David Securities Pty Ltd v Commonwealth Bank of Australia

David Securities Pty Ltd v Commonwealth Bank of Australia - [1992] HCA 48 - HCA 1989 case summary — Zoe

[35]

The word "stipulation" had a technical meaning in Roman law and in the Admiralty Courts, but long ago assumed the more common meaning of anything which forms a material provision of an agreement [10] . In In re Jarvis and Burgess's Contract, Lowe J. used the word to refer generally to a promise [11] . The word "covenant", however, retains the strict legal meaning of a promise under seal, although in general legal parlance it is used to denote any promise, whether contained in a deed or not [12] . To this extent, the meanings of the two words in s. 261(1) overlap. It may well be true, as the Bank submits, that a promise or covenant to do something creates no obligation if a failure to abide by it gives the innocent party no redress. That question can be left open for it is not the same as the issue which faces the Court in this case. While failure to pay the additional amounts under cl. 8(b) would not have amounted to a breach of contract by the appellants, the combined operation of cl. 8(b) and (c) would relieve the Bank of its obligation under cl. 2(d) to renew any advance or to replace any maturing bills in the event of non-payment by the appellants. Clause 8(b) thus directs the appellants - and, in so doing, uses the word "obligation" - to do something which, if not done, would result in non-renewal of the loans. To suggest that the appellants' promise under cl. 8(b) is somehow formal only and imposes no obligation is therefore to take too technical and restrictive a view of the agreement. The ability to sue upon breach may generally be considered an element of a "covenant". However, the absence of that element in this case does not have the effect that the appellants assumed no obligation upon agreeing to the clause. The clause specifically imposes an obligation and this fundamental feature is not altered by the fact that separate provision is made in the loan agreement to the effect that limited consequences will flow from non-compliance with this obligation.

[37]

The Bank raises another argument, that the covenant in cl. 8(b) nevertheless does not "have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage". Without cl. 8(b), the obligation to pay withholding tax rests on the Bank as a non-resident receiving income in the form of interest. Part VI, Div 4 of the Act provides a mechanism whereby the Australian resident making the interest payments is given responsibility for deducting and remitting to the Commissioner the amount of the tax; this does not have the effect of transferring the statutory liability for payment, which remains imposed on the non-resident. Without cl. 8(b), the appellants would pay an amount of money representing the contractual interest and the Bank would pay - albeit through the agency of the appellants, as the collection mechanism requires - an amount of money representing the 10 per cent withholding tax. By virtue of cl. 8(b), the Bank sought to ensure that payment of both amounts of money came from the coffers of the appellants. While the statutory obligation to pay the withholding tax still lay upon the Bank, cl. 8(b) had the effect of obliging the appellants to bear the financial burden represented by the withholding tax. In these circumstances, it seems entirely apposite to conclude that the clause had "the purpose or effect of imposing on the mortgagor the obligation of paying income tax". Nevertheless, the Bank argues that the appellants were not paying income tax, but only "additional amounts" as described by the clause. This argument relies upon the judgment of Isaacs J. in Brett v Barr Smith [13] where his Honour concluded that a covenant in a mortgage which allowed the mortgagors to pay interest at a reduced rate if they also paid an amount representing the mortgagee's income tax liability did not oblige the mortgagors to pay tax on interest at all, but merely to pay interest either at the express contractual rate or, upon certain conditions, at a reduced rate. Such a covenant, which would now be rendered void by s. 261(3) and (4), is quite different from the covenant in issue in this case. In cl. 8(b), the appellants were not presented with a choice but with a legal obligation to pay the additional amounts, nor were they given a discount for their pains as were the plaintiffs in Brett v Barr Smith . The Bank demanded and received its full income and ensured that the appellants met the Bank's own tax liability. The construction of s. 261 contended for by the Bank is unnecessarily restrictive and would fly in the face of the legislative intention to provide protection for mortgagors. This argument must therefore be rejected.

[49]

In the present case, the mistake related to the subsistence of the liability itself, and [was] not made simply because of what was or was not stated in the loan agreement or because of the existence of some related circumstance, such as the date on which a payment fell due. The mistake was as to the existence of s. 261 and its operation to render void the purported contractual obligation in cl. 8(b). This was a mistake of law for the purposes of this particular field of discourse, or at least a mistake as to law mixed with fact. As Winfield makes clear, mistake not only signifies a positive belief in the existence of something which does not exist but also may include "sheer ignorance of something relevant to the transaction in hand" [16] . A mistake of this latter kind, and one similar to the mistake allegedly made in this case, was found in J. S. Holdings Pty Ltd v N.R.M.A. Insurance Ltd. [17] . In that case, the failure of a money lender to comply with an Australian Capital Territory ordinance regulating loan contracts meant that the loan contract was void in so far as it provided for payment of a rate of interest higher than 12 per cent. The borrower unsuccessfully sought repayment of the excess interest it had paid in compliance with the contractual provision for interest. The Full Court (Blackburn, Deane and Ellicott JJ.) concluded [18] that the borrower's mistake consisted of its "ignorance of or inadvertence to the existence or operation of the general statutory provisions contained in s. 12 of the Ordinance" and denied recovery to the appellants on the basis of the so-called traditional rule that restitution is not available in cases of a mistake of law. Their Honours referred to various authorities in other jurisdictions, as well as to textbooks, which reject the rule, but having noted [19] that "the distinction which has been drawn between mistake of fact and mistake of law has been subjected to much learned criticism and is often difficult to apply", observed that, at least as far as the Federal Court was concerned, the distinction was "firmly entrenched" [19] . Further, in that case, there was no insistence that the borrower show that it had protested before paying or that duress or involuntariness be proven in order for a finding of mistake to be made, though the Court referred to such matters in the context of when money paid under a mistake of law might be recoverable. Thus, in this case, the Bank's claim that the appellants paid the additional amounts without protest is of little consequence in itself. 1. (1990) 23 F.C.R., at p. 34. 2. "Mistake of Law", Law Quarterly Review, vol. 59 (1943) 327, at p. 327. 3. (1982) 61 F.L.R. 108; 41 A.L.R. 539; 6 A.C.L.R. 803. 4. ibid., at p. 118; p. 547; p. 810. 5. ibid., at p. 122; p. 550; p. 813. 6. ibid., at p. 122; p. 550; p. 813.

[80]

[I]t is unnecessary, for the purposes of the present case, to investigate what constitutes a "fundamental mistake" for the purposes of the principle that money payable under a fundamental mistake of fact is prima facie recoverable by the payer: see, e.g., Porter v Latec Finance (Qld.) Pty Ltd [66] . It can, however, be said that we can see no reason to doubt the correctness of the view expressed or implicit in the judgments in the courts below to the effect that the notion of "fundamental mistake" does not require either that the payer's mistake be shared by the payee or that the mistake be as to the existence of a fact which, if it had existed, would have resulted in the payee being under a legal obligation to make the payment: see Commercial Bank of Australia Ltd. v Younis [67] ; Barclays Bank Ltd. v W. J. Simms Son & Cooke (Southern) Ltd. [68] ; Bank of New South Wales v Murphett [69] . That having been said, it is preferable to leave for another day consideration of the question whether the requirement that the mistake be fundamental involves any more than that it appears that, without the mistake on the part of the payer, the payment would not have been made: cf., e.g., Porter [70] and Barclays Bank Ltd. v W. J. Simms Son & Cooke (Southern) Ltd. [71] . The requirement that the mistake be fundamental as well as causative is not as restrictive as the liability approach considered above, but it has been suggested that the requirement is still a worthwhile precaution against a potential flood of claims and consequent insecurity of receipts [72] . The notion of fundamentality is, however, extremely vague and would seem to add little, if anything, to the requirement that the mistake cause the payment. If the payer has made the payment because of a mistake, his or her intention to transfer the money is vitiated and the recipient has been enriched. There is therefore no place for a further requirement that the causative mistake be fundamental; insistence upon that factor would only serve to focus attention in a non-specific way on the nature of the mistake, rather than the fact of enrichment. If a strict approach is taken towards the issue of mistake so that a plaintiff bears the burden of establishing on the balance of probabilities that a causative mistake has been made, there would also be no need to appeal to the element of fundamentality as a limiting factor. So, the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment. 1. (1988) 164 C.L.R., at pp. 671-672. 2. (1964) 111 C.L.R. 177, at pp. 187, 190, 204. 3. [1979] 1 N.S.W.L.R. 444, at pp. 447-450. 4. [1980] Q.B., at pp. 686-694. 5. [1983] 1 vR. 489, at pp. 491-492, 494-495. 6. (1964) 111 C.L.R., at pp. 186-187, 204. 7. [1980] Q.B., at pp. 694-696. 8. Birks, op. cit., p. 159.

[114]

It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution. The root idea was stated by three Lords of Appeal, Lord Shaw, Lord Sumner and Lord Carson, in R. E. Jones Ltd. v Waring & Gillow Ltd. [5] , which dealt with a particular species of the category, namely, money paid under a mistake of fact. Lord Sumner referring to Kelly v Solari [6] , where money had been paid by an insurance company under the mistaken impression that it was due to an executrix under a policy which had in fact been cancelled, said: "There was no real intention on the company's part to enrich her." Payment under a mistake of fact is only one head of this category of the law. Another class is where, as in this case, there is prepayment on account of money to be paid as consideration for the performance of a contract which in the event becomes abortive and is not performed, so that the money never becomes due. There was in such circumstances no intention to enrich the payee. (Emphasis added.) In Pavey & Matthews Pty Ltd v Paul [7] , Deane J. described the concept of unjust enrichment as "a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff". 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. By contrast, a payment made for a consideration that totally fails is not affected by any operative mistake: it is made in order to obtain the consideration bargained for. The payer acquires no right to recover when the payment is received, but only when the consideration totally fails. The very hypothesis which makes it unjust for the payee to retain the payment when the consideration fails is that the payer has received no part of the contractual benefit for which the payment was made. There are cases which appear to fall into both categories - for example, where money is paid as the price of goods sold in ignorance of the fact that the goods have perished - but, on analysis, cases of that kind will reveal one mistake affecting the formation of the contract under which the payment is purportedly made and a mistake as to the existence of the contract pursuant to which the payment is made [8] . If a case should occur where a payment is recoverable as having been made both under a mistake and for a consideration that has totally failed, the facts would reveal both a receipt which unjustly enriches the payee and a failure by the payer to acquire the contractual benefit for which the payment was made. The point of distinguishing the two categories of unjust enrichment is this: "consideration", when given for a payment made under a mistake, is a benefit given at or prior to the receipt by the payee: at that moment it can be determined whether and to what extent the payee has been unjustly enriched. On the other hand, "consideration which has totally failed" refers to a benefit under a contract or purported contract that the payee has totally failed to give during the period available for contractual performance. It is therefore a fallacy to conflate the two categories and to find a total failure of consideration to be an element common to both. 1. Rover International Ltd. v Cannon Film Ltd. [1989] 1 WL.R. 912, at p. 923; [1989] 3 All E.R. 423, at p. 433. 2. Cf. Lipkin Gorman v Karpnale Ltd. [1991] 2 AC. 548, at p. 575, where performance of a gaming contract was held to be not good consideration. 3. [1943] A.C. 32, at p. 61. 4. [1926] A.C. 670, at p. 696. 5. (1841) 9 M. & W. 54 [152 E.R. 24]. 6. (1987) 162 C.L.R. 221, at pp. 256-257. 7. Birks, op. cit., pp. 151-152.

[118]

Under that rule the action is available when the payee cannot justly retain the money paid to him because it would not have come to his hands if it had not been for a false supposition of fact on the part of the payer causing the latter to believe that he was compellable to make the payment or at all events that he ought to make it. The notion that unjust enrichment is the essential requirement of an action to recover money paid under a mistake appears more recently in the judgment of this Court in Australia & New Zealand Banking Group Ltd. v Westpac Banking Corporation [10] : The basis of the common law action of money had and received for recovery of an amount paid under fundamental mistake of fact should now be recognized as lying not in implied contract but in restitution or unjust enrichment: see, generally, Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd. [11] ; Goff & Jones [12] ; Birks [13] . It is a common law action for recovery of the value of the unjust enrichment and the fact that specific money or property received can no longer be identified in the hands of the recipient or traced into other specific property which he holds does not of itself constitute an answer in a category of case in which the law imposes a prima facie liability to make restitution. Before that prima facie liability will be displaced, there must be circumstances (e.g., that the payment was made for good consideration such as the discharge of an existing debt or, arguably, that there has been some adverse change of position by the recipient in good faith and in reliance on the payment) which the law recognizes would make an order for restitution unjust. This citation omits, inter alia, a sentence speaking of "compensation for the benefit of unjust enrichment, to the person who has sustained the countervailing detriment". That sentence raises a question as to the availability of restitution as a remedy in cases where the plaintiff is not seeking a return of money or property with which the plaintiff has parted. That is not the present case and the problems which arise in those cases can be left for another day. A plaintiff's right to restitution of a payment made under a mistake may be lost, even if the defendant has been unjustly enriched by receipt of the money, where supervening circumstances give rise to an overriding defence, e.g., estoppel. The passage cited from Australia & New Zealand Banking Group Ltd. v Westpac Banking Corporation contemplates a possible change of position defence. That defence has now been accepted in England [14] . Leaving aside defences that arise from supervening circumstances, the essential condition for an order for restitution of money paid by mistake is that the receipt of the payment by the defendant has unjustly enriched the defendant at the expense of the plaintiff. What is meant by unjust enrichment? 1. (1957) 98 C.L.R. 65, at p. 75. 2. (1988) 164 C.L.R. 662, at p. 673. 3. [1943] A.C., at pp. 61-64. 4. Law of Restitution, 3rd ed. (1986), p. 5ff. 5. English and Roman Learning in Moses v Macferlan , Current Legal Problems, vol. 37 (1984) 1. 6. Lipkin Gorman v Karpnale Ltd.

[126]

(1888) 59 L.T. 636. 2. (1930) 47 T.L.R. 110. His Lordship added other paragraphs descriptive of classes of voluntary payments. The dichotomy between voluntary payments which are irrecoverable and payments made under a mistake or under compulsion which are recoverable can be found as far back as Cartwright v Rowley [27] . It is not surprising that payments made under a mistake of law have been treated as a class of voluntary payments. That has been a convenient legal mechanism for holding such payments to be irrecoverable. To admit mistake of law as a ground for restitution in any case in which a mistake of fact would ground such a remedy would render many payments insecure even in cases where both parties expected the payment to be final: the uncertainty of the law and the overruling of decisions by later cases or on appeal would infect many payments with a provisional quality incompatible with orderly commerce. Moreover, while mistakes of fact are specific to particular relationships, the revealing of a mistake of law in one case could throw into uncertainty the finality of payments made in a great variety of cases. Although payments made under a mistake of law should not be excluded entirely from the categories of cases in which restitution may be ordered, something more than a mere mistake of law is required before the remedy is available. As Lord Denning said in Kiriri Cotton Co. Ltd. v Dewani [28] : The true proposition is that money paid under a mistake of law, by itself and without more, cannot be recovered back. The problem, of course, is to articulate the elements additional to a mere mistake of law that entitle a plaintiff to restitution or preclude recovery of the money paid under a mere mistake of law. That problem, it should be said immediately, does not affect payments made in compromise of contested claims. When a claim is settled by accord and satisfaction, a payment made in satisfaction is made in discharge of an obligation created by the accord: it is unaffected by any mistake as to the validity of the claim compromised.
1. [1993] A.C. 142, at pp. 164-166.
2. (1888) 59 L.T. 636.
3. (1930) 47 T.L.R. 110.
4. (1799) 2 Esp. 723, at p. 723 [170 E.R. 509, at p. 510].
5. [1960] A.C. 192, at p. 204.

[131]

We must take this payment to have been made under a demand of right, and I think that where a man demands money of another as a matter of right, and that other, with a full knowledge of the facts upon which the demand is founded, has paid a sum, he never can recover back the sum he has so voluntarily paid. It may be, that upon a further view he may form a different opinion of the law, and it may be, his subsequent opinion may be the correct one. If we were to hold otherwise, I think many inconveniences may arise; there are many doubtful questions of law; when they arise, the Defendant has an option, either to litigate the question, or to submit to the demand, and pay the money. I think, that by submitting to the demand, he that pays the money gives it to the person to whom he pays it, and makes it his, and closes the transaction between them. Latham C.J. in Werrin v The Commonwealth [40] stated the principle in similar terms: The principle appears to me to be quite clear that if a person, instead of contesting a claim, elects to pay money in order to discharge it, he cannot thereafter, because he finds out that he might have successfully contested the claim, recover the money which he so paid merely on the ground that he made a mistake of law. The fallacy in this approach is that many payments, without conscious adversion to the relevant law, would not have been made had the payer known the true legal position. Such payments are no more voluntary than payments made under a mistake of fact when the payer does not have full knowledge of the facts when the payment is made. Many cases of payments that turn out to have been made under a mistake of law are made simply by an omission to consider the law: they cannot realistically be treated as payments made in submission to a claim. Professor Birks reminds us that [41] : Not only are there many doubtful questions of law, there are also many decent people and institutions whose habit is to meet their liabilities without waiting to be hounded, and necessarily they meet the liabilities they think they see. Mistakes only come out later. Since the law is often misunderstood and even changes under foot, recipients have a special need for security whether they actively claim or passively receive. If it be desirable to introduce a principle to protect the finality of payments made under a mistake of law in satisfaction of what, to the mind of the payee, is an honest claim of right, it is not satisfactory to press into service the concept of voluntary payments. The principle should be dressed in modern attire rather than in an older garb that will not fit. 1. See Kelly v Solari . 2. "Mistaken Payments, Change of Position and Restitution", in Essays on Restitution, ed. P. D. Finn (1990), p. 95. 3. (1813) 5 Taunt. 143, at p. 152 [128 E.R. 641, at p. 645]. 4. (1938) 59 C.L.R. 150, at p. 159. See also p. 168, per McTiernan J. 5. op. cit. (1989), p. 166.

[145]

But the recognition of restitution as the true remedy in the case of money paid under a mistake of fact makes it no longer possible to sustain in logic or in principle the denial of the same remedy in the case of money paid under a mistake of law. If the payment of money under a mistake of fact raises a prima facie case of unjust enrichment on the part of the recipient there can be no reason why the payment of money under a mistake of law should not do likewise. While the recent reappraisal of cases in quasi-contract has made quite apparent the absence of any relevant distinction between the two types of mistake, the distinction which has been drawn in the cases has always been unsoundly based. Not only is it often possible to classify a mistake of law as a mistake of fact and vice versa [52] , but the original justification for the denial of a remedy in cases of mistake of law was that "[e]very man must be taken to be cognizant of the law" [53] . That is a presumption which has no foundation in truth. The true principle is that ignorance of the law is no excuse, that is to say, a person cannot escape the consequences of breaking the law by pleading ignorance of it. A person seeking to recover money paid under a mistake of law is not seeking to escape from the law, but to avail himself of it. The subject is examined in the reasons for judgment of Mason C.J., Deane, Toohey, Gaudron and McHugh JJ. I agree with their conclusion that the rule precluding the recovery of moneys paid under a mistake of law should not be held to form part of the law in Australia. I agree with their reasons for reaching that conclusion and shall not attempt to repeat them. I also agree, for the reasons given by Mason C.J., Deane, Toohey, Gaudron and McHugh JJ., that a mistake of law should be treated in the same way as a mistake of fact, so that a prima facie entitlement to restitution arises when a mistake of law has caused a payment to be made. And I agree, for the reasons given by Mason C.J., Deane, Toohey, Gaudron and McHugh JJ., that s. 261 of the Income Tax Assessment Act 1936 Cth rendered cl. 8(b) in the relevant loan agreements void.

[158]

(1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. (2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payer or by a third party by whom he is authorized to discharge the debt; or (c) the payee has changed his position in good faith, or is deemed in law to have done so. In Australia & New Zealand Banking Group Ltd. v Westpac Banking Corporation this Court recognized that the prima facie liability to restore money paid under a mistake may be displaced, but only in "circumstances (e.g., that the payment was made for good consideration such as the discharge of an existing debt or, arguably, that there has been some adverse change of position by the recipient in good faith and in reliance on the payment) which the law recognizes would make an order for restitution unjust" [63] . No doubt the Court regarded money paid voluntarily as money not paid under a mistake and hence as not giving rise to any prima facie liability to repay (cf. Goff J.'s category 2(a)). The onus of proving the circumstances which displace prima facie liability must, of course, lie upon the recipient. The tentative acceptance of change of position as a defence to a claim for restitution may now I think be stated more positively in the light of the decision of the House of Lords in Lipkin Gorman v Karpnale Ltd. [64] . As Lord Goff of Chieveley observed in that case, it is basic to the concept of unjust enrichment that [65] "where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution". Whilst unjust enrichment does not of itself constitute a cause of action, it provides a "unifying legal concept" and serves to mark out the defences to claims in restitution [66] . 1. [1980] Q.B. 677, at p. 695. 2. (1988) 164 C.L.R., at p. 673. 3. [1991] 2 A.C. 548. 4. ibid., at p. 579. 5. See Pavey & Matthews Pty Ltd v Paul (1987), 162 C.L.R., at pp. 256-257.

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Judgment (162 paragraphs)

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