Southage Pty Ltd v Vescovi
[2014] VSC 141
•4 April 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 00450 of 2012
| SOUTHAGE PTY LTD | Plaintiff |
| v | |
| LISA ANGELA VESCOVI & ORS | Defendants |
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JUDGE: | Macaulay J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27 , 28 August 2013 | |
DATE OF JUDGMENT: | 4 April 2014 | |
CASE MAY BE CITED AS: | Southage Pty Ltd v Vescovi | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 141 | Second Revision: 7 April 2014 |
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RESTITUTION − Money paid under mistake of fact − Unjust enrichment – Where defendant’s signature was forged on loan documentation – Where money lender lent money mistakenly believing defendant had requested a loan and had given a mortgage security − Loan funds used by defendant’s husband to pay deposit under contract of sale for other land – Proper identification of moment of enrichment – Whether enrichment received by virtue of defendant’s subsequent nomination as purchaser under the contract − Principles of tracing − Whether proceeds of loan could be traced into estate in land − Tracing into a mixed fund at common law − Whether assessment of enrichment by acquiring estate interest in land must take into account liabilities incurred in consequence − Whether enrichment by virtue of occupation of property − Defence of change of position on the faith of the receipt – Whether knowledge of facts entitling defendant to deal with property must be derived from payer − Significance of non-retention of benefit − Unjust to require restitution − David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 − Heperu Pty Ltd v Belle (2009) 76 NSWLR 230 − Perpetual Trustees Australia Ltd v Heperu Pty Ltd (2009) 76 NSWLR 195 − Hills Industries Pty Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380 − Lipkin Gorman (a firm) v Karpnale [1991] 2 AC 548 – State Bank of NSW v Swiss Bank Corporation (1995) 35 NSWLR 350 - Commissioner of State Revenue v Politis [2004] VSC 126.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D Aghion | Velos Lawyers |
| For the First Defendant | Mr P Bornstein | Hendersons Legal |
| For the Second Defendant | Mr M Rivette | Obst Legal |
| For the Third Defendant | Did not appear |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Background......................................................................................................................................... 3
Issues.................................................................................................................................................... 6
Did Ms Vescovi receive a benefit from the Southage loan by which she was enriched?... 9
Tracing, and the nature of the claim being asserted or claimed.......................................... 10
Moment of enrichment............................................................................................................... 13
Enriched by the nomination?.................................................................................................... 16
Enriched by taking title to the property?................................................................................. 18
Tracing into a ‘mixed fund’ at common law?......................................................................... 18
Enrichment must take into account liabilities?....................................................................... 19
Enrichment by occupying the property?................................................................................. 22
Was the enrichment unjust?........................................................................................................... 23
Did Ms Vescovi change her position on the faith of the receipt of the benefit?................. 25
On the faith of the receipt: the source of the payee’s knowledge....................................... 26
Application to the facts.............................................................................................................. 29
Relevance of not retaining any benefit..................................................................................... 31
Other matters.................................................................................................................................... 34
Summary and conclusion............................................................................................................... 35
HIS HONOUR:
Introduction
Both Southage Pty Ltd (the plaintiff) and Lisa Vescovi (the first defendant) are the victims of a fraud.
Of the numerous issues that once existed in these proceedings, only one now remains for my determination: is Ms Vescovi bound by the principles of unjust enrichment to make restitution of money lent by Southage which partly funded the purchase of her family home?
Ms Vescovi became the sole registered proprietor of her family home, a property in the Melbourne suburb of Kew, in February 2010. Initially, her husband, Robert Kalivoda, had contracted to buy the home in his name alone. He paid the deposit on the contract, telling Ms Vescovi he did so out of his own funds (or those of his business). It is now clear that what he told Ms Vescovi was false. But, on the basis of what she was told, Ms Vescovi consented to being nominated as substitute purchaser to take a transfer of the title at settlement.
Before that nomination took place, on 20 January 2010, Southage, a money lender, advanced $285,000 pursuant to a letter of offer of the same date, apparently signed by Ms Vescovi. It was a forgery. Ms Vescovi had no knowledge of Southage or the letter of offer.
According to the letter of offer, the loan was required to fund the deposit on an ‘investment property’. As it turned out, at Mr Kalivoda’s instigation $219,500 of the amount lent was applied towards the deposit on the purchase of the Kew property. The loan was to be repayable in 3 months from drawdown and was to be secured by a second mortgage over a different property - a property at 62 Cole St, Williamstown.
Ms Vescovi was the registered proprietor of the Williamstown property. A mortgage over that property, again apparently signed by Ms Vescovi on 20 January 2010, was provided to Southage at the time of the advance. It was also a forgery.
When Southage lodged the mortgage for registration at the Land Titles Office about two years later, Ms Vescovi obtained an interlocutory injunction from this court restraining the Registrar of Titles from proceeding to register the mortgage. She claimed that her signature on the document was a forgery. Southage did not accept her assertion.
By that time the Kew property had been sold. Ms Vescovi did not receive any proceeds from its resale. Southage has not been repaid its loan. Mr Kalivoda is a bankrupt and the company that operated his business is in liquidation.
Two separate legal proceedings[1] were issued as a result. In one proceeding, Southage sued Ms Vescovi claiming an entitlement to register the Williamstown mortgage and seeking the repayment of its loan (and unpaid interest) on a variety of bases. In the other, Ms Vescovi sought a permanent injunction restraining the Registrar from registering the Williamstown mortgage. I heard the proceedings together.
[1]Southage Pty Ltd v Vescovi & Ors SCI 2012 00450 and Vescovi v Southage Pty Ltd & Anor SCI 2012 01167.
During the hearing of the proceedings Southage conceded that Ms Vescovi’s signature on the mortgage over the Williamstown property was a forgery, as was her signature on the letter of offer. Its concession followed uncontested evidence given by a solicitor that a certificate, allegedly signed by him as confirmation that he had given advice to Ms Vescovi about the mortgage and had witnessed her signature, was itself a fabrication by some other unidentified person. He gave no such advice nor did he witness her signature.
As a consequence, Southage further conceded:
·first, its claim for an order that the Registrar of Titles register the Williamstown mortgage must fail;
·secondly, Ms Vescovi’s claim for a permanent injunction must succeed; and
·thirdly, its claim for recovery of the $285,000 under the mortgage (or associated loan documentation) must fail.
Orders giving effect to those concessions have been made.
However, Southage pleaded two alternative claims against Ms Vescovi in case the court found the mortgage to be a forgery. One of those alternative claims, for the restitution of money paid by Southage under a mistake of fact, gives rise to the question of unjust enrichment identified above. The other alternative claim was not pursued.[2]
[2]The further claim, that Southage can recover against her by reason of an unpaid vendor’s lien, was not formally abandoned, but no submissions were advanced in favour of it. Counsel for Southage informed me that, on the state of the authorities, he could not expect the court to find in his client’s favour. I will say nothing further about that claim.
Before turning to the issue that remains, it is necessary to tell the story set out above in greater detail.
Background
Lisa Vescovi and Robert Kalivoda married in November 2006. Mr Kalivoda conducted a business called RK Consultancy. Ms Vescovi is a lawyer. She practised as a lawyer until 2008 when she ceased work shortly before the birth of their first child. She had purchased the property at 62 Cole St, Williamstown well before her relationship with Mr Kalivoda. After they met and formed a relationship she kept the Williamstown property as an investment.
At the time they were married she and Mr Kalivoda lived in a rented property in Parkville. After a time they began looking for a property to buy. In December 2009 their attention was drawn to a property at 4 Evans Rd, Kew.
On 16 December 2009, Mr Kalivoda entered a contract in his name alone to purchase 4 Evans Rd, Kew for $2,695,000. He paid the initial deposit of $50,000 by 5 January 2010. Ms Vescovi said that her husband was the driving force for purchasing a property in that price bracket. She would have been content with a more modest property. She was not particularly privy to her husband’s financial position, but he represented to her that it was substantial. He had previously informed her that he had $2 million in shares that he would sell if they were ever to buy a house, and that his business was worth several millions of dollars.
Of the $285,000 advanced by Southage on 20 January 2010, $219,518[3] was used to pay the unpaid balance of the $269,500 deposit on the purchase. Most of the balance of the loan was paid to Mr Kalivoda’s business, RK Consultancy. Ms Vescovi was unaware the deposit had been partly funded by a loan from Southage. She knew nothing of Southage, or the Southage loan, or the forged mortgage given over her Williamstown property as security for the loan. She asked her husband where the deposit funds had come from. He told her, and she believed, that he paid it from a cheque drawn on his business. She continued to hold that belief until early 2012.
[3]An additional $18 was paid to reimburse the vendor for a bank fee incurred when Kalivoda’s initial cheque for the $50,000 was dishonoured.
After paying the deposit, on 5 February 2010 Mr Kalivoda nominated Ms Vescovi as purchaser of the Kew property. She accepted the nomination ignorant of the Southage loan and the Williamstown mortgage. She did not pay Mr Kalivoda any money in consideration for being nominated as purchaser. She said that she understood it was not uncommon for ‘husbands with their own companies to put properties in their wive’s names’. She was not challenged when she said that, had she known the deposit had been paid from borrowed money, she would not have agreed to be nominated as purchaser.
The purchase was settled on or about 17 February 2010. The balance of the purchase monies (in excess of $2.4 million) was entirely borrowed from the National Australia Bank (NAB). To secure its loan the bank took a first mortgage over the Kew property, executed by Ms Vescovi on 12 February 2010. She signed the mortgage documents in the office of an independent solicitor who gave her advice about them.
Upon settlement of the purchase contract, she became both registered proprietor and mortgagor of the Kew property. Combined, the stamp duty and registration fee paid in respect of the purchase was $149,577. Funding for those expenses also came from the NAB loan secured by the mortgage.[4]
[4]Although no explicit evidence was given about this, the argument proceeded on that basis and it can reasonably be inferred from the whole of the evidence that must have been the case.
Ms Vescovi and Mr Kalivoda lived at the Kew property with their children (their second being born in November 2010) until they separated in September 2011. Shortly before separating, in late August 2011, Ms Vescovi discovered that a caveat had been lodged by Southage on her Williamstown property to secure an alleged loan made by that company. That was her first knowledge of anything to do with the Southage loan. Even then she was unaware that the loan had funded part payment of the deposit on the Kew property. She did not learn that until the following February.
The Kew property was sold by Ms Vescovi at auction on 16 July 2011 for $2,610,000, less than the price for which her husband had agreed to buy it 20 months earlier. Mr Kalivoda had not maintained mortgage payments to the NAB and, as he had made clear to Ms Vescovi, either she sell the house or the NAB would. That sale was settled on 16 September 2011. The NAB took the whole of the proceeds. Whether or not there remained a deficit in the amount repaid to the NAB is not clear, but there was no surplus payable to Ms Vescovi.
RK Consulting was placed into liquidation as a result of taxation debts on 14 December 2010 and Mr Kalivoda was made bankrupt on 27 January 2012. Mr Kalivoda was the third defendant to Southage’s claim but did not file an appearance and has played no part in this proceeding.
So far I have not mentioned the second defendant, Stavros Katsimadakos (trading as Katsimadakos Lawyers). Southage engaged Katsimadakos, a solicitor,[5] in respect of the $285,000 loan and mortgage transaction that enabled Mr Kalivoda to pay the deposit. Because Southage settled its claim against him at the outset of the proceeding, Katsimadakos took no part in the trial. Although there is no need for me to say anything further about that claim at this stage, I return to it briefly under ‘Other Matters’ below.
[5]Not the same solicitor referred to in [10] above.
Issues
In final submissions Southage put its claim against Ms Vescovi almost exclusively on the basis of money paid under a mistake of fact.
Southage initially stated that the court’s jurisdiction to order restitution from Ms Vescovi might also be founded on the basis that the money could be pursued as the proceeds of established fraud on the part of Mr Kalivoda. Apart from making a statement to that effect, Southage advanced very little further argument on the issue of fraud, or by whom it was committed or what the consequence was if it was proven. No claim based on fraud was pleaded. Ms Vescovi did not deal with the subject at all.
Clearly, the finding of forgery bespeaks fraud. Such as it was, the evidence may permit a reasonable degree of speculation that the fraud was committed by Mr Kalivoda. But not enough was established by the evidence about Mr Kalivoda’s business, or the precise interactions that led to the submission and collection of documents to and from Southage, to enable me to be satisfied on the requisite standard[6] that the money advanced by Southage to pay the deposit, and other business expenses of RK Consultancy, was procured by a fraud committed by Mr Kalivoda or any other identified person.
[6]See Evidence Act 2008 (Vic) s 140(2); Briginshaw v Briginshaw (1938) 60 CLR 336
For that reason alone I decline to make any findings about fraud. It was not suggested by Southage that its claim based upon fraud enjoyed better or different prospects than a claim based on mistaken payment. Therefore, I will consider the claim for relief only on the ground of money paid under a mistake of fact.
Payment of money made under a mistake, whether of fact or law, is recoverable on restitutionary principles. In David Securities Pty Ltd v Commonwealth Bank of Australia[7] the High Court said -
The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognizes would make an order for restitution unjust. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust.[8]
[7](1992) 175 CLR 353 (‘David Securities’).
[8]Ibid 379 citing Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662, 673
One circumstance that may show that the recipient’s receipt or retention of the payment is not unjust, as contemplated in that passage, is that the recipient has, in reliance upon the receipt of payment, and in good faith, changed his or her position to his or her detriment.[9]
[9]Ibid 379-380.
As matters unfolded, Ms Vescovi neither expressly admitted nor did she dispute that Southage had paid the money under a mistake of fact. No evidence was given on behalf of Southage of any subjectively held mistaken belief that induced payment. But, whether or not it paid money by mistake is to be determined objectively.[10] The objective facts were:
·Southage required a letter of offer and instrument of mortgage, each signed by Ms Vescovi, before making the loan;
·it made the loan upon receipt of those documents, bearing the apparent signature of the offeree and mortgagor, together with what purported to be a certificate of legal advice from an independent solicitor; and
·neither the letter of offer or mortgage was a validly signed instrument because the signature of Ms Vescovi had, in each case, been forged.
[10]Taylor v Johnson (1983) 151 CLR 422, 428-9.
I accept that a reasonable person would infer from those facts that Southage made the loan mistakenly believing it was dealing with Ms Vescovi: that is, that Ms Vescovi had requested the loan and had given a registrable mortgage over the Williamstown property as security. In fact, such a belief would be mistaken because she knew nothing of either transaction and had not signed any of the loan or security documents.
Because there was no actual dispute between the parties that the money was paid under a mistake of fact, the arguments by counsel focused, in substance, on three things, namely:
·Did Ms Vescovi receive a benefit from the Southage loan by which she was enriched?
·If so, was that enrichment unjust?
·If so, did she change her position on the faith of the receipt such that she has a good defence to the claim?
Professor Birks, whose work on the subject has contributed so much to the development of the concept of unjust enrichment, said every problem of unjust enrichment could be ‘unlocked’ by asking five questions:
(i) Was the defendant enriched? (ii) Was it at the expense of this claimant? (iii) Was it unjust? (iv) What kind of right did the claimant acquire? (v) Does the defendant have a defence?[11]
[11]Peter Birks, Unjust Enrichment (Oxford University Press, 2nd Ed, 2005) 39.
Although I will not necessarily address my reasons to Professor Birks’ precise questions in that order, I nevertheless intend to deal with them in the course of addressing the three issues as argued by counsel. As will appear, the second of the issues posed by counsel, concerning the injustice of the enrichment (if any), is, at least in this case, very closely intertwined with the third issue concerning change of position.
Did Ms Vescovi receive a benefit from the Southage loan by which she was enriched?
The very first issue to determine in this case is whether Ms Vescovi benefited, in the sense of being enriched, by the loan made by Southage.
It might be thought that the benefit received by Ms Vescovi was obvious: she acquired the interest, partly paid for by Southage, of registered proprietor of the Kew property. But the benefit associated with the acquisition of the interest in land is complicated by attendant liabilities incurred as a necessary incident of that acquisition.
Perhaps to avoid that complication, Southage attempted to show that Ms Vescovi received benefits that were independent of the land interest itself: first, at nomination, then secondly (or alternatively) by virtue of her occupancy of the home. For her part, Ms Vescovi argued that, for a number of reasons, she received no benefit at all.
For these reasons it is necessary to closely analyse the issue of the receipt of a benefit (or enrichment).
Before analysing those things that might qualify as such a benefit, it is convenient to recapitulate in some further detail the steps that occurred from the point of making the loan:
·On 20 January 2010 Southage provided a cheque for $219,518 payable to Jellis Craig to Mr Kalivoda who, through his solicitors, sent it to Jellis Craig, agents for the vendors of the Kew property. As already mentioned ([18] above), most of the rest of the $285,000 loan was applied to Mr Kalivoda’s business.
·No doubt, the proceeds of that cheque – being an order by Southage to its bank to pay money to the payee’s account – were received by Jellis Craig on behalf of the vendor.
·When received, that money (along with the earlier $50,000) satisfied Mr Kalivoda’s contractual obligation to pay the deposit and ‘guaranteed’[12] his performance of the contract. It also reduced the ultimate sum payable by him at settlement of the contract by a commensurate amount.
·On 5 February 2010, pursuant to a clause in the contract of sale permitting him to do so, Mr Kalivoda nominated Ms Vescovi to be ‘substitute purchaser to take a transfer or conveyance in lieu of the Purchaser’. By her signature to the nomination form Ms Vescovi accepted that nomination. No consideration passed between them.
·On 17 February 2010, at settlement of the contract, the vendor provided a transfer of the land transferring the property to Ms Vescovi. The balance of purchase price (with adjustments, $2,442,580), and the money for the stamp duty and registration fees ($149,577), were advanced by the NAB. The advance was secured by a mortgage over the Kew Property that Ms Vescovi signed on 15 February 2010 under the terms of which she became personally liable for its repayment.
·Thereafter, the transfer and mortgage were registered on title and Ms Vescovi became the registered proprietor and the mortgagor of the property.
·Between about March 2010 and September 2011 Ms Vescovi and her family occupied the property.
[12]P.N Wikrama-Nayake, Voumard: The Sale of Land in Victoria (The Law Book Company Limited, 4th ed. 1986) 461
Tracing, and the nature of the claim being asserted or claimed.
It can be seen from the above set of steps that the various stages (to which I shall refer shortly) at which Ms Vescovi potentially received a benefit from the Southage loan were at increasing points of remoteness, in time and in kind, from the moment the loan of money was made. This is far from a simple case of money being transferred from the plaintiff-payer’s bank account to the defendant-recipient’s bank account, either directly or via an intermediary account.
Accordingly, both parties referred to the ‘traceable proceeds’ of the Southage loan in their respective arguments. It is helpful, at the outset, to say something about how the principles of tracing might operate and assist in the exercise of identifying if a benefit was received by Ms Vescovi.
The essential function of tracing is, I believe, very helpfully explained by these two propositions from Professor Smith in his work The Law of Tracing:
Tracing identifies a new thing as the potential subject matter of a claim, on the basis that it is the substitute for an original thing which was itself the subject matter of a claim.[13]
…
What is traced, then, is the value inherent in things. It is value, not property or assets, which can be identified in different forms after each substitution. The grammatical object of ‘to trace’ is ‘value’. When a person makes a substitution through which we trace, value is the only constant that is held by that person before, through and after the substitution.[14]
[13]Lionel D. Smith, The Law of Tracing (Clarendon Press, 1997) 6
[14]Ibid 15
Importantly, the outcome of the exercise of tracing is not to prove or establish a claim. Nor is it of itself a remedy. But it may be used for different purposes ancillary or preliminary to making a claim. Again, as Professor Smith explains:
Sometimes a plaintiff is seeking to identify an asset as standing now in the place of another asset; this might be in order to assert proprietary rights in it, or personal rights in relation to it. Those are claims to ‘surviving enrichment’, which require the plaintiff to identify a specific asset as the current traceable proceeds of his value. In other cases, the plaintiff is not concerned to show what is now the traceable proceeds of his value; he only needs to show that his value has been used in a certain way. That is true where the plaintiff seeks to establish personal rights based on a past interference with her proprietary rights, or based on receipt by the defendant of the plaintiff’s value at some point in the past.[15]
[15]Ibid 144-145
In Heperu Pty Ltd v Belle, Allsop P (as he then was) succinctly summarised these principles in the following way:
Tracing has been said to be neither a claim nor a remedy, rather the process by which a claimant demonstrates what has happened to its property, identifies its proceeds and the persons who have handled or received them; and the successful completion of a “tracing exercise” may be a preliminary to the making of a personal or proprietary claim, to the extent such is available…[16]
[16] (2009) 76 NSWLR 230, [89] (‘Heperu v Belle’) citing Foskett v McKeown[2000] UKHL 29; [2001] 1 AC 102 at 128 per Lord Millett approved and applied by Spigelman CJ in Robb Evans of Robb Evans and Associates v European Bank Limited[2004] 61 NSWLR 75 at 103 [133] (with whom Handley JA and Santow JA agreed).
More relevant to the issue of the defence raised by Ms Vescovi (discussed below), Professor Smith also explained that tracing the use and movement of value may
…also be relevant where a defendant is attempting to establish the defence of change of position by showing that the traceable proceeds of the value received were lost without his fault.[17]
[17]Smith, above n 13, 145.
In Lipkin Gorman (a firm) v Karpnale,[18] Lord Templeman and Lord Goff employed the principles of tracing to ascertain that money gambled at a casino were the substitute of moneys misappropriated from a solicitor’s trust account. In Perpetual Trustees Australia Ltd v Heperu Pty Ltd,[19] Allsop P relied on the same principles to ascertain whether monies used to reduce personal credit card and mortgage debts of the wife of an investment adviser were the substitute of money that had been misappropriated. The money had been provided to the adviser by his client for investment in an investment fund. Both were cases concerning claims for restitution of money paid under a mistake of fact.
[18][1991] 2 AC 548 (‘Lipkin Gorman’).
[19](2009) 76 NSWLR 195 (‘Perpetual v Heperu’).
The final point to be made at this stage relates to the nature of the claim made by Southage in this proceeding. It does not seek a proprietary remedy. That is, it does not assert that it has a proprietary interest in any specific asset in the hands of Ms Vescovi against which it makes its claim. It simply claims a personal remedy, namely a monetary award as restitution measured by the extent to which Ms Vescovi has been unjustly enriched at its expense. And its personal remedy does not depend on establishing any unconscionable conduct on her part, such as would be the case, for example, in relation to a claim based on the knowing receipt of the proceeds of a breach of fiduciary duty: Barnes v Addy.[20]
[20](1874) LR 9 Ch App 244 (the first limb).
So, adapting the words of both Allsop P and Professor Smith, the successful completion of the tracing exercise is, from Southage’s point of view, intended to be preliminary to making a personal claim (ie. for restitution of moneys paid under a mistake) to the extent it is available. That is, Southage seeks to establish personal rights based on the receipt by Ms Vescovi of its value at some point in the past.
Moment of enrichment
Ms Vescovi’s first argument on the issue of enrichment was that the moment in time to assess whether a benefit was received by a defendant was the moment when the payer paid or transferred away its money or property. Because that moment was 20 January when Southage provided its cheque to Mr Kalivoda to pay the vendor’s agent, when Ms Vescovi had no interest in the contract nor any indebtedness to the vendor, she argued that she received no benefit at all. She argued that it was only Mr Kalivoda who received a benefit and was thereby enriched.
Ms Vescovi’s proposition that the ‘moment’ when the enrichment had to be identified was the moment when payment was made was derived from a statement made by the High Court in David Securities.
In that case, a bank customer, David Securities, sought to recover money it paid to the bank, under the terms of a foreign currency loan, in respect of income tax on the interest payments (made to the bank). The payment was made under a clause of the loan agreement which, unknown to the customer, was void as a matter of law. A fundamental point of interest in the case was whether a claimant could rely on a mistake of law, and not just a mistake of fact, in making a restitutionary claim for money paid under a mistake. The High Court held that it could and that the former distinction no longer applied.
There was no question, in that case, that enrichment occurred at the moment of payment by the customer to the bank. It was a simple, direct process of payment and receipt. The court held that the enrichment occurred because the customer mistakenly thought it was obliged to pay, and so did pay, the income tax component stipulated under the loan agreement with the bank.
In the passage set out at [30] above, the court explained that the fact that the payment had been caused by a mistake was sufficient to give rise to a prima facie obligation by the bank to make restitution. Immediately before that passage, the court had rejected the bank’s submission that David Securities had to independently prove ‘unjustness’ over and above the mistake.[21]
[21]David Securities, 379.
Attention was then turned to a defence raised by the bank: the defence of change of position on the faith of the receipt. It was in that context the court said:
If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt.[22]
[22]Ibid 385 (underlining added; citations omitted).
From the underlined sentences Ms Vescovi construed a principle that when ascertaining whether or not a benefit has been derived by an alleged recipient, the focus of attention must necessarily be confined to the moment in time when the payer makes the payment. On that basis, she argued, she could not have been enriched by the loan because she did not receive the money or any benefit from it at that moment in time.
In my view that proposition cannot be accepted. The court was laying down no such principle. The court was not addressing, in that passage, whether the moment of mistaken payment and the moment of enrichment must necessarily occur simultaneously. The critical point was how the defence of change of position operates if the defendant is prima facie obliged to make restitution of a received benefit from the moment of the enrichment resulting from the mistaken payment.
So, the court explained that an assessment of the character of the enrichment – ie. whether it was unjust or otherwise – needs to have regard to different ‘critical moments’[23] in relation to the enrichment and the change of position said to follow it. From the payer’s perspective, the unjust character of the enrichment is manifest when the payment is made. So the payer is not concerned, when establishing its prima facie entitlement to restitution, to look beyond the moment of mistaken payment. But, from the recipient’s perspective, the just or unjust character of the receipt (or retention of it) has to take into account events that necessarily occur after the moment of initial enrichment because the very nature of the defence contemplates some action after receipt, on the faith of the receipt.
[23]State Bank of NSW v Swiss Bank Corporation (1995) 35 NSWLR 350, 355 (‘Swiss Bank’)
Drawing upon the very same passage, Allsop P said in Hills Industries Pty Ltd v Australian Financial Services and Leasing Pty Ltd:
It is the existence of the qualifying or vitiating factor [eg mistake] and the receipt which gives rise to the prima facie liability in restitution. The receipt in those circumstances…will be seen to be unjust enrichment, unless there are circumstances which the law recognises would make an order for restitution unjust. The “moment of enrichment” is that of receipt: David Securities at 385; but it is the retention that is to be regarded as unjust for an order to be made.[24]
[24][2012] NSWCA 380, [70] (‘Hills Industries’) (on appeal to the High Court; see Transcript of Proceedings, Australian Financial Services and Leasing Pty Ltd v Hills Industries and Anor [2013] HCATrans 191 (16 August 2013)). Consistently with that view, in a separate judgment in David Securities in which he agreed with the majority in the result, Brennan J at 389 described the payer’s prima facie entitlement to restitution as arising when the payee receives the benefit: ‘If, under a mistake, money is paid to and unjustly enriches a payee, the payer's right to recover the amount paid accrues at the moment when the payee received the money.’
So to draw from the particular passage in the majority judgment a principle that the moment of receipt must match the moment of payment is to misunderstand the issue there being addressed. The equating of the two in the passage had more to do with the particular point of view of the paying party, and distinguishing the different moments that need to be considered when the defence of change of position is raised, than with a rule of universal application about the timing of enrichment.
If it were correct that the unjust enrichment of the defendant had to accompany the moment of payment by the plaintiff, cases in which the plaintiff had to trace the benefit of the initial payment through a variety of intermediary transactions into the hands of the defendant would instantly fail. The English Court of Appeal decision in Lipkin Gorman, the facts of which I have briefly mentioned, is a case of that kind in which the plaintiff successfully recovered its mistaken payment. In David Securities the High Court cited Lipkin Gorman with apparent approval in relation to the recognition of a defence of change of position.[25] It did so without any suggestion that the initial enrichment was incorrectly recognised due to the enrichment not occurring simultaneously with payment.
[25]David Securities, 384-385.
For these reasons I reject Ms Vescovi’s argument on this issue.
Enriched by the nomination?
I now turn to the question of whether Ms Vescovi was enriched by being nominated as substitute purchaser pursuant to the nomination clause in the contract.
Southage argued that she was. Ms Vescovi’s primary argument in response was that she did not receive any benefit as a result of the nomination. All she received was a bare ‘right to complete’ the contract of sale. She argued that the fact that the deposit was fully paid ($219,500 of which came from Southage) was of no benefit to her unless and until the contract was completed. Put another way, at the point of the nomination it had no value to her. Indeed, if completion did not occur, the deposit would be forfeited to the vendor, illustrating her proposition that, at that point, it conferred no benefit on her at all.
In arguing that the nomination was the moment of enrichment, Southage seemed to adopt or agree with Ms Vescovi’s analysis that she obtained a ‘right to complete’ the contract on nomination. Perhaps Southage went further: in written submissions it referred to Ms Vescovi being nominated as substitute purchaser, knowing of the deposit and thereby “adopting” the benefit of that deposit. Its submission may have implied that Ms Vescovi was now a party to the contract of sale and so acquired the benefit of part payment of the purchase price represented by the deposit.
Whether or not that was Southage’s intended analysis, I do not agree with the premise that the legal outcome produced by the nomination was a ‘right to complete’.
General Condition 18 of the contract of sale between Mr Kalivoda and the vendor of the Kew property provided:
The purchaser may nominate a substitute or additional purchaser, but the named purchaser remains personally liable for the due performance of all the purchaser’s obligations under this contract.
It is well settled that a nomination under a clause in those terms does not operate as a novation of the contract or give the nominee any power to compel the vendor to complete. For the same reason, it does not make the nominee liable to complete the contract or to pay the purchase price. Those obligations remain with the named purchaser. As Nettle JA explained in Commissioner of State Revenue v Politis:
…for most nomination clauses constitute no more than a power in the purchaser to require the vendor to complete the contract by transfer of the land to the purchaser's nominee… But the nominee does not acquire any rights as against the vendor, because the nominee is not privy to the contract.[26] [emphasis added]
[26][2004] VSC 126 [11].
In 428 Little Bourke St Pty Ltd v Lonsdale St,[27] Judd J applied that principle to a nomination made under a clause that was identical to General Condition 18 in Mr Kalivoda’s contract. In turn, Judd J’s decision was cited with approval by the Victorian Court of Appeal in Joseph Street Pty Ltd v Tan.[28]
[27][2009] VSC 133 [39].
[28][2012] VSCA 113 [3].
As Ms Vescovi gave no consideration for her nomination, it would appear she acquired no contractual right of her own by reason of the nomination, either against the vendor or against Mr Kalivoda. Rather, upon making the nomination, it was Mr Kalivoda who secured the right to compel the vendor to transfer the title to Ms Vescovi in place of himself. He remained liable to pay the purchase price. At that point, only he benefited from the reduction of the sum payable under the contract because only he was obliged to pay it.
So, albeit for a different reason to the one she argued, I agree with Ms Vescovi’s submission that she received no benefit from the Southage loan by virtue of the nomination itself. I reject Southage’s argument that she obtained some interest in the contract, however it might be termed, from which she acquired the benefit of the previously paid deposit.
Enriched by taking title to the property?
The second potential moment of Ms Vescovi’s enrichment put forward by Southage was the point at which she took title to the Kew property.
Upon completion of the contract of sale and attendance to the registration process, Ms Vescovi became registered as the proprietor of the fee simple estate in the land. The payment of the purchase price for the land was satisfied by the payment of:
· $50,000 on 5 January 2010;
· $219,500 on 20 January 2010 (funded by the Southage loan); and
· $2,442,580 (after adjustments) at settlement on 17 February 2010.
Ms Vescovi’s acquisition of title to the property was, therefore, effected, in part, with the proceeds of the Southage loan. Although not quite put by Southage this way, arguably the value inherent in the Southage loan can be traced into the title to the fee simple estate in the Kew property so long as the rules of tracing permit it.
Tracing into a ‘mixed fund’ at common law?
Potentially, there are some objections to the rules of tracing applying with that result. One is that, arguably, whereas the rules of tracing in equity permit the tracing of a fund or property into a mixed fund, at common law they do not.[29] That is, once the original property is mixed with other property, common law tracing principles do not permit the substitute to be regarded as incorporating the original. In the present case, arguably, the Southage loan monies have been ‘mixed’ with other monies (the initial $50,000 deposit and the money borrowed from the NAB) to acquire the interest in the Kew property.
[29]Smith, above n 13, 162; Thomson Reuters, Ford and Lee: The Law of Trusts, [17.4070]; Mason, Carter and Tolhurst, Restitution Law in Australia, (LexisNexis, 2nd ed, 2008) [303]; Lipkin v Gorman [1991] 2 AC 548, 572, Commonwealth Bank of Australia v Mohamad Saleh [2007] NSWSC 903, [24].
I did not hear argument on this principle as neither party considered in any detail the application of the tracing rules. Although each referred briefly to some aspects or uses of tracing principles, neither drew attention to a possible distinction between the operation of the rules in equity and the operation of the rules at common law. And each appeared to assume that, at this point of the analysis, the proceeds of the Southage loan could be traced into the title to the land.
In my view, there is little doubt that if there is a distinction to be drawn, the common law principles would apply in a case in which the cause of action is for restitution of money paid under a mistake. However, I will assume (without deciding) that there is no such obstacle to tracing the proceeds of the Southage loan into the title obtained by Ms Vescovi. In any event, that view seems to marshall strong academic support[30] and appears, at least implicitly, to be adopted in cases such as Heperu v Belle, Ford v Perpetual Trustees Victoria Limited[31] and Hills Industries.
[30]Thomson Reuters, Ford and Lee: The Law of Trusts, [17.4070]; Smith, above n 13, 162.
[31](2009) 75 NSWLR 42 (‘Ford’).
Enrichment must take into account liabilities?
So, assuming that the proceeds of the Southage loan are traceable into the estate interest in the Kew property received by Ms Vescovi around February 2010, her next argument was that the question whether she thereby received any benefit must take into account the liabilities she acquired at the same time. The first liability she said she incurred was her personal liability under the terms of the mortgage to repay the NAB loan. The loan sum was said to comprise both the balance of the purchase price ($2,442,580) and the sum advanced to meet the combined costs of stamp duty and registration ($149,577), a total of around $2,592,157.
Assuming the property had a market value equal to the price under the contract, $2,695,000, Ms Vescovi argued that the net benefit to her of acquiring the property was, on that reckoning, already less than the sum advanced by Southage.
But, she said, two other factors also needed to be considered. First, that it was questionable whether the property had a market value equal to the sum paid for it. As she pointed out, it had been sold to her husband by private sale after it failed to sell at auction. Eighteen months later, when it was sold at auction, it only fetched $2,610,000. No valuation evidence was presented by either side. Ms Vescovi argued that Southage, as plaintiff, had the burden of establishing that she obtained a net benefit. On the evidence before the court, she submitted that Southage had not discharged that burden.
Secondly, Ms Vescovi argued that yet another liability also had to be taken into account as a liability that she necessarily incurred to receive a transfer of the property. On the same occasion that she signed the NAB mortgage documents, she also signed a personal guarantee by which she guaranteed the repayment of a debt RK Consultancy owed to the NAB. On 5 February 2010, when she signed the guarantee, the company debt then stood at $939,000. By later variations, the guaranteed sum increased to $1.4million.
She agreed with her own counsel’s characterisation, put to her as a leading question, that execution of the guarantee was ‘part of the same transaction’ as the signing of the mortgage documents. That evidence – and that evidence alone – was said to substantiate her claim that entering the guarantee was a condition of the mortgage loan being made. On that basis she argued that the acquisition of the property was conditioned upon her incurring liabilities both under the mortgage and under the guarantee; therefore, the net benefit to her of acquiring the land was heavily in the negative.
Southage did not address the question of the guarantee in any detail. But, first, it denied that it was correct to analyse Ms Vescovi’s benefit, at the time she acquired the land, as being the net result of taking title and incurring liabilities. If it was correct to take the liabilities into account at all, Southage argued, it was to be done at the point of considering Ms Vescovi’s defence of ‘change of position’. It was not to be done as part of the analysis of whether she received a benefit as a consequence of Southage lending money to meet the deposit.
Secondly, it claimed that Ms Vescovi had ‘cast her net too widely’ to off-set more expenses or liabilities than were justified: probably a reference to the stamp duty and registration fees (referred to as mere incidents of the transaction), and the guarantee.
A practical and very real consequence of treating the incurrence of liabilities as relevant only to the change of position defence is that Ms Vescovi must then show that she incurred them ‘on the faith of the receipt’ of the benefit of the Southage loan. If, however, the liabilities are simply regarded as a component of the overall benefit or enrichment at the expense of Southage, she does not need to do so.
So, the argument neatly raises questions about the meaning of ‘benefit’ or ‘enrichment’, and how that is to be distinguished from an adverse positional change consequent upon its receipt.
In my opinion, the matter is resolved in Southage’s favour when attention is paid to the essential question: did Ms Vescovi receive the benefit of the money Southage paid under a mistake? That question is answered by applying the principles of tracing. Seen in that way, the question becomes whether the value inherent in the Southage loan can be traced into the hands of Ms Vescovi, albeit in a substitute asset.
The answer to that question is: yes it can, in the form of the interest as proprietor of the fee simple interest in the Kew property. The incurrence of liabilities to acquire that asset are a separate issue. Of themselves, they do not impact the fee simple interest, including the NAB loan secured by a registered mortgage. [32]
[32]The mortgage of Torrens Land is a security interest only: Transfer of Land Act 1958 (Vic) s 74(2)
In the result, it is my view that Ms Vescovi was prima facie enriched by the Southage loan when she acquired her interest as proprietor of the fee simple estate in the Kew property.
Enrichment by occupying the property?
Reaching that conclusion makes it less important that I state my views about Southage’s final argument concerning the enrichment Ms Vescovi received, namely that she was enriched at the expense of Southage by occupying the premises. But in case I am wrong about Ms Vescovi being enriched by the receipt of fee simple estate, I should address it. I should do so particularly because different considerations may apply in determining whether Ms Vescovi adversely changed her position on the faith of the receipt of that benefit (the occupancy of the Kew property), if there was one. Also, the assessment of an appropriate sum for restitutionary compensation for receipt of that benefit may very well be different.
Put briefly, Southage put its argument on the ‘occupancy benefit’ on an entirely subjective basis. Rather than attempting to establish some sort of commercial rental value for the premises, Southage pointed only to the comfortable quality and amenity of the house. It sought to elicit admissions from Ms Vescovi that the house had a particular appeal to her because of its style and character, certain features associated with its rooms, the location of the house, its proximity to her parents, and so on. In its written submissions it described this benefit as the ‘use and occupancy of a highly valuable and attractive property’.
Even if the ‘value’ inherent in the Southage loan could be traced into an ‘occupancy right’ as its substitute – which is in itself a dubious proposition – it is much more difficult to see how it might be traced into something as subjective and vague as an amenity of life. No attempt was made by Southage to justify its proposition by reference to authority or reasoning. I reject it. I also agree with Ms Vescovi’s submission that it is virtually impossible to assess the value of the asserted benefit.
Was the enrichment unjust?
Although both parties identified the question whether the enrichment was unjust as the next issue, each moved almost immediately to the question of Ms Vescovi’s change of position defence saying that the two issues were closely interrelated. Although that is true, perhaps the simplest reason for moving directly to the defence is that, once it has been established that the defendant has been enriched because of a mistakenly made payment by the plaintiff, the prima facie position is that the defendant has thereby been unjustly enriched and is obliged to make restitution.
As noted earlier, in David Securities the respondent bank had argued that a claim for restitution for mistaken payment could not succeed solely upon proof of the payment by mistake. It argued that a further element had to be proven separately and independently: unjustness. That is, said the bank, the claimant had to go on to establish that it was unjust in all the circumstances for the recipient to retain the money or benefit.
The High Court rejected that proposition with the following reasoning:
·First, it was not ‘greatly different’ whether restitution required (1) proof of a mistaken payment and that retention of it was unjust in all the circumstances, or (2) proof of a mistaken payment which gave rise to a prima facie entitlement to recovery that could be displaced if other circumstances made it unjust to order restitution.
·Secondly, however, a practical difference lay in what a plaintiff had to plead and prove.
·Thirdly, the first formulation of the required proof involved the misconception that ‘unjust enrichment’ was a definitive legal principle rather than a unifying legal concept which explains why recovery may exist in a variety of distinct categories of case.
·Fourthly, recovery in restitution is not determined by reference to a subjective notion of what is fair or unconscionable: the qualifying factor is, in a case like the present, the mistake.
·Therefore, fifthly, the fact that a payment has been caused by mistake is sufficient to give rise to the prima facie obligation by the recipient to make restitution; but that prima facie liability is displaced if the recipient ‘points to’ circumstances which the law recognises would make an order for restitution unjust. [33]
[33]David Securities, 378-379, citing Pavey & Matthews Pty Ltd v Paul [1987] 162 CLR 221, 256-257 (per Deane J).
A very clear exposition of the close interrelationship between the injustice of the enrichment and the concept of change of position is to be found in the judgment of Allsop P and Handley AJA (Campbell JA agreeing) in Perpetual vHeperu:[34]
In Lipkin Gorman v Karpnale Ltd [1988] UKHL 12; [1991] 2 AC 548 Lord Goff (with whom Lord Bridge of Harwich, Lord Griffiths and Lord Ackner agreed) made clear (at 578) that it is the inequitable retention of money or benefit which lies at the root of both the injustice of the enrichment and the related concept of change of position (578-580). Likewise, Lord Templeman (with whom the same Lords agreed as agreed with Lord Goff) spoke of the necessity to remain unjustly enriched (560). This notion of continuance of the injustice of the enrichment through retention is not to be defeated by a view that once the prima facie right to repayment arises, the unjust enrichment has been proven for all time. It is certainly the case that the injustice of the receipt and the right to recovery is prima facie enlivened by the relevant legal circumstance accompanying the payment: here, the mistake or the fraud: see David Securities at 379. The necessity for the retention to remain unjust can be seen to be the clear justification for a defence of change of position. Such a defence has been recognised by the High Court: David Securities at 385-386…
[34]Perpetual v Heperu, [128]
As will appear, notions of the inequitable retention of money or benefit and the necessity to remain unjustly enriched, emphasised in that passage, will assume critical importance in the resolution of this case.
But, for the present, it follows from the finding that Southage made a mistaken payment that caused Ms Vescovi to be enriched, that she was prima facie obliged to make restitution of the benefit she received. The question is now whether she has pointed to circumstances that the law recognises would make an order for restitution unjust. In this case, the only such circumstances advanced by Ms Vescovi were that she changed her position on the faith of the receipt of the benefit of the Southage loan.
Did Ms Vescovi change her position on the faith of the receipt of the benefit?
Having now identified the ‘benefit’ that Ms Vescovi received as a result of the Southage loan, the question becomes: did Ms Vescovi detrimentally change her position, in good faith, on the faith of receiving the value inherent in the Southage loan (ie. in the form of the fee simple interest in the Kew property)?
Essentially, Ms Vescovi submitted that the adverse changes to her position, made on the faith of the receipt, were all or some of the following: [35]
·being nominated as the purchaser;
·incurring the liability to pay stamp duty and registration fee:
·entering the mortgage to secure repayment of the NAB loan;
·agreeing to sell, and selling, the Kew property under ‘forced’ circumstances;
·her husband paying interest to Southage for most of the time of their occupancy of the home; and
·signing the NAB guarantee.
[35]Not all of which had been pleaded in her defence.
For reasons I will explain below, of these possibilities the third and fourth have most merit.
The scope and meaning of the ‘good faith’ element is not entirely clear. It may include a state of mind that is honest even though careless. But where the question is whether it would be inequitable for the defendant to retain a benefit received at the expense of a mistaken plaintiff, the better view might be that the ‘good faith’ of the defendant requires a more stringent standard. It may require the exercise of the caution and diligence to be expected of a person of ordinary prudence placed in that situation.[36]
[36]See: Hon Justice W M C Gummow, Moses v Macferlan: 250 Years On (2010) 84 ALJ 756, 763. Such a standard would also be consistent with the standard applied by the Court of Appeal in Swiss Bank (1995) 35 NSWLR 350 where, at 356, the Court explained the failure of the change of position defence because although the defendant’s conduct was not dishonest, it was not sensible, and therefore not conduct on the faith of the receipt.
For present purposes I will assume and apply the higher standard.
On the faith of the receipt: the source of the payee’s knowledge
Ms Vescovi argued that all changes to her position were made on the faith of receipt of the deposit. That was because she only agreed to accept the nomination on the basis of a belief that a deposit had been paid, and paid from the financial resources of her husband. She had been told that by her husband.
Then, she argued, having accepted the nomination, she was committed to complete the contract otherwise she would be in breach of it. Therefore, accepting the mortgage, taking the transfer, paying the price and fees, occupying the house, and ultimately selling it, were all consequential steps taken ‘on faith of the receipt’.
Of course, there are problems for Ms Vescovi in this reasoning because of the dependence she placed on the (incorrect) assumption that the nomination bound her to complete the contract and pay the purchase price. But, as will emerge, those problems are not fatal to Ms Vescovi’s defence.
Southage’s primary argument was that, whatever might be put forward as constituting Ms Vescovi’s change of position, such change was not ‘on the faith of’ Southage having funded part of the purchase price (in the form of the deposit). It argued that the requirement that a change be on the ‘faith of the receipt’ meant that:
·first, the payee must have more than just knowledge of receipt itself; she must have knowledge of something that would entitle her to deal with receipt as she did; and
·secondly, and most importantly, that knowledge must come from the payer itself.
So, in this case, those principles required that in order to rely on a change of position on the faith of the receipt, Ms Vescovi had to know from Southage that the money had been lent by Southage to be applied for the deposit. Immediately, it becomes apparent that if that principle is correct, then Ms Vescovi has no defence. She had no contact with Southage at all before taking title to the house.
Further, if that principle is correct, its application to a person in her situation would always negate the defence. That is because, had Ms Vescovi learned from Southage that it had paid the deposit, she would never have accepted the nomination or become the registered proprietor of the land. It is only because she did not have direct communication with Southage that she is placed in the situation where the need to rely on the defence arises. Yet had she had direct communication with Southage she would not be in the position of needing to do so.
Such circularity and illogicality invites careful scrutiny of the supposed principle.
The principle is said to come from Swiss Bank, a decision of the NSW Court of Appeal. It is important to understand the facts to understand the asserted principle.
Swiss Bank transferred $20 million to the State Bank of NSW (‘State Bank NSW’) because a fraudulent, but until then trusted, bank officer inserted a false document into Swiss Bank’s system telling it that it had $20 million on overnight deposit from the State Bank NSW. When the money was received ‘back’ into State Bank NSW’s account, it believed the money was the proceeds of a loan to be paid to its client, Essington Ltd. Essington instructed State Bank NSW to pay out the money to it, and so it did. All three players were tricked by the fraudster in different ways.
Swiss Bank sued State Bank NSW for the $20 million, less recoveries made elsewhere, as money paid under a mistake of fact.
The Court of Appeal upheld Rogers CJ who denied State Bank NSW a ‘change of position’ defence. It emphasised, as the High Court had said in David Securities,[37] that the defence is only available to the payee who detrimentally changes position on the faith of the receipt of the money. It found that State Bank NSW changed its position on the instruction of Essington Ltd, not merely on the faith of the receipt of the money. The interbank transfer system, by which the State Bank NSW received the transfer from Swiss Bank, required there be a message to say, specifically, to whom the money was destined. The transfer documentation on this occasion contained no such instruction so, as far as the State Bank NSW was concerned, it was receiving the money as the principal.
[37]David Securities, 385.
Put succinctly, the Court of Appeal said:
Looked at on its own terms State Bank of New South Wales' submission has an element of the fantastic about it. It says that it received this very large payment with a message from Swiss Bank saying: “Credit this to the account you keep for customers.” Nothing more than that. State Bank of New South Wales' case involves the propositions: (a) that it was for it to decide which customer should be credited; and (b) that it credited Essington Ltd because Essington Ltd asked it to do so. On the judge's findings what State Bank of
New South Wales did was not dishonest but on anybody's view it was not sensible and in our opinion it was not done on the faith of the receipt.[38]
[38]Swiss Bank, 356.
In so deciding, the court made this statement:
It seems to us that knowledge derived otherwise than from the payer cannot be relevant in deciding whether a change of position by the payee occurred on the faith of the receipt.[39] [emphasis added].
[39]Ibid 355.
The emphasised words in that last passage were said to contain the principle. This principle may well make sense when the money is received by a payee directly from the principal payer or from someone the payee knows is acting for the payer. In those circumstances a practical opportunity exists for the payee to do something to check if the payment is valid.
But when the payment comes to the payee from a false ‘principal’ who is cloaked with the appearance of a person who is entitled to deal with the money as if it is his own, a requirement that the payee must act only upon knowledge that comes from the true payer lacks the same sensible and logical foundation.
Unsurprisingly, later courts of appeal in NSW have not construed Swiss Bank to stand for the restrictive principle that Southage advanced.
In Perpetual vHeperu, the same submission[40] was rejected by the court, explaining the so-called principle by reference to the facts of that case:
Care should be taken not to overextend the application of what was said by the Court [in Swiss Bank] beyond the facts. On the facts, the State Bank simply did not act on the faith of the legitimacy of the receipt, but on what Essington (not the payer) told it. True it is that a payee must know more than the fact of mere receipt. It must have information that entitles it (on the basis of the information) to deal with the receipt. The requirement that the information came from the “payer” can be seen as no more than a requirement that the change of position be on the faith of the receipt and its attendant circumstances. The point in the case was that the change of position arose from reliance upon the statements of Essington, not upon the faith of the receipt and its validity. We do not view what was said by the Court as narrowly constraining the notion of acting on the faith of the receipt. There needs to be a foundation of information obtained in connection with the receipt to justify acting on the basis of the receipt. That was absent in Swiss Bank.[41]
[40]Perpetual v Heperu, [137].
[41]Ibid [139].
In Hills Industries, Meagher JA rejected the proposition that, when considering the change of position defence, the court can only have regard to information that came from the payer. To the extent the court of appeal in Swiss Bank had said otherwise, his Honour did not consider it had stated the position correctly.[42]
[42]Hills Industries, [204]-[205].
With respect, I adopt the interpretation of the statement appearing in Swiss Bank given by the later court of appeal in Perpetual v Heperu. For these reasons, I reject Southage’s argument that for Ms Vescovi to rely on a change of position defence, she must have derived the relevant knowledge about the deposit from Southage itself.
Application to the facts
In what sense, then, did Ms Vescovi have knowledge, not merely of the receipt itself, but of something that would entitle her to deal with receipt as she did?
Ms Vescovi received the title to the Kew property believing she was entitled thereafter to deal with it free of any interest other than those of herself, her husband and the NAB. That is because she received the title believing it had been paid for solely by a deposit supplied by her husband and settlement monies supplied by NAB.
She received the title because she had been nominated to take it. It is important to remember that Ms Vescovi consented to the nomination. That is, she consented to a process that had the legal effect that when the balance of the purchase price was paid she would become the proprietor of the land. She might have refused. The nomination could not be effective without her consent.
No less importantly, she only consented to the nomination because she was informed by her husband that the deposit had been fully paid. And, critically, she was told and believed the deposit had been paid from his or his companies’ money. Had she known it had been borrowed money she would not have given her consent.
It follows, then, that she received the title interest because she believed that her husband had paid the deposit from his own financial resources. She was entitled to have that belief. Holding such a belief involved no negligence, or want of proper care on her behalf. There is nothing in the evidence to suggest that, at that time, she was not entitled to trust what her husband had assured her. Her grounds for mistrust only arose later.
So, being told the deposit had been paid for by her husband, she had information that entitled her to believe she could deal with the property the way that she did: first, to mortgage it to the NAB to secure the monies used to complete the purchase; then, when it appeared that she (or her husband) could not afford to meet the mortgage payments, to sell it without accounting to any interest other than the NAB.
She did all of that without knowing that Southage had supplied most of the deposit money.
Remembering that the inquiry is relevant to determining, ultimately, whether the retention of the benefit of the Southage loan is unjust in all the circumstances, the approach to the question whether Ms Vescovi has acted to her detriment on the faith of the receipt should not be overly narrow.[43] As with other aspects of the analysis, the focus should be on the substance of the transactions.
[43]Perpetual v Heperu, [133]. See also Lord Goff in Lipkin Gorman, 580: ‘At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would make it inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full’.
In my view, the steps taken by Ms Vescovi, first to enter the mortgage with the NAB and later to sell the land with all proceeds going to the NAB, were, as a matter of substance, acts taken on the faith of the receipt of the deposit.
As a result of these steps being taken, by the time she came to know that the Southage advance had funded most of the deposit on the land, she no longer retained any of the value inherent in that loan. Ultimately, Ms Vescovi changed her position by disposing of the very asset in which the value of the Southage loan had been invested, receiving nothing in return. By the time it came to her attention that the loan had funded the deposit, the retained ‘value’ was nothing more than a memory of having owned and lived in the property.[44]
[44]See the illustrations given by Lord Templeman in Lipkin Gorman, 560 in which he compares two innocent donees of misappropriated money. One spends the money on a second hand car which loses some value before he discovers the truth about the source of the money; the other pays for and completes a round the world trip before discovery.
Relevance of not retaining any benefit
That then leads to the final — and in my view determinative — consideration relevant to the justice or injustice of an order for restitution. Given that she did not retain any benefit from the Southage loan when first informed Southage had funded the deposit, is it just that Ms Vescovi be ordered to make restitution to Southage for having once received it? In my opinion, in all the circumstances of this case, the answer is no.
I referred earlier to the notion of inequitable retention of money.[45] The focus on whether a benefit was actually retained by the recipient when informed of the true source of the receipt has been emphasised in several cases: see Lipkin Gorman; Ford; Heperu v Belle and Hills Industries.
[45]See [98].
In Heperu v Belle, Allsop P contrasted the way in which Lord Templeman and Lord Goff had reached their respective conclusions in Lipkin Gorman. That contrast exposed slightly differing approaches, but each highlighted the centrality of the retention of the benefit:
Lord Templeman reached the conclusions he did, not by concluding that there was a prima facie obligation to repay all received moneys less a deduction based on a defence of change of position, but relying on Banque Belge, by focussing on the unjust enrichment by reference to the money retained.
Lord Goff of Chieveley (with whom Lord Bridge of Harwich, Lord Griffiths and Lord Ackner also agreed) at 578–582 dealt with the arrival at the net retained sum by an application of a defence of change of position; that is there was a prima facie obligation to repay all received moneys, less a deduction based on a defence of change of position.
…
Thus, the approach of the Court of Appeal in Banque Belge and of Lord Templeman in Lipkin Gorman (supported by Professor Smith in “Simplifying Claims to Traceable Proceeds” (2009) 125 LQR 338 at 340) is entirely supportive of an obligation at law to restore, in money terms, the value of the retained proprietary benefit derived (as here) from the receipt of funds traceable in equity from cheques misappropriated from the appellants. The importance of retention of benefit, as a matter of substance, can be seen in Ford v Perpetual Trustees Victoria Limited [2009] NSWCA 186 at [119]–[131].
…
The remedy, both at law and in equity should focus upon the value properly attributable to the earlier receipts derived from misappropriations and still retained by the volunteer at the relevant time. ...[46]
And, as Allsop P also said in Hills Industries:
The ‘moment of enrichment’ is that of receipt … but it is the retention that is to be regarded as unjust for an order to be made.[47]
[46]Heperu v Belle, [150]-[157].
[47]Hills Industries, [70].
In my view, the conclusion that it would be unjust to order Ms Vescovi to pay Southage the value of its loan, or any part of it, can be reached soundly by either of two methods.
The first is to conclude that there was a prima facie obligation to repay all received benefit (traceable from the Southage loan) less a deduction based upon the extent to which Ms Vescovi had adversely changed her position on the faith of the receipt. The second is to regard the legal obligation to make restitution as one to restore, in money terms, the value of the retained benefit derived from the receipt of the Southage loan traceable into the title to the Kew property.[48]
[48]These two approaches may be compared to the alternatives that, in David Securities, 353, the High Court described as not “greatly different”: see above [96], first bullet point.
In summary, the pertinent circumstances in the context of which the prima facie obligation to make restitution must be considered are these:
·the Kew house, in which the value of the Southage loan had been invested, was sold;
·the entire proceeds of sale were paid to the NAB;
·the disposition was one that Ms Vescovi was entitled to make on the basis of a belief that the only persons who possessed an interest in the home, apart from the NAB’s security interest, were herself and her husband;
·the disposition was made in good faith;
·it was made without knowledge of Southage’s interest; and
·Ms Vescovi received nothing in return for it.
Either way, the conclusion in those circumstances is the same whichever analytical method is adopted: it would be unjust to require Ms Vescovi to make restitution to Southage of any amount.
Other matters
There are a number of matters that were argued or otherwise mentioned that I have not expressly dealt with. I have not needed to do so to reach my conclusion. Nevertheless I will briefly state my views on them.
·Ms Vescovi did not establish to my satisfaction that the execution of the guarantee of her husband’s company’s debt was a condition of the making of the mortgage loan. It is possible that it was; but the evidence, such as it was, did not prove it.
·It was not established that there was an excess of value (in the Kew property) over the liabilities incurred to acquire it; nor was the converse established. It did not become necessary to decide which party bore the burden of proof on that matter.
·The interest payments made (presumably by Mr Kalivoda) on the Southage loan during the occupancy of the Kew property might, if anything, have been relevant to an argument that Ms Vescovi was unjustly enriched by an occupancy benefit. But, in the circumstances, I have not upheld any such benefit and I do not propose to say anything more about the interest payments.
· I made brief mention above about a further claim that had been made by Southage against its former solicitor whose task it was, allegedly, to attend to the timely registration of the mortgage over the Williamstown property. I made orders by consent as a consequence of the settlement of that claim. Had Southage succeeded against Ms Vescovi, the outcome of that settlement would likely have impacted the quantum of recovery.
·Southage put to me some arguments on the quantum of the restitution Ms Vescovi should pay. It has not been necessary to deal with them. I would only say that, had it been necessary to do so, I believe that the proper starting point would have been $219,500 (that being the component of the loan traced into the interest in the land). I consider that sum should then have been reduced by a rateable proportion of the amount Southage recovered against its solicitor under the settlement it reached with him. I say ‘rateable proportion’ because the claim against the solicitor for which the settlement sum was paid was in respect of the whole $285,000 loan.
Summary and conclusion
I summarise my conclusion this way:
(a)Southage paid a sum of $285,000 by mistake, of which sum $219,500 was paid to fund part of the deposit on the purchase of the Kew property.
(b)When Ms Vescovi took title to the Kew property, she was enriched at the expense of Southage.
(c)Notwithstanding that she was enriched at the expense of Southage’s mistaken payment, it would be unjust to order her to make restitution.
(d)It would be unjust because of all the circumstances attending her receipt of the benefit, and because she disposed of it in good faith, without being aware of the true source of it, and no she longer retains any value from it.
Southage’s claim for restitution must be dismissed.
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