Including Overpayments to Employees - Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14

What were the facts of the case?

Australian Financial Services and Leasing (AFSL), a finance company, was prompted by Mr Skarzynski to make payments to two suppliers of equipment, Hills and Bosch. Mr Skarzynski prompted AFSL to make these payments through fraudulent conduct by supplying AFSL with forged invoices for equipment that was non-existent. Rental agreements were entered into by AFSL on the basis of the invoices provided.

The two suppliers were led to believe by Mr Skarzynski that the payments received by AFSL were to be in satisfaction of debt owed to the suppliers by companies controlled by Mr Skarzynski, collectively referred to as “TCP”.

On receiving the payments the suppliers treated the relevant monies as reducing the indebtedness of TCP. Hills on receiving the payment withdrew a threat of legal action and recommenced trading with TCP. Bosch on receiving payment, agreed to file consent orders setting aside default judgements supporting garnishee orders against TCP and TCP’s directors, and also resumed trading with TCP.

AFSL later became aware that they had been prompted to make payments under a mistake of fact namely that they had paid for debt owed and not equipment being provided to TCP. TCP by this stage had gone into liquidation so AFSL instituted proceedings for recovery of the money from the suppliers.

The change of position defence

The ‘change of position’ defence was first recognised by the High Court of Australia in David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48.  In broad terms, the recipient of monies paid by mistake can rely on the change of position defence and resist repaying the relevant monies if he or she can show that he or she has changed his or her position in good faith in reliance on his or her receipt of the relevant funds.  For example, an employee may have received an overpayment of wages of $2,000 and, thinking the money to be hers, spent the money on a holiday she would otherwise not have taken.  In this case, if the recipient could show that she had received the monies in good faith, for example, that she genuinely believed the she was entitled to those monies, and that she had changed her position to her detriment, that is, by spending the relevant money on the holiday that would otherwise not have been taken, then the defence of change of positon could likely be relied upon to allow her to avoid repaying the relevant overpayment.  

The High Court’s decision

AFSL argued, amongst other things, that the change of position defence should only operate where the party seeking to rely on it has lost an opportunity by reason of its change of position that had a proven monetary value.

The Court rejected this argument and instead found that repayment of monies paid by mistake can be resisted on the broader basis that it would be ‘inequitable’, without necessarily needing to show a monetarily quantifiable detriment, for the recipient to be required to repay those monies.  To put it another way, the Court considered that the relevant enquiry was not the precise value of the lost opportunity but whether it would be unconscionable for the respondents to retain the money they had been paid.

The Court therefore also rejected the idea that the change of position defence was only open to “a recipient who was able to demonstrate monetary disenrichment”[1] and further clarified that the defence does not necessarily rely on a “mathematical assessment”[2]  of the relevant detriment, but rather the correct question to ask is: ‘who should properly bear the loss and why’.

The Court consequently unanimously held that a change of position defence was made out because the relevant payments, although they were induced fraudulently, were received in good faith and the suppliers on receiving the payments had given up a valuable commercial opportunity to recover the funds now lost by the intervening liquidation of TCP.  The suppliers had also suffered a disadvantage “as a practical matter of business[3] having forgone the opportunity to secure their debts and had continued trading with the third party, resulting in a high degree of risk.  The Court found that this ‘practical disadvantage’, in addition to any quantifiable monetary loss, also constituted a detriment that would make it inequitable for the appellant to demand repayment of the money.

What does this case mean for employers?

In many cases an employee is overpaid as result of monies being paid by mistake, for example, where an employee continues to be paid an allowance, such as a payment for performing higher duties, despite the pay team being informed that the allowance should be ceased. 

As discussed above, the decision in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd, clarifies that to rely on the change of position defence employees do not need to show (in addition to establishing that the relevant monies were received in good faith, as discussed above) an exactly quantifiable monetary detriment that they would suffer if required to repay the relevant monies, but rather will be able to rely on the change of position defence if it can be established, more broadly, that it would be ‘inequitable’, including, potentially, for non-quantifiable reasons, to require the overpayment to be repaid.