Plaintiff v First Defendant Second Defendant

Supreme Court of Victoria|2014-08-15|Before: SLOSS J

Restitution - Money paid under mistake - Mistake of fact - Right to recover - Unjust enrichment - Money had and received - Constructive trust - Requisite knowledge required of a payee who is paid by mistake - Defences of "No Mistake" and "Change of position".

1 The plaintiff, Focus Metals Pty Ltd ("Focus Metals"), a company located in Richmond, Victoria, operates a business of buying, smelting, assaying and refining gold and other precious metals. Focus Metals seeks to recover from the first defendant, Mr Kris Babicci ("Mr Babicci"), the sum of $166,688.33 which it says it paid to him by mistake by four electronic funds transfers to his account with the National Australia Bank ("NAB") (BSB 082-401 Account No. 752036778) ("Mr Babicci's NAB account") on 9 September 2011. In the alternative, Focus Metals seeks to recover the sum of $133,859.93 from Mr Babicci and the balance of $32,828.40 from the second defendant, Mr Bruce McNab ("Mr McNab"), the latter sum having been transferred by Mr Babicci to an account with the NAB in the name of Mr McNab by two internet transfers, made on 14 and 15 September 2011.

2 The alleged mistaken payment to Mr Babicci, and his subsequent payment of the sum of $32,828.40 to Mr McNab, arose in the context of a gold refining and purchasing transaction undertaken by Focus Metals in September 2011.

3 Between 2007 and 2011, Focus Metals refined and assayed several consignments of ore containing gold and other precious metals that were exported from Papua New Guinea by Exara Limited, under instructions from its managing director Mr Aristotelis (Telly) Nicolaou ("Mr Nicolaou").

4 From time to time, Mr Nicolaou involved different investors in funding the gold transactions. Generally, the ore was exported from Papua New Guinea using Exara Limited's export licence, and consigned to Focus Metals for refining and assaying. Upon completion, the gold and other precious metals were usually purchased by Focus Metals whereupon the proceeds would be remitted according to instructions given by Mr Nicolaou.

5 In February 2010, Mr Babicci and Mr McNab, together with Mr Jon Brunner ("Mr Brunner"), entered into an agreement with Mr Nicolaou and Exara Limited, whereby they agreed to export geological samples obtained from Papua New Guinea, using Exara Limited's export licence, and refine them with a view to earning and sharing financial returns. Early in the piece, Mr McNab apparently paid some preliminary expenses of $10,000, by way of establishing their venture and Mr Babicci contributed an initial sum of $200,000 by way of loan funds.

6 In August 2010, a consignment of alluvial gold was exported from Papua New Guinea by Exara Limited on behalf of the participants in the February 2010 agreement to Focus Metals for refining and assaying. Upon completion, in accordance with instructions given by Mr Nicolaou, 155.5 grams of fine gold was retained in a metals account with Focus Metals and the balance was purchased by Focus Metals. From the proceeds of sale, $88,592.86 was remitted to Mr Babicci's NAB account, and $15,000 was paid into Empire Distributors' account with Westpac Banking Corporation Limited (BSB: 033 072 Account No.: 229171) ("the Westpac account") by way of reimbursement of Mr Nicolaou's expenses.

7 In September 2011, another consignment of gold bearing ore was exported from Papua New Guinea by Exara Limited to Focus Metals for refining and assaying. The purchase of the refined gold the subject of this transaction was undertaken by Focus Metals upon instructions given by Mr Nicolaou on behalf of Empire Distributors, or Empire Distributors trading as Exara Gold. Some months earlier, Mr Nicolaou had apparently provided Focus Metals with change of account details, requiring payments for future "in and out business transactions" to be made to the Westpac account and he had requested that Mr Babicci's NAB account be cancelled and deleted from their system as it was no longer valid. Mr Nicolaou's instructions were not, however, implemented by Focus Metals. The result was that, upon settlement of the purchase of the refined gold the subject of the September 2011 transaction, the sales manager Mr Howard Cooklin ("Mr Cooklin"), paid the settlement moneys, totalling $166,688.33, into Mr Babicci's NAB account, rather than to the Westpac account that Mr Nicolaou had designated.

8 A few days later, when Focus Metals became aware that the moneys had been paid to the wrong account, it took action through its bank, the NAB, seeking to recover the moneys but without success. When the matter of the mistaken payment was raised by Ms Yvonne Balogh of Focus Metals ("Ms Balogh") with Mr McNab in a telephone conversation, he informed her that he and Mr Babicci "d[id] not consider that the payment had been made to the wrong account" and said that the funds were the repayment of a debt and that both Exara Limited and Mr Nicolaou personally "owed the debt to Mr Babicci for a considerable time and it was long overdue for repayment."[1]

9 On 6 October 2011, Empire Distributors commenced a proceeding against Focus Metals in the County Court of Victoria, seeking payment of the debt of $166,688.33. Focus Metals took legal advice and subsequently settled the proceeding on 7 November 2011. The Deed of Release entered into recorded that "[w]ithout admission of liability and to commercially resolve the Proceeding"[2] Focus Metals agreed to pay Empire Distributors the sum of $166,688.33, and the proceeding was to be struck out without adjudication and no order as to costs. It was a term of the Deed of Release that both Empire Distributors and Mr Nicolaou would "render all reasonable and timely assistance" to Focus Metals in relation to its Supreme Court proceeding against Mr Babicci.[3]

10 Focus Metals commenced this proceeding in late September 2011, when it sought a freezing order over Mr Babicci's NAB account and other associated relief. At the outset, Mr McNab, a solicitor by profession, appeared as the solicitor on the record for Mr Babicci. However, in about September 2012, Focus Metals became aware from subpoenaed banking documents that Mr McNab had personally received the sum of $32,828.40 from Mr Babicci, paid from his "line of credit account". This was the same account into which Mr Babicci had transferred the whole of the sum of $166,688.33 he received from Focus Metals. Focus Metals then made an application for Mr McNab to be added as a second defendant and relief was also sought against him, following which Mr Babicci engaged new solicitors to represent him.

11 Focus Metals contends that when it paid the sum of $166,688.33 into Mr Babicci's NAB account on 9 September 2011, it did so as a result of a mistake of fact arising from a clerical error in paying the wrong account, contrary to instructions. At the time when Mr Cooklin made the payments on behalf of Focus Metals to Mr Babicci's NAB account, he believed he was discharging the indebtedness of Focus Metals to Empire Distributors for its purchase of the precious metals the subject of the September 2011 assaying and refining transaction.

12 Focus Metals says it had no indebtedness to Mr Babicci. Accordingly, when Mr Babicci, and through him Mr McNab, claimed ownership of the funds which had been paid to them by mistake, and refused to repay them, Focus Metals contends that two legal consequences arose:

(a) upon becoming aware of the mistake, or wilfully shutting their eyes to the obvious, each of Mr Babicci and Mr McNab was liable to Focus Metals to account as a constructive trustee; and

(b) irrespective of knowledge, Mr Babicci and Mr McNab were each liable pursuant to restitutionary principles on the basis of unjust enrichment and money had and received.

Focus Metals also pleaded a Quistclose trust[4] claim as against the second defendant, contending that emails sent by Mr Babicci to Mr McNab in September 2011 demonstrated that he had intended to "refund" the sum of $32,828.40 to Focus Metals. This additional claim was not, however, pursued by Focus Metals and in closing submissions Senior Counsel confirmed that it was not relied upon.[5]

13 In their defences, Mr Babicci and Mr McNab initially pleaded a number of defences including allegations of no mistake, change of position and estoppel. However, at the trial, the defences of change of position and estoppel were not pursued and effectively no evidence was led in relation to either of them. Indeed much of the factual framework alleged in the defence was not the subject of any evidence in chief given by or on behalf of the defendants at trial. Rather, the gist of the "defences" advanced by the defendants during the course of the trial was to the effect that:

(a) there was no relevant error or mistake because Focus Metals had contracted with Exara Limited, the September 2011 transaction was an "Exara transaction" and Mr Babicci's NAB account was the correct and only authorised account for payments for ore sourced or derived from Exara Limited; and

(b) if there was a mistake, it was not unjust for the defendants to retain the monies because Focus Metals was aware of an issue with Exara Limited and it nevertheless chose to settle the County Court proceeding brought by Empire Distributors. The defendants contend that it was this settlement and release, "hastily entered into" by Focus Metals, which was the real cause of the loss alleged.[6]

14 Against that background, the arguments advanced by Counsel for the respective parties in closing submissions focussed on three main issues:

1. Did Focus Metal pay the sum of $166,688.33 to Mr Babicci's NAB account under a mistake of fact?

2. If so, did Mr Babicci and Mr McNab have knowledge of the mistake?

3. (Irrespective of their knowledge) is it unjust for Mr Babicci and Mr McNab to retain the moneys so paid by Focus Metals?

15 In order to understand the claimed entitlement of Mr Babicci and Mr McNab to retain the total sum of $166,688.33, or part thereof, it is necessary to set out below, in a little more detail, the background to the gold transactions undertaken, the alleged mistaken payment and the events that ensued as Focus Metals attempted to recover the moneys paid to Mr Babicci.

16 The factual narrative set out below is taken from the business records and other documents tendered by the respective parties and the viva voce evidence adduced from the witnesses at the trial. In that regard, Mr Cooklin gave evidence for the plaintiff and was cross-examined. Mr Babicci, Mr McNab and Mr Brunner each gave evidence on behalf of the defendants but only Mr Babicci and Mr McNab were cross-examined.

17 Mr Cooklin gave cogent evidence on behalf of Focus Metals in a clear, frank and forthright manner both in examination in chief and under cross-examination. He listened to the questions asked and answered them in a direct way. He was an impressive witness.

18 The evidence given on behalf of the defendants, on the other hand, was vague, fragmentary and lacked coherence. In part, this was because it was led in a manner and form that provoked frequent objections, many of which were upheld, and in the final outcome, the evidence adduced fell well short of establishing the basic framework for some of the defences that had been advanced in their pleadings. Furthermore, the evidence that was given orally by each of Mr Babicci and Mr McNab often conflicted with what was recorded in their contemporaneous email exchanges.

19 Mr Babicci was the first of the defendants to give evidence. For the most part, he had a poor recollection of the events that took place. Even during his examination in chief he was often unable to recall matters of significance that had been mentioned in the course of his email exchanges with Mr McNab and others. During cross-examination he exhibited the same difficulty with recalling events and he often sought to give evidence about what "he would have done" rather than what actually took place. Furthermore, on one occasion during his cross-examination, when answering a question about the transfer of the moneys across to his line of credit account and whether he had spoken with Mr McNab beforehand, Mr Babicci admitted that he was "having a guess".[7] Accordingly, where the oral evidence given by Mr Babicci is at odds with the contemporaneous record of events set out in the email exchanges, I have generally preferred the written version.

20 Mr McNab was present in Court whilst Mr Babicci gave evidence. Mr McNab also sought to give evidence in terms of "what would have happened" and what "he would have done" rather than informing the Court about what had actually happened. When giving his evidence, I did not find him frank and forthcoming in his answers. For example, his evidence concerning the payment by Mr Babicci to him of the sum of $32,828.40 was implausible and unconvincing - not only did his account contradict the contemporaneous documents in which Mr Babicci had identified that sum as an overpayment which was to be refunded - he also effectively contradicted Mr Babicci's oral evidence that the payment of the $32,828.40 to him was "to make him good on his investment as well".[8] Mr McNab said the payment was "an amount of money which Kris [Babicci] elected to pay to me from his funds"[9] and he did not consider that Mr Babicci "had done anything other than pay me funds from his personal account".[10] He agreed, under cross-examination, that the payment from Mr Babicci could be a characterised as "a gift" but said that was "an unusual way to put it."[11] Later, Mr McNab appeared to suggest that the payment he received from Mr Babicci was "to pay some money back to [him] because [Mr Babicci] knew [he] was out of pocket" in relation to the joint venture.[12]

21 Furthermore, I regarded the explanation that Mr McNab proffered about his failure to disclose his receipt of the $32,828.40 in previous proceedings before the Court and in affidavit materials filed with the Court as somewhat unsatisfactory and inadequate.[13] Accordingly, as with Mr Babicci, where the oral evidence given by Mr McNab is at odds with the contemporaneous record of events set out in the email exchanges, I have generally preferred the written version.

22 The evidence given by Mr Brunner was peripheral to the real issues in the case. He gave evidence in very general terms about the activities of the joint venture conducted by Mr Babicci, Mr McNab, Mr Nicolaou and himself. He mentioned that at a meeting held in Thailand in May 2010 requests were made of Mr Nicolaou for more rigour and discipline in the conduct of the business and preparation of its accounting records. He said that he participated in teleconferences between Mr Nicolaou in Melbourne and others based in Papua New Guinea concerning their attempts to secure gold. Mr Brunner also said that he had discussions with Ms Balogh at Focus Metals, usually to seek information about matters such as security and shipping arrangements.

23 Mr Brunner was not cross-examined. I did not find his evidence of any real assistance in resolving the issues in the case.

Mr Nicolaou and Ms Balogh were not called to give evidence

24 Neither Mr Nicolaou nor Ms Balogh were called to give evidence. The defendants were critical of Focus Metals for not calling them. In the case of Ms Balogh, in closing submissions, Counsel for the defendants contended that an adverse inference should be drawn under the rule in Jones v Dunkel[14] because Focus Metals failed to call her, in particular to give evidence about the February 2011 email from Mr Nicolaou containing the payment instructions.

25 Mr Cooklin gave a cogent explanation for not calling Ms Balogh. He gave evidence about why she is no longer employed at Focus Metals. Mr Cooklin said that she was not candid with him when he questioned her about what had happened, and she seemed to be having some personal health issues at the time. Mr Cooklin said that the circumstances of her leaving Focus Metals in late October 2011 were "partly" connected with this problem arising from the payment.[15] In the circumstances, I am not satisfied that any adverse inference should be drawn. Further, it was open to the defendants to call Ms Balogh themselves if they were of the view that her evidence would assist their case. The same can be said for Mr Nicolaou. Whilst the Deed of Release entered into by way of settlement of the County Court proceedings required Mr Nicolaou to assist Focus Metals, its case was one of mistaken payment and his evidence was not necessary for that case to be made out. If the defendants had wished to adduce evidence from Mr Nicolaou in furtherance of their "defences" to prima facie recovery of the mistaken payment, it was open to them to call him.

26 At all relevant times Empire Distributors was controlled by, and had as its sole shareholder and director, Mr Nicolaou. Empire Distributors operated a jewellery and gold purchasing business from premises at Evelina Road, Toorak, Victoria.

27 Exara Limited was a company incorporated and registered in Papua New Guinea in April 2007. At all relevant times it held a licence to buy and export gold and other precious metals from Papua New Guinea.[16] Exara Limited was controlled by Mr Nicolaou, who was both the managing director and a shareholder of Exara Limited. In addition to Mr Nicolaou, Exara Limited also had a locally appointed director and shareholder, Mr Kaman Denge, so as to comply with Papua New Guinean laws.

28 Empire Distributors and Exara Limited conducted a gold purchasing business involving the export of ore sourced from Papua New Guinea. The ore was exported from Papua New Guinea using Exara Limited's export licence. From time to time, different investors were apparently involved in funding the gold purchasing business conducted by Empire Distributors and Exara Limited.

29 On 25 August 2010, Empire Distributors registered the business name "Exara Gold" in Victoria. The nature of the business to be conducted by Exara Gold was stated as being the importation of alluvial gold.

Background to Focus Metals' dealings with Exara Limited between 2007 and 2011

30 In the period commencing from 2007 through to 2011, Focus Metals entered into several gold refining, assaying and purchase transactions with Empire Distributors and its principal, Mr Nicolaou, where Exara Limited was the licensed entity exporting the precious metals from Papua New Guinea. Mr Cooklin had met Mr Nicolaou but he was not directly involved in the customer side of the business - that was handled by Ms Balogh. Ms Balogh was variously described in evidence as the accounts manager, the client manager and Mr Cooklin's personal assistant. Mr Cooklin said that Focus Metals' normal business practice was to deal only with big companies or partnerships that have an Australian Business Number. They rarely dealt with individuals but there were occasions when they dealt with Mr Nicolaou personally. At all relevant times, the transactions undertaken were monitored by an Australian entity known as "AUSTRAC"[17] for regulatory compliance purposes.

31 Mr Cooklin said that Ms Balogh had discussed with him something about the background of the transactions conducted between Empire Distributors, Exara Limited and Focus Metals. The substance of their conversations was that Mr Nicolaou was the director of Empire Distributors and managing director of Exara Gold and was the prime mover in all of the transactions. Mr Cooklin was aware that Mr Nicolaou had a number of silent or passive investors involved and believed that he may have met one or two of them, but said he didn't take much notice of them because they weren't relevant to Focus Metals. Rather, Mr Cooklin said that "[w]hat was relevant to Focus Metals was the instructions by Mr Nicolaou."[18]

32 Mr Cooklin said that the first refining transaction undertaken by Focus Metals involving Mr Nicolaou was in early February 2008, where the gold was brought into Australia from Papua New Guinea by Mr Nicolaou and his (then) business partner, Mr Chris Karamountzos. He could not recall whether it was undertaken for Empire Distributors or Exara Limited, but the consignment was processed under the name "Exara Ltd"[19] and involved melted bars containing gold and silver.

33 Mr Cooklin's evidence was that Focus Metals prepared the customs clearance papers for the consignment and the product arrived at the refinery in late January 2008. Upon completion, Focus Metals purchased the gold and silver from Exara Limited and paid the settlement sum into Exara Limited's account with the ANZ Banking Group (PNG) Limited at its Port Moresby branch. A number of similar transactions took place during February, March and April 2008. In some cases, upon instruction from Mr Nicolaou, Focus Metal split the proceeds of sale and paid a portion into the bank accounts of each of Exara Limited and Empire Distributors.

34 Mr Cooklin recalled that Mr Nicolaou's partner, Mr Karamountzos, had emailed him in February 2008 and raised some concerns about Mr Nicolaou and his accounting for the disbursement of "investor" money from the 2008 transactions. He said that during a later telephone conversation, Mr Karamountzos had told him that once the present dealing was finished he would not be doing any more business with Mr Nicolaou. Mr Cooklin said that the issues Mr Karamountzos had raised in these discussions did not cause him to become concerned about dealing with Mr Nicolaou because when Mr Nicolaou started to trade out of Papua New Guinea in 2008, he was "green"[20] and did not have a great depth of knowledge about the precious metal industry. He said the mistakes that Mr Nicolaou made with Mr Karamountzos in importing the first consignment were the sort of mistakes inexperienced people make, but he imagined that Mr Nicolaou would have learned from them and would not make them again.

35 There is no evidence of any gold consignments taking place between Mr Nicolaou, Empire Distributors, Exara Limited and Focus Metals from March 2008 or during 2009. Later events confirmed that Exara Limited had not been conducting business during that time. In particular, no export activity had been undertaken by Exara Limited and it had effectively been dormant.

36 In January 2010, Mr Nicolaou met with Mr McNab and Mr Brunner to discuss a potential investment by them in his gold exportation activities from Papua New Guinea and Bougainville. According to an email Mr Nicolaou sent to them after their meeting, the "necessary funding amount of $10k [was] needed to start and secure as per our discussions" and Mr Nicolaou said that, at that stage, he would use his company, Empire Distributors, to disburse the necessary payments as required. He also provided them with the relevant banking details for making the initial investment of $10,000, nominating the Westpac account of Empire Distributors.[21]

37 Mr McNab followed up their conversation and informed Mr Nicolaou by email of another potential investor, Mr Babicci, a "personal and trusted friend" who was currently the CEO of Bank Dhofar in Oman, whom he said could "comfortably fund our proposed business from his own resources".[22] Mr Nicolaou responded by email and instructed Mr McNab to "lift the cone" of silence and include Mr Babicci.

38 In the meantime, Mr Nicolaou was making the necessary preparations for the re-activation of Exara Limited's export licence. He also made arrangements with Focus Metals for the refining and assaying of gold that was proposed to be exported from Papua New Guinea by Exara Limited. At Focus Metals, Mr Nicolaou dealt primarily with Ms Balogh.

39 Mr Cooklin was cross-examined about the various company names and business names used by Mr Nicolaou in dealings with Focus Metals. He said that:

at all times whether it was Exara or Exara Gold - Gold or Exara Limited they were companies and entities controlled by Mr Nicolaou. Mr Nicolaou at all times was our client. Nobody else. No one else gave us instructions at any time to do anything else with the product that Mr Nicolaou organised to bring in from - from Papua New Guinea.[23]

He was also asked about Focus Metals' in-house differentiation between corporate customers. He said that Focus Metals gave each company a code that was used internally but not shown on invoices.[24] Mr Cooklin said that he did not differentiate between Exara Gold and Exara Limited - "we dealt with Exara".[25]

40 Mr Cooklin said that Focus Metals always understood that Mr Nicolaou was its client and he was using the export licence of Exara Limited only to export the gold. He said that he was not aware of how shipments from Papua New Guinea to Australia via Exara Limited were funded, or who paid for the shipment and the like.

41 He said that Focus Metals had a number of clients who were using other people's export licences to take the gold legally out of Papua New Guinea and that this was standard practice in Papua New Guinea. Mr Cooklin said that, from the Australian perspective, what mattered was the company that imported the material. Relevantly, the ore exported from Papua New Guinea by Exara Limited was imported under the name of Focus Metals and cleared by the customs agent in Focus Metals' name.

42 Mr Cooklin said that in transactions in which Mr Nicolaou was involved it was often the case that the material may have come in under one name and he wanted it settled in another entity and so the entity shown on the settlement documents would be changed. Mr Cooklin said that where the director of a corporate entity asked for the transaction to be directed to another entity, Focus Metals would action the request because it was normal business practice, especially in circumstances where the particular person and companies had been identified and undergone due diligence. Further, Focus Metals had no reason to be wary of Mr Nicolaou.

43 On or about 13 February 2010, Ms Balogh forwarded Mr Nicolaou a Focus Metals' document entitled "Contract for Dore ex Exara Limited". The contract recorded that Exara Limited was responsible for security shipment to Australia and compliance with AUSTRAC requirements. It also set out Focus Metals' terms and conditions pertaining to the recovery operations and the settlement prices payable. These terms included that following the recovery operations "Focus Metals Pty Ltd will pay 99% of the recovered gold to the client".[26] Mr Nicolaou executed the contract in his capacity as managing director of Exara Limited and Mr Cooklin then signed the contract in his capacity as Focus Metals' sales manager.

44 Mr Cooklin said that the Contract for Dore ex Exara Limited was a document that was entered into by way of compliance with the relevant regulations for the export of gold from Papua New Guinea. He said that the contract is a standard document that "is required by the exporting authorities in Papua New Guinea for the exportation of gold or precious metals".[27] He said that without such a contract, the Central Bank of Papua New Guinea would not allow the export of gold.

45 Mr Nicolaou, Mr Brunner, Mr Babicci, Mr McNab and Exara Limited entered into an agreement, in writing, with effect from 18 February 2010, "to record the basic agreement between the parties" ("the February 2010 agreement").[28] The February 2010 agreement, which was drafted by Mr McNab, recited:

Telly [Nicolaou], Jon [Brunner], Bruce [McNab] and Kris [Babicci] have agreed to reactivate the business of Exara Limited with a view to earning and sharing financial returns in accordance with their individual proportions, building their respective wealth and enjoying themselves at the same time.
Exara is a Papua New Guinea registered company and it is intended that its business remain in Papua New Guinea and that it be controlled outside of Australia and earn active income.

Telly has considerable experience and contacts in Papua New Guinea and in the precious metals industry generally, Jon has broad entrepreneurial skills and abilities, Kris is a banker with specific skills in managing risk and funding and Bruce is a lawyer with experience in establishing and managing issues involved with businesses in different jurisdictions.

All parties are committed to making the business work successfully and to protecting each other's financial and other risks in connection with Exara and its business.[29]

46 When giving evidence, Mr Brunner, Mr McNab and Mr Babicci referred to the arrangement between them variously as a "joint venture agreement", a "partnership" and a "consortium". For the purposes of this judgment, I will refer to it as a "joint venture" and to the parties as "joint venturers", but whatever be the correct characterisation, in their written agreement the parties expressly provided that:

[n]o party is the partner, agent, employee or representative or [sic] any other party and no party has the power to incur any obligations on behalf of, or pledge the credit or [sic], any other party.

47 Under the February 2010 agreement, each party committed "to making the business of Exara [Limited] work and to at all times be honest and faithful to each other and always mindful of each other's interests." The relevant "Business" to be conducted by Exara Limited was defined to mean "the export and refinement of geological samples from Papua New Guinea and any further business which may be agreed by the parties as appropriate for Exara [Limited] to profitably conduct."[30] The agreement provided that the "business of Exara [Limited] will be managed by Telly" and required that the parties "keep each other informed about operational issues".[31] The agreement recorded that Mr Nicolaou was to be the managing director,[32] and that Mr Kaman Denge, a Papua New Guinea national, is and would remain a director of Exara Limited.[33]

48 Under the February 2010 agreement, Exara Limited was required to "do all things necessary to maintain its license of export geological samples and to renew it each year" and the business was to "be conducted on an ad hoc basis as opportunities arise."[34] There was, however, nothing explicit in the agreement that confined Exara Limited to undertaking export activities only on behalf of the joint venture.

49 Exara Limited was permitted to raise funds for working capital, investment and expansion as may be agreed from time to time by the parties. At the outset, Mr Babicci apparently provided $200,000 and Mr McNab, the sum of $10,000. The February 2010 agreement provided that where any of the individual participants provided funds, "each of Telly, Jon, Kris and Bruce severally indemnify the party providing the funds to the extent of their individual proportion."[35] In that regard, each of Mr Brunner, Mr McNab and Mr Babicci held a two ninths interest and Mr Nicolaou held a one third interest in the arrangement.[36] Any funding provided by any of them was required to "be repaid as a priority to any payment or distribution of profit."[37] Any profits arising were to be "allocated in cash or in kind to Telly, Jon, Kris and Bruce in accordance with their individual proportions as soon as practical after each transaction conducted by Exara [Limited]."[38]

Activities conducted under the February 2010 agreement

50 Early in 2010, an excursion to Bougainville was undertaken by some of the participants in the February 2010 agreement, but no business arose from it. On a later occasion, however, Mr McNab apparently went back to Papua New Guinea with Mr Nicolaou and secured some gold.

51 In May 2010, Mr Nicolaou, Mr Brunner, Mr McNab and Mr Babicci met in Pattaya in Thailand for a series of meetings to discuss their activities under the February 2010 agreement. Each of Mr Babicci, Mr McNab and Mr Brunner gave evidence to the effect that one of the matters they discussed in Thailand was that they were unhappy with Mr Nicolaou's reporting on financial matters and it was an ongoing issue.

52 A few weeks after the meeting in Thailand, Mr Babicci sent an email to Mr McNab in which he offered both the use of his personal bank account for the joint venture's activities and to take over the financial reporting, provide a financial report and transfer surplus money to the partners.[39] He said that being a non-resident for tax purposes, he was not taxed on share and commodity trading gains, which "should be good news for everyone". It seems that while Mr Babicci's NAB account was later used, the financial reporting and other matters nevertheless remained with Mr Nicolaou.

Shipment from Papua New Guinea to Focus Metals in August 2010

53 In early August 2010, Mr Nicolaou informed Focus Metals that it would shortly receive a shipment of alluvial gold from Papua New Guinea. Focus Metals received the consignment on 5 August 2010 and undertook its refining and assaying operations, following which Mr Nicolaou gave instructions to Focus Metals about how the processed gold was to be dealt with.

Written instructions given by Mr Nicolaou to Focus Metals

54 By letter dated 16 August 2010, apparently sent to Focus Metals following a request made by Ms Balogh, Mr Nicolaou gave written instructions to Focus Metals on the letterhead of Empire Distributors trading as Exara Limited, as follows:

I Telly Nicolaou of the above address, being the director of Exara Limited hereby authorized and request Funds to be deposited into Empire Distributors P/L account, bsb no: 033072/acc no: 229171 Until further notice

Also regarding the opening and operations of the metal account with Focus metals, only two signatures to operate at this time, being myself and Ms Tina Nicolaou.

The bank account of Empire Distributors that Mr Nicolaou specified was the Westpac account.

55 Mr Nicolaou also provided a further written authorisation to Focus Metals, dated 25 August 2010, on the letterhead of Exara Limited, in his stated capacity as a director and as "the duly authorized person to make this request". The authorization referred to alluvial gold having been imported and received by Focus Metals on 5 August 2010 for refining. Two jobs were listed:

Job 1. Gross weight: 261.1 gms

Net weight: 247.9 gms

Job 2. Gross weight: 2146.4 gms

Net weight: 361.5 gms

56 Mr Nicolaou authorised Focus Metals "to transfer the total of our metal account from importation of Alluvial Gold received by Focus Metals Pty Ltd on the 5th August 2010 for refining, to Empire Distributors Pty Ltd trading as Exara Gold." The authorisation apparently reflected the terms of a pro forma letter provided by Focus Metals, and once executed by Mr Nicolaou, it was witnessed by Ms Balogh.

57 On 25 August 2010, Empire Distributors was successful in having the business name "Exara Gold" registered in Victoria pursuant to the Business Names Act 1962 (Vic.). On the same day, Mr Nicolaou provided to Ms Balogh, under cover of an email concerning "Exara Transfer", a copy of the registration of "Exara Gold, trading as Empire Distributors". In the email, Mr Nicolaou requested that Ms Balogh:

disburse funds as follows, as perversely [sic] discussed:

1. Hold 155.5 grams in Exara Gold Metal Account. being (5oz)

Transfer the remaining after Focus metals to: NAB bsb:082 401 acc: 7520 3677 Kris Babicci/ref: Exara Gold.

He signed off the email as "Telly Nicolaou ABN: 69 111 552 875", which was the ABN for Empire Distributors.

58 Focus Metals prepared a "Metal Account Transaction"[40] invoice dated 26 August 2010, in the name of "Empire Distributors Pty Ltd T/as Exara Gold" (bearing the ABN 69 111 552 875), recording the purchase by Focus Metals of 2122.5 gms of gold for a total price, inclusive of GST, of $103,592.86. The invoice included payment instructions as per Mr Nicolaou's earlier email, and bore a handwritten note: "Howard please note different bank a/c", presumably a reference to the fact that Mr Babicci's NAB account was typed on the invoice, with "ref: Exara Gold". Further handwritten annotations showed a payment of $15,000 made on 16 August 2010 and the balance of $88,592.86 was noted as "balance to be paid". Mr Cooklin made payment on 27 August 2010 and the sum of $88,592.86 was received into Mr Babicci's NAB account the same day.[41]

59 Following the processing of the August 2010 shipment, Mr Nicolaou followed up with an email to Mr McNab on 2 September 2010, addressed to both him and Mr Babicci. Mr Nicolaou reported that he believed "there is a business in PNG, and not a small one at that". He noted that, apart from the unavoidable expenses that would be incurred from this transaction, "there's a kitty at this point" and that they hold 155.5 grams of fine gold in their metal account, "as agreed 1 oz. between us." On 4 September 2010, he also provided them with a list of the "expenses for the 15k withdrawal." This withdrawal appears to relate to the payment of $15,000 noted above as having been made by Focus Metals on 16 August 2010.

60 It seems clear from Mr Nicolaou's reporting that this transaction was one that was undertaken for and on behalf of the participants in the February 2010 agreement. The payment of the balance of $88,592.86 to Mr Babicci's NAB account was apparently by way of partial reimbursement of his initial contribution of $200,000.

61 There is no evidence of any further transactions having been conducted through Focus Metals during 2010.

62 On 8 February 2011, Mr Nicolaou provided fresh banking details concerning Focus Metals' document metaltransaction-txn6301.pdf[42] and instructions to Focus Metals by email as follows:

Please deposit to

Empire Distributors P/L

Westpac

BSB: 033 072

ACCOUNT No. 22 9171

Please note for future deposit's on all .. in and out business transaction between Focus Metals and Empire Distributors and Exara Gold to be deposit to the above nominated account only.

Please also cancel and delete account of Chris Babici [sic.] NAB account from your system. No longer valid!

Many thanks

Kind regards

Telly Nicolaou

Empire Distributors also t/a Exara Gold.

63 There is no direct evidence about what "metaltransaction-txn6301" concerned. The email exchange with Ms Balogh suggests that it was one conducted with Focus Metals by Mr Nicolaou on behalf of "Empire Distributors also t/a Exara Gold". No evidence was given by Mr Babicci, Mr McNab or Mr Brunner about any gold transaction activity having been undertaken by the participants in the February 2010 agreement at around this time. Indeed, the transaction undertaken on their behalf in August 2010 was referred to by Mr McNab in later email communications with Mr Babicci as their "one and only transaction".[43]

64 In late August 2011, Mr Nicolaou was again in contact with Ms Balogh to advise her of an incoming gold transaction and request that she arrange customs clearance. He provided Focus Metals with an invoice, numbered FMEXL001, prepared on the letterhead of Exara Limited and addressed to Focus Metals for the delivery of approximately 5.747 kilograms of "gold rock samples/assaying-analysis" at an approximate amount of (USD) $169,544.00. Mr Cooklin gave evidence that this invoice was generated to satisfy two regulatory requirements: first, to permit the export of the gold rock samples to Australia under Exara Limited's export licence, and secondly, to declare the approximate value of the gold to enable customs clearance to take place.

65 The gold rock was delivered to Focus Metals on 26 August 2011 for refining and assaying and dealt with in four lots, as follows:

This lot contained gold, silver and mercury. After treatment, the ore produced a net payout of $38,803.37.

This lot contained gold and silver. After treatment that ore produced 712.2 grams resulting in a net payout of $29,263.27.

This lot contained gold, silver and mercury and after treatment constituted a weight of 2,170.7 grams and produced a net payout of $91,588.05.

This lot contained gold and silver and after treatment constituted a weight of 134 grams and produced a net payout of $7,033.64.

Focus Metals makes payment of $166,688.33 on 9 September 2011

66 Focus Metals assayed and refined the gold rock and then purchased the precious metals the subject of the four refining lots. On 9 September 2011, Mr Cooklin transferred funds totalling the sum of $166,688.33 to "Exara Gold". However, because Mr Cooklin was unaware that Mr Nicolaou had given updated instructions to Ms Balogh in February 2011 changing the bank account details, he transferred the funds into Mr Babicci's NAB account on 9 September 2011.

67 Mr Nicolaou soon noticed that the proceeds of the September 2011 transactions had not reached the nominated Westpac account of Exara Gold and he followed the matter up with Ms Balogh and Mr Cooklin.

68 Mr Cooklin gave evidence about what took place when Mr Nicolaou came looking for the money. He said that two or three days after he had made the payments, Mr Nicolaou rang Ms Balogh and complained that he had not received the money. Mr Cooklin looked at Focus Metals' bank account and confirmed that the money had been paid out. He could not understand why there was a problem and so they let the next day pass. Then, Mr Nicolaou came to Focus Metals' office demanding the funds for the last consignment. Mr Cooklin said to him that Focus Metals did not owe him any money and said that they had paid the money and discharged their debt. Mr Cooklin also produced receipts for the electronic funds transfers. When he showed the receipts to Mr Nicolaou, Mr Nicolaou said words to the effect of "Oh my God, you've sent it to the wrong account."[44] It was then that Mr Nicolaou produced a copy of the email that he had sent to Ms Balogh in February 2011.

69 Mr Cooklin said that he was not aware of this email having been sent to Focus Metals and it came "as a complete shock" to him when he saw it.[45] Mr Cooklin said that "it was only then we realised that we had by mistake sent it to the wrong account".[46] Once he was aware that he had sent the payments to the wrong account, Mr Cooklin immediately rang Focus Metals' lawyer, Mr Alan Sheppet, and asked him what to do. Mr Cooklin also provided a copy of Mr Nicolaou's email to his solicitor.

Focus Metals seeks to recover the $166,688.33 it paid to Mr Babicci's NAB account

70 Once Focus Metals became aware that it had paid the proceeds of the September 2011 transactions to the wrong account, Focus Metals contacted its bank, the NAB, to seek reimbursement from the account that the money had been paid into. The NAB commenced an investigation and tried to contact the third party and their banker.

71 In the meantime, at some point over the weekend of 10-11 September 2011, Mr Babicci noticed that Focus Metals had sent some money to his account. He contacted Mr McNab by email and asked him if he had any idea why Focus Metals had sent some money to his account. He stated:

Hi Bruce,

Any idea why Focus Metals has sent some money to my account? Do you think it is Telly making good?

Very interesting, let's have a discussion before asking anyone else. Do you think it could be Telly trading again and Focus operating on old instructions?

Please give me a call in the morning.

72 Mr McNab responded, by email in the first instance. He commented:

Very interesting! How much? It might be as a result of a meeting Jon [Brunner] and I had with Focus two weeks ago in relation to the possibility of Focus processing some PNG gold for a different client. We commented about Exara but the discussion didn't go anywhere.

How much was deposited? I think that there was about 100 grams held over from our one and only transaction, so if the deposit was $5k or thereabouts that's probably what it is. If it's more, then perhaps Telly is trading again. How much was deposited?

$166,000 plus a bit of change. About what I am owed plus some interest and fees. Very good of Telly to sort it out.

73 This contemporaneous email exchange between Mr Babicci and Mr McNab conveys the clear impression that each of them was unaware of any gold transaction activity being undertaken by Mr Nicolaou on behalf of the participants in the February 2010 agreement, or involving them.

74 On Monday, 12 September 2011, Mr Babicci promptly transferred the whole of the funds that Focus Metals had deposited in his NAB account across to his "line of credit" account with the NAB (BSB: 082-401 Account no.: 53-949-7890) ("the line of credit account").

75 On the next day, Tuesday, 13 September 2011, Mr Babicci made contact by email with Mr Jesse McPherson, a Private Client Manager, at NAB Private Wealth. He referred to some payments that had been made to his trading account by Focus Metals and said they related to "a company that I am a shareholder and director of". Mr Babicci suggested that, as "[o]ne of the ex-directors of that company might try and contest the payments, please let me know if you hear anything." Mr McPherson responded that if he was approached he would be bound by privacy details and not be able to give them any information.

76 Mr Babicci then followed up with a further email that same day to Mr McPherson, providing more background information. He stated that:

This is our small gold business that we have in PNG. We had a director that did some silly stuff last year and we had to exit him. He is still owing us some money and it looks like he might have started trading under his own account but using our company name.

Likewise, Focus Metals has quoted confidentiality clauses and privacy requirements to us, so we will just see if anything comes out of the woodwork. Let me know if you hear anything.

The terms in which this response is framed do not convey the impression that Mr Babicci believed that the recent gold refining and purchasing activities that Mr Nicolaou had been conducting were being undertaken on behalf of the participants in the February 2010 agreement or involved Mr Brunner, Mr McNab and Mr Babicci in any way. Rather, the use of the language "we had to exit him" suggests that Mr Babicci held the view that Mr Nicolaou was no longer a current participant in their "small gold business". Further, it conveys the impression that Mr Babicci thought it was likely that Mr Nicolaou was trading on his own account but using "our company name", presumably a reference to Exara Limited, even though Mr Nicolaou was actually at all times, and remained, the managing director and substantial shareholder of Exara Limited.

77 Later that day, Mr McPherson emailed Mr Babicci and asked him to call. Mr Babicci forwarded that email, without any covering message, to Mr McNab. By this time, Focus Metals had also become aware that the proceeds of the September 2011 transaction had been paid into the wrong bank account and it was separately following the matter up with the NAB and seeking a reversal of the transfers.

78 Mr McNab said that he telephoned Ms Balogh immediately after he had been told by Mr Babicci that he had received the payment from Focus Metals "because it occurred to [him] that it may have been that that payment was in relation to a totally unrelated transaction" and that they might have "pressed a wrong button on a computer."[47] He said:

I rang Yvonne [Balogh] and I said, "Yvonne, I'm presently at the NAB. I'm just ringing about the recent transaction. I want to confirm that it's an Exara transaction." And she said, "Yes, well, yes, Mr McNab, it is. But look, I'm very sorry. It's gone to the wrong account," or words to that effect. And I said, "No, no, it's gone to the correct account. It's the account that is to be used for Exara transactions." And she said something along the lines of, "Well, Telly forgot to change the instructions." And I said, "No, no, it's gone to the right account. I'll take the matter up with Telly."[48]

79 Following a telephone conversation between Mr McNab and Ms Balogh on the morning of Wednesday, 14 September 2011, Ms Balogh also forwarded him a copy of her email exchange with Mr Rose at the NAB. Mr McNab then contacted Mr Babicci and forwarded that email exchange to him by way of an update on developments. In his covering email, Mr McNab informed Mr Babicci as follows:

I spoke with Yvonne today and she kindly sent me this email.

Telly has told her that the money should have been paid to "Empire t/as Exara Gold" and she said that she has asked her bank to seek reimbursement from the account that the money has been paid to.

I told her that it didn't seem to me that the money had gone to the wrong account and that I would be taking the matter up with Telly.

It seems to me that it would be sensible for us to get off on the front foot against Telly. I'll do some searches and see if I can find out what new structures he has in place.

I'll also suggest to him that the way forward is to trade out of the problem and to stop doing stuff behind our back.

Contemporaneously, Mr McNab also sent an email to Ms Balogh, thanking her for forwarding the email chain and saying that he would take the matter up with Mr Nicolaou.

80 Later that morning, Mr McNab contacted Mr Nicolaou by email. He said:

I've heard from Kris that his Exara loan account has been repaid. This is good, but it would be useful if you would keep us informed about what you are doing.

We have an opportunity to bring in a further 36kg - it's in Mount Hagen and I'm told that it can be done on a consignment basis. Are you able to meet at your place at say 2.00pm tomorrow with Gayle Daisley and myself (and Jon) to discuss?

81 Mr Nicolaou responded by email a few minutes later. He pointed out to Mr McNab that the amount of money transferred to Mr Babicci's account was "a mistake wrong transfer via Focus Metals" and that the funds "have to be returned asap".

82 At the same time as Mr McNab was emailing Mr Nicolaou, he was also communicating by email with Mr Babicci. He laid out his "on the front foot" strategy to Mr Babicci as follows:

Telly will obviously come chasing the money when Focus's bank gets back to them, so I'm getting off on the front foot. He seems to have incorporated a new company Exara Gold Pty Ltd (and [sic.] Australian company) and there is an Exara Gold business name as well, I'll have the searches this arvo.

Anyway, I've confirmed with Gayle Daisley that the 36kg deal is still available. The obvious solution to everyone's issues is for that deal to go ahead using Exara's export licence. I want to use that deal as leverage to wrap up what might otherwise be a messy drawn out argument - payment under mistake, interpleader, blah blah. Assuming that the overpayment is about $20K if we tip in another $20K that would just about be enough to fund the $36kg [sic.] deal. In simply [sic.] terms (subject to your instructions) we cut a deal with Telly that he stops claiming that the payment went to the wrong account on the basis that we cut him in (and kick back some funds) on the 36kg. That leaves us $126K better off than last week without any arguments and a prospect of some further profits if the 36kg actually works (and I suspect that might - at least in part).

We need to quickly do the maths about how much Exara has overpaid.

Focus Metals contends that in this email, sent to Mr Babicci mid-morning on 14 September 2011, Mr McNab demonstrates clear knowledge of the payment by Focus Metals having been made by mistake.

83 Later on 14 September 2011, Mr Rose of the NAB communicated by email with Mr McPherson and others at NAB. He attached the NAB online payment advices along with an email from Focus Metals requesting that the payments be recalled. Mr McPherson responded, saying that he had been in contact with Mr Babicci and advised that Mr Babicci was not prepared to authorise the return of the funds and that there were potential legal matters pending. Mr Rose acknowledged that response and informed Mr McPherson that he would advise Focus Metals accordingly.

84 On 14 September 2011, Mr Babicci also responded to Mr McPherson's earlier request by email that he contact him. Mr Babicci informed him that regarding the payment from Focus Metals "we have found that this was our ex-director trading without authority." He said that Mr McNab, is "reaching an agreement for a refund" and that he wants to "send money back using internet banking today." Mr Babicci then made arrangements with the NAB to facilitate the transfer to Mr McNab of the money to be refunded.

85 In subsequent emails exchanged on 14 September 2011, Mr Babicci said that he would send Mr McNab his workings and bank statements, and his calculation of the "refund" due - $32,828.40 - as follows:

I have calculated interest on principal outstanding at the prevailing rates of my Line of Credit account with NAB plus 1.0%pa - on a simple interest basis - total is $18,257.27

Expenses for the visit to Pattaya, includes airfare, accommodation and entertainment, $5,624.73.

Total owing to me is $133,859.93

The amount credited to my account by Focus Metals was $166,688.33

Refund due is $32,828.40, let me know who to make it out to and I'll send a cheque.

86 In response to the question raised in the last sentence of Mr Babicci's email, Mr McNab provided details of his own NAB account (BSB: 083 054 Account no.: 18-725-4499) ("Mr McNab's NAB account") that same day. Mr Babicci responded and said that, because of the daily limit on transactions, he would send Mr McNab $12,828.40 that day and $20,000 the next day. Mr Babicci then made the transfers from his line of credit account, describing each of the internet transfers as "refund". Mr McNab gave no consideration for either payment. The following day, being 15 September 2011, Mr McNab confirmed with Mr Babicci that he had received all of the money and would keep him posted. He added that Mr Nicolaou had cancelled the meeting that was scheduled to take place that afternoon to discuss the Mt Hagen opportunity.

87 A week or so passed without any developments. In an email sent to Mr McNab on 23 September 2011, Mr Babicci observed that they had heard nothing more from Mr Nicolaou and commented that it was "hard to believe if it has gone away so easy."

Empire Distributors demands that Focus Metals makes payment of the $166,688.33 due

88 By letter dated 23 September 2011, the solicitors for Empire Distributors, HWL Ebsworth, sent a formal Letter of Demand to the solicitors for Focus Metals seeking payment of the sum of $166,688.33 by Monday, 3 October 2011.

89 On 23 September 2011, Mr McPherson contacted Mr Babicci by email to let him know that "[t]he wolves are howling again". He said that he had been contacted by Focus Metals and he enquired whether Mr Babicci was on top of recent events. Mr Babicci responded, and let Mr McPherson know, that the matter is "with Bruce and under control". A day or so later, Mr Babicci followed up with Mr McNab by email, forwarding a copy of Mr McPherson's email to him, and suggested that they should "talk tomorrow to see where we are going to take this".

90 On 26 September 2011, Mr Cooklin made contact with Mr McPherson at the NAB to "officially inform the NAB" that he had lodged a police report and to request that he "freeze the funds that [Focus Metals] sent in error." Mr McPherson responded by email, thanking him for the information and informing him that he was not able to freeze the funds on the advice of a third party.

91 Later that day, Mr McPherson made contact with Mr McNab and requested that he "get confirmation from Kris [Babicci] that you're acting for him in this matter" so that he could put Mr McNab in touch with the NAB's legal department. A short while later, Mr McNab emailed Mr McPherson and confirmed that he was acting for Mr Babicci.

92 Earlier that day, Mr McNab and Mr Babicci had been discussing what approach they should make to Focus Metals following an attempt made by Mr Cooklin the preceding weekend to contact Mr Babicci via his elderly mother. Those discussions led to Mr McNab sending an email to Ms Balogh at Focus Metals addressed to "Mr Coghlan" (intended for Mr Cooklin), in the following terms:

Re Exara deposit.

I understand that in telephone discussions with Mr Babicci's elderly mother, you have threatened police action in the event that the money deposited to Mr Babicci's account is not returned to Focus Metals.

I have already confirmed with Yvonne Balogh that the funds in question were the proceeds of the smelting of some material imported from PNG by Exara. She has also told me that the issue which has arisen is that Mr Nicolaou did not advise Focus that the proceeds of his latest transaction ought be paid to a different account.

We do not consider that the payment has been made to the wrong account. Exara (and Mr Nicolaou personally) has owed the debt to Mr Babicci for a considerable time and it was long overdue for repayment. We have emailed Mr Nicolaou about the matter and offered to meet with him, but after initially accepting the suggestion he is now refusing to meet.

Under the circumstances I (a) request that you refrain from troubling Mr Babicci's elderly mother about the matter and (b) suggest that you leave the issue to Mr Nicolaou and Exara to sort out.

Focus Metals commences Supreme Court proceeding seeking freezing orders

93 On 26 September 2011 or thereabouts, Focus Metals sought and obtained ex parte before Justice Kaye a freezing order preventing Mr Babicci and the NAB from removing, disposing, dealing with or otherwise encumbering all or any part of the moneys standing to the credit of Mr Babicci's NAB account up to the unencumbered value of $166,688.33. Thereafter, Focus Metals commenced this proceeding by a generally Indorsed Writ naming Mr Babicci and the NAB as defendants, and seeking freezing orders, payment of the sum of $166,688.33, and further or alternatively, a declaration that Mr Babicci holds the sum of $166,688.33 that Focus Metals paid to him on trust for Focus Metals.

94 Once the freezing order was in place, Mr Cooklin informed Mr McPherson and others at the NAB that it had been made and requested that they confirm that "the funds will not be transferred from this account." Mr McPherson notified Mr Babicci, and he in turn Mr McNab, who then discussed this development with Mr McPherson by email.

95 At the time when the freezing order was made, neither Focus Metals nor the Court was aware that the whole of the amount paid by Focus Metals had already been transferred from Mr Babicci's NAB account and deposited into his line of credit account. This remained the position on the first return of the freezing order on 28 September 2011, and on the extension of the freezing order on 24 October 2011, even though Mr McNab appeared on each occasion in his capacity as Mr Babicci's solicitor and had by then received (in his personal capacity) the payments made by Mr Babicci from his line of credit account totalling $32,828.40.

96 On 20 December 2011, when the freezing order came on for hearing before Justice Kyrou, his Honour expressed his "concern that the money was taken out of the NAB account fairly quickly and details of what occurred was not disclosed to the Court on a timely basis."[49] The fact that the entirety of the moneys had been transferred out of the account was only revealed to Focus Metals when it later obtained documents it had subpoenaed from the NAB. His Honour said:

Now in this case the thing that's caused me the greatest concern is that the moneys that were deposited in the account with the National Australia Bank, were almost immediately to the cent, taken out and beyond the reach of the freezing order that was subsequently made.

On the continuation of the freezing orders and subsequent appearances before the court, the court was allowed to proceed on the false assumption that the amount remained in that account without timely information being brought to the court's attention that the court's processes were rendered nugatory by virtue of that amount having been taken out.[50]

97 Mr McNab responded and sought to explain to his Honour what had occurred:

MR McNAB: ...perhaps if I could say I'm instructed that the money that was in the account was simply applied against the line of credit Your Honour. It wasn't - - -

HIS HONOUR: But it's beyond the reach of the plaintiff. Isn't that the point? It doesn't matter whether it's shipped overseas or not.

MR McNAB: Yes, the transaction occurred simply as part of ordinary prudent financial arrangements before the freezing orders applied...[51]

However, Mr McNab did not inform the Court that Mr Babicci had also paid him the sum of $32,828.40 from his line of credit account by way of "refund". Indeed, Focus Metals did not become aware of that fact until September 2012 when it obtained the subpoenaed bank documents from the NAB.

98 On 20 December 2011, Kyrou J made orders varying the freezing orders so as to restrain Mr Babicci from dealing with two Australian properties that he owned and with any bank accounts held with the NAB.

Empire Distributors commences a proceeding against Focus Metals in the County Court

99 On 6 October 2011, no payment having been made by Focus Metals in response to the solicitors' letter of demand, Empire Distributors commenced a proceeding by Writ issued in the County Court of Victoria seeking payment of the debt of $166,688.33. The Writ and Statement of Claim were served on Focus Metals' solicitor on 7 October 2011.

100 Mr Cooklin gave evidence that following service of the proceeding brought by Empire Distributors, he consulted with Focus Metals' solicitor and obtained advice from two barristers. He did not detail the substance of the advice but said that he was advised by several barristers and solicitors that Focus Metals should repay the money to Mr Nicolaou. He discussed the matter with the directors and they determined to follow that advice. To that end, Focus Metals entered into the Deed of Release with Empire Distributors, Exara Limited and Mr Nicolaou, without any admission of liability, and repaid the sum of $166,688.33 to the solicitors for Empire Distributors on 7 November 2011.

101 On 14 November 2011, Orders were made in the County Court by Judge Lewitan, striking out the proceeding without adjudication and with no order as to costs.

Mr McNab seeks to obtain evidence in support of Mr Babicci's claim for repayment of his loan

102 Behind the scenes, on 5 October 2011 or thereabouts, Mr McNab made contact with Mr Kaman Denge, whom he apparently understood to still be a director of Exara Limited, seeking to have him provide some support for Mr Babicci's claim for repayment of his loan. Mr McNab followed up with emails on 5 October 2011, 7 October 2011 and 21 November 2011, but Mr Denge did not reply to any of them.

103 On 6 October 2011, Mr McNab forwarded the 5 October 2011 email exchange with Mr Denge to Mr Babicci and commenting as follows:

Just FYI. This is the email I've sent to Kaman - I expect a reply from him shortly.

I enclose Focus's new Statement of Claim. It's quite odd that they seem to think that they can avoid all of the Exara emails and instructions and pretend that their instructions came from Empire Distributors. No mention (for instance) of the written Exara contract (attached) etc etc etc. Also no mention of the Exara Ltd invoice which was raised (and which they paid by directing the payment to your account).

Jon is digging out all his emails with Focus also.

Seems to me that on any basis Exara must be the principal in the transaction and even if Empire was giving instructions it was doing so as agent on Exara's behalf.

104 Contrary to Mr McNab's expectation, no response was forthcoming from Mr Denge.

105 Against that background, Focus Metals' claim proceeded to trial.

106 Before turning to consider the three main issues raised for decision, l shall summarise the relevant legal principles.

107 Where money is paid under a mistake of fact, the person paying the money (the payer) may recover it from the recipient in an action for money had and received. In Australia & New Zealand Banking Group Limited v Westpac Banking Corporation[52] the High Court clarified that the basis of the common law action for money had and received for recovery of money paid under fundamental mistake of fact should now be recognized as lying in restitution or unjust enrichment rather than in implied contract. The Court, in a joint judgment,[53] stated:

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 the unjust enrichment, to the person who has sustained the countervailing detriment.[54]

108 The Court continued, to point out that the action for recovery itself is not one for the enforcement of a trust or for tracing or the recovery of specific money or property. Rather, the Court explained:

It is a common law action for recovery of the value of the unjust enrichment and the fact that specific money or property received can no longer be identified in the hands of the recipient or traced into other specific property which he holds does not of itself constitute an answer in a category of case in which the law imposes a prima facie liability to make restitution. Before that prima facie liability will be displaced, there must be circumstances (e.g., that the payment was made for good consideration such as the discharge of an existing debt or, arguably, that there has been some adverse change of position by the recipient in good faith and in reliance on the payment) which the law recognizes would make an order for restitution unjust.

The prima facie liability to make restitution is imposed by the law on the person who has been unjustly enriched.[55]

109 A few years later, in David Securities Pty Ltd v Commonwealth Bank of Australia,[56] the High Court made clear that, where a qualifying or vitiating factor such as mistake of fact or law is established by the payer, there is a prima facie liability on the recipient to make restitution, and the recipient is entitled to raise by way of defence any matter or circumstance that will demonstrate that the receipt or retention of the payment is not unjust. In their joint judgment, Mason CJ, Deane, Toohey, Gaudron and McHugh JJ summarised the applicable principles as follows:

The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognises would make an order for restitution unjust.[57] There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust.[58]

110 In David Securities, the Court also clarified that it is no longer necessary for the payer to prove that the mistake was "fundamental"; rather what the payer must prove is that the mistake caused the payment to be made and also the extent of the mistaken payment.[59]

Constructive trust arising from the retention of a mistaken payment

111 In the present case, Focus Metals argued for the imposition of a constructive trust as a result of the making of the alleged mistaken payment. Focus Metals contended that:

1. where money is paid by mistake, the payee's conscience is bound upon becoming aware of the mistake; and

2. the law recognises that where a payee retains moneys known to have been paid by mistake, and for which there was no consideration, a constructive trust arises from the retention of those moneys from the time the payee acquired such knowledge.

112 Focus Metals relied on the decision of White J in Wambo Coal Pty Ltd v Ariff[60] as authority for the proposition that once the payee has knowledge of the mistake, it would be against conscience for the payee to use that money as his or her own. Wambo Coal is also authority for the proposition that a proprietary remedy is appropriate "once the recipient is aware that, by a mistake, he has got something for nothing."[61]

113 In Wambo Coal, White J held that the requisite knowledge required of a payee who is paid by mistake is the same knowledge as is required to render a third party liable under the second limb of Barnes v Addy.[62] That is, a payee will be treated as having knowledge of a payment if he or she has:

(b) wilfully shuts his or her eyes to the obvious; or

(d) has knowledge of circumstances which would indicate the facts to an honest or reasonable person.[63]

114 Focus Metals also relied on the later decision of White J in Credit Union Australia Ltd v Lyons[64] and the decision of the New South Wales Court of Appeal in Shields v Westpac Banking Corporation[65] as examples of cases where the court has found it appropriate to grant relief by way of a constructive or resulting trust.

115 In Credit Union Australia Ltd v Lyons, funds had been withdrawn from a line of credit account that was not closed, due to an administrative oversight. The plaintiff had allowed the drawings to take place on the line of credit account because it was acting under a mistake that the account was still secured. When it became aware of its mistake, the plaintiff commenced proceedings seeking to recover the moneys that were withdrawn by the defendants, contending that it should be inferred that they knew of the mistake, and that the moneys so paid out were held on trust for the plaintiff. Relevantly, His Honour found that the:

moneys received by the defendants from the accounts, with knowledge that they were permitted to be drawn as a result of the mistake, when the monies were paid without any consideration passing from the defendants to the plaintiff other than the original promise made by the first defendant in her loan agreement, were at that time impressed with either a constructive or resulting trust in favour of the plaintiff.[66]

116 Furthermore, as certain amounts of the payments made in that case could be traced as having been used to reduce the mortgage debts secured over properties acquired by the first defendant, his Honour said that the court "may treat those lands as charged with the payment to the plaintiff of the amounts so applied."[67]

117 In the present case, Focus Metals seeks to recover the whole of the moneys the subject of the mistaken payments from either Mr Babicci or from both Mr Babicci and Mr McNab. Focus Metals contended that both Mr Babicci and Mr McNab knew of the mistake at or shortly after the time of receipt and, instead of repaying the funds, have sought to justify their retention of the proceeds.

118 In the case of the two payments made by Mr Babicci to Mr McNab, Focus Metals contends that Mr Babicci held the sum of $166,688.33 subject to a constructive trust, and that when he transferred the sum of $32,828.40 to Mr McNab, he did so in breach of trust. In those circumstances, it was said that the disposition of trust property to a third party recipient in breach of trust may give rise to two remedies:

(a) a proprietary remedy in respect of the trust property and its traceable proceeds subject to the defence of bona fide purchaser for value without notice;[68] and

(b) personal liability for equitable compensation, where the recipient has notice that it is received in breach of trust.[69] Focus Metals contends that Mr McNab had the requisite knowledge.

The proprietary remedy contended for is distinct from the personal liability.[70]

119 As noted above, where a party pays money to another as a result of a mistake, the payer is prima facie entitled to its restitution. To displace that prima facie liability, the recipient must identify matters or circumstances which the law recognises would make an order for restitution unjust[71] and the enriched party has the onus of demonstrating that his or her receipt (or retention) of the payment is not unjust. In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd,[72] Einstein J observed that it "is not a defence to claims for recovery of mistaken payments (based on mistake of fact) that the defendant(s) honestly believed in his or her entitlement to receive or retain money mistakenly paid".[73]

120 Similarly, where a payment is made for a consideration that has wholly failed, and the money so paid is sought to be recovered by the payer on the basis of money had and received, nowadays it would also be prima facie recoverable in restitution.[74] Even in the absence of knowledge, a party who receives money as a result of mistake is liable in an action for restitution or in an action for money had and received.[75] In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd Einstein J set out the three essential elements of an unjust enrichment claim as being that:

2. the benefit must be unjust in a legal sense; and

3. the benefit has to have been made at the plaintiff's expense.[76]

121 In David Securities, the respondent bank had received moneys in respect of certain foreign currency loans that were claimed to have been paid over under a mistake of law, the payer believing that the relevant loan agreements were valid and enforceable. The bank contended, by way of defence that first, the payments by the appellants were made for good consideration, and secondly, that in reliance upon receipt of the payments the bank, in good faith, had changed its position to its detriment. Their Honours noted[77] that these "defences" were included in the well-known formulation of the applicable principles by Goff J in Barclays Bank Ltd v W.J. Simms Son & Cooke (Southern) Ltd.[78] Therein, his Lordship stated:

[C]ertain simple principles can, in my judgment, be deduced: (1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. (2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or; (c) the payee has changed his position in good faith, or is deemed in law to have done so.[79]

122 The circumstances that would make an order for rectification unjust, in the context outlined in Goff J's proposition 2(b) above where a payment is made for good consideration to discharge a third party debt, were considered in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd.[80] The President of the Court of Appeal, Allsop P (with whom Bathurst CJ and Meagher JA agreed), in the context of addressing defences to restitution and the circumstances which the law recognises would make an order for restitution unjust, explained the position that applies with respect to the discharge for value of a third party debt.[81] His Honour said:

The question arises whether the defence, to the extent it should be recognised in Australia, is limited to the circumstance where the payer intends to make the payment to the payee on account of the debt of the third party (leaving to one side the distinction that may be made as to whether the debt is real or void: compare the majority and minority in Porter, or compare Gaffner with Shawmut Bank). The expression of the matter in proposition (2)(b) in Barclays Bank appears to require the intention of the payer to pay off a debt for there to be "good consideration". Further, the third party's authority or ratification is required for there to be a discharge, by the payment. So much can be accepted as an expression of how a payer's payment, of itself, can discharge the debt of another. Barclays Bank, Porter, Aiken, Gaffner, and Shawmut itself (as long as the underlying debt is real) can be taken as authority for this proposition. Implicit in all these cases is the proposition that discharge of the debt of the third party debtor, achieved by the payment, so intended and so received and with authority, makes restitution to the payer unjust or retention by the payee not unjust. No additional act of prejudice, such as giving up security, or other change of position is required. These cases can be rationalised in a way that makes the payer's intention relevant as reflecting the bargain or exchange that it was making and what it intended to achieve. But what is essential for there to be consideration or value is the question of discharge of the third party's debt. If that has occurred, by the payment, the law will consider repayment unjust. One way that the discharge of debt is brought about (by the payment itself) is by the circumstances underlying Barclays Bank principle (2)(b) being present.[82]

123 In his (generally) concurring judgment, Meagher JA also considered the defence of payment made for good consideration. He noted that the defence of valuable consideration was recognised in ANZ v Westpac[83] and in David Securities[84]. However, his Honour found that "as formulated and recognised, that defence does not extend to the circumstances of Hills and Bosch"[85]. As Australian Financial Services and Leasing Pty Ltd's ("AFSL's") payments were not made to discharge Total Concept Projects (Australia) Pty Ltd's ("TCP's") debts to Hills and Bosch, he found that the payments AFSL made to them "were not paid or received in the circumstances described in [Goff J's] proposition 2(b)"[86] (TCP being a company associated with Mr Skarzynski, who had generated fake invoices for the purchase of non-existent equipment from Hills and Bosch). Meagher JA did not agree with Allsop P that Hills and Bosch were entitled to succeed on the basis of a separate defence of bona fide discharge of debt.[87] His Honour held that the discharge of the debts owed to each of them by TCP was equivalent to each of them paying the monies received from AFSL to TCP and receiving the money back in discharge of the debt.[88]

124 Meagher JA also made observations on the good faith requirement, noting that knowledge of a mistake or circumstances which raise questions as to entitlement may be relevant to good faith. His Honour said that in that case before him it was not suggested that either of the recipients of the payments dealt with the receipts with knowledge of the mistake or in circumstances which raised questions as to their entitlement to retain and apply the payments in discharge of the relevant debts. Rather, the issues were whether they had established detriment or prejudice as a result of their doing so and whether that detriment or prejudice could be quantified sufficiently to provide a complete or partial change of position defence.[89]

125 When the present case was argued, the High Court had heard and reserved its decision on AFSL's appeal from the decision of the Court of Appeal in Hills Industries. The High Court delivered judgment on 7 May 2014, unanimously dismissing the appeal.[90] Neither of the parties in the present case sought leave to make any further submissions following delivery of judgment.

126 The substantial issue on the appeal to the High Court, was the "change of position" defence. AFSL argued that the debts owed by TCP to Hills and Bosch were worthless because TCP was unable to pay and that the opportunities to recover payment by enforcing or securing repayment were therefore of minimal value. Accordingly, AFSL said it would be unjust to permit Hills and Bosch to retain the whole of the mistaken payments. A majority of the Court held that the relevant enquiry was whether retention of the monies by Hills and Bosch would be inequitable in all the circumstances. The Court concluded that, in the circumstances of the case, if Hills and Bosch were required to repay AFSL, the disadvantages that would enure to them were such that it would be inequitable to require them to do so.

127 AFSL sought to rely upon ANZ v Westpac, where a distinction was drawn between a case in which the change of position was constituted by a payment that had involved a true parting with money and a case where there was no physical payment but a credit entry which had been made in the books of the recipient for or on behalf of another party. Their Honours in the majority (Hayne, Crennan, Kiefel and Keane JJ) said it was not accurate to characterise the payments to Hills and Bosch as "bare receipts" or "mere book entries". Further, they observed that it was "an unattractive aspect" of the approach urged by AFSL that a recipient who honestly appropriates a payment to discharge a debt owed to it is in the same position, so far as the change of position defence is concerned, as a recipient who receives a payment by way of advance against the supply of goods in the future.[91] But, they added:

Even if it were accepted that AFSL neither entertained, nor expressed, an intention to discharge TCP's debts to Hills and Bosch, it is nevertheless the case that, as between each of Hills and Bosch on the one hand and TCP on the other, the payments were made and applied to discharge TCP's indebtedness to Hills and Bosch. Even if the discharges were legally reversible for some reason, such as TCP's fraud against AFSL, the consequence of such a reversal would be that Hills and Bosch would become unpaid creditors of TCP in its liquidation. In a practical sense, the receipts had consequences for Hills and Bosch beyond the simple fact of the receipt and these consequences were irreversible as a practical matter of business. Moreover, neither Hills nor Bosch was able to reverse the consequences of its decision to continue trading with TCP and the commercial risks that decision entailed.[92]

128 When considering the "other issues on appeal", the majority approved of the observation made by Meagher JA in the Court of Appeal that AFSL's payments were not made to discharge TCP's debts to Hills and Bosch (and were not paid in the circumstances envisaged by Goff J in Barclays Bank[93]) but were rather paid to discharge debts that AFSL thought it owed to them.[94] However, their Honours regarded Meagher JA's alternative basis for rejection of AFSL's claim (i.e. treating Hills and Bosch as if they had advanced the amount of their respective debts to TCP and then received payment back) as being "somewhat artificial", in light of the fact that neither creditor had made a decision to make a fresh advance to TCP.[95]

Did Focus Metals make the payments under a mistake of fact?

Focus Metals contended that payment was made as a result of an oversight and a clerical error

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