ORIX AUST CORP v M WRIGHT HOTEL REFRIG & ANZ BANK No. SCGRG-99-783 [2000] SASC 57

Supreme Court of SA|2000-03-08|Before: Cole J, Bleby J

Judgment No. [2000] SASC 57

On Appeal from MAGISTRATES COURT (MR R H KLEINIG SM)

ORIX AUSTRALIA CORPORATION LTD v M WRIGHT HOTEL REFRIGERATION PTY LTD and AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD

This appeal seeks to resolve the question of which of three innocent parties should bear the loss resulting from fraudulent conduct of another.

M. Wright Hotel Refrigeration Pty Ltd (the first respondent) has for some time conducted a business which supplies, installs and services commercial refrigeration equipment in hotels, restaurants and bars. The business was conducted from the home of the two directors, Mr and Mrs Bryant. Mr Bryant was a refrigeration mechanic by training and carried out the physical installation and service. His wife kept the books of the company and carried out all the company's banking.

The appellant, Orix Australia Corporation Ltd (Orix) is a finance company, and the second respondent, Australia and New Zealand Banking Group Ltd (the bank) is a well-known bank. Orix sued the first respondent and the bank in the Magistrates' Court for conversion of a cheque it had drawn in the amount of $28,400.

The relevant fraud was perpetrated by one David John Thornalley. He was the proprietor of a business known as "All Star Catering Equipment". He manufactured commercial refrigeration cabinets. Since about June 1996 Thornalley had from time to time engaged the first respondent to supply and fit refrigeration equipment to his cabinets.

Some time in July 1997 Thornalley and Mr Bryant had had a discussion about the possibility of Thornalley purchasing a sheet metal former machine to assist in Thornalley's business. Bryant had encouraged Thornalley to purchase such a machine, and said he knew where he could obtain one. Nothing more was said between the two about the purchase of the machine until the events which I am about to describe took place.

Later in July 1997 Thornalley approached Orix through a finance broker purportedly to obtain finance for the purchase of a sheet metal former machine. The State Operations Manager of Orix, Mr Bernardi, processed the initial application made by Thornalley. The application was dated 22 July 1997. In it, the equipment was described as "New Herless Steel Roll Former", and the supplier was described as "M W Refrigeration Ltd - Contact Geoff 0412 882 3028". Mr Bryant's first name is Jeffrey. The telephone number quoted was a corruption of his mobile telephone number. The amount required was shown on the application as $28,400. After the application had been approved the broker supplied a copy of an invoice dated 24 July 1997. The invoice was purportedly issued by "M.W. Refrigeration Pty Ltd" whose address was provided as a post office box number.

Mr Bernardi was anxious to ascertain the existence and identity of the supplier of the goods. In a note which he wrote on the copy of the invoice to which I have referred, he recorded that there was no listing for the supplier in the current telephone book, but another note on the copy invoice records "listed under Wright M. Hotel Refrigeration. Page 1253 phone book", and a telephone number and business address, being that of the first respondent and of Mr and Mrs Bryant was recorded. In fact the relevant page of the telephone book described the respondent as "Wright M. Hotel Refrigeration Pty Ltd".

The Magistrate found that during the course of making his inquiries Mr Bernardi telephoned Mr Bryant to establish the existence and business of his company, and to ascertain its full name. That finding was challenged on appeal, but it was open on the evidence for the Magistrate to make the finding. In any event, in relation to Mr Bernardi's belief as to the identity of the payee of the cheque, not a great deal turns on whether or not the telephone conversation occurred.

Mr Bernardi identified other problems with the invoice. One was that the machine was not listed as new, and the second was that it contained no delivery address confirming that the machine was to be delivered to All Star Catering Equipment. He requested an amended invoice from the broker. The broker then supplied an original invoice dated 28 July 1997 still in the name of "M.W. Refrigeration Pty Ltd" but this time showing the street address of the first respondent. The machine was also described as "new", and the invoice contained delivery instructions to All Star Catering Equipment and an address.

Both the copy invoice originally supplied and second original invoice had been forged by Mr Thornalley.

An asset purchase agreement relating to the machine and dated 1 August 1997 was entered into by Thornalley and by Orix. It was an agreement to hire the machine for a period of five years, with no residual payment required, but provided that property in the goods would vest in the hirer at the conclusion of the term or earlier, if he had exercised an option to purchase the goods.

On the same date Orix drew a cheque for $28,400 payable to "M.W. Refridgeration Pty Ltd" (sic) or bearer. It was crossed and marked "Not Negotiable". The Magistrate inferred (and this was not challenged on appeal) that the cheque was collected from the office of Orix by the broker and then placed in Mr Bryant's letterbox by Thornalley. The cheque was inside an envelope marked with the name of All Star Catering Equipment.

Mr Bryant found the envelope containing the cheque in his letterbox early on the morning of 6 August 1997. There was nothing else in the envelope. He concluded that it had come from Thornalley by virtue of the marking on the envelope. At that stage All Star Catering Equipment was indebted to the first respondent in the sum of $18,615 for work done and invoiced. In addition, Mr Bryant was working on a contract in progress for Mr Thornalley for which no invoice had been raised. He was unaware, when he opened the envelope, of the precise amount then owing by All Star Catering Equipment to the respondent. He noted that it was a cheque from Orix. He was aware that Orix was a finance company. He endorsed the back of the cheque "M. Wright, Refrigeration Pty Ltd" and his own signature and his mobile telephone number. That was his practice with all finance company cheques. However, it was ineffective as an endorsement on what was, in any event, a bearer cheque. He left it in the house for his wife to bank. She banked it that day at their local branch of the bank.

Bryant assumed that the Orix cheque was the proceeds of loan moneys raised by Thornalley to meet his indebtedness to the first respondent. This was induced, at least in part, by the recent conversation he had had with Mr Bernardi from Orix.

Mr Bryant went about his work that day as usual. Later that day, whilst working at Thornalley's premises, he spoke to Thornalley who explained to him that the cheque was for the purchase of the machine. By that Bryant assumed that he meant the sheet metal former machine which they had previously discussed. However, that machine was no longer available to Bryant. He could not supply it. Because of this he drew a cheque on behalf of the first respondent in the amount of $28,360 payable to All Star Catering Equipment. He had deducted $40 for fees and charges which he knew the bank would charge as a result of the processing of the two cheques.

Thornalley made several payments to Orix in accordance with the asset purchase agreement, but upon his default in February 1998 the fraud was uncovered.

It is clear that at no time was there an entity named "M.W. Refrigeration Pty Ltd" or "M.W. Refridgeration Pty Ltd".

The Magistrate found that Orix intended the cheque to be paid to the first respondent. That finding was challenged on appeal. The officers of Orix who gave evidence claimed that they intended payment to be made to the party named on the invoice and no-one else, although they acknowledged the spelling error on the cheque. The purpose, they said, was to ensure that Orix got good title to the equipment. They did not intend to pay the cheque to the first respondent, and therefore the first respondent could have no title to the cheque. However, it was Mr Bernardi's evidence that, upon his inquiring of the finance broker about the identity of "M.W. Refrigeration Pty Ltd", he was told that it was under the name "Wright M. Hotel Refrigeration" at an identified page in the telephone book at an address which happened to be that of the first respondent, and with a telephone number which was also that of the first respondent. Mr Bernardi, who approved the transaction on behalf of Orix, said in evidence that he assumed that the entity was M.W. Refrigeration Pty Ltd, trading as M. Wright Hotel Refrigeration. There appeared to be no doubt in his mind that the two entities were one and the same. That belief would appear to be confirmed by the endorsements that Mr Bernardi made on the first copy invoice as to the details obtained from the telephone book. His belief could only have been confirmed by the identical address appearing on the second invoice.

The evidence of Mr Coombe, the State Manager of the Finance Services Division of Orix, was that where a company operated under a business name, which was all that appeared on the invoice, they would make inquiries as to the true identity of the company and would make the cheque out in the company name "trading as ....." the business name. That was not done on this occasion because of the belief that the name on the invoice was in fact the correct name.

In my opinion the Magistrate was correct in finding that Orix intended to pay the cheque to the first respondent. It is clear that Orix intended to pay it to the trading entity which included a name bearing the initials "M" and "W" and which contained the name "Refrigeration". It is also clear that it intended to pay the cheque to such a company which traded from the address from which the first respondent traded. It made out a cheque payable to bearer and crossed "not negotiable" and delivered it either to the broker or to Mr Thornalley for the purpose of delivering it to the payee. On the evidence before the Magistrate the intended payee could only be the respondent and no other company, notwithstanding its misdescription on the cheque.

From the point of view of the first respondent, Mr Bryant was aware that what he received was an Orix cheque and that Orix was a finance company. It appeared to him to have come from All Star Catering Equipment in satisfaction of a substantial outstanding debt and significant work in progress. There would be nothing unusual about All Star Catering Equipment obtaining money from a finance company in order to meet its trading debts. It was not for him to inquire whether Orix intended to take a fixed charge over or ownership of any goods supplied by the first respondent. Payment of a finance company cheque to the first respondent was equally consistent with a number of possible forms of finance, including a personal loan or a loan secured by floating charge over the assets of All Star Catering Equipment.

Later on 6 August, after the cheque had been banked, Thornalley told Mr Bryant that the purpose of the cheque was one which Mr Bryant could no longer fulfil. Mr Bryant then honourably returned the money, notwithstanding that he was owed a substantial sum by All Star Catering Equipment. His drawing the first respondent's own cheque in favour of All Star Catering Equipment merely reflected his continued and not unreasonable belief that Orix had made an advance to Thornalley, and that the whole or a portion of that advance included an amount which Thornalley had requested to be paid direct to the first respondent, ostensibly for the purchase of a machine.

The Magistrate found that the first respondent had received the cheque for value, being for payment of money owed to the first respondent by Thornalley trading as All Star Catering Equipment, that the first respondents had gained a voidable title to the cheque, voidable by virtue of Thornalley's fraud on Orix, but that Orix was unable to rescind and avoid the cheque because to do so would affect the rights and interests of the first respondent which had acquired the cheque in good faith and for value.

The Magistrate did not deal with the alternative claim by Orix for money paid under a mistake of fact.

The Magistrate further found that the bank had received the cheque and credited its customer's account with the amount of the cheque in good faith and without negligence, and was therefore entitled to the defence provided by s 95 of the Cheques Act 1986 (Cth). I will refer to the question of the bank's alleged negligence and the facts surrounding that deposit when I come to deal with the claim against the bank.

Whether the first respondent had title to the cheque

In a case such as the present, much of the ground work has been laid by Giles J in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420. The circumstances are remarkably similar. The plaintiff was a finance company. It made out cheques to the supplier of certain goods, Indent Imports Pty Ltd, with a view to acquiring them from Indent and leasing them to the defendant company (Maloney). Maloney entered into lease agreements for the goods. Both cheques were sent to Indent Imports. The invoices to support the purchases had been made out by a person who worked both for Indent and for Maloney. She had arranged with the principal of Indent to use some invoice forms of Indent in order to condense a number of items, which it was said Maloney was going to purchase, onto one invoice and submit them to a finance company. The arrangement was that cheques would be made out to Indent to be countersigned by the principal and then returned to Mr Maloney, the principal of Maloney. The cheques were duly endorsed to Mr Maloney or his company as requested. At no time did Indent own or have in its possession any of the goods itemised in the invoices. The cheques endorsed were then deposited by Mr Maloney to the credit of his own bank account with Westpac Banking Corporation.

Hunter claimed damages for fraud against Maloney and Mr Maloney, alleging that it had been falsely represented to Hunter that Indent was or would become the owner of the goods, and that Hunter, in reliance thereon, entered into the lease agreements and paid the money the subject of the cheques. In the alternative, Hunter claimed against Maloney damages for default under the lease agreements. More relevant from the point of view of this case, however, was that Hunter also claimed against Westpac for conversion of the cheques or alternatively for the proceeds of the cheques as money had and received. Maloney and Mr Maloney consented to judgment. The issues in the case involved only the claims by Hunter against Westpac. The argument was that the cheques were given to Indent in relation to non-existent sales and that Indent obtained no title to the cheques. Alternatively, they obtained only a voidable title because the transactions pursuant to which they were given were induced by fraud. The proceedings, it was argued, effectively avoided the transactions ab initio, whereby title to the cheques at all times remained in Hunter. Westpac could obtain no better title to the cheques than Indent: Bills of Exchange Act 1909 (Cth), s 87. Therefore, Westpac was liable for conversion of the cheques.

Giles J concluded that Indent was not a party to any transaction with Hunter. Hunter knew of Indent and of the purported availability and sale of the goods and of the destination of the cheques, but only from what it was told by Mr Maloney or by what was on the invoices. He described the transactions in the following manner, at 431:

"The transactions were between Hunter and Maloney, being transactions wherein Hunter, at the request of Maloney and in consideration of Maloney entering into the agreements for lease as lessee, entered into the agreements for lease as lessor and sent the cheques to Indent. Hunter sent the cheques to Indent, as it believed, in fulfilment of purchases of the goods, but in fact there were no such purchases. In short, the transactions were transactions between A (Hunter) and B (Maloney) as part of which A delivered property (the cheques) to C (Indent)."

Thus far, this case is on all fours with the situation in that case, where A is Orix, B is Thornalley and C is the first respondent.

Giles J held that property in the cheques passed to Indent, both Hunter and Maloney intending that they should be delivered to the supplier, even though this was as a result of Mr Maloney's fraud. The supplier, Indent, was a consenting recipient. It intended to receive the cheques and to endorse them to Maloney or to Mr Maloney. Indent was not a fictional entity. There was a passing of property in the cheques even though Hunter's intention to pass the property was the result of the fraud practised upon it.

It is not necessary here to analyse all the cases discussed by Giles J in reaching his conclusion. I respectfully agree with it, and with his summary (at 432):

"Where A as the result of fraudulent representations by B transfers goods to B, property passes and B obtains a title, though a voidable title. There is no reason why the result should be different where A as the result of fraudulent representations by B transfers goods to C, C being a consenting recipient thereof."

The Magistrate found in this case that Orix intended that the first respondent should be the payee of the cheque. I have decided that that finding must be upheld. In those circumstances and to that extent the case is indistinguishable from Hunter. The first respondent obtained a voidable title to the cheque from Orix.

Orix argued that its only intention was to give the cheque in return for goods the subject of the transaction. It did not intend to give the cheque to a body which had no intention of supplying the goods. However, it did intend also to pay the cheque to an entity which was the first respondent. The fact that that intention was induced by fraud of Thornalley is nothing to the point, save that the cheque may be voidable, a question which I deal with below.

The appellant relied on an unreported decision of the Supreme Court of New South Wales (Cole J) in Esanda Finance Corporation Ltd v Commonwealth Bank of Australia (25 May 1993, BC 9303712) as authority for the proposition that Orix did not intend the first respondent to be the payee of the cheque. In that case the fraudulent party arranged for a finance company to approve various proposals relating to the retail leasing or financing of motor vehicles. He arranged for the applications to be submitted in the names of various existing car dealers but in relation to fictitious transactions with fictitious purchasers. After the forged documentation was approved by the finance company, cheques payable to the various vendor dealers were dispatched to another dealer through whom the application had been lodged, and the cheques were delivered not to the dealers but to the person who perpetrated the fraud. He then banked the cheques in another "trust" account operated by another person found to be complicit in the fraud. Cole J found that none of the payees (except one) had knowledge of the transactions, nor did they expect to receive any monies from the finance company. The dealer who received the cheques only had authority to pay them to the respective named payees. That dealer was not the agent of the payees, and therefore there was no intention on the part of Esanda to deliver the cheques to the payees in respect of fictitious transactions, nor was there any intention in the named payees to receive the cheques.

However, the situation here is different. Orix did intend the cheque to be paid to the first respondent. It was so paid. The first respondent believed that it was entitled to the cheque. The fact that Orix and the first respondent believed that the entitlement was in respect of different transactions is nothing to the point. Cole J himself (at 11) recognised the distinction between that case and Hunter. A similar distinction can be made here.

In arguing that no title in the cheque passed to the first respondent, Orix also sought to rely on Australian Guarantee Corporation Ltd v Commissioners of the State Bank of Victoria (1989) Aust Torts Repts 80-229. That case does not assist Orix. The plaintiff finance company was induced to make cheques payable to the supposed suppliers of goods which were to be the subject of a lease by the finance company to a lessee. The goods were either non-existent or were already owned by the lessee. The named supplier supplied no goods and received no payment. The cheques were sent to the lessee's finance broker, who in fact handed them to the lessees who banked them. Action was brought against the bank for conversion of the cheques. Not surprisingly, the action succeeded. The finance company never intended the lessees to have the benefit of the cheques. The lessees never had title to them. They could give no better title to the bank than they had. Importantly, it was found that there was no intention on the part of the finance company to deal with the lessees.

However, Ormiston J said that in the absence of any real transaction, the cheques were drawn in favour of suppliers who had no right to claim payment or to deal with the cheques. Therefore, if the finance company knew the true facts, it could have sought return of the cheques. That may be so, but it does not detract from the fact that the cheque in this case was intentionally delivered to its intended payee, notwithstanding that it was voidable at the instance of Orix.

On this aspect also, Hunter BNZ Finance Ltd v C G Maloney Pty Ltd is instructive. Giles J pointed out that if A, as the result of fraudulent representations by B, transfers goods to B, then subject to questions of affirmation or the intervention of rights of third parties, A may rescind the transaction and regain the goods in question: Clough v London and North Western Railway Co (1871) LR 7 Ex Ch 26 at 34. He went on to point out that rescission ab initio required both parties to be put back in the position in which they had been prior to the transaction. There had to be restitutio in integrum. He pointed out the more ample and more flexible remedies provided by equity, and concluded that if A rescinds a transaction whereby as a result of fraudulent representations by B he transferred goods to B, he may regain his property by claiming (among other remedies) its value in an action for conversion or the proceeds thereof as money he had not received. He pointed out that this was because, where no formality is required, the rescission causes the property which is passed to revest: Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216 at 224; Kramer v McMahon [1970] 1 NSWLR 194 at 206 - 207; Spencer Bower and Turner on Actionable Misrepresentation (1974) 3rd ed at 272, 287 - 288 and Clough v London and North Western Railway Co (supra) at 36 - 37. His Honour then posed the question:

"Does the same ability to rescind and regain property by claiming its value in an action for conversion apply where A as the result of fraudulent representations by B transfers goods not to B, but to C? That, it will be recalled, is, in my view, the true nature of the transactions."

He pointed out that the rationale of the limitation is that rescission would cause injustice to the innocent third party, because it would mean that he would lose his rights, and as between the two innocent parties A and C the loss is left to fall upon A. A is left to his right of action against B for damages for fraud. The true test was whether the undoing of the contract "would prejudicially affect the rights or interests which any third party has, in good faith and for value, acquired under it whilst it was still unavoided, because this would be obviously unjust to the third party, who would thus be punished for no fault of his own, and for the benefit of the person by whose conduct or inaction he was encouraged to acquire those rights and interests": Spencer Bower on Actionable Misrepresentation (1974) 3rd ed at 309.

Thus, it is apparent that rescission will be effective if the rights of the third party (in this case, the first respondent) are not adversely affected. In Hunter Giles J held that they were not adversely affected for two principal reasons. The first was that Indent was a volunteer, having given nothing to Hunter or Maloney in return for the cheques. The second was that Indent received the cheques only in order to pass them on to Mr Maloney. It is at that point that a distinction arises between Hunter and this case.

The first respondent was not a volunteer. It gave value for the cheque in the form of goods and services supplied until it was pointed out by Mr Thornalley that it was not intended for that purpose. The first respondent then drew its own cheque in favour of All Star Catering Equipment after deducting only an amount due to be paid for bank charges as a result of the transactions. Rescission would therefore cause a substantial injustice to the first respondent. Therefore, unlike Hunter, Orix could not effectively rescind the voidable transaction by commencing the proceedings. The Magistrate was therefore correct in dismissing the action based on conversion against the first respondent.

Although the Magistrate did not deal with this claim, in my opinion it too must fail. It is now well-established that money paid as a result of a mistake, whether of fact or of law on the part of the payer, can in certain circumstances be recovered: David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353. There would appear to be little doubt that in this case the money was paid by Orix to the first respondent under such a relevant mistake induced by the fraud of Thornalley.

However, David Securities also affirmed the availability of the defence of change of position as being "necessary to ensure that the enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust", ibid at 385. Mason CJ, Deane, Toohey, Gaudron and McHugh JJ continued (at 385):

"From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt." (original emphasis)

In this case it was important that Mr Bryant had received the cheque in an All Star Catering Equipment envelope. Otherwise, he would have had no explanation for the receipt of the cheque. The envelope, coupled with the knowledge there was a substantial amount owing or shortly to become owing by All Star Catering Equipment to the first respondent, provided the explanation for the receipt of the cheque and for the first respondent's belief that it was entitled to the cheque. Another important circumstance was the fact that it was a finance company cheque with no prior relevant communication from the finance company. Mr Bryant's evidence was that in his experience, whenever finance companies were taking security over equipment he had supplied, he had been contacted by the finance company and "asked for an invoice with their (the finance company's) full name and address on top and then a full description of the goods and the delivery to the customer on the bottom". That had not happened in this case. His previous conversation with Mr Bernardi had only been as to the identity of his company, and not in relation to any particular transaction. It was those circumstances which led Mr Bryant to believe that the payment was the proceeds of a personal loan, or at least of a loan in respect of which there was no fixed security.

In the absence of these circumstances, and if, without any explanation, the cheque had merely been received by the first respondent and banked by it, there could not have arisen in Mr Bryant's mind any belief that the second respondent was entitled to the cheque without his making further inquiry from Orix. In such circumstances the first respondent could not have acted on the faith of the receipt in banking the cheque and in subsequently drawing a cheque against the payment. As it happened, there was an explanation induced by the circumstances of the payment. The first respondent was able properly to form the belief that it was entitled to the cheque, and on the faith of that belief, banked the cheque. It can also be said that it was also on the faith of that belief and because it had banked the cheque that it then proceeded to draw on the account a cheque for almost the same amount in favour of All Star Catering Equipment.

Mr Bryant was pressed as to why he gave the money to Thornalley and not to somebody else. He said (T80:29):

"Well, I'd been contacted from no-one else. I just presumed that Dave had organised a personal loan through the finance company so I believed the money was his, so I returned it."

Later he was asked why, if he thought he was owed money by Thornalley, he gave the money back at all. He said (T101:23):

"I knew David borrowed the money so I paid him back in full and as I previously explained he did pay his accounts and I was under the assertion when the accounts were paid he sold materials to shops, they paid him, then he paid me so it was just the way I thought it had happened."

Later again he said that he knew, after the conversation with Thornalley, that the cheque was not available for clearance of Thornalley's debt. He apparently formed a naïve belief that he was not entitled to the money and paid it back, almost in full, to the person he believed was entitled to it. He acknowledged that it was not his to hold. He believed that the only person entitled to the money was All Star Catering Equipment, that he had no reason not to trust Thornalley and that he considered that he had refunded the money to him in good faith.

Orix relies on a passage from the joint judgment of the New South Wales Court of Appeal (Priestley, Handley and Sheller JJA) in State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350 at 356:

"A bank which receives a mistaken payment and disburses it can only bring itself within the change of position defence if it shows that at the time of disbursement it knew or thought it knew more than the fact of receipt standing alone. This must be information which, if true, would entitled the payee to deal with the receipt as it did and that information must have come from the payer." (My emphasis)

It was argued in this case that at the time of disbursement, the first respondent knew much more than the fact of the receipt. By that time it knew, through Mr Bryant, that it was not entitled to the money at all and that that information had come not from Orix but from Thornalley.

At first blush, this argument has a superficial attraction. However, in my opinion, it does not stand close scrutiny. One may accept Mr Bryant's belief, whether ill-founded or not, that the first respondent was not entitled to keep the money. It will be remembered, however, that his belief, induced by the circumstances of the payment, in which circumstances Orix played a material part, was that the money belonged to Thornalley. There was nothing in the circumstances to suggest to him that the cheque remained the property of Orix. His belief as to Thornalley's entitlement to the money was induced by the circumstances of the payment of the cheque to the first respondent. Those circumstances were created largely by Orix and had not changed. They were the circumstances which led Bryant to believe that Orix had made a personal loan to Thornalley, of which the cheque he received formed part. Consistent with that belief and in reliance on it he drew a cheque payable to All Star Catering Equipment.

His entitlement to the defence is reinforced when one considers the basis of the claim for money had and received, as explained by Lord Goff of Chieveley in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 549 - a case heavily relied on by the High Court in David Securities in declaring that the defence of change of position should apply. Lord Goff was speaking of the situation, which commonly occurs, of money being paid to an innocent donee by a thief where the true owner has made no representation whatever to the defendant, but where the defendant has innocently changed his position by disposing of part of the money. He said, at 579:

"In these circumstances, it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, 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. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position. Likewise, on facts such as those in the present case, if a thief steals my money and pays it to a third party who gives it away to charity, that third party should have a good defence to an action for money had and received. In other words, bona fide change of position should of itself be a good defence in such cases as these."

"It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer... A prominent example will, no doubt, be found in those cases where the plaintiff is seeking repayment of money paid under a mistake of fact; but I can see no reason why the defence should not also be available in principle in a case such as the present, where the plaintiff's money has been paid by a thief to an innocent donee, and the plaintiff then seeks repayment from the donee in an action for money had and received. At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistaken assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions."

What is important in this case is not that Mr Bryant believed that his company was no longer entitled to the cheque, but his belief that Mr Thornalley was. That belief had to a large extent been induced by circumstances created by Orix. Having banked the cheque, he changed his position to his detriment by drawing the cheque in favour of All Star Catering Equipment. In my opinion, the claim by Orix against the first respondent on this ground must also fail.

Orix argued that the rescission of the transaction by virtue of the commencement of the proceedings by Orix avoided the cheque, and that fed to the alleged conversion of the cheque by the bank. By virtue of the crossing of the cheque, s 55 of the Cheques Act 1986 (Cth) ensured that the bank could not receive a better title to the cheque than the voidable title that the first respondent had: see Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (supra) at 437.

At trial the bank had raised the defence available to it under s 95 of the Cheques Act, in that it had received the payment of the cheque for its customer and had credited the customer's account with the amount of the cheque "in good faith and without negligence".

The bank's good faith was not challenged. It bore the onus of showing that it acted without negligence: London Bank of Australia Ltd v Kendall [1920] HCA 53; (1920) 28 CLR 401; Hunter BNZ Finance Ltd v ANZ Banking Group Limited [1990] VicRp 4; [1990] VR 41 at 42; Hunter BNZ Finance Ltd v C G Maloney Ltd (supra) at 441.

The cheque was banked by Mrs Bryant on 6 August 1997 at the Golden Grove branch of the bank where the first respondent kept its account. It was accepted for deposit into the first respondent's account without query by the teller and was duly collected by the bank. The teller (who gave evidence), not surprisingly, had no recollection of the transaction. It was common ground, however, that she did not refer the cheque for any direction from her supervisor, and it was her evidence that if presented with the cheque she would not consider it necessary to do so.

There was evidence led of the bank's practice and procedures, particularly as to precautions to be taken in relation to dealing with what were described as "third party" cheques, namely cheques drawn by A in favour of B, being presented for encashment by or for deposit in the account of C. Although evidence was led of the bank's practice, Orix argued that the bank had led no evidence of recognised banking practice, and that the bank had therefore failed to discharge its onus. However, at the end of the day, neither before the Magistrate nor in this Court did Orix criticise the procedures laid down by the bank.

In my view, it is not imperative that a bank is required to lead evidence from some independent expert as to what good banking practice might be in dealing with third party cheques presented by customers, particularly when the actual procedures in question are not apparently challenged by the plaintiff. Without such evidence a bank may run the risk of having its practice criticised and the subject of attack, which it is not then in a position to refute. However, it will be for the Court to determine whether or not the practices of the bank, if they are adhered to, show that in the given circumstances the bank has failed to discharge its onus of proving that it was not negligent.

I should add that in any event the branch manager was also called by the bank. He was effectively qualified by counsel for Orix as a person well versed in banking practice having served 30 years with the bank or one of its predecessors, having had fifteen years' experience in dealing with inquiries related to third party cheques. He acceded to a suggestion by counsel for Orix that he was "a proficient and experienced manager". In my opinion he was sufficiently qualified in any event to give evidence of good banking practice in the area on which he was called to give evidence.

The real criticism of the bank's conduct in this case was that the teller negligently failed to identify the cheque as a third party cheque and then to deal with it in accordance with the bank's recognised procedures. It was argued that it should have been obvious from the description of the payee on the cheque that it was not that of the first respondent. Furthermore, it was said that Mr Bryant's endorsement on the back of the cheque must have been seen by the teller because she had applied a duty stamp to the back of the cheque. That endorsement too should have made it clear to her that it was a third party cheque.

The test of negligence was stated by Isaacs and Rich JJ in London Bank of Australia Ltd v Kendall (supra) at 410:

"Was the transaction of paying in the given cheque, coupled with the circumstances antecedent and present, so out of the ordinary course that it ought to have aroused doubts in the bankers' minds and caused them to make inquiry? As Lord Dunedin says (Commissioners of Taxation (NSW) v English, Scottish and Australian Bank 36 TLR 305 at 306), 'the question is necessarily a question of fact'. And, as we are reminded by the same judgment, 'it is really impossible to lay down rules or statements which will determine what is negligence and what is not. Each case must be determined on its own circumstances'."

Where doubts are aroused about the transaction, their Honours went on to say (at 417):

"The only guiding principle is that, where doubt is once aroused as to the nature and true ownership of the cheque, the nature and extent of the inquiry proper to allay it must be measured by what, in the circumstances, a fair-minded banker, paying due regard to the reasonable exigencies of banking business in relation to the person depositing the cheque, would consider it prudent to do in order to protect the interests of the true owner whoever he might be."

It is reasonably clear, therefore, that one does not look merely at what is written on the cheque but the whole circumstances surrounding its presentation.

There was a substantial correspondence between the name appearing on the cheque and the name of the first respondent. The cheque did not contain the word "Wright" or "Hotel", but the description of the payee was a true abbreviation of the first respondent's name. The name on the cheque did not contain any words that were not included in the first respondent's name, such as might cause a reasonable bank teller to pause before accepting it. The misspelling of "Refridgeration" was sufficient to indicate that there might have been some laxity in the drawing of the cheque. The teller concerned was an experienced teller, although she had only been in the branch for some months. However, she was familiar with the account, and Mrs Bryant was a regular customer on behalf of the first respondent. She deposited the cheque on a properly encoded summary slip for use only by the first respondent. There was nothing in the behaviour of Mrs Bryant or of anyone else to suggest that the circumstances raised any ground for suspicion. Although the teller may have seen the endorsement on the back, she would have been pardoned for thinking that it was a meaningless endorsement both for the reason that it was a bearer cheque and for the fact that it did not even replicate the description of the payee on the face of the cheque. It was also endorsed and signed by a person authorised to operate on the first respondent's account.

In my opinion, taking into account all the circumstances, the teller had no reason to suspect that it was other than a regular transaction. The Magistrate correctly held that the bank had discharged its onus of establishing that it was not negligent. It was therefore entitled to the protection of s 95 of the Cheques Act both in relation to the claim for conversion and for money had and received.

The appeal against both respondents is dismissed with costs.

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Judgment (83 paragraphs)

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