Unjust enrichment

A financing company which mistakenly provided payments for non-existent goods to two equipment companies has been refused restitution by the New South Wales Court of Appeal. A Sydney businessman provided fraudulent invoices to the financing company, and informed the equipment companies that the funds they received were to discharge his debts. The equipment companies successfully relied on the defences of good consideration and change of position because legal proceedings against the businessman were discontinued and the opportunity to recover the debts was lost.

This case concerned a determination as to which of a number of entities should bear the cost of a fraud. A finance company rented out purchased equipment for clients. The client fraudster entered into a rental agreement with the finance company in relation to equipment that never existed. The fraudster had provided the finance company with fraudulent invoices for payment to various suppliers who the fraudster owed money to and the finance company sought return of payments made by mistake to the suppliers named. The suppliers refused.

Claim for unjust enrichment

The court noted the three essential elements of an unjust enrichment claim are:

• That the defendant received a benefit (here the suppliers each received a sum of money);
• That the benefit must be unjust in a legal sense (here, it was unconscionable for the suppliers to retain the money paid on the basis of mistake of a genuine invoice or fraud by a third party);
• That the benefit has to have been made at the plaintiff’s expense (the finance company never obtained property in any equipment and cannot recover all of their monies from other parties).

The finance company succeeded against the first and third supplier, but not the second supplier, who succeeded in arguing its change of position defence. The first supplier argued he would suffer an injustice if called upon to repay because he had changed his position by foregoing the opportunity to take recovery action against the fraudster. This was dismissed as too speculative, since recovery was unlikely given the fraudster’s precarious finances.

The second supplier also argued a change of position defence on the basis that its judgment debts were extinguished by way of consent orders (with proceedings discontinued and default judgments set aside) when the monies were received and this was irreversible, with no recovery now being possible because of the fraudster’s financial position. This defence succeeded because the second supplier showed real detriment by way of extinguishment of its claim to the fraudster’s property in reliance on the payment received, such that it would be unjust to require repayment.

The third supplier’s change of position defence was rejected as they merely suffered a disappointment of expectation rather than a real determent.

“It is detriment rather than disappointment that is essential to making out the change of position defence.”

However the court found that the receipt of certain benefits by the finance company (a payment and an input tax credit) should be deducted from amounts repaid by the first and third suppliers.

The finance company had alternatively claimed repayment on the basis of knowing receipt of trust property (as a constructive trustee). The court noted that liability requires that the recepient knew at the time of receipt that it was trust property and that it was being misapplied. Knowledge can be:

• actual knowledge;
• wilfully shutting one’s eyes to the obvious;
• wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
• knowledge of circumstances which would indicate the facts to an honest and reasonable man; and
• knowledge of circumstances which would put an honest and reasonable man on inquiry.

The court found the suppliers did not have knowledge (because evidence was given that it was not unusual to receive payments from third party finance companies) and the claims failed.