff. By March 2010 the plaintiff had determined that all the invoices it had been provided with for the equipment in connection with the TCP and TCP2 rental agreements were fraudulent or false. The suppliers named on the invoices had not created the invoices. The reference to equipment in the invoices were false. The equipment did not exist. The equipment never existed.

The plaintiff contacted the defendants and sought return of the payments it had made to them under the fraudulent invoices.

Each of the defendants acknowledged the invoices had not been created by them and that no equipment had been provided by them to either TPC or TPC2. Each of the defendants has denied they have any obligation to repay the plaintiff for the amounts the plaintiff paid to them by mistake.

Claim for unjust enrichment

The plaintiff claims that each of the payments made to the defendants were made as a result of a mistake of fact, namely that:

(1) each of the invoices were genuine invoices; and

(2) that the plaintiff would obtain title and property in the equipment identified in each of the invoices.

The first two defendants admit that all the invoices that were provided to the plaintiff were not genuine. The third defendant raised some dispute in closing on this issue. Either way the plaintiff did not obtain title and property in the equipment identified in each of the invoices, that equipment never existed.

The plaintiff discovered the mistake it had made on or about 5 March 2010 and demanded repayment of all the amounts it had paid from all three defendants.

The defendants have refused to repay the amounts paid to them by the plaintiff.

The plaintiff's case is that :

(1) All three defendants have incontrovertibly benefited from the payments they have received.

(2) The defendants have all admitted receiving the payments from the plaintiff.

(3) They have each been unjustly enriched.

(4) The defendants all admit they did not supply TPC or TPC2 with any of the equipment identified in the invoices.

(5) The plaintiff never obtained property in any equipment. It has received nothing from the defendants.

The principles

Albeit, that a number of authorities were cited by the respective parties, I formed the view that in essence the principles which inform this area of the law were essentially not in doubt. Rather this case throws up close questions of fact requiring careful attention, the critical issue concerning the precise facts exposed by the evidence.

As a starting point, the three essential elements of an unjust enrichment claim are :

(1) That the defendant received a benefit

(2) That the benefit must be unjust in a legal sense

(3) That the benefit has to have been made at the plaintiff's expense.

Upon satisfaction of these elements, a payer (such as the plaintiff) is prima facie entitled to recover moneys paid under a mistake of fact, that is, a mistake as to a fact giving rise to a legal liability make a payment or that the payee (the defendants) was legally entitled to a payment ( Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; ANZ Banking Group Ltd v Westpac (1988) 164 CLR 662 and David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353 (a case on mistake of law)).

This prima facie liability to make restitution will only be displaced in circumstances that the law recognises would make an order for restitution unjust ( ANZ Banking Group v Westpac and Perpetual Trustees Australia Ltd v Heperu [2009] NSWCA 84). The onus of which lies with the enriched party. It is not a defence to claims for recovery of mistaken payments (based on mistake of fact) that the defendant(s) honestly believed in his or her entitlement to receive or retain the money mistakenly paid (cf. David Securities Pty Ltd v Commonwealth Bank; see Mason & Carter's Restitution Law in Australia 2 nd edition , at para [438]).

In Lipkin Gorman v Karpnale Pty Ltd [1988] UKHL12; [1991] 2 AC 548, the majority of the House of Lords made clear that it is the inequitable retention of money or benefit which lies at the root of the injustice of the enrichment (approved in Perpetual Trustee Australia v Heperu ).

In saying this, it is important to recognize that unjust enrichment is "not a definitive legal principle according to its own terms" Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [151] , but rather depends on the existence of a qualifying or vitiating factor falling into some particular category", Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [150]. The plaintiff contends that :

(1) Their prima facie entitlement to restitution is evident from the facts.

(2) nothing in the defendants' defences or evidence displaces the plaintiff's prima facie entitlement to restitution for the mistaken payment.

(3) it is unclear on what proper basis the defendants can resist the claims against each of them.

(4) the defendants must give restitution to the plaintiff for the full amounts that were paid to them together with interest and costs on those amounts.

Alternative Claims for knowing receipt of trust property

The plaintiff also makes alternative claims against each of the defendants for being liable under the first limb of Barnes v Addy (1874) LR 9 Ch App 244, and seeks orders, in the alternative, that each of the defendants holds the money paid to them by the plaintiff on constructive trust for the plaintiff.

It is fair to observe that the plaintiff's claims for knowing receipt of trust property seemed to be all but abandoned in the plaintiff's final address, the plaintiff having to be reminded by the defendants that such a claim had been pleaded.

Nonetheless it falls to the court to examine the knowing receipt of trust property issue. As will appear from these reasons there was no substance in those claims.

The plaintiff's case in this regard includes the following :

(a) Mr Skarzynski's fraud on the plaintiff was equivalent to theft ( Menzies v Perkins [2000] NSWSC 40 at [9]; Orix Australia Corporation Ltd v Moody Kiddell & Partners Pty Ltd [2005] NSWSC 1209 at [156]. The money received by the defendants was received as a result of a fraud perpetrated on the plaintiff.

(b) It follows that the funds received by the defendants (which is admitted by them) were impressed with a trust, which prevails against the recipients of the money (the defendants) ( Black v S Freedman & Company (1910) 12 CLR 105 at 109 and Malouf v MBF Australia Ltd [2007] NSWSC 1020).

(c) The defendants ought reasonably to have been on notice that a fraud had been perpetrated by Mr Skarzynski.

(d) At the very least they each had knowledge of circumstances that would have put a reasonable person on inquiry as to the fraud that was committed by Mr Skarzynski.

(e) The defendants have obtained an advantage of a fraud to which they were not a party, and have decided to keep the advantage. In those circumstances the defendants are liable to the plaintiff in equity.

(f) The defendants are liable to the plaintiff for knowing receipt of trust property under the first limb in Barnes v Addy and they each hold the amounts they received from the plaintiff on constructive trust for the plaintiff.

In support of its claims, the plaintiff relied on a single witness, Mr Sofi.

The evidence of Mr Sofi

Mr Sofi is a company director of the plaintiff.

He was clearly very well prepared for his cross-examination and rarely shown to be at fault.

Although a number of questions were put to him by the three cross-examiners, to my observation, none of those questions established that the plaintiff had acted inappropriately at any stage. It was clear that it had taken some considerable time before the plaintiff had discovered the fraud. When the fraud was discovered the plaintiff acted as quickly as practicable in the circumstances.

In my view the evidence given by Mr Sofi should be accepted in total. He was a witness of truth.

Dealing with the issues concerning the first defendant

First defendant's witnesses

The first defendant presented a number of witnesses, all of which aided the Court in understanding the first defendant's case.

Renate Elisabeth McLeod

Ms McLeod is the Credit Manager at Hills.

She enlightened the Court as to Hills' processes for granting credit to purchasers and how payments on credit are managed.

The cross-examination of Ms McLeod focused on four areas:

(1) The credit department must have seen the remittance advice sent by AFS to Hills;

(2) It is Hill's standard procedure to only tick items of the Westpac bank statement upon receiving a remittance advice;

(3) Hills must have known the invoice number on the remittance advice did not match any invoice number recorded against TCP;

(4) If Hills did not know this, it failed to take appropriate precautions.

Ms McLeod gave evidence that was later supported by Jesika Callaghan that there were numerous cases where payers did not send remittance advices or where the invoice numbers on these advices did not match. Therefore this case was not out of the ordinary. In these instances Hills simply credited the payments against the amount owed by the company.

The witness also explained that receiving payments from a finance company on behalf of a creditor was not uncommon. In this case, TPC had specifically told Hills a third party was going to pay $308 000 and she was therefore expecting the payment.

After considering Ms McLeod's evidence, I do not make much of the plaintiff's assertions that there was evidence of sloppy account keeping procedures and inadequate checks on money received by Hills. I note the apparent oversight in not printing and checking the remittance advice sent by AFS and accept that if this remittance advice was thoroughly scrutinised, the fraud induced by TPC may have been found. However, as explained below, given the commercial realities within which Hills operates this failure was not seriously negligent or reckless.

Jesika Callaghan

Ms Callaghan is an administrator with Hills.

She was clearly nervous in the witness box. Presumably this was her first time in Court. Despite this, her evidence was of much assistance.

Ms Callaghan gave a more detailed explanation concerning the procedures with respect to clearing debts and dealing with remittance notices.

Jesika was personally involved in clearing the TCP account although she could not specifically recall this specific payment.

I found Jesika to be an honest and informative witness who supported Ms McLeod in her explanation.

David Muir

Mr Muir is the General Manager of Finance at Hills. He is essentially in charge of the credit department where this alleged error took place.

The cross-examination focused on the apparent failures of the credit department and Mr Muir's alleged personal recklessness in that regard.

Mr Moses questioned Mr Muir as to why the matter of fraud was not referred to the police and why there was not sufficient investigation.

Mr Moses also pressed Mr Muir as to why the usual processes as to disallowing credit and retrieving payment were not followed. Mr Muir explained he has the power to make judgement calls in this regard.

It was finally put to Mr Muir that his department recklessly overlooked all these issues in their zeal to be repaid by TCP.

I am convinced that there was a break down in process and Mr Muir's department did not take all the necessary steps. However, considering the explanations given by the previous witnesses, I cannot conclude that this break down in process should impact upon the case in a material way.

The first defendant also called Ms Seiferet, Ms Condon and Mr Brewer. Their evidence does not require comment, save to say I found them reliable witnesses.

The unjust enrichment claim against the first defendant

The plaintiff submitted that establishing their prima facie entitlement to restitution was a given. The facts relied upon were:

(1) Each of the defendants received a sum of money from the plaintiff;

(2) The sum of money was transferred on the basis of mistake, namely:

(a) Each of the invoices were genuine invoices; and

(b) That the plaintiff would obtain title and property in the equipment identified in each of the invoices.

(3) Mistake is a valid basis for considering a benefit unjust per David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353;

(4) The plaintiff never obtained property in any equipment. It has received nothing from the defendants despite demanding repayment. Therefore the benefit was at the plaintiff's expense.

The first defendant did not automatically accept the proposition advanced by the plaintiff that there is on the facts a clear claim for unjust enrichment.

Mr Thawley argued that no cause of action arises where there is no injustice. In support of this argument the defence argued:

(1) the defendant was not enriched;

(2) the claimant has a contractual right to recover the amount from a party that is not innocent.

The first defendant's argument that it was not enriched

In relation to the first claim, the first defendant relied on Port of Brisbane Corporation v ANZ Securities Limited [2002] 2 Qd R 661 at [9], [10] per McPherson JA (with whom Davies JA and Mullins J agreed). In this case the Court held that where a party receives money to which they were entitled, then there is no unjust enrichment and the cause of action must fail.

However, the basis of his Honour's conclusion in this case was that:

"ANZ Securities neither retained money to which the Port Corporation had title; nor (except perhaps to the extent that it had benefited from receiving commissions on stockbroking transactions conducted for Windermere) can it be said to have been or to have remained enriched, unjustly or otherwise, by receipt of money to which the Port Corporation was entitled. Having received and dealt with the money throughout, not beneficially, but as trustee for Windermere, ANZ Securities was never enriched by its receipt". [10]

The situation here is clearly different in that the first defendant both retained the money and dealt with it not as trustee but as its own. Despite the debt owing to Hills, it was enriched by the payment. In these circumstances the observations of McPherson JA are not relevant to this matter.

The plaintiff may recover from others

The first defendant also submitted that if the plaintiff has recovered or is likely to recover the relevant amount from a person contractually liable for the loss, then the prima facie liability to make restitution is not made out. The rationale for this is that the first defendant has not been enriched at the expense of the plaintiff. There is therefore no fairness in requiring the first defendant to make restitution to a party who has not suffered loss.

By way of explanation, the plaintiff provided the Court with a document explaining its position in relation to actions against other parties. This was marked as MFI P5.

The document usefully summarised all the separate recovery proceedings in which the plaintiff was involved in relation to the TPC account. While the primary information is available in volumes 7 and 8 of the court book, it is simpler to make reference to the information in this document. I note that there was no dissent from the bar table concerning this information in summarised form.

Relevantly the documents explains that:

(1) the plaintiff claims a total of $698,445.00 from the three defendants;

(2) the total principal to be paid under the agreements is $1,050,720.00;

(3) the total amount due under the agreements is $1,821,514.96;

(4) total payments made in respect of the agreements $169,321.72;

(5) total amount quarantined under All Up Finance proceedings $512,378.94;

(6) on or about 28 September 2010 the plaintiff recovered $117,920.00 from the Maher Family Superannuation Fund in respect of agreement 1030;

(7) even if the plaintiff recovers all of the payments in the All Up Finance proceedings, the plaintiff is still due $1,106,670.18.

In these circumstances, there is no injustice in allowing the plaintiff's cause of action to proceed. The plaintiff cannot sufficiently recover all of their monies from other parties and therefore the defendants are enriched at their expense.

Change in position as a complete defence

It is only when a defendant is required to make restitution that a change of position defence is relevant. Hills were made aware of the fraudulent invoice in March 2010. By that time:

(1) Hills had foregone its decision to take recovery action against TCP or its directors and lost its opportunity to do so.

(2) Hills advanced further goods for which it was not paid.

The principles underlying a change of position defence were first recognised in the House of Lords In Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 579 where Lord Goff said:

"[W]here an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution."

This is a position that was subsequently recognised by the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353.

The recognised elements of establishing this defence are:

(1) The onus of establishing the change of position defence, including the necessary reliance, lies upon the defendant.

(2) The defence may be applied pro tanto.

(3) Mere expenditure does not constitute a change of position.

(4) The defence is not available where the defendant has simply spent the money received on ordinary living expenses.

(5) Money spent solely in reliance on the payment, from which the defendant no longer retains a benefit, constitutes a good defence.

(6) The defence is available only to those who act in good faith.

Underlying this defence is the requirement that the first defendant has suffered detriment arising out of this change of position and therefore restitution would be unjust. Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444 at 450.

A similar scenario of foregone opportunity was discussed by Bell J in Palmer v Blue Circle Southern Cement Ltd (1999) 48 NSWLR 318 .

The case involved an injured worker who received under mistake worker compensation benefits. Requiring the defendant to repay these benefits was held to be unjust on the basis of change of position.

The relevant change of position was expressed in paragraph 4 as follows

Had he not been in receipt of workers compensation payments the

defendant would have applied for and received during the period referred to either sickness benefits or an invalid pension.

The present circumstances, at least in relation to the first defendant, are different.

As the plaintiff submitted, it is not altogether clear that recovery actions would have immediately commenced in August 2009 if the payment of $308,000 had not been made. Nor is it clear that:

(1) Mrs Skarzynski would have been prepared to give a mortgage to Hills as it did to TCP in respect of the debts owed to AFS

(2) Nor is it certain that Mr Skarzynski was ready to ensure repayment to Hills by having the unencumbered equity in his house (registered in his wife's name) made available to secured debts owing by TCP as he was said to have been prepared to do for Mr Christowski.

Mr Christowski was a personal friend and AFS was TCP's last resort. There is no basis with which to compare Hills, an ordinary creditor, to these two parties.

I have also taken into account the precarious financial position of TPC and the extent to which it is unlikely that given TCP's debts and other creditors Hills would have been able to recover significant sums from TCP. Indeed Bosch's judgment interest obtained on July 2009 would have posed a further hurdle to recovery for Hills.

In these circumstances, the first defendant has failed to show any real detriment arising out of a change of position. The change of position pleaded is too speculative and cannot operate as a bar to the plaintiff's prima facie claim.

Payment for good consideration as a complete defence

Further, independently of the change in position, if the amount is found to be paid for good consideration, this is also a complete defence: W J Simms Son & Cooke (Southern) Ltd [1979] 1 QB 677 at 695 (approved in David Securities at 380, 405).

In advancing this argument, the first defendant relied on W J Simms Son & Cooke (Southern) Ltd [1979] 1 QB 677. In this case, the Court rejected the argument stating there are circumstances in which the payment will not be in consideration for the debt, but rather an unauthorised mistaken payment. The present case is such a case. There was no consideration what so ever given to AFS in discharge of the debt. The consideration intended for AFS was the rental agreement. A rental agreement which was ultimately a forgery. The link between these two claimed considerations is too distant and first defendant's contention is misconceived.

Partial defences

If the Court is of the view that there is no complete defence (and the plaintiff is otherwise entitled to relief), then the first defendant claimed there should only be partial restitution arising by reason of specific matters:

(1) First, AFS received $55,314.60 from TCP by way of payments pursuant to its contractual arrangements. That amount should be deducted. There is no expense to that extent to AFS. See also: Orix Australia Corporation Ltd v Moody Kiddell & Partners P ty Ltd [2005] NSWSC 1209 at [161], per White J.

(2) Secondly, AFS received the benefit of an input tax credit to the extent of $28,000 and, accordingly, it did not incur that amount as an expense.

(3) Thirdly, Hills advanced further goods to TCP for which it was not paid and it would not have re-opened TCP's account or provided such equipment had it not received the payment of $308,000 from AFS. Accordingly, Hills changed its position on the faith of the receipt.

Mr Moses made some submissions on this matter and handed up a document, which I marked MFI P4. Notwithstanding these submissions, the assertion that the defendant is not entitled to a reduction in the amount of restitution owed cannot stand. The benefits that the plaintiff has accrued must be considered, otherwise the plaintiff would be doubly enriched.

For this reason, the restitution paid to the plaintiff by the first defendant must be reduced on account of

(1) AFS received $55,314.60 from TCP by way of payments pursuant to its contractual arrangements. That amount should be deducted. There is no expense to that extent to AFS. See also: Orix Australia Corporation Ltd v Moody Kiddell & Partners [2005] NSWSC 1209 at [161], per White J.

(2) Secondly, AFS received the benefit of an input tax credit to the extent of $28,000 and, accordingly, it did not incur that amount as an expense.

I do not accept the amount should be reduced by any unpaid invoices owed to Hills as a result of further business dealings with TCP. The plaintiff received no benefit from these.

Plaintiff's entitlement to restitution

The plaintiff is entitled to $308 000 less $55 314.60 and $28 000 from the first defendant.

This is a total entitlement of $224 685.40.

Second claim: Knowing receipt

In finding the plaintiff successful on its first claim, strictly the Court does not need to deal with second. However, for the sake of completeness, the Court has done so.

The first defendant correctly identified the issues concerning it in relation to knowing receipt as follows :

(1) Whether Hills received trust property, with notice, in circumstances which are capable of attracting the knowing receipt principle in Barnes v Addy ;

(2) if so, whether any one or more of the matters reason in the evidence operate to deny the relief sought either wholly or partly.

The Court accepts that the facts concerning the first defendant may be summarised as follows :

(1) The plaintiff ("AFS") paid an amount of $308,000 to Hills on 25 August 2009.

(2) That amount was paid pursuant to a written agreement between AFS and Total Concept Projects (Australia) Pty Ltd ("TCP") dated 25 August 2009 under which TCP agreed to "rent" equipment supplied by TCP. The directors of TCP were Mr Richard Skarzynski and Mr Anthony Musico, both of whom were identified as guarantors under the agreement.

(3) The invoice supplied by Mr Skarzynski was not a genuine invoice. It purported to be, but was not, an invoice dated 20 August 2009 from Hills in respect of certain equipment costing $308,000, inclusive of GST. It was not until between 22 March 2010 and 1 April 2010 that employees of Hills became aware that the amount of $308,000 which had been received, had been paid pursuant to an invoice which had been fraudulently created. Before 22 March 2010, no person at Hills knew of the fraudulent invoice.

AFS seeks the imposition of a constructive trust over the $308,000 received by Hills based on "knowing receipt", that is, the "first limb" of Barnes v Addy (1874) LR 9 Ch App 244.

Persons who receive trust property become chargeable as constructive trustee if it is established that they have received it with notice of the trust: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [112].

The first question which arises is, therefore, whether trust property has been received. The property which the plaintiff asserts is trust property is the amount of $308,000 received by Hills on 25 August 2009.

It may be accepted that when property is obtained by fraud, equity imposes a trust on the fraudulent recipient: Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589 at [40] per White J; Robb Evans of Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75 at 100-101; Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716 per Lord Browne-Wilkinson; Black v S Freeman & Co (1910) 12 CLR 105. The first defendant asserted that as Hills was the direct recipient of funds from AFS it was not engaged in any fraud. Accordingly, the funds it received were not trust property and therefore the cause of action fails. This is a point on which it is not essential I express an opinion for reasons that will become apparent in the reasons immediately following.

Recipient liability is concerned with the knowledge of the defendant. It is important to appreciate what knowledge it is that the plaintiff must establish. The plaintiff must establish that Hills received the amount with knowledge of the existence of the trust. This is made clear in Farah Constructions at [112] (a case concerning the second limb) and Sweeney v Howard [2007] NSWSC 852 at [65] (a case concerning the first limb). What gives rise to the alleged existence of the trust is - on the plaintiff's case - the fraud perpetrated on AFSL by Mr Skarzynski. The cross-examination did not address that issue.

In Hancock Family Memorial Foundation Limited v Porteous [1999] WASC 55, Anderson J held that the third party must know, at the time he received the relevant property, that it was trust property and that it was being misapplied. In Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025 at [58], Finkelstein J observed that "knowledge means a third party's knowledge that the relevant property was trust property being misapplied or transferred pursuant to a breach of fiduciary duty or trust" [In Farah Constructions , the High Court raised but did not decide the correctness of the assumption that first limb of Barnes v Addy applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary ([2007] HCA 22 at [113])]. In Bell Group , Owen J held that the relevant knowledge was that, "at the time of receiving the trust property, the third party must have known of the trust and of the misapplication of the trust property" [2008] WASC 239 at [4748].

The cross-examination of the witnesses did not address knowledge in respect of any of these issues.

The requisite level of knowledge which must be established is one of the first four categories of knowledge agreed between counsel in Baden v Socit Gnrale pour Favoriser le Dvelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 at 575-576, 582:

(i) actual knowledge;

(ii) wilfully shutting one's eyes to the obvious;

(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

[See: Farah Constructions at [174] - [178]. Although in this passage the High Court was expressly discussing the second limb of Barnes v Addy , relating to "knowing assistance", the same test for knowledge applies under both limbs. This conclusion is implicit in Heperu at [86]. See also Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 at [4745]; Kalls Enterprises Pty Ltd (In Liq) v Baloglow [2007] NSWCA 191 at [176] per Giles JA; Magafas v Carantinos [2007] NSWSC 917 at [12].]

As to knowledge on the part of Hills, at the time of receipt and at the time detriment occurred on the faith of the receipt:

(1) There is no evidence that Hills had actual knowledge of the existence of a trust or of any misappplication and such a proposition was not put to any of the witnesses.

(2) Hills did not have knowledge of circumstances which would indicate the facts to an honest and reasonable person. .

(3) It was suggested in cross-examination but not proven that any of the witnesses wilfully and recklessly failed to make inquiries.

(4) Nor was it proven that any of the witnesses that they wilfully shut their eyes to the obvious.

This conclusion is founded upon three documents of particular relevance that were put before the Court:

(1) The "remittance advice" (at 4CB6F page 81). As to that document:

(a) As at August 2009, it was Ms Condon who usually printed out remittance advices received by email.

(b) Ms Condon was not at work on 26 to 28 August 2009. The remittance advice was received by email on 26 August 2009. Ms Condon did not recall seeing the remittance advice in the period 25 August 2009 to 1 September 2009. Ms McLeod did not recall reading the email or opening the attachment. Ms Callaghan does not recall seeing the remittance advice. Ms Seifert did not recall seeing the remittance advice.

(c) The Court accepts appropriate inference to be drawn is that Ms Callaghan did not see the remittance form and it is likely that it was never printed out (or seen by anybody at the time) because:

(i) if Ms Callaghan had seen it, in accordance with her usual practice, she would have attached it to the "batch form;

(ii) evidence to similar effect was given in the.

(iii) the remittance advice email of 26 August 2006 was automatically forwarded to Ms Condon who was not at work on 26 August 2006.

(iv) Ms McLeod wrote to Mr Skarzynski on 26 August 2009 asking for a remittance [advice] which she would not have done if she had known one had been received. Importantly , that email also reveals that, at that time, the calculation had already been made that the $308,000 would leave a balance owing of $5,331.62 in TCP's NSW account, a process which records the same result as that which arises under the "debtor transactions" document (dealt with below). That establishes that the likelihood is that Ms McLeod - without the remittance advice - informed Ms Seifert (perhaps also Ms Callaghan) that the amount of $308,000 related to the TCP account. It is not surprising the Ms McLeod knew what account to offset. She had been told (via Mr Muir) by TCP in an email on 25 August 2009 that the amount of $308,000 had been transferred that day into Hills account. She said to herself to check the details of the receipt on the bank statement when she attended work the next day. She recalls seeing the "bank statement" on 26 August 2009 recording a credit of $308,000. As at 26 August 2009, Hills was well aware that it was to receive the amount of $308,000 and it was, accordingly, not surprising that it was received.

(v) that inference also arises by reason of the fact that, as recorded above, it is likely that the remittance advice was never printed by reason of Ms Condon's absence from work;

(vi) further, it is consistent with the fact that a screen dump of invoices ("debtor transactions" schedule) is produced if no remittance advice is received.

(2) The "bank statement" at 4CB6F pages 1-3. As to this document:

(a) On page 1, the bold writing under the heading "Description of transaction" is the writing of Ms Condon. Page 1 relates to transactions, which occurred on 21 August 2009. Those transactions are presently irrelevant.

(b) On page 3 - which is the critical page - the only writing which is Ms Condon's is "24352". The writing next to the relevant transaction on 25 August 2009 - namely the number "2374" is the writing of Ms Seifert. The tick next to the relevant transaction was made by Ms Callaghan.

(c) It was Ms Callaghan's responsibility to look through the bank statement and see what monies had been received.

(d) Ms Callaghan would compare the figures on remittance forms received with figures on the bank statement to see whether amounts identified in the remittance forms corresponded with amounts in the bank statement. If that did not reveal the relevant account to offset, she would look for other matters to locate the correct account. Ms Callaghan could not actually recall what she did on 26 August concerning the amount of $308,000. She may have consulted Ms McLeod about which account to offset.

(3) The "batch facer" (at 4CB6F page 83) and the attached "debtor transactions" schedule (at 4CB6F pages 84, 85). As to these documents:

(a) On the "batch facer" the initial KJS and the batch number "2374" are in the handwriting of Ms Seifert. She also stamped the form on 1 September 2009. Ms Seifert processed the form on 1 September 2009, but has no specific recollection of having done so. She offset the $308,000 from the NSW account of TCP, but has no specific recollection of having done so.

(b) The remaining handwriting on the "batch facer" is the handwriting of Ms Callaghan. Although it is dated 25 August 2009, that is a reference to the date of the relevant receipt, rather than a reference to when the "batch facer" was prepared.

(c) As to the "debtor transactions", the number "14,775.28" was written by Ms Seifert.

(d) In summary, the "batch facer" was largely filled out by Ms Callaghan and then processed by Ms Seifert.

In accepting this evidence, it is also important to bear in mind the factual context emphasised in the observations of McPherson JA in Port of Brisbane Corporation v ANZ Securities Limited [2003] 2 Qd R 661:

[17] ... A stockbroker who refused to receive or to deal with money from his client without first checking the client's title to it would soon find himself out of business. He is, after all, conducting a stockbroking business and not a detective agency. The same is true of a host of other activities, including the practice of accountants, solicitors and estate agents, in which funds are constantly being received from clients on trust to be applied for particular purposes. In many instances, the exigencies of the contemplated transaction would not permit a thorough, or indeed any, investigation as to the original source of the funds or their true ownership at the time of their receipt.

Employees in an accounts department provided with limited pieces of information and performing specific identified roles, dealing with large volumes of payments from a variety of customers are not approaching their task as detectives seeking to identify possible fraud

Properly analysed the plaintiff's case rises no higher than a suggestion that there was a systems failure. Even if that be correct, that is not sufficient for the purposes of a claim alleging dishonesty. Nor is it sufficient for a claim that there was constructive notice for the purposes of an unjust enrichment claim, which ultimately involves an allegation of dishonesty or moral obtuseness. Indeed, such a case was not put to the relevant witnesses.

For the above reasons the knowing receipt claim in reference to the first defendant fails.

Dealing with the plaintiff's case against the second defendant

In examining the plaintiff's case against the second defendant close attention to the sequence of events must be paid.

The second defendant was a supplier of electrical audio and visual equipment.

Bosch supplied equipment on credit to each of TCP Projects (Australia) Pty Ltd (" TCP Australia "), TCP Projects (Vic) Pty Ltd (" TCP Vic ") and TCP Projects (Qld) Pty Ltd (" TCP Qld ") (together, the " TCP Companies ").

The second defendant's witnesses

The second defendant called two witnesses who on the whole had difficulty answering the assertions put to them by the plaintiff.

Anthony John Charles Piper

Mr Piper is the Finance Director of Bosch.

Mr Moses highlighted a number of breakdowns in process at Bosch.

Following cross-examination it appeared that Bosch' conduct fell very far short of what would be expected from a company receiving large amounts of money. I was particularly surprised by the fact that Bosch continued to deal with TCP after the fraud was discovered.

Q. Sir, the two emails that you've been shown this morning, is it your evidence that you cannot recall either receiving the 1 April email or your response to it? Is that your evidence?

A. I can't recall receiving it, correct.

Q. Can you recall sending the email of 29 March?

A. Yes, I can

Q. You can recall that?

A. Yes.

Q. What triggered you to send that email to Mr Musico?

A. I was disgusted with what Mr Musico had done. As I indicated in the email to him, it just wasn't acceptable practice from our point of view to draft up what we found to be a false invoice in the name of Bosch.

Q. And you would not tolerate that behaviour again. Is that what you said to him in the email, is that the effect of it?

A. That is the effect of it.

Q. And were you continuing to do dealings with Mr Musico at that time?

A. I believe that the three TCP companies were still trading and that I also believed that they were buying from us on a cash basis only.

Q. Did you refer the matter off to the police in terms of this falsification of a Bosch document?

A. No, I didn't.

Amanda Jane Blake

The next witness called by the second defendant was Ms Blake.

Ms Blake essentially admitted to a break down in procedure by not checking the remittance advice:

Q. Because of your failure to follow the usual procedure within Bosch, the position was that you did not pick up that the invoice number was a falsification, correct?

A. Yes, I didn't pick it up.

Mr Moses also emphasised the apparent 'oddity' in Bosch receiving the $198 000:

Q. When you looked at the remittance advice did you notice anything odd about it?

A. No, just that it, no, odd? What's odd mean? ...

Q. When you say what does odd mean, odd means something unusual, is that what you understand odd to mean? Something different?

A. I suppose, yes.

Q. I'm just going to show the witness exhibit P2, you can look at exhibit P2. It's the bottom email that you sent to Mr Piper on 1 April and if you could just read that to yourself and once you've done that if you could let me know so I can ask you a question about that?

A. Okay.

Q. Have you read that?

A. Yep.

Q. At the time that the money was received being the $198,000 you thought that it was a bit odd, didn't you?

A. The 198? No I was expecting the money to come in.

Q. I'm sorry, read your email. You say there at the time that you received the money you thought it was a bit odd?

A. Only because it was more than what the outstanding garnishee was.

Immediately following cross-examination it appeared the second defendant's procedures were not followed. This was a consideration that the plaintiff argued must be detrimental to the second defendant's case.

However, upon reflection, a close reading of the affidavits on which the witnesses were examined and in light of Mr Gor's submissions, I am of the view that the break down in processes were understandable in light of the commercial reality in which Bosch operated.

I was particularly persuaded by the documentary evidence, which highlighted that the payment had been credited to TPC's account before the remittance advice was even received. This, and the fact the money was expected, explains why the remittance advice was not as closely scrutinised as may have been expected. I deal with these concerns in greater length below.

The events leading up to Bosch's legal proceedings against TCP

In May 2008, Bosch and the TCP Companies agreed on a rebate arrangement.

By May 2009, the TCP Companies had fallen substantially into arrears. As at mid May 2009, the TCP Companies owed Bosch just under $193,000. Bosch ceased supply on other than a C.O.D. basis.

Sometime after May 2009, Bosch commenced recovery proceedings against the TCP Companies for their indebtedness. On 8 July 2009, Bosch obtained a default judgment against TCP Vic, Messrs Skarzynski and Musico for $81,712.69.

By 5 August 2009, Bosch obtained defaults judgments against each of TCP Australia and TCP Qld, as well as Messrs Skarzynski and Musico ($55,335.96 against TCP Australia/Skarzynski/Musico and $37,853.04 against TCP Qld/Skarzynski/Musico).

Bosch pursued the enforcement of its judgments issuing Writs for the Levy of Property on 19 August 2009 against the TCP Companies and Messrs Skarzynski and Musico. Examination Notices were issued to Messrs Skarzynski and Musico on the same day.

By 28 August 2009 Bosch had placed garnishee orders on the accounts of the TCP Companies with the Commonwealth Bank of Australia and the National Bank of Australia. These garnishee orders were taking effect as one of the principals of the TCP Companies complained that these had had the effect of freezing payroll.

The events leading up to Bosch relinquishing its legal entitlements

On 31 August 2009 Mr Skarzynski informed the Finance Director of Bosch, Mr Anthony Piper, that payment would be made by the end of that week.

As at 1 September 2009, the indebtedness of the TCP Companies to Bosch was $177,689.06.

The judgment enforcement process was taking effect as a solicitor for the TCP Companies contacted Mr Piper on 2 September 2009 seeking a stay of the garnishee orders and promising payment of $198,000 from a third party .

On 3 September 2009, the plaintiff (" AFSL ") sent by electronic funds transfer $198,000. This figure includes $18,000 in GST which AFSL has sought an input tax credit.

On 4 September 2009 Bosch became aware that it received $198,000 on 3 September 2009. It became aware of the receipt of these funds before the receipt of the remittance advice, which was received (into the Sales Department, not the Administration Department in which Ms Blake worked) sometime around midday. It is this payment which AFSL seeks to recover in these proceedings

Prior to AFSL's transfer of the funds, there had been no contact with Bosch.

On 7 September 2009, Mr Skarzynski sought Mr Piper's assistance to record satisfaction of the judgments by correcting external credit records. Bosch agreed to this.

On 15 September 2009, Consent Orders were filed setting aside Bosch's default judgments against the TCP Companies and discontinuing the recovery proceedings.

Further, during the period 18 to 22 September 2009, Bosch transferred $52,326.35 to the TCP Companies to take account of the rebate, the overpayment, and some other transactions.

Examining the second defendant's case against the above background

The plaintiff advanced its case against the second defendant on the basis of:

(1) Unjust enrichment

(2) Knowing receipt of trust property

Unjust enrichment

In relation to the second defendant, the plaintiff contends:

(1) It made the payment of $198,000.00 to the first defendant as a result of a mistake of fact, namely that invoice OPC051689 dated 28 August 2009 was a genuine invoice created by the second defendant and that it was in respect of actual equipment to be supplied by the second defendant to the plaintiff.

(2) The plaintiff discovered the mistake on or about 5 March 2010 and demanded repayment of the sum of $198,000 from the second defendant.

(3) The second defendant has failed or refused to repay to the plaintiff any part of the sum of $198,000.

(4) As a result, the second defendant has incontrovertibly benefited from the payment by the plaintiff in the amount of $198,000 and has thereby been unjustly enriched at the plaintiff's expense.

(5) In the premises the plaintiff is entitled to repayment of the sum of $198,000 from the second defendant.

The second defendant's argument that the plaintiff did not make out its prima facie case of unjust enrichment

The second defendant submitted that the plaintiff did not make out its prima facie case of unjust enrichment for two reasons:

(1) Allocation of contractual risk

(2) Satisfaction of existing rights

Allocation of contractual risk

The second defendant argued that in pursuing Bosch, AFSL seeks to wholly disregard the Rental Agreement between it and TPC. This is fatal to AFSL's unjust enrichment claim per Lumbers v W Cook Builders Pty Ltd (In Liq.) (2008) 232 CLR 635 .

In relation to this argument the second defendant submitted:

Regard must be had to the contractual arrangements between the parties. The decision in Lumbers v W Cook Builders Pty Ltd (In Liq.) makes clear that this is not confined to the contractual arrangement between the plaintiff and defendant (or the payer and payee), but extends to a contractual arrangement between the plaintiff or payer (AFSL) and a third party (TCP Australia) where this covers the same subject matter. Put another way, in the circumstances of this case, it matters not that there is no contract between plaintiff (AFSL) and defendant (Bosch) (or payer and payee). This is because the contract between AFSL and TCP Australia allocates the risks, rewards and benefits between the parties, including the risk for default. The provision of restitutionary relief for unjust enrichment against Bosch violates the sanctity of contract and upsets or re-allocates those contractual risks, rewards and benefits. For this reason, the claim for unjust enrichment must fail.

I have carefully considered the argument put forward by Mr Gor and on a close reading of Lumbers v W Cook Builders Pty Ltd (In Liq.) (2008) 232 CLR 635 I reject it.

Lumbers was a case where the 'Lumbers' engaged 'Sons' to build a house on their property. The majority of the work was contracted out to a third party 'Builders'. 'Builders' went into liquidation and claimed a sum from 'Lumbers' on the basis of unjust enrichment.

The plurality at [77] emphasised the need to consider the contractual relationship between the parties and whether it would be unconscionable for the 'Lumbers' to retain a benefit conferred on them by 'Builders'.

Considering the facts of Lumbers it is clear why the High Court found the contractual allocation of risk would preclude a claim against 'Lumbers'. This is clearly expressed at [125].

First, the Lumbers accepted no benefit at the expense of Builders which it would be unconscionable to retain. The Lumbers made a contract with Sons which either has been fully performed by both parties or has not. Sons made an arrangement or agreement with Builders which again has either been fully performed or it has not. If either the agreement between Sons and the Lumbers or the agreement or arrangement between Sons and Builders has not been fully performed (because all that is owed by one party to the other has not been paid) that is a matter between the parties to the relevant agreement. A failure of performance of either agreement is no reason to conclude that Builders should then have some claim against the Lumbers, parties with whom Builders has no contract.

It seems to me that the critical issue for their Honours was whether the enriched party unconscionably retained a benefit at the expense of another party. In this case, the 'Lumbers' gave good consideration for a house, which they received. They should not be concerned with how this benefit was conferred; this was a matter for contention between the contracting parties and it would be unfair for the 'Lumbers' to have to make restitution for a loss, the risk of which was voluntarily accepted by the 'Builders'.

In the present case the factual matrix is very different.

The plaintiff made a payment on the basis of fraud by a third party. As a result, the second defendant has received a benefit at the expense of the plaintiff, which it is unconscionable to retain. The second defendant must be concerned with how this benefit was received, as it was a direct result of the fraud. It is not the case that AFS took upon itself through contract the risk of fraud and it is of no concern to the second defendant.

The second defendant has not clearly pointed to any voluntary assumption of contractual risk. This is clearly a circumstance of unjust enrichment arising out of mistake, giving rise to the plaintiff's prima facie entitlement to restitution.

Satisfaction of existing rights

The second defendant claims there has been no unjust enrichment because at the time of receiving $198,000 Bosch was a judgment creditor of the TCP Companies, Mr Musico and Mr Skarzynski. It received $198,000 in satisfaction of those rights. It did this without any suggestion of bad faith or fault. The receipt was completely consistent with what Bosch had been told by the TCP Companies' lawyers, ie this amount would be received from a third party

I reject this argument for reasons identical in relation to the first defendant under the heading 'Payment for good consideration as a complete defence'

The plaintiff has therefore made out its cause of action against the second defendant and has a prima facie right to restitution.

Defences

Change of position

The second defendant claims that on receipt of the $198,000, $177,689.06 of Bosch's judgment debts were extinguished by way of Consent Orders discontinuing the recovery proceedings and setting aside the default judgments.

The second defendant claims that the first occasion on which Bosch learned of any impropriety was in March 2010 when Mr Sofi contacted Ms Blake. By this time, the change of position had become irreversible. Mr Musico informed Mr Sofi in mid-February 2010 of the group's insolvency, of some of the creditors chasing them, and that the group's bankers having frozen the accounts. By then, the TCP Companies had no ability to pay and to this extent Bosch's position became irreversible.

By the time Bosch received notice of the true state of affairs (March 2010) it had paid away the entirety of the $198,000 received and could not pursue the TCP Companies or Messrs Skarzynski and Musico because of their financial position.

Distinguishing between the first and second defendants' changes of position defences

The second defendant's claim is similar to the first defendant's except for one very significant difference. The second defendant can show real detriment by way of actual extinguishment of legal claim to TCP's property.

The above actions are evidence of a real change in position by the second defendant in reliance on AFS's payment. In this circumstance it would be unjust to require the second defendant to remit back to the plaintiff the money it received. Their prima facie entitlement to restitution is displaced per David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. This is to be distinguished from the first defendant whose claim of change of position was speculative and without evidence of any actual change in position.

Knowing receipt of trust property

Given the finding in relation to the plaintiff's unjust enrichment claim, it is important to carefully consider the plaintiff's alternate claim.

In reference to the second defendant, the plaintiff claims the sum of $198,000 was paid by the plaintiff to the second defendant as a result of fraud that was committed upon the plaintiff by TCP, namely as a result of the plaintiff being provided with a fraudulent or false invoice (being invoice OPC051689 dated 28 August 2009) by TCP.

The plaintiff claims that because of the fraud, the $198,000 paid to the second defendant by the plaintiff was impressed with a trust whereby the beneficial interest in the money remained with the plaintiff. By causing the $198,000 to be paid to the second defendant, TCP has acted in breach of that trust.

The plaintiff argued that the second defendant, when it received the sum of $198,000, knew or ought to have known or could have taken reasonable steps to find out that the money had been obtained by TCP by reason of fraud committed upon the plaintiff.

The alleged facts that amount to constructive knowledge on the part of the second defendant are as follows:

(1) The payment of $198,000 was made by the plaintiff from whom the second defendant had never received payment for equipment before.

(3) The amount was for a large sum.

(5) The payment was made for an amount ($198,000) that was discordant with the amount the second defendant asserts it was owed by TCP (namely, $174,901.69).

(7) On the same day that the plaintiff made the payment to the second defendant, the plaintiff advised the second Defendant when confirming the payment by electronic funds transfer that it was a payment made in respect of invoice OPC051689 dated 28 August 2009, being an invoice number which was non-existent and an invoice which the second defendant admits was a false invoice.

(9) The payment was for equipment that was to be supplied by the second defendant, but was never supplied by the second defendant because the equipment never existed.

In response, Bosch took the position that the ' knowing receipt ' case fails for three reasons.

(1) First ,this is not an appropriate case for the imposition of a remedial constructive trust;

(2) Second, there is no relevant notice or knowledge; and

(3) Third, Bosch received payment in satisfaction of its judgment debt as it was its entitlement.

It is the defendant's second proposition in relation to notice which is most compelling.

As outlined above the requisite level of knowledge which must be established is one of the first four categories of knowledge agreed between counsel in Baden v Socit Gnrale pour Favoriser le Dvelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 at 575-576, 582:

(i) actual knowledge;

(ii) wilfully shutting one's eyes to the obvious;

(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man;

(v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

AFSL' case is that Bosch had notice of the fraud for the following reasons:

(1) Bosch had never received payment from AFSL for equipment.

(2) The receipt of $198,000 was a large sum.

(3) The incongruity between the sum received ($198,000) and debt owed $177,689.06

(4) On the same day as AFSL transferred $198,000, it sent a remittance advice notifying an invoice which was non-existent and which Bosch admits is false.

(5) Bosch never supplied the equipment the subject of the fake 'Bosch' invoice.

When the evidence is examined, none of these factors whether separately or in combination amount to notice of any impropriety, much less notice of fraud (a matter which having regard to the seriousness of the allegation bears the commensurately heavy onus per Briginshaw v Briginshaw ). Each is dealt with in turn below.

Payments from third parties

The evidence of Ms Blake and Mr Piper is that it was not unusual to receive payments from third parties, including finance companies. When cross-examined, Mr Piper gave evidence that he received payment from third parties on behalf of Bosch.

It is AFSL's evidence that its business was making payments to third parties it had never dealt with. This is its normal practice.

No explanation is offered why a payment from a third party on its own or in combination amounts to notice of impropriety.

AFSL did not cross-examine to the contrary.

The receipt of large sums

Ms Blake's evidence was that it was not unusual to receive large sums.

She was not cross examined to suggest that the receipt of a large sum by itself or in combination with other factors was a cause for concern or alarm.

I see nothing suspicious about a company the size of Bosch receiving such large sums.

The difference between the receipt and debt

Ms Blake and Mr Piper's evidence is that overpayments were not unusual.

Mr Piper's evidence is that he thought it may have been related to a Coles payment of $20,000 or a C.O.D transaction. Indeed a payment of $20,000 was received on 1 September 2009.

It must be remembered that Bosch is a judgement creditor and looking to collect overdue moneys. In Port of Brisbane v ANZ Securities McPherson JA at [17] stated that commercial enterprises are not detective agencies on the lookout for fraud when receiving payment for goods or services. The need to consider commercial realities is central.

The remittance advice

The sum of $198,000 was sent by electronic funds transfer on 3 September 2009 and dealt with on the morning of 4 September 2009. The remittance advice (although dated 3 September 2009) arrived at about noon on 4 September 2009 (see the fax signature at the top).

Far from alerting Bosch to fraud, the remittance advice received at about noon on 4 September 2009 was too late to convey any useful information to Ms Blake.

The email exchanges of 31 August 2009 and 2 September 2009 were such that Ms Blake was expecting receipt of $198,000 from a third party source and she was to allocate this sum amongst the TCP Companies.

On the morning of 4 September 2009, Ms Blake discovered this sum in Bosch's bank account the sum expected. The receipt of remittance advice some hours later into the Sales Department (not the Administration Department where Ms Blake worked) conveyed no useful information which Ms Blake needed to identify the sum and how to allocate it. This was her evidence on cross-examination.

AFSL made much of the remittance advice, yet Mr Sofi's evidence is that on at least 3 occasions where rental agreements (nos. 200911001, 1029, and 1030) were concluded, significant sums were paid without a remittance advice being sent to the payee. This was consistent with Ms Blake's evidence that remittance advices are not always sent. This underscores that whilst these documents are routinely sent and may serve a useful function, their absence does not impede the receipting and allocation of payments and this is precisely what occurred at Bosch.

Conclusion

The second defendant has established a good defence to the plaintiff's prima facie right of restitution under the principle of unjust enrichment. The plaintiff has failed to make out a claim in respect of knowing receipt of trust property.

The defendant is not required to make any payment to the plaintiff in respect of the sum of money received on 3 September 2009.

Turning to the case concerning the third defendant

The plaintiff claims restitution against the third defendant on the basis of:

(1) Unjust enrichment

(2) Knowing receipt of trust property

The facts relied upon by the plaintiff in reference to the unjust enrichment claim are as follows:

(1) The plaintiff made the payment of $192,445.00 to the third defendant as a result of a mistake of fact, namely that invoice 08898 dated 14 September 2009 was a genuine invoice created by the third defendant and that it was in respect of actual equipment to be supplied by the third defendant to the plaintiff.

(2) The plaintiff discovered the mistake on or about 5 March 2010 and demanded repayment of the sum of $192,445 from the third defendant.

(3) The third defendant has failed or refused to repay to the plaintiff any part of the sum of $192,445.

(4) The third defendant has incontrovertibly benefited from the payment by the plaintiff in the amount of $192,445 and has thereby been unjustly enriched at the plaintiff's expense. The unjust enrichment arises because the plaintiff has made a payment of $192,445 to the third defendant and the third defendant did not supply any equipment to the plaintiff.

(5) In the premises the plaintiff is entitled to repayment of the sum of $192,445 from the third defendant.

In relation to the constructive trust claim, the plaintiff states:

(1) The sum of $192,445 was paid by the plaintiff to the third defendant as a result of fraud that was committed upon the plaintiff by TCP, namely as a result of the plaintiff being provided with a fraudulent or false invoice (being invoice 08898 dated 14 September 2009) by TCP.

(2) In the circumstances, because of the fraud, the $192,445 paid to the third defendant by the plaintiff was impressed with a trust whereby the beneficial interest in the money remained with the plaintiff. By causing the $192,445 to be paid to the third defendant, TCP has acted in breach of that trust.

(3) On or about 8 October 2009 the third defendant received the sum of $192,445, being trust property.

(4) The third defendant, when it received the sum of $192,445, knew or ought to have known or could have taken reasonable steps to find out that the money had been obtained by TCP by reason of fraud committed upon the plaintiff.

(5) When receiving the sum of $192,445 the third defendant:

(a) Either, shut its eyes to the obvious; or

(b) Wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make; or

(c) Had knowledge of circumstances which would have indicated to an honest and reasonable person; or

(d) Had knowledge of circumstances which would put a reasonable person on inquiry;

(e) that the sum was received as a result of a fraud perpetrated on the plaintiff and was thereby money that was impressed with a trust.

(6) In the circumstances the third defendant had notice of the trust that arose as a result of the fraud that was committed upon the plaintiff by TCP.

(7) In the premises the third defendant became liable for knowing receipt of trust property under the first limb in Barnes v Addy to hold the sum of $192,445 on constructive trust for the plaintiff, and it continues to be liable to hold that sum on constructive trust for the plaintiff.

Mr Christowski's evidence

Mr Christowski proved a difficult witness. During cross-examination he displayed an almost unbelievable lack of knowledge as to the events with which these proceedings were required to deal.

In reference to critical events such as the payment of money by TCP, Mr Christowski frequently could not recall the events.

Q. Can I ask you then to go to page 40 of your affidavit. This is annexure K your Honour. Now prior to this email of 30 September 2009 had you placed any requests of Mr Skarzynski to repay money back to you ?

A. I don't recall exactly .

Q. And in this email he informed you that the best that he could do was to pay you $100,000 on 9 October and the balance at the end of October. Correct ?

A. Yes .

Q. So when you received this email you were expecting to receive on or about 9 October the sum of $100,000 from him and the rest at the end of October. Correct ?

A. Can't recall .

Q. Sir, I'm reading to you what's in the email ?

A. Yes I know but I can't recall that's exactly what I thought was going to happen because at that stage I didn't really believe anything he was saying

Mr Christowski's oral evidence also frequently did not accord with the information provided in his affidavit:

Q. On 9 October you've given evidence that there was an amount of money that was deposited into your overdraft facility. Is that right ?

A. Yes .

Q. That was the sum of $192,445 is that right ?

A. Yes .

Q. And I think your evidence is in your affidavit that you checked your bank account on line that day. Is that right ?

A. I'd received an email saying that he'd deposited the money in my account. I had a look at the account and the money was there. I was happy .

Q. Where is the email that you're referring to that he told that he deposited the money into your account ?

A. I don't know. You guys have got it .

Q. I'm sorry ?

A. You guys have got it.

Q. In that email does he tell you he's deposited $192,000 ?

A. No, no, he says he's deposited into the money into my account today . That was the words I recall from the email. I don't think he said the exact amount that he deposited.

At times there were even direct contradictions:

Q. Well at that stage you were still on friendly terms with him weren't you ?

A. Yeah, I was still friends with him but I was still thinking that you know it had been more than three weeks .

Q. More than three weeks since what sir ?

A. Since he told me he was going to pay me back the money .

Q. Did he. Where's that in your affidavit ?

A. I'm just thinking that's probably what I was thinking. Maybe it's not in my affidavit .

Q. I'm asking you is it in your affidavit ?

A. I don't know .

Q. Do you want me to have a look. If there's a conversation there in which he tells you that you were to get three weeks ago ?

A. No, he told me originally in the original agreement he said he was going to pay me back in three weeks . I'm just going off what he originally told me

Q. Didn't he originally tell you four weeks ?

A. Okay, he said four weeks .

At one point, these contradictions were so stark, that Mr Moses suggested that Mr Christowski may have been manufacturing evidence from the witness box:

Q. Did he tell you why he was approaching you at this time to access funds?

A. Yes.

Q. What did he say?

A. He said he needed a loan, some money to help him with his business.

Q. Did he tell you why?

A. Yeah, yes he did.

Q. And what did he say to you?

A. He said that the - that was just at the stage where the GFC had hit. You know, people wanted to be paid earlier, you know, suppliers wanted to be paid quicker. You know, his clients were, you know, wanting to stretch out their payments and he wanted - he needed some money just to see him through a big contract he had.

Q. Have you just made that up?

A. Sorry?

Q. Have you just made that evidence up?

A. No.

Q. Can you go to paragraph 8 of your affidavit.

A. Yeah.

Q. That's not what you told the Court there.

A. What did I say?

.....

Q. So what conversation is true, the one that you told the Court a few moments ago when I asked you the question, or what you've deposed to in the affidavit, sir?

A. The one I deposed in the affidavit.

Q. Why did you give the evidence a few moments ago when I asked you the question about the contents of the conversation?

A. That's just what I recalled and I - I don't know, I don't know.

I accept Mr Marshall's submission that cross examination is not a memory test, but Mr Christowski's difficulty with recall must be given consideration when deciding the weight to be given to his evidence. In the circumstances, his evidence, unless substantiated by documentary evidence, must be discarded in its entirety. Whatever may or may not have been in his mind through this seemingly amazing exhibition of non-recall, the only approach open to the Court is to reject his evidence unless substantiated in the fashion already alluded to.

Mark Dominic Hourigan

Mr Hourigan, Jetobravo's solicitor, also gave evidence. His evidence was prompted by a significant confusion as to the instructions Mr Christowski gave his solicitor in reference to his 5 May response to the plaintiff's solicitors. The reason for his evidence can only be viewed as an attempt to repair the credibility of his client.

While I accept Mr Hourigan's evidence and appreciated his candid admission that his wording in that letter was not as accurate as it should have been in reference to whom he received instructions from, ultimately his evidence was not sufficient to persuade me of Mr Christowski's reliability.

It is with this in mind that the defences raised by the third defendant must be approached.

The unjust enrichment claim

The Court's approach to the unjust enrichment claim is identical to the other defendants, save for one importance difference stressed by Mr Marshall.

Mr Marshal submitted that in finding unjust enrichment the plaintiff must prove that the Ironmark Engineering invoice number 08898 dated 14 September 2009 was false. Failing this, the payment could not be definitively said to be based on a mistake of fact and the plaintiff has no valid cause of action against the third defendant.

On this point Mr Marshall submitted:

(1) The plaintiff needs to prove to the Briginshaw standard that a fraud has been committed.

(2) Two non-parties (Richard Scarzynski and TCP) are alleged to have committed a fraudulent act. Because the alleged fraudsters have not been joined or been heard, the Court should exercise caution. At the very least, a representative of Ironmark should have been called.

(3) Proving the Ironmark Engineering invoice is false is important to the plaintiff because the plaintiff's case theory is that it made a payment of $192,445 that was received by Jetobravo, " ... as a result of the mistake of fact, namely that: (a) each of the invoices was a genuine invoice; and (b) that the plaintiff would obtain title and property in the equipment identified in each of the invoices. "

(4) The difference between the plaintiff's cases against Hills and Bosch on the one hand and against Jetobravo on the other is that the false invoices in the Hills and Bosch cases were purported to be Hills and Bosch invoices. Both Hills and Bosch concede that the two invoices were not theirs, and thus there is strong evidence that these invoices were false.

(5) There is no such evidence from Ironmark.

I accept the third defendant's submission that a difference must be drawn between the first and second defendants on the one hand and the third on the other. However, this difference does not prohibit a finding of unjust enrichment.

I accept that the plaintiff has not absolutely proven beyond any reasonable doubt that that the Ironmark invoice was forged, nor was the equipment not delivered. However, such a high standard is not necessary. On the balance of probabilities, the plaintiff has more than discharged their onus of proof in this regards for the following reasons:

(1) Ironmark Engineering invoice number 08898 dated 14 September 2009 did not contain the company's bank details but rather Mr Christowski's;

(2) There is no evidence of any physical equipment existing;

(3) In cross examination Mr Marshall highlighted some equipment was sold by Grays Online, but did not by any means relate this sale to the Ironmark equipment; and

(4) Given the manner in which AFS was defrauded in relation to the other defendants, it is safe to infer that a similar fraud took place.

Ultimately, considering AFS paid money in the expectation of obtaining title to equipment, but instead paid this money to a dissociated third party's bank account, there can be no finding other than a mistake of fact on behalf of the plaintiff.

Full defences

The third defendant submitted that if the plaintiff was found to have a prima facie right to restitution, then it relied on the defence of change of position.

It expressed its defence in the following terms:

(1) Jetobravo lent money to TCP;

(2) TCP advised by email on 9 October 2010 that, " We have arranged to transfer $192,445 into your account via EFT today ", that is, TCP was making the payment, or arranging for it to be made on its behalf;

(3) the payment was received in partial discharge of the $450,000 loan made by Jetobravo to TCP;

(4) further, to the extent necessary, the $192,445 was received into Jetobravo's NAB Overdraft Account and served to reduce the debt (by way of overdraft) owed by Jetobravo to NAB;

(5) This position is now irreversible, especially given that the NAB Overdraft Account was closed on 29 January 2010.

Even if I accept in full this sequence of events, I fail to see any discernible detriment arising to the third defendant as a result of this payment. There is merely a disappointment of expectation. It is detriment rather than disappointment that is essential to making out the change of position defence ( Commercial Bank of Australia Ltd v Younis [ 1979] 1 NSWLR 444 at 450). The third defendant must show that in all the circumstances restitution would be unjust. I do not accept that this is the case. The prima facie entitlement of the plaintiff to restitution is undisturbed.

Partial defences

The third defendant submitted that account must also be taken of amounts received from TCP in payment on the relevant rental agreement 05102009/15 in the amount of $37,510.

As with the first defendant, I accept the argument. Considering the benefit that has flowed to the plaintiff it is fair to reduce the remittance amount by this figure.

Conclusion in respect of the third defendant

The third defendant was unjustly enriched by an amount of $192,445 paid by the plaintiff on October 8 2009.

This amount is to be repaid by way of restitution with a deduction of $37, 510 for rental payments received by the plaintiff in reference to rental agreement 05102009/15.

The total restitution is to be $154 935.

This conclusion means that I do not need to deal with the plaintiff's alternate claim.

*****************

Decision last updated: 07 April 2011

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Citations

Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2011] NSWSC 267

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Statutory Material Cited

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Medium Neutral Citation:	Australian Financial Services and Leasing Pty Ltd v Hills Industries Limited & Ors [2011] NSWSC 267
Hearing dates:	28/3/2011 - 31/3/2011, 1/4/2011
Decision date:	05 April 2011
Jurisdiction:	Equity Division - Commercial List
Before:	Einstein J
Decision:	Verdict for the plaintiff as against the first defendant. Verdict for the second defendant as against the plaintiff. Verdict for the plaintiff as against the third defendant
Catchwords:	Equity Perpetration of a fraud by outside party Plaintiff carrying on finance business Fraudulent invoices Unjust enrichment Elements of unjust enrichment claim Which of a number of entities should bear the cost of the fraud Fraudulent invoices Alternative claims for knowing receipt of trust property Change in position Recognized elements of establishing change of position defence Contractual allocation of risk Barnes v Addy
Cases Cited:	Australia & New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662 Baden Delvaux & Lecuit v Socit Gnrale pour Favoriser le Dvelopment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 Barnes v Addy (1874) LR 9 Ch App 244 Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 Black v S Freedman & Company (1910) 12 CLR 105 Briginshaw v Briginshaw (1938) 60 CLR 336 Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444 David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 Hancock Family Memorial Foundation Limited v Porteous [1999] WASC 55 Kalls Enterprises Pty Ltd (In Liq) v Baloglow [2007] NSWCA 191 Lipkin Gorman v Karpnale Pty Ltd [1991] 2 AC 548 Lumbers v W Cook Builders Pty Ltd (in liquidation) (2008) 232 CLR 635 Magafas v Carantinos [2007] NSWSC 917 Malouf v MBF Australia Ltd [2007] NSWSC 1020 Menzies v Perkins [2000] NSWSC 40 Orix Australia Corporation Ltd v Moody Kiddell & Partners [2005] NSWSC 1209 Palmer v Blue Circle Southern Cement Ltd (1999) 48 NSWLR 318 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84 Port of Brisbane Corporation v ANZ Securities Limited [2003] 2 Qd R 661 Robb Evans of Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75 Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025 Sweeney v Howard [2007] NSWSC 852 Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Texts Cited:	Mason & Carter's Restitution Law in Australia, Keith Mason; J.W. Carter; G.J. Tolhurst; 2nd edition, 2008, LexisNexis Butterworths
Category:	Principal judgment
Parties:	Australian Financial Services and Leasing Pty Ltd (Plaintiff) Hills Industry Limited (First Defendant) Bosch Security Systems Pty Limited (Second Defendant) Jetobravo Pty Limited (Third Defendant)
Representation:	Counsel: Mr A Moses SC, Mr M Cleary (Plaintiff) Mr T Thawley (First Defendant) Mr L Gor (Second Defendant) Mr R Marshall (Third Defendant) Solicitors: Berry Buddle Wilkins Lawyers (Plaintiff) Cosoff Cudmore Knox (First Defendant) HWL Ebsworth (Second Defendant) Lee Hourigan & Brooks (Third Defendant)
File Number(s):	2010/0133256