NIML Limited v MAN Financial Australia Limited [2004] VSC 449

CONVERSION - Cheques signed by authorised signatories and collected for the payee in accordance with mandate - Whether conversion by collecting bank - Whether, if so, collecting bank acted as agent for payee - Whether converted by defendant.

2. "If I may say so", said Tadgell J in Hunter BNZ Finance v Australia and New Zealand Banking Group Ltd.[1] "it is incontestable that the question whether a particular person was ever intended by the drawer of a cheque to benefit from the cheque, or can assert against the drawer a right to benefit from it, will be determined ultimately by reference to what the cheque says." His Honour continued:

"No such issue, however, arises in this case...The question here is whether, having drawn the cheque, the plaintiff relinquished its right to immediate possession of it in favour of the payee. I put it in that way having regard to what McNair J said in the Marquess of Bute's Case,[2] namely: '...in order to claim in conversion, it is not necessary for the plaintiff to establish that he is the true owner of the property alleged to have been converted. It is sufficient if he can prove that at the time of the alleged conversion he was entitled to immediate possession.' "

6. This case puts these propositions, and several more, to the test. It concerns a series of cheques (seventeen in all) each of which was signed by persons who had the drawer's authority to sign cheques on its behalf. The drawer was a company which at that time was named Norwich Investment Management Limited. It is now known as NIML Ltd ("NIML"), and is the plaintiff in these proceedings. Each cheque was crossed, marked "not negotiable", and drawn in favour of the defendant, Man Financial Australia Limited ("MFA"). Each was then presented to the plaintiff's bank, Westpac Banking Corporation ("Westpac"), for payment; and that payment was thereupon effected "by reference to what the cheque said"; that is, to the benefit of precisely that person (the defendant/payee) to whom, by reference to the cheque, the drawer's beneficence was directed. As the paying bank was also the defendant's bank, the proceeds of each cheque were then collected by Westpac and credited to the defendant's account.

9. It is difficult to fault Westpac's conduct. As paying bank, it did no more and no less than it was bound by its relationship with NIML - that of banker and customer - to do: it paid the relevant NIML cheques because they were signed by those very NIML employees who, according to NIML's instructions to Westpac, had authority to sign them on NIML's behalf. As collecting bank, it collected the proceeds to the account of the named payee, MFA; a customer which (one might properly assume) was of long standing and unblemished record. At all events, nothing in the evidence suggests that the bank had the slightest reason to think that the cheques should not be acted upon in accordance with their terms. There is no suggestion of negligence on its part. On the contrary: given the facts as known by the bank, it had no choice but to do what it did.

12. Yet the plaintiff submits (and this is an important aspect of its case) that had it, the plaintiff, been aware of all the material facts, it could properly have demanded that the cheque or cheques in question be surrendered to it. This is so, according to the plaintiff, because none of the cheques discharged any obligation of NIML to MFA, and all of them were the subject of a fraud perpetrated by one of the signatories. That person, the only one who signed all seventeen of the cheques, was dishonest. He had his own malevolent reasons for wanting his employer's money to go to the defendant: once there, he could - and did - access it for his own purposes without MFA being aware that those purposes were nefarious.

15. Thus arose the difficult questions which now demand an answer. Which of the parties to this litigation, each of whom claims to be guiltless of any involvement in the fraud, should ultimately shoulder the loss suffered when the dishonest employee, although caught, was not in a position to repay the money over which he had illegally gained control? Did the plaintiff have a right to immediate possession of the cheques up to the point that each was paid in for collection? Can the defendant rely on the fact that the bank discharged its obligations exactly in accordance with the mandate of cheques which, both on their face and in the circumstance in which they were paid and collected, raised no grounds for suspicion? Does it make any difference that the bank acted both as paying and collecting bank? Are there other grounds for attack or defence?

18. Every successful fraud has its victim or victims; and each of them may be blameless. Even so, none may be able to obtain recompense from an impecunious wrongdoer. But one or more of the victims may be the innocent transferee or transferees from the wrongdoer of the latter's fraudulently acquired spoils. In their quest for compensation, it is to that transferee or those transferees that the other victims frequently turn. They invoke the assistance of the law. The courts must then grapple with the dilemma created by the necessity of identifying by whom among the innocent the loss must be borne. The choice is often difficult, for the relevant principles are frequently obscure. The truth is that, in this peculiarly problematic area of the law, the creation and elucidation of those principles has not been the consistent object of the law's attention. The concept of the negotiability of bills of exchange is an exception to that broad proposition. Generally, however, the law has been content to adopt an alternative strategy. To the task of identifying that person who, from among the guiltless, shall bear the loss, the law has attempted to apply those very precepts by which the liability of the wrongdoer is adjudged. But this may force otherwise commonplace causes of action into alien territory; territory to which they will not necessarily adapt.

21. This case illustrates the point. A fraud has been committed. The identity of the wrongdoer is known. Both of the victims of his fraud have a cause of action against him - either directly or in third party proceedings. But he is not worth pursuing. So, in its search for recompense, one of his two victims has turned on the other. Several causes of action have been invoked. One is conversion; another, money had and received. Each is obviously applicable in a proceeding by that victim against the wrongdoer. Neither offers an equally ready solution where, as here, the defendant is not the tortfeasor, but rather has been singled out essentially because it was a party, albeit (as it claims) an innocent one, to a series of transactions financed by the proceeds of the wrongdoer's tortious conduct. A third cause of action - liability to account as a constructive trustee - is also pleaded. This does include as an element the defendant's knowing involvement in the wrongdoer's fraudulent design. Even here, however, the allegation is not so much that the defendant knew, but that it ought to have known, that a wrong was being done to the plaintiff.

24. The miscreant was a man named Shane Joseph Burke. He was a trusted employee of the plaintiff. It maintained an account with Westpac. This was a vehicle for the receipt of customer's fees, as well as for the settlement of accounts as between Norwich Australia and Norwich UK. It was also used for purchasing NIML stationery and other supplies not directly provided to the Norwich group. The relevant chequebook was of the traditional kind: its forms were to be completed manually. All other NIML cheques were generated and printed electronically.

27. Mr Burke had his employer's authority to co-sign cheques drawn on NIML's account. Between April 1997 and June the following year, he signed the seventeen cheques the subject of this litigation. He intended that the proceeds would accrue to him, while being lost to NIML. His liability was criminal as well as tortious.

30. Each cheque was honoured on presentation. As a result, a very large sum - $2,596,777 in all - was debited to NIML's account. On each occasion, one or other of a number of authorized (and, as I understand it, innocent) employees was a co-signatory; NIML was the drawer; and the payee was the defendant, MFA (which, at the relevant time, was known as Ord Minnett Jardine Fleming Futures Ltd).

33. NIML now seeks to recover from MFA the sum of $2,076,585, being the total value of those seventeen cheques less $235,000 repaid on 30 December 1997 and $285,192 recovered in mitigation of its loss. One basis for its claim is that, had MFA ordered its affairs as it should, the fraud would have been discovered before any loss had been suffered. This is in part because, had MFA so ordered its affairs, procedures would have been in place which would have identified clues to suspicious behaviour. These would then have been investigated, and the fraud exposed. It is not otherwise contended that MFA knowingly participated in wrongdoing.

36. Some matters are not in contention. NIML managed the funds of the Norwich group of companies, and of some large superannuation funds who were external clients. MFA was a futures broker. By a nice co-incidence, both parties happened to be customers of Westpac. Indeed, the relevant account was in each case held at Westpac's branch at 509 St Kilda Road, Melbourne (BSB No. 032000). NIML's account was numbered 032000 691457; MFA's, 032000 700812. All but four of the seventeen cheques included MFA's account number as part of the description of the payee.

39. Shane Burke was a client of MFA. On 26 April 1996 he executed the standard form of agreement between the defendant and those for whom it acted.[3] Almost exactly one year later, on 10 April 1997, he drew the first of the fraudulent cheques. Given the amounts involved, it was surprising that another fifteen months were to pass before NIML's staff discovered what appeared to be discrepancies in the account. The fraud came to light shortly afterwards.

42. In some respects, the scheme was simplicity itself. It took advantage of several unusual circumstances. First, there were the particular characteristics of MFA's standard form of agreement between it and the clients of its futures broking practice. Secondly, the account which MFA had with Westpac's St Kilda Road branch itself incorporated distinctive features that facilitated Mr Burke's purposes. I will examine first the terms of the agreement (which is referred to in the standard form itself as the "Private Client Agreement"; I shall dispense with the capitals).

45. By clause 3.3 of the private client agreement, Mr Burke appointed MFA "as [his] agent for the purpose of dealing in futures contracts in accordance with the terms of this [private client] agreement." At the same time, and by contrast, clause 3.11 states that "in entering futures contracts traded by [MFA] on the client's behalf [MFA] assumes liability as a principal".

48. This duality of role has an important part to play in the present dispute. Its nature is further articulated by clauses 3.14 and 3.19 of the agreement, which read as follows:

"3.14 [I]n relation to all trades conducted on the Sydney Futures Exchange by [MFA] and all contracts registered by [MFA] with the clearing house the client has no rights whether by subrogation or otherwise against any person or corporation other than [MFA]. 3.19 [MFA] will be trading on the markets conducted by a futures exchange at all times as a principal notwithstanding that in certain trading [MFA] will be carrying out the instructions of the client as the client's agent."

52. Clause 9 of the private client agreement deals with deposits and margin calls. Both are features of the futures industry. In particular, clause 9.2 seeks to ensure that the broker is not unduly exposed as a principal for trades entered into on behalf of a client. It states, in somewhat awkward language which (save for the substitution of the initials "MFA" for "Ord Minnett Jardine Fleming Futures Limited") is here reproduced exactly as written, that:

"[MFA] may call for payment of deposit or margin (by whatever terms those obligations are described) such money or property (or call for the lodgement of approved securities in lieu thereof) as [MFA], in its absolute discretion, deems is necessary to protect itself from the personal obligation incurred by dealing in futures contracts on behalf of the client."

56. Clause 9.5 provides that, in the payment of margin calls, time is of the essence; and if no other time is stipulated by MFA when making a call, the required response must be made within 24 hours. By clause 14.1, MFA shall segregate and invest all money and property received by it from or on behalf of the client in accordance with The Corporations Law and the relevant rules of the Sydney Futures Exchange.

59. The scene is thus set. Futures brokers must wear simultaneously the hats of both a principal and an agent. They are, in trading in the futures market on behalf of their clients, entitled to require that they be put in funds by those clients. But the funds are the clients', not the brokers'. At the same time, if a client's funds are not there, the broker may be liable, as principal, to meet a debt that has been incurred as a result of a trade made on the client's behalf.

62. Of course, there must be no dealings that are inconsistent with the interests in the relevant funds of the persons who are entitled to them. On the other hand, the futures industry cannot function unless brokers have timely access to so much of the funds of their clients as are necessary to complete their transactions in accordance with the legitimate expectations not only of the clients, but also of those others with whom they trade - expectations the fulfillment of which is the very reason for the existence of the futures industry.

65. The maintenance of an appropriate balance between, on the one hand, the protection of clients' funds and, on the other, their accessibility to those whose business it is to facilitate trades, is therefore crucial. In framing The Corporations Law, the Federal Parliament has acted to preserve that balance. It must not be unnecessarily upset by the courts. Of course the industry must operate in accordance with law. A futures broker will necessarily, in the ordinary course of its business, handle on behalf of its clients monies which are not those of the broker. Accordingly, the right of the broker to deal with those monies must be limited. But the law must allow the industry to operate by commercially feasible means. This, it seems to me, is the rationale behind the General By-Laws of the Sydney Futures Exchange. These require (among other things) that margin calls be met within a limited time. In 1997-1998, when Mr Burke was exercising his unorthodox talents, rule G4(a) provided that payment or lodgement of approved securities must be effected within twenty-four hours of a call or by a time stipulated not exceeding "the earliest reasonable time" as defined by rule G2(a)(vi) and (b)(iv).

68. Section 1209 of The Corporations Law is another mechanism by which an appropriate balance is preserved_._ Its precursor was s.86 of the Futures Industry Act 1986. The explanatory memorandum to that section includes the following observation:

"The clearing house deals with the floor member on a principal to principal basis and makes no distinction between contracts of the floor member and contracts of the floor member's clients. Accordingly, when the clearing house calculates the deposit and margin calls with respect to any floor member, it has regard to the net position of all contracts registered with it by that floor member. When funds are paid by the floor member to the clearing house in response to deposit and margin calls it is not possible to trace funds received from any particular client as passing to the clearing house. So far as the clearing house is concerned, the mechanism for calculating deposits and margins and the procedure for dealing with such funds upon receipt will remain unchanged. However, the mechanism by which the floor member calculates and pays such deposits and margins and deals with funds of clients will be directly affected by cl.86 [of the Futures Industry Bill]."

72. Consistently with this, paragraph 212 of the explanatory memorandum records that money paid into the clients' segregated account is not to be available for the payment of the debts or liabilities of the broker, although the client's right to recover money or property to which he or she is entitled will not be affected. Nor will the broker be prevented from withdrawing money from the account to which it is entitled. Paragraph 213 points out that where a broker invests money from a clients' segregated account, neither that money nor any property in which the money is invested is available for the payment of debts or liabilities of the investment institution.

75. Section 1209 refects these precepts. It is long and detailed. It provides in part that where, in connection with dealings in futures contracts effected by a futures broker on behalf of a client, money is deposited with the broker by the client, or is received by the broker for, or on behalf of, the client, the broker shall - on or before the next day after receipt - deposit the money in a clients' segregated account.[4] This must be designated as such.[5] In order to further this purpose, s.1209 (11) provides that the broker shall in relation to the clients' segregated account keep records that (a) are separate from any other accounting records of the broker and (b) record separately in respect of each client particulars of (among other things) the amounts deposited in, and withdrawn from, the account of the client. Pursuant to this provision, Mr Burke was allocated an account (strictly speaking, as I understand it, a sub-account) within MFA's clients' segregated account. The sub-account was given the number 241223.

78. It is hardly surprising that, in keeping with this regime, The Corporations Law places severe restrictions upon the broker's right to withdraw moneys from its clients' segregated account. Funds shall not be withdrawn except for a purpose specified in s.1209(5). One of these is that of making a payment to, or in accordance with the written direction of, a person entitled to the money. Another is making a payment for, or in connection with, the entering into, margining, guaranteeing, securing, transferring, adjusting or settling of dealings in futures contracts effected by the broker on behalf of clients (but no one else). Yet other purposes for which the money may be withdrawn are to (a) defray brokerage and other proper charges; (b) invest the money in certain specified investments; (c) pay to the broker the amount of a fee properly charged by it; or (d) make a payment that is otherwise authorised by law. That being so, MFA was not beneficially entitled to the funds held in its clients' segregated account.

81. Mr David Kiely is a client adviser at MFA's retail desk. He described the circumstances in which MFA permitted payments out of MFA's clients' segregated account. As I understood his evidence, these were consistent with the restrictions imposed by s. 1209. I accept his evidence.

84. While account No. 241223 remained opened in Mr Burke's name, he retained his membership of that class of MFA's clients known as "retail investors". Such investors deposited funds into the clients' segregated account by a number of alternative means. For example, the client could present the relevant cheque to a Westpac branch. Alternatively, the cheque could be delivered to MFA, after which the broker could itself present the cheque to the bank. This method, however, had the disadvantage that, unless the client was in Sydney, delivery by hand would generally be impractical; and, when time was of the essence, any other form of delivery would risk delay. For this reason, almost all deposits were made by the client directly depositing a cheque into the clients' segregated account with Westpac. MFA did not accept cash.

87. Direct deposit was the means adopted by Mr Burke. He went to various Westpac branches where he deposited, directly into account No. 032000 700812, the seventeen NIML cheques he had improperly procured. This had, for him, the significant advantage that MFA never saw that cheques were being drawn by NIML, on NIML's account, in MFA's favour. Had it done so, it would presumably have realised at once that the former had no reason to put the latter in funds. The fraud would have been exposed. This, so it was argued on behalf of NIML, is an important circumstance.

90. Direct deposits into the clients' segregated account helped to conceal Mr Burke's misdemeanours; and there were also, for him, other advantages in the arrangements by which he made himself the conduit for transferring NIML's money into MFA's clients' segregated account. True, they meant that he had to notify the defendant of the fact of each deposit. On receipt of that notification, however, MFA asked no questions; it simply credited the relevant funds to account No. 241223. To the extent that those funds were not required to meet margin calls, settlements, brokerage or other proper charges, they could be (and were) disbursed in accordance with instructions given by Mr Burke to the broker. The account therefore became a surrogate bank account for him. He was happy to grasp the resultant opportunities.

93. The plaintiff gave evidence through Mr Ian Oliver (who was at the material times the Group Financial Controller of the Norwich group of companies) that during the same period Mr Burke was employed by NIML as its Company Secretary and Financial Controller. While MFA admits Mr Burke's employment by NIML, it does not admit that he held the offices alleged. Nor does it admit the allegation that Mr Burke's duties included "the control of the conduct of [NIML's] investment administration operations and of its financial affairs".[6] Indeed, at the conclusion of the trial it was submitted on behalf of MFA that NIML had failed to establish either what Mr Burke's duties were, or the scope his authority. I, however, accept the evidence of Mr Oliver. It may be that, even so, I could not find that Mr Burke did in fact hold an office or shoulder responsibilities which rendered him as an employee continuously subject to "fiduciary obligations" as that expression is defined in (now Justice) Finn's seminal work Fiduciary Obligations.[7] Nevertheless, as a cheque signatory he undoubtedly occupied a position of trust.

96. One of the issues in this case is whether, in any relevant sense, ever received the proceeds of the cheques. There is no doubt that each was paid into account No. 03200 700812. But this was a clients' segregated account. It was conducted by MFA as a necessary part of its business as a futures broker (that is, as a dealer, on behalf of other persons, in futures contracts) and as a member of the Sydney Futures Exchange. According to MFA, monies received into its clients' segregated account were not received by it in its own right, but rather upon deposit for and on behalf of its client or clients. It follows, so MFA submits, that the seventeen cheques in question here were held by it for and on behalf of Mr Burke in accordance with s.1209. Their receipt did not constitute receipt of them by MFA for its own use and benefit. Alternatively, MFA had neither the knowledge nor the means of knowing that it was in receipt and control of monies belonging to NIML. Furthermore, before learning of NIML's title to the monies, MFA drew upon a portion of them against fees and commissions payable by Mr Burke to MFA in consideration of its services as a broker. A further share was paid out of the Westpac account in accordance with Mr Burke's directions. In so doing, MFA submits, it changed its position in good faith and to its detriment. It had no way of knowing of any mistaken belief by Westpac about the validity of the cheques. Just as Westpac had a mistaken belief in its capacity as paying bank, so was MFA acting under the same mistake.

99. Although the plaintiff in its reply denies that the monies were deposited for and on behalf of Mr Burke it says that, even if this were so, the payments retained their character as payments to MFA itself - not to the defendant as an agent for a designated principal or as an agent at all, but to the defendant as principal. Nor did MFA change its position on the faith of the receipt; on the contrary, the payments were made on the faith of Mr Burke's instructions. In any event, any change in position was not to the detriment of the defendant: it benefited by paying itself fees and commissions, and by reimbursing itself against futures trading losses on Mr Burke's account.

102. MFA also knew, according to NIML, that the amounts of the cheques were substantial. This is especially so (a) when set against what MFA knew of Mr Burke's financial capacity and (b) given that the cheques were paid frequently. Indeed, drawings were made from their proceeds almost as soon as they were banked. Large amounts were directed by Mr Burke to be paid to his account with his own bank or to his creditors. What is more, Mr Burke not only failed to provide a satisfactory explanation to a request in about mid 1997 by an employee of MFA, Mr David Kiely, for identification of the source of the funds, but also informed the defendant that he wanted dealings with his account kept secret. In these circumstances, MFA did not act in good faith. It is therefore not entitled to rely upon any change of position.

105. On behalf of MFA it was submitted that the clients' segregated account was, as a matter of legislation and as a matter of operation, an agency account. The plaintiff has therefore failed to establish a necessary condition of the cause of action: that is, that the monies were received for the use and benefit of MFA.

109. The current statement of claim has been amended several times. It is headed "Second Amended Statement of Claim". I shall refer to it simply as "the statement of claim". It begins with allegations which are relevant to all three of the causes of action upon which the plaintiff relies. Among these are the claim that, from 10 April 1997 to 22 June 1998, Mr Burke fraudulently prepared the seventeen cheques, had them signed, and on or about the date of each delivered them to Westpac for payment and collection. In response, the defence makes no relevant admissions, save that Mr Burke was an authorised signatory, that he signed (and caused his co- signatories to sign) each cheque for his own fraudulent purposes, and that "monies were deposited by or on behalf of Burke into the Westpac account".[8]

112. The agency of Westpac, and its consequences, is the next point to which the statement of claim directs its attention. By debiting the plaintiff's account - and, as a direct result of each debit, crediting that of the defendant - with the amount of each cheque, Westpac acted first as agent of NIML and then as agent of MFA. The consequence, as a matter of law, is (according to the plaintiff) that "each of the payments was had and received by the defendant to the use of the plaintiff."[9] The fact that the plaintiff had no reason to pay, and the fact that the defendant had no right to receive, any part of the proceeds of any of the cheques, is doubtless to be inferred from the allegation (which, as we have seen, MFA admits) that Mr Burke's dealings with each cheque were for his own fraudulent purposes.

115. While admitting Mr Burke's fraud, MFA denies that the amount of any cheque was paid to it beneficially; at worst, each payment was to be held by it for and on behalf of Mr Burke. Alternatively, if the monies were received by the defendant in its own right, the defendant is not liable to account for them because it neither knew nor could have known of such receipt. And if neither absence of beneficial receipt nor lack of knowledge is a sufficient defence, MFA remains free of any obligation to NIML because, before learning of the plaintiff's title to the monies, it paid them away in circumstances which amount to its changing its position in good faith and to its detriment.

118. Just as MFA pleads several pillars for its defence, so NIML asserts alternative grounds upon which its cause of action may be made out. There is, according to the statement of claim, another basis - that of mistake - for holding that the proceeds in question represent money had and received by the defendant to the use of the plaintiff. In this case the mistake is not that of the principal, but of the agent. The statement of claim alleges that the bank as NIML's agent paid each cheque under a mistaken belief: that each was a genuine and valid mandate, that MFA was entitled to receive the proceeds, and that in delivering each to the bank, Mr Burke was acting honestly. The truth, however, was in each case to the contrary.

121. What is sauce for the goose is sauce for the gander. So, at least, would the defendant have it. MFA pleads in its defence that if the bank was acting under a mistake in its capacity as a paying bank, it was equally mistaken in its capacity as a collecting bank.

124. The statement of claim next alleges breach of trust. Mr Burke, according to that pleading, defrauded the plaintiff of each of the payments; was in breach of his fiduciary relationship with his employer; and was its trustee of the cheques and of their proceeds. Accordingly, on its receipt of those proceeds, the defendant held them on a constructive trust for NIML. If knowledge is a necessary element in this, the defendant had that knowledge: at the time it received the proceeds of the cheques it knew that it was receiving trust property, and that the payments were in breach of trust. In particular, it knew that the "amounts of the cheques", both individually and in total, were very substantial, and that they were paid frequently; that they "were extremely large in proportion to what the defendant knew of Burke's financial capacity"; that access to the proceeds was made "almost as soon as they were banked and large amounts were directed by Burke to be paid to Burke's account with his own bank or to Burke's creditors"; that he failed to explain satisfactorily the source of the funds; and that he wanted his dealings with his account kept secret.[10] It follows that MFA had information which indicated that enquiries of NIML ought be made. Not having made them, the defendant's receipt of and dealing with the funds was dishonest.

127. MFA's response is that it admits the fraud. It admits nothing else.

130. The plaintiff's final cause of action is in conversion. It is based on the earlier allegations, made in the statement of claim, that in fraud of his employer Mr Burke prepared the impugned cheques and delivered them to Westpac for payment and collection. This amounted to conversion on his part. By reason of the circumstance that Westpac collected each tainted cheque as agent for MFA, the defendant in turn likewise converted them to its own use.

133. MFA seeks to answer these allegations not merely by a denial but also by the assertion that the deposit of the proceeds into the clients' segregated account which it maintained with Westpac accorded with the apparent mandate of NIML as drawer of the cheques. As payee, MFA had the right to their immediate possession. In any event, Westpac acted in good faith and without negligence within the meaning of s.95 of the Cheques Act 1986. It follows, so the defendant asserts, that "neither the bank nor its alleged principal is liable for conversion of the cheques."[11]

136. In the result, the claim most urgently pressed by the plaintiff at trial was that in conversion. I will nevertheless examine each cause of action in the order in which they were pleaded.

140. Whenever it is necessary to decide whether a third party is liable to account to a beneficiary of a trust where the trustee has breached his or her fiduciary duties, one assembles the facts and the arguments and marches them towards Barnes v Addy.[12] In a passage as celebrated as any in the law of trusts, Lord Selborne LC said in his judgment in that case:[13]

"Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."

144. NIML alleges that, because Mr Burke held "property" on trust for NIML, and because MFA as a third party received that property from him, MFA likewise held it "on a constructive trust for the plaintiff".[14] NIML therefore contends that MFA is a constructive trustee, with NIML as the beneficiary, because it falls within the first of the two situations to which Lord Selborne referred: that in which a third party receives trust property as a consequence of a breach of trust. The second limb of Lord Selborne's pronouncement, where a third party knowingly assists a trustee to misapply trust assets, was neither pleaded by NIML in its statement of claim nor relied upon at trial. I therefore put it to one side.

147. NIML's primary position is that mere receipt by MFA is enough; as a defrauded beneficiary it is not required to prove that MFA knew of Mr Burke's illegal activities. But if knowledge is a necessary element in the cause of action, then constructive rather than actual knowledge is sufficient; and MFA was constructively aware of the relevant facts. It follows that MFA "received the trust property with knowledge of the fact that it was trust property and that the payments were in breach of trust." [15]

150. I pause to add here that actual knowledge is not only not pleaded but that, if it were, the second limb of Barnes v Addy would necessarily be in issue. Unless actual knowledge was first gained by MFA only as the last of the seventeen cheques was paid, such knowledge would necessarily implicate MFA in accessorial involvement (or "knowing assistance") in Mr Burke's dishonest scheme. This is not NIML's case.

153. Or so, save for one contra indication, it would seem. In paragraph 19 of its statement of claim, NIML alleges that, given the knowledge that NIML attributes to MFA, the latter did not receive or deal honestly with any of the payments. If this is what NIML alleges, then (at least as MFA asserts in response) it can only make that allegation good by reference to MFA's actual knowledge.

156. MFA asserts that in any event none of this is relevant because the proceeds of the cheques went into its client's segregated account. That being so, the argument runs, MFA itself received nothing.

159. I disagree. MFA did receive something as a result of its relationship with Mr Burke. He was its client. It was in the business of obtaining and retaining such people. It rendered services to them, and in return charged and was paid fees and commissions. That was how it obtained the income, or some of the income, which was its reason for existence. Mr Burke and his fellow clients were in that sense essential to MFA's continued existence; and the funds improperly acquired from NIML were part of its lifeblood. It undoubtedly received that portion of those funds which represented its fees and commissions.

162. All this may be accepted. In my opinion, however, MFA beneficially received nothing other than its fees and commissions. And that which it did receive was in return for the services that it rendered to Mr Burke. In other words, MFA gave good consideration for the money it obtained from its client. It is nevertheless true that, if that money was paid by it in the knowledge that it was obtained by fraud, Barnes v Addy could to that extent apply. For reasons to which I refer below, I do not think that the balance of the funds which entered the clients' segregated account were received by MFA.

165. It is, however, important to consider whether (constructive) knowledge is in the relevant circumstances - including a relevant receipt of the proceeds by MFA - necessary; and, if so, what is enough to constitute such knowledge. In my opinion, it is an essential ingredient in the cause of action pleaded by NIML against MFA that the latter either had constructive knowledge of the general nature of Mr Burke's dishonesty or was unjustly enriched by its receipt. My reasons follow.

168. A relevant starting point is Black v S Freedman & Co.[16] It is authority for the unremarkable proposition that stolen money is trust money in the hands not only of the thief but also anyone else to whom it has come either as a gift or with notice of its provenance. So Mr Burke held the cheques and their proceeds, or the funds to which those proceeds could properly be traced, on trust for NIML. There is however nothing in Black's case, as I read it, to support the proposition that, if MFA were a third party to whom the cheques or their proceeds had come without knowledge of Mr Burke's fraud, it would nevertheless hold that property as a constructive trustee. Indeed, in his judgment, Griffith CJ said:[17]

"I think that where a man pays a large sum of money to his wife, and no more appears, the inference is that it is a present. Therefore the doctrine of equity is applicable. The money is identified; it came into her hands as a volunteer, she is liable to repay it. It was pointed out by Sir George Jessell, in a well known case, that a man may at a certain stage be innocent, but that, if he knows that he has got the advantage of a fraud to which he was no party and says he will keep it, then he becomes himself a party to the fraud and is liable to the jurisdiction of the court of equity."

172. The other members of the High Court agreed with the Chief Justice. Barton J said that he was "of the same opinion entirely".[18] O"Connor J said:

"Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person's hands. If, of course, that other person shows that it has come to him bona fides for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not."[19]

176. In Thomson v Clydesdale Bank Ltd[20] a stockbroker had been instructed by a client to sell certain shares and to deposit the proceeds in bank accounts in the client's name. The stockbroker had other ideas. He deposited the proceeds not into the client's, but into his own (overdrawn) account. There was evidence that the bank manager was aware that the funds in question did not belong to the broker; but he neither knew nor suspected any breach of trust. Lord Herschell said:[21]

"My lords, I cannot assent to the proposition that even if a person receiving money knows that such money has been received by the person paying it to him on account of other persons, that of itself is sufficient to prevent the payment being a good payment and properly discharging the debt due to the person who receives the money. No doubt if the person receiving the money has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt money which he has no right to hand over, then the person taking such payment would not be entitled to retain the money, upon ordinary principles which I need not dwell upon. But in the present case there appears to me to be an absolute absence of any evidence of that kind."

180. In the same case, Lord Watson said:[22]

"I regard it as settled law that a transaction which is fraudulent as between the agent and his employer will bind the latter, unless he can show that the recipient of the money did not transact in good faith with his agent ... [T]he broker's fraud is of no relevancy in this case, unless it is coupled with bad faith on the part of the respondents. The onus of proving that they acted in male fide rests with the appellants."

184. Lord Shand echoed Lord Herschell. He said[23] that before the third party's liability could be established, it would have to be "... shown directly, or as the reasonable inference from facts proved, that these parties were cognisant that the money was being wrongfully used, in violation of the agent's duty..." All three law lords, therefore, held that something more than mere receipt of money paid in breach of trust was required. Given that this is so, a breach of the first limb of Barnes v Addy depends either on the knowledge, or on the bad faith, of the third party.

187. More recent cases give no support to the proposition that knowledge, actual or constructive, is not a necessary element in the first limb of Barnes v Addy. In International Sales and Agencies Ltd v Marcus[24], Lawson J said at 558:

"...the knowing recipient of trust property for his own purposes will become a constructive trustee of what he receives if either he was in fact aware at the time that his receipt was affected by a breach of trust, or if he deliberately shut his eyes to the real nature of the transfer to him (this could be called 'imputed notice'), or if an ordinary reasonable man in his position and with his attributes ought to have known of the relevant breach. This I equate with constructive notice. Such a position would arise where such a person would have been put on inquiry as to the probability of a breach of trust. I am satisfied that in respect of actual recipients of trust property to be used for their own purposes the law does not require proof of knowing participation in a fraudulent transaction or want of probity, in the sense of dishonesty, on the part of the recipient. That is a test which relates, not to knowing recipients of trust property for their own use, but to those who knowingly participate by assisting in a breach of trust."

191. One of the more important judgments on the point presently under examination is that of Megarry VC in Re Montague's Settlement Trusts[25]. In that case, a family settlement had created a trust in favour of D, who with his solicitor (L) was a party to the settlement. Twenty five years later, the trustees mistakenly transferred certain property to D, who shortly afterwards received a letter from L informing him of the transfer and of the fact (as L mistakenly believed it to be) that D was free to dispose of the property for his own benefit. D did just that. Thirty years later again, a beneficiary under the settlement sued D's estate alleging that from the time D received the property he held it as a constructive trustee. The Vice-Chancellor held that this was not so. D had acted at all times innocently and without notice of the breach of trust. According to the Vice-Chancellor, the basic question in considering whether a constructive trust has arisen in a case of the knowing receipt of trust property is whether the conscience of the recipient is sufficiently affected as to justify the imposition of such a trust. For this purpose, however, knowledge is not confined to actual knowledge. It includes also knowledge which would have been acquired had not a putative trustee wilfully shut his or her eyes to the obvious, or wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make.

194. In Re Montague's Settlement Trusts, Sir Robert Megarry therefore regarded the touchstone of liability as being what he described as the third party's "want of probity".

197. In this Court, the authorities were exhaustively surveyed by Hansen J in Koorootang Nominees Pty. Ltd. v Australian and New Zealand Banking Group Ltd.[26] His Honour concluded that there were three competing approaches to the principles which underpin recipient liability. The first of these he referred to as the "property approach", in which liability is based upon the concern of equity to protect equitable estates and interests in property. That approach favours liability in any case in which the recipient has notice of the beneficiary's interest. The second or "conscience approach" imposes liability where the recipient has acted unconscientiously. Montague's case falls within this category. The third is based upon the avoidance of unjust enrichment and "is most appropriately governed and explained by the law of restitution of unjust enrichment"[27].

200. Hansen J thought that there was "considerable persuasion in the third view."[28] If it were adopted, the liability of the recipient would be strict, but subject to defences such as bona fide purchase and change of position. But the knowledge of the recipient would not be relevant in considering whether the elements of recipient liability are established. "Rather", his Honour continued "the beneficiary is prima facie entitled to restitution of trust property if he can show that the transaction by which the trust property was referred to the defendant was vitiated by some recognised 'unjust' factor."

203. In this context, two points may be made. First, what is just or unjust is to be determined not by idiosyncratic notions of right and wrong but by the ordinary processes of legal reasoning. Secondly, those processes include paying due regard to relevant authority. One of these is Lloyd v Grace-Smith & Co[29]. There, an employee of a firm of solicitors defrauded a client. The firm obtained no benefit from the misdeed. It attempted, unsuccessfully, to paint the client as not a client but a personal friend of the miscreant. The House of Lords was unimpressed. The Earl of Halsbury was of the opinion that if somebody must be a loser by the deceit, better that it should be he who employed and put his trust and confidence in the deceiver. It was not the stranger who should suffer the loss.[30]

206. The other law Lords (Earl Loreburn, Lord Macnaghten, Lord Atkinson and Lord Shaw of Dunfermline) were of the same opinion. The latter said[31]:

"The case is in one respect the not infrequent one of a situation in which each of the two parties have been betrayed or injured by the fraudulent conduct of a third. I look upon it as a familiar doctrine as well as a safe general rule, and one making for security instead of uncertainty and insecurity in mercantile dealings, that the loss occasioned by the fault of a third person in such circumstances ought to fall upon the one of the two parties who clothed that third person as agent with the authority by which he was enabled to commit the fraud."

210. The existence and standard of a bank's duty of care was discussed by Steyn J in Barclays Bank Plc v Quincecare Ltd[32]. At 376, his Lordship said:

"The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers."

214. It is also useful to bear in mind the cautionary words of Palmer AJ in Mercedes Benz (NSW) Pty Ltd v ANZ and National Mutual Royal Savings Bank Ltd[33] that:

"... In a case involving fraud by an employee where fault is sought to be apportioned amongst innocent third parties it is essential, in my opinion, never to lose sight of the fact that the 'fons et origo' of the losses which flow from the fraud out into the wider commercial community is the abuse of position as between employer and fraudulent employee. If the employer has been lax in protecting his own interests from the fraud of his employee, can he reasonably require that third parties with their own legitimate commercial pressures and concerns to attend to, be more vigilant in his interest than he is himself?"

218. In paragraph [40] above, I referred to the allegations of fact upon which NIML relies. It may be convenient if I repeat them, in summary form, here. According to NIML, MFA knew, when it received the proceeds of the cheques, that those proceeds were trust property. It knew that the payments were in breach of trust. It knew that the proceeds of individual cheques were substantial, especially in proportion to Mr Burke's known financial capacity, and that they were paid frequently. It knew that the client often gained immediate access to the particular proceeds of particular cheques and in so doing exploited MFA as if it were a surrogate bank rather than a stockbroker. Finally, MFA was aware that Mr Burke wanted his dealings with his account kept secret, and had failed to satisfactorily explain how he came by such largesse as he directed to the clients' segregated account.

221. There are several levels at which MFA pitches its response to these allegations. First, its defence pleads that the crediting of the account did not constitute receipt by MFA of anything; and it certainly did not receive the proceeds of any of the seventeen cheques either as a gift, or whilst having actual knowledge of Mr Burke's nefarious dealings with his employer's chequebook. It did not, therefore, "assist with knowledge in [Mr Burke's] dishonest and fraudulent design".[34]

224. Secondly, MFA asserts that even if it did receive the funds in question, it had neither the alleged knowledge (i.e. that it was in receipt and control of moneys belonging to NIML) nor the means to acquire it. Thirdly, it points out - correctly, in my view - that a corporation cannot acquire knowledge, constructive or otherwise, by aggregating particular facts known to a number of individual employees so as to produce a notional (in this case, MFA) representative who in that capacity is dishonest: Macquarie Bank Ltd v Sixty-fourth Throne Pty Ltd.[35]

227. I find as a fact that whatever knowledge individual employees of MFA may have had, none knew of Mr Burke's misdemeanours. Some knew that he used the client's segregated account not merely for purposes associated with the client/broker relationship. They knew that funds having been paid into that account were very shortly thereafter dispersed not to advance Mr Burke's futures trading activities but for other, quite separate, reasons. Of all the facts relied upon by NIML, this in my opinion is the only circumstance that approaches something upon the basis of which any MFA employee might have inferred misconduct on the part of Mr Burke. But the employee most closely connected with him , Mr David Kiely, said in evidence that I accept that:

"Some clients effectively used their futures trading account as a private bank because there were no fees payable unless the client traded or requested a transfer of funds by letter of credit or telegraphic transfer."

231. Mr Kiely also swore that it was "not uncommon" for clients to deposit large sums in the clients' segregated account and to direct the disbursement of those funds to third parties. Again, I accept this evidence.

234. In my opinion, MFA should not be held accountable for the failure of its employees to draw the inference which NIML says should have been drawn. Still less is that inference a likely conclusion on the basis of the other facts as alleged by NIML and upon which it relies.

238. This, according to Butterworths Australian Legal Dictionary is "[a] cause of action whereby the plaintiff seeks to recover money from the defendant on the ground that the defendant had received the money to the use of the plaintiff to whom in justice and equity it belongs". It is of ancient lineage; and among its offspring are a number of names, honoured in their time, which the law has since sought to disown. Several Australian cases are important for an understanding of the current law.

241. One circumstance giving rise to a claim for money had and received is that the relevant payment was induced by mistake. This is the basis upon which NIML seeks recovery here - although the mistake upon which it relies was that of Westpac as NIML's agent, not that of NIML itself; and it also contends that the fact that the cheques were procured by fraud is itself sufficient to sustain the cause of action. The circumstance that the payments were made in the absence of any consideration flowing to NIML from MFA further strengthens the former's case.

244. Mistake was the initiating factor in the litigation that came to the High Court as ANZ Banking Group Ltd v Westpac Banking Corporation.[36]. In the joint judgment of Mason CJ, Wilson, Deane, Toohey and Gaudron JJ their Honours there said:

"The basis for 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 an implied contract but in restitution or unjust enrichment... In other words, receipt of a payment which has been made under a fundamental mistake is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution, in the sense of compensation for the benefit of unjust enrichment, to the person who has sustained the countervailing detriment... 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 (eg 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."[37]

248. This passage, or at least part of it, was reproduced in the joint judgment of Mason C.J. and Deane, Toohey, Gaudron and McHugh JJ in David Securities Pty.Ltd. v Commonwealth Bank of Australia[38]. The context is important. The passage illustrated the proposition, which the Court also articulated in Pavey & Matthews v Paul,[39] that in Australia the old indebitatus counts, which employed a fictitiously implied contract as the vehicle by which the law allowed recovery of money paid by mistake, should give way to a general doctrine of restitution based on notions of unjust enrichment. The High Court emphasised, however, that the doctrine is not a definitive legal principle but rather:

"...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 and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new and developing category of case."[40]

252. Idiosyncratic notions of right and wrong therefore have no place in determining whether or not an "enrichment" is just. But it will be assumed to be unjust where the payment has been caused by a mistake - in which case there will be a prima facie obligation on the part of the recipient to make restitution.[41] The concept of unjust enrichment therefore maintains the primary focus of its attention on the moment of enrichment. The High Court put it this way in David Securities:

"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." [42]

256. Of course, the point of view of the person making the payment is unlikely to be entirely disinterested. NIML's justifiable conclusion that it has been unjustly deprived does not necessarily translate into an equally justifiable conclusion that MFA has thereby been unjustly enriched. That honour goes first to Mr Burke. MFA which, necessarily, is no more disinterested than its protagonist, can point to the not unattractive argument that even at the moment of payment there was no injustice in its "enrichment". MFA is (the argument continues) the innocent recipient of money paid as consideration for its fulfilment of its contractual obligations to Mr Burke. Accordingly, it has not been "enriched" in any relevant sense at all. Indeed (it submits) it was never the recipient of the funds in respect of which NIML seeks restitution: at no material time did it beneficially hold any money of which the plaintiff was the source. To the extent that it received any such money at all, it did so merely as an agent for Mr Burke. Those funds were paid into the relevant clients' segregated account.

259. MFA therefore relies on the proposition that the proceeds of the cheques came to it through the agency of the miscreant. It had a contract with him. The money was received into the clients' segregated account pursuant to and in accordance with the terms of that contract. To the extent that consideration is an issue, MFA gave full consideration. Had the payments been made in cash there would and could be no question of unjust enrichment. It cannot be that a payment by cheque will result in unjust enrichment while payment in cash, where all the other circumstances are precisely the same, will not.

262. NIML argues that the circumstances are not precisely the same. Cheques reveal the identity of the drawer, and thus the source of the money. They may therefore give the recipient notice where cash does not. Had MFA required Mr Burke to produce the cheques to it, rather than permit him to deposit them directly into the clients' segregated account, the defendant would at once have appreciated that NIML was the drawer. There being no basis for the transfer of money from NIML to MFA, the latter would have realised, with equal promptitude, that it was being proffered funds upon which it had no claim.

265. So much is doubtless true. The question is whether MFA should suffer because it adopted a policy, in relation to the payment of cheques into its clients' segregated account, which was dictated by the exigencies of its business as a futures broker. In my opinion, it should not. Indeed, as I understand the law it not only should not, but does not, impose upon dealers engaged in the futures industry an obligation to require that cheques destined for their clients' segregated accounts be physically delivered to them so that they can ensure thereby that the Burkes of this world do not deceive them about the source of their funds. They have, of course, no general duty of care to drawers of cheques such as would impose upon brokers the requirement that they so manage their businesses as to protect those drawers from frauds perpetrated by the latter's employees. And, as McPherson JA said in Port of Brisbane Corporation v ANZ Securities[43] :

"A stockbroker who refused to receive or to deal with money from his client without first checking the client's title to it would soon find himself out of business. He is, after all, conducting a stockbroking business and not a detective agency."

269. It is true that the responsibility that NIML submits should be imposed upon MFA is no more arduous than that of making a note of the name of the drawer of the cheques deposited into the relevant clients' segregated account. A simple task if cheques are few. The total amount deposited into the MFA clients' segregated account between 10 April 1997 and 22 June 1998 was, however, nearly four billion dollars (the precise sum was $3,732,186,099.30). Moreover, the cause of action upon which NIML relies is not negligence; and if it were, the burden would be on NIML to show that MFA failed to take reasonable care in circumstances in which a duty of care was owed. That kind of exercise is of course undertaken daily in the courts; but I know of no basis upon which a court could determine the degree to which a broker, if it is to avoid a successful claim that it was unjustly enriched, must modify the practices best suited to the efficient conduct of its business. To attempt the exercise may well take the court into the dangerous territory about which Deane J spoke in Pavey & Matthews v Paul[44] when he referred to "idiosyncratic notions of what is fair and just". This is also, it seems to me, what the High Court (Mason CJ and Deane, Toohey, Gaudron and McHugh JJ) had in mind in David Securities, when stating[45] that "it is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair and unconscionable."

272. Against this background, it is (as it seems to me) arguable that MFA received the funds in question not from NIML but from Mr Burke. That was certainly what MFA believed. I find as a fact that MFA did not suspect any fraud on his part. MFA did not know that Mr Burke had no right to the proceeds of the cheques. On the contrary, it believed that the funds held in account No.241223 were his. And it was in fact Mr Burke who took the cheques to the bank. It was he who deposited them into the MFA clients' segregated account. It was he who directed that the resultant credits be shown as being received into his sub-account, i.e. that numbered 241223. If these be the facts which determine whether or not MFA was unjustly enriched, then it was not.

275. The decision of the Queensland Court of Appeal in Port of Brisbane Corporation v ANZ Securities.[46] is relevant here. That case repays examination, because it has important similarities with that with which I am presently concerned. Peter Hinterdorfer, an employee of the Corporation, incorporated (in the Turks and Caicos Islands) a company which he called Windermere Investments Limited. Despite the absence of any "Pty" in the company's name, he was the only shareholder and director. He engaged an intermediary, based in Honk Kong, to invest the company's surplus funds on the company's behalf. He also appointed ANZ Securities Ltd to hold cash and securities as custodian and nominee for Windermere pending instructions from either Windermere or the intermediary. He then went about acquiring the surplus funds he had in mind.

278. His scheme was straightforward enough. The Corporation employed him to decide how much of its funds were not immediately required. He was then to invest the sum so ascertained. The two general managers to whom on 20 August 1996 he took a cheque for $4,500,000 drawn on the Commonwealth Bank in favour of "ANZ" therefore had no qualms about signing it. They believed that the money was destined for investment with the ANZ Banking Group. They were wrong. After the cheque had been signed, Hinterdorfer secretly inserted the expression "Securities Ltd. - Trust Account" so that it followed the letters "ANZ". ANZ Securities Ltd. was a stockbroker and licensed securities dealer. Hinterdorfer then deposited the cheque at the ANZ Bank's head office in Brisbane for crediting to Windermere in an ANZ Securities Ltd account. The Commonwealth Bank subsequently paid the cheque, and the ANZ Bank collected the proceeds. They were placed into the relevant account of ANZ Securities Ltd. But they did not remain there. Between 21 August and the following 28 October they were paid out in their entirety in accordance with the directions of the intermediary. The trial judge found that ANZ Securities believed that the money had been lawfully credited to Windermere's account; and it acted in good faith in making the payments. In my opinion, the same findings are warranted in the case of MFA. The trial judge also held, however, that - in not making further inquiries about the source of the funds - ANZ Securities had not acted reasonably or with care. That finding was not challenged on appeal. It seems to me, by contrast, that in this case MFA acted both reasonably and carefully.

281. The Queensland Court of Appeal considered whether, by the time the misappropriated funds came into the hands of ANZ Securities, the "payer" was the Corporation or Windermere. It identified the latter as having played that role. The broker and recipient, ANZ Securities, had not seen the cheque. It had no reason to suppose either that the Corporation was the drawer, or that its proceeds were to be held on trust for anyone other than Windermere. In its eyes there was no question but that it received the relevant funds from Windermere, its client. Likewise, there was no question, as far as MFA was aware, but that it received the proceeds of the seventeen cheques from its client, Mr Burke.

284. The finding in the Port of Brisbane Corporation case that Windermere was the "payer" is, for present purposes, important. After observing in David Securities that, from the point of view of the person making the payment, it is at that moment that the recipient of money paid under a mistake is unjustly enriched, the High Court moved to a defence relied upon by ANZ Securities: change of position. That company had, or so it argued in the Court of Appeal, changed its position on the faith of the instructions it received from the Hong Kong intermediary. That change was to its detriment. In those circumstances, as the High Court held in David Securities,[47] "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." [48]

287. It was this point that led ANZ to fail in its claim against Westpac in ANZ Banking Group Ltd v Westpac Banking Corporation.[49] That case concerned the attempt by ANZ to recover a mistaken overpayment of money to Westpac. Intending to effect a telegraphic transfer of $14,158.20 to the account of Westpac's customer, Jakes Meats Pty Ltd ("Jakes"), ANZ actually forwarded $114,158.20. There could hardly be a more obvious case of mistake, or of an agent (Westpac) acting as a conduit pipe for funds passing through on their way, as intended by the mistaken payer, to their ultimate destination.

290. Jakes had an overdraft facility with Westpac. On the day that the telegraphic transfer was made, the account was already overdrawn by $67,700.96. When, in accordance with ANZ's instructions, the $114,158.20 was with certain other moneys credited to that account, the difference was of course dramatic. Three days later, ANZ informed Westpac of the mistake. In the meantime, however, all but $17,021.68 of the overpaid funds had been applied either to extinguish Jakes' indebtedness to Westpac, or to pay cheques drawn by it on that bank. Jakes admitted that ANZ had acted in error. It repaid $2,500.00 of the windfall, but then went into liquidation. The action, for the recovery of $100,000 as money had and received to the use of ANZ, proceeded against Westpac alone. The trial Judge found in favour of the plaintiff, although he made allowance for the $2,500 received from Jakes. ANZ therefore obtained judgment for $97,500.

293. Westpac appealed. It succeeded, in part. The amount to which ANZ was held to be entitled was reduced to $39,320.70. This satisfied neither party. By special leave, ANZ appealed to the High Court. Westpac cross-appealed. The High Court was of the opinion that the latter had a good defence to ANZ's claim to the extent that it had, on behalf of Jakes, paid out the proceeds of the telegraphic transfer before it first received notice of ANZ's mistake. The Court said:

"The prima facie liability to make restitution is imposed by the law on the person who has been unjustly enriched. In the ordinary case of a payment of money, that person will be the payee. However, when the person to whom the payment is directly made receives it as an intermediary (eg. as agent for a designated principal), there may be uncertainty about the identity of the actual recipient of the benefit at the moment of payment. If the circumstances are such that the intermediary is to be seen as being himself the initial recipient of the benefit, his prima facie liability will ordinarily be displaced when he has handed the money received on to the person for whom he received it. In such a case he has, in the event, not retained `the benefit of the windfall' but been `a mere conduit pipe' ... and `the only remedy is to go against the principal'. " [50]

297. A number of concessions were made on behalf of Westpac in the proceeding before the High Court. Of particular interest for present purposes is the concession that no part of the overpayment "should be seen as effectively and irrevocably applied to eliminating the pre-existing indebtedness"[51] of Jakes to Westpac. Their Honours pointed out that, by conceding this point, Westpac foreclosed any argument that it was entitled to retain such amount as represented Jakes' indebtedness to it. Where an agent holds money for his principal, who at the same time is indebted to the agent in a smaller sum, the agent in paying over the difference may be said to notionally pay all that he holds while receiving back the amount which represents his principal's debt. The High Court quoted[52] from the judgment of Collins MR in Continental Caoutchouc (1904) 9 Com. Cas. 240, at 248:

"He [that is, the agent] has thus no doubt benefited by getting his debt paid, but he has done so in discharging his primary duty of passing the money on to his principal. He has constructively sent it on and received it back, and has done nothing incompatible with his position as a conduit-pipe or intermediary. He was entitled to be paid, and has been paid by his debtor, who was no doubt put in funds to do so by the receipt of the money, and who therefore, and not the intermediary, has had the benefit of the windfall."

301. Notwithstanding the concession, their Honours rejected the arguments put by ANZ against the proposition that an agent's payment over of money received by him on behalf of his principal will itself, in the absence of awareness of the mistake, constitute a good defence to an action for recovery of money paid under that mistake. They said:

"The complete answer to the overall submission is, however, that its legal basis is mistaken for the reason that, on balance, both authority and principle support the conclusion that an agent who has received money on his principal's behalf will, without more, have a good defence if, before learning that the money was paid under fundamental mistake, he has `paid it to the principal or done something equivalent' thereto... The rationale of such a general rule can be identified in terms of the law of agency and of notions of unjust enrichment. If money is paid to an agent on behalf of a principal and the agent receives it in his capacity as such and, without notice of any mistake or irregularity in the payment, applies the money for the purpose for which it was paid to him, he has applied it in accordance with the mandate of the payer who must look to the principal to recover... In those circumstances, the benefit of the payment has been effectively passed on to the principal who will be prima facie liable to make restitution if the payment was made under a fundamental mistake of fact. If the matter needs to be expressed in terms of detriment or change of position, the payment by the agent to the principal of the money which he has received on the principal's behalf, of itself constitutes the relevant detriment or change of position. In that regard, no relevant distinction can be drawn between payment to the principal or payment to another or others on behalf of the principal..."[53]

305. Clearly enough, the High Court had in mind a situation in which the recipient responds to the receipt consistently with "the purpose for which [the money] was paid to him" by the mistaken payer. A change of position on the faith of that receipt removes whatever unjust enrichment there may have been at the moment of receipt. The person making the original (mistaken) payment must then seek what comfort he can from the ultimate recipient who (on the hypothesis here under examination by the High Court) is the principal of the recipient/agent.

308. But neither in Port of Brisbane Corporation nor in the present case did the recipient act on the faith of any instruction or message from the mistaken payer. This circumstance did not deter the Queensland Court of Appeal from deciding against the plaintiff Corporation, the victim of Mr Hinterdorfer's fraud. It held that because the real payer was Windermere, and ANZ Securities acted on the faith of its receipt from that company, there was no unjust enrichment.

311. This decision was criticised by NIML. It pointed to the judgment of the NSW Court of Appeal in the contrasting case of State Bank of NSW Ltd v Swiss Bank Corporation.[54] On 7 December 1989 the records of the Swiss Bank Zurich appeared to show that it had received $US 20,000,000 on overnight deposit from the State Bank of New South Wales. Under the misapprehension that the records were accurate, the Swiss Bank that day paid $US 20,004,583.33 to the New York branch of the State Bank, to which the Swiss in fact owed nothing. In making the payment, the Swiss Bank did not give the State Bank any instructions about the future disposition of the funds; doubtless the Swiss thought it was none of their business. It was therefore the State Bank's own decision to pay the money to a customer, Essington Ltd., which that bank mistakenly identified as the entity entitled to it. The Swiss Bank succeeded in obtaining judgment for the money's return. The State Bank failed in its defence because although it had changed its position, it had done so not on the faith of the receipt from Switzerland but rather on the basis of information (or misinformation) obtained from Essington and its own resultant (and inaccurate) conclusions. The Court of Appeal (Priestley, Handley and Sheller JJA) said:[55]

"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."

315. In the Port Corporation case, the Queensland Court of Appeal (McPherson JA, with whom Davies JA and Mullins J agreed) distinguished State Bank v Swiss Bank Corporation on the basis that it was:

"...difficult to escape the impression that, in the end, the decision in State Bank v Swiss Bank rested on the straightforward proposition that, in paying out the $20 million, State Bank had simply exceeded the terms on which that sum had been received, and that a recipient of money may not claim the benefit of the defence if it has exceeded its instructions. This may be why special leave to appeal to the High Court was refused: the question at issue turned ultimately on the extent of the authority given to State Bank to dispose of the money. By contrast, in the present case ANZ Securities Ltd throughout acted strictly in accordance with, and within the limits of, the instructions it received from [the Hong Kong intermediary] acting on behalf of Winderemere."[56]

319. I respectfully differ from this characterisation of the point of distinction between the two cases. In my opinion the success of ANZ Securities depended only in a secondary sense on it acting in strict accordance with the instructions it received from its dishonest client. It succeeded primarily because the money it received from Windermere was never received otherwise than as agent and trustee of that company. ANZ Securities therefore was never itself "enriched" by that receipt, save in the sense, and to the extent, that Collins MR had in mind in the passage from his judgment in Continental Caoutchouc quoted at [ 92] above. And if ANZ Securities was never enriched, then it could not be said to have been unjustly enriched. It was Windermere, not ANZ Securities, which reaped the spoils of the fraud committed by Mr Hinterdorfer on the Port of Brisbane Corporation. ANZ Securities dealt with those spoils as a broker should; in accordance (doubtless, at least in general, in strict accordance) with its client's instructions and the terms of the contractual relationship between them. Doubtless the arrangements thus set in place between client and broker would allow the latter to draw from the client's funds sufficient to cover its fees, commissions and disbursements; but the funds otherwise remained the funds of the client. I respectfully agree with what was said by McPherson JA at [10] of his judgment in the Port Corporation case:

"...nor (except perhaps to the extent that it had benefited from receiving commissions on stockbroking transactions conducted for Windermere) can it be said to have been or remained enriched, unjustly or otherwise, by receipt of money to which the Port Corporation was entitled. Having received and dealt with the money throughout, not beneficially, but as trustee for Windermere, ANZ Securities was never enriched by its receipt."

323. In my opinion, the same may be said about MFA in the present proceeding. It may or may not have been a trustee for Mr Burke. It was certainly required to treat the proceeds of the seventeen cheques not as its own but in accordance with the strict limits imposed by the law. As a futures broker subject to the regime put in place by s.1209 of The Corporations Law and the rules of the Sydney Futures Exchange, MFA's position vis a vis Mr Burke was analogous to that between ANZ Securities and Windermere. That was not true, however, of the State Bank in the Swiss Bank case.

326. Nothing I have said above is intended to suggest that a recipient, such as MFA or ANZ Securities, of money paid under a mistake will never be subject to a successful claim by a person or entity in the position of NIML or the Port of Brisbane Corporation. True, the cause of action in money had and received is based upon the notion of the restitution to the true owner of money the retention of which by the recipient would result in his or her unjust enrichment; and you cannot be unjustly enriched by that which you never received. But (although it is not for me here to decide) it would have been unjust, it seems to me, for MFA to retain on behalf of Mr Burke and as against NIML uncommitted money which at the time his fraud was discovered was held in the relevant sub-account of MFA's clients' segregated account. (By "uncommitted" I mean money which MFA was not lawfully committed to disburse other than to Mr Burke himself). Money received as the result of a mistake but already paid away or committed (a) in ignorance of that mistake and (b) in accordance with MFA's obligations as a futures broker is in a different category. A payment made in those circumstances can be said to have been made "on the faith of the receipt"; and it was not a receipt by which MFA was unjustly enriched - or, indeed, enriched at all.

329. For the above reasons, NIML's claim for money had and received must in my opinion fail.

333. Conversion is the intentional exercise of control over a chattel which so seriously interferes with the right of another to control it that the intermeddler may justly be required to pay its full value: Fleming The Law of Torts (9th 1998) at 60-61.

336. In the statement of claim, the only conduct alleged to constitute a conversion is the conduct of Westpac. As collecting bank, it was paid the proceeds of the seventeen cheques. It then credited the relevant amounts to MFA's segregated account. The allegation that MFA has committed conversion rests on the allegation that, in doing as it did, Westpac acted as MFA's agent. No separate act of MFA itself is alleged to constitute the tort.

339. In my opinion, the cheques were not converted by Westpac. The deposit of the funds into the clients' segregated account accorded with the apparently lawful mandate of NIML as the drawer of the cheques. To repeat and adapt the words of Tadgell J in the Hunter BNZ Finance case,[57] what the cheque says is what Westpac did; and that is what NIML by its mandate required. One cannot commit a conversion if one does no more and no less than obey the instructions of the owner of the goods.

342. If authority for this proposition were needed, it is to be found in Lloyds Bank Ltd v The Chartered Bank of India, Australia and China.[58] In that case, the plaintiffs had a branch office in Bombay. In 1922, their chief accountant at that branch began fraudulently drawing cheques on the plaintiffs' bankers. The defendant bank was the payee, with whom the fraudulent accountant had an account. He gave written instructions that the plaintiffs' cheques be credited to that account. In this way, he obtained the proceeds of nineteen cheques.

345. In that case as in this, the cheques were drawn in favour of the defendant. Their proceeds were paid to the defendant, and then placed in an account or sub-account in the name of the wrongdoer. By that means, in each case, access to the funds was improperly obtained.

348. The Chartered Bank was sued in conversion. Scrutton LJ said[59] :

"It was perfectly true that as between the [plaintiffs] and himself [the accountant] had no authority to issue such a cheque for his own benefit, but to outsiders he was acting within his ostensible authority, and unless they had notice of his fraud or until the principal, learning of his fraud, avoided the transaction, they were protected in their dealings with the apparently regular cheque. ...In my view it is established that a third party, dealing in good faith with an agent acting within his ostensible authority, is not prejudiced by the fact that as between the principal and his agent the agent is using his authority in such a way that the principal can likely complain that the agent is using his authority for his own benefit and not for that of his principal. Probably the plaintiff bank could not successfully sue the Imperial Bank of India [the paying bank] for honouring these cheques signed by persons who had ostensible authority to sign, because in fact one of them was using his ostensible authority for his own benefit. But it is otherwise where [as here] the third party has notice of irregularity putting him on inquiry as to whether the ostensible authority is being exceeded. ... If the cheque had come forward without the accompanying authority of [the accountant] I do not think that the defendant bank would have committed conversion by collecting the proceeds and asking for further instructions."

352. It is in my opinion significant that neither in the Port of Brisbane Corporation case nor in Re Montague were proceedings taken in conversion. If NIML's submissions on the point are correct, conversion would have been open to the plaintiffs in each case. It is also significant that nothing in either Midland Bank Ltd v Reckitt[60] or Morison v London County and Westminster Bank Ltd[61] is inconsistent with the above.

355. NIML relied on its right to immediate possession of the cheques at the time of their presentation to Westpac. It had that right. This is an important, but not a determinative, consideration. A chattel mistakenly intended as a gift may be recalled at the point of exchange. Suppose, however, that it is not. Suppose also that the donee receives it as a gift without notice of the mistake. In these circumstances the donee will not be guilty of conversion because, before the chattel is reclaimed by the donor, the donee uses it as his own.

358. For these reasons, NIML has failed to establish any of the three causes of action upon which it relies. There must accordingly be judgment for the defendant.

[1] [1989] VR 41 at 46.

[2] Marquess of Bute v Barclays Bank Ltd. [1955] 1 QB 202 at 211.

[3] Signed and completed extracts (pages 12, 19, 21 and 22) from the form in usage in 1996 to 1998 were faxed to the defendant on 26 April 1996 (exhibit 2).

[6] Second amended statement of claim, para. 4, p2.

[7] Finn, P. D. Fiduciary Relations Law Book Company 1977 at pp.1-3.

[8] Second amended statement of claim, para. 5(f)(ii).

[10] The passages quoted are taken from para. 18 of the statement of claim.

[11] Second further amended defence, para. 23.

[12] (1874) L.R. 9 Ch. 244.

[16] [1910] HCA 58; (1910) 12 CLR 105.

[18] [1910] HCA 58; (1910) 12 CLR 105 at 110

[20] [1893] AC 282.

[24] [1982] 3 All ER 551

[25] [1987] Ch 264

[26] [1998] 3 VR 16.

[29] [1912] UKHL 1; [1912] AC 716

[32] [1992] 4 All ER 363

[33] (unreported, Supreme Court (NSW) 5 May 1992)

[34] Barnes v Addy (1874) L.R. 9 Ch. App. 244 at 252.

[35] [1998] 3 VR 133 at 144-145.

[36] (1988) 164 CLR 662.

[38] [1992] HCA 48; (1992) 175 CLR 353 at 379.

[39] [1987] HCA 5; (1987) 162 CLR 221.

[41] [1992] HCA 48; (1992) 175 CLR 353 at 379.

[43] [2003] Qld R 661 at 673 para.17.

[44] [1987] HCA 5; (1987) 162 CLR 221 at 256.

[45] [1992] HCA 48; (1992) 175 CLR 353 at 379.

[46] [2002] Qd R 661.

[47] (1992) CLR 353 at 385.

[49] (1998) 164 CLR 662.

[50] (1987-88) 164 CLR 662 at 673-4.

[52] (1998) 164 CLR 662 at 680.

[54] (1995) 39 NSWLR 350.

[57] [1989] VR 41 at 46.

[58] [1929] 1 KB 40

[60] [1933] AC 1

[61] [1914] 3 KB 356