Sanwa Australia Finance Ltd v Finchill Pty Ltd, GIO Finance Ltd v Finchill Pty Ltd

Court of Appeal (NSW)|2001-09-03|Before: Beazley JA, Heydon JA

CITATION : Sanwa Australia Finance Ltd v Finchill Pty Ltd, GIO Finance Ltd v Finchill Pty Ltd [2001] NSWCA 466 FILE NUMBER(S) : CA 40340/00; 40341/00 HEARING DATE(S) : 3 September 2001 JUDGMENT DATE : 13 December 2001

Sanwa Australia Finance Limited PARTIES : GIO Finance Limited Finchill Pty Ltd JUDGMENT OF : Beazley JA at 1; Heydon JA at 2; Davies AJA at 3

LOWER COURT JURISDICTION : District Court LOWER COURT 7944/98; 6837/98 FILE NUMBER(S) : LOWER COURT Balla ADCJ JUDICIAL OFFICER :

COUNSEL : Appellant: M Cashion SC/T M Thawley Respondent: P Finch SOLICITORS : Appellant: Kemp Strang Respondent: James A Moustacas & Co CATCHWORDS : Conversion - Unjust Enrichment - Cheques LEGISLATION CITED : Cheques Act 1986 Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 National Australia Bank Ltd v KDS Construction Services Pty Ltd (1987) 163 CLR 668 CASES CITED: Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd (2000) 155 FLR 267 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68 DECISION : Appeals allowed

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA 40340/00; DC 7944/98 CA 40341/00; DC 6837/98 BEAZLEY JA HEYDON JA DAVIES AJA

Thursday, 13 December 2001 SANWA AUSTRALIA FINANCE LTD v FINCHILL PTY LIMITED GIO FINANCE LTD v FINCHILL PTY LIMITED

FACTS The appellants were two finance companies who financed three purported purchases of goods by Alpha Pty Ltd from the respondent. Sanwa provided finance by way of a lease agreement. GIO provided finance by way of an asset purchase agreement. In all other relevant respects the transactions were identical.

In each, Alpha advised the respondent of goods it wished to purchase and requested the respondent to forward an invoice to the respective appellant. The respondent did so. On each occasion, the respective appellant issued a cheque to the respondent and gave it to the director of Alpha for delivery to the respondent. The director of Alpha requested the respondent to endorse the cheque to it, which the respondent did. However, at no time did Alpha place a formal order for the goods with the respondent, advising on each occasion that it had been able to obtain the goods elsewhere.

It was accepted at trial that the appellants had been subject of a fraud committed by Alpha. The respondent was not implicated in the fraud.

The trial judge held that the provision of the invoice by the respondent to the appellants constituted an offer but that the tender of the cheques was not an acceptance. On appeal the appellants argued that the provision of a cheque did constitute an acceptance. They said the acceptance gave rise to a contract between the appellants and the respondent and the failure to provide the goods was a total failure of consideration.

HELD (per Davies AJA, Beazley and Heydon JJA agreeing) (i) Without there being an order from Alpha to the respondent for the goods, the whole substratum on which any contractual relationship could exist fails. As there were no contracts as between Alpha and the respondent, there could be no contracts as between the appellants and the respondent: Hunter BNZ Finance v C G Maloney Pty Ltd (1998) 18 NSWLR 420.

(ii) The appellants had a right of recovery against the respondent arising from the conversion of their cheques and from the principles of unjust enrichment.

(iii) The payments which the appellants received from Alpha must be taken into account whether the cause of the action be looked at as damages for conversion or recoupment of unjust enrichment.

(ii) The judgment and orders of the trial Judge are set aside;

(iii) The parties are to bring in agreed minutes of order as to the judgment sums within seven days of the date of judgment;

(iv) In the absence of agreement, the parties are to re-list the matter for future directions prior to 21 December 2001;

(v) The respondent is to pay each appellant's costs of the trial and of the appeal but is to have a certificate under the Suitors' Fund Act 1951 (NSW), if so entitled. The parties should have the opportunity to confer and, if possible, to agree as to the sums which should be deducted from the amounts of the proceeds of the cheques. ********** IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA 40340/00; DC 7944/98 CA 40341/00; DC 6837/98 BEAZLEY JA HEYDON JA DAVIES AJA Thursday, 13 December 2001 SANWA AUSTRALIA FINANCE LIMITED v FINCHILL PTY LIMITED GIO FINANCE LIMITED v FINCHILL PTY LIMITED JUDGMENT 1 BEAZLEY JA: I agree with Davies AJA. 2 HEYDON JA: I agree with Davies AJA. 3 DAVIES AJA: These are appeals from judgments of her Honour Acting Judge Balla, an Acting Judge of the District Court of New South Wales, given in two proceedings brought by finance companies against a supplier of refrigeration equipment and its director. In one proceeding, Sanwa Australia Finance Limited ("Sanwa") sued Finchill Pty Limited ("Finchill"), which traded as Ezray Refrigeration, and its director, Angelo Pandol. In the other proceeding, GIO Finance Limited ("GIO") sued Finchill and Mr Pandol on like claims. The learned trial Judge dismissed the claims. The appeals raise the issue of the liability of Finchill, it being conceded that the claims against Mr Pandol were properly dismissed. 4 The proceedings below were difficult both in their factual and legal aspects. The factual issues were complex, for Mr Pandol was a crucial witness. He was, as the trial Judge held, "a very unsatisfactory witness". Much of his evidence was rejected. 5 On the legal side, although the facts gave rise to issues of unjust enrichment and restitution, the pleadings simply alleged that there had been a contract between each finance company and Finchill for the supply by Finchill of refrigeration equipment to Alpha Foods Services Pty Limited ("Alpha"), the property in which goods was to pass to the finance company. The statement of claim in each proceeding claimed that Finchill failed to deliver the goods to Alpha and there was thereby a failure of consideration for the payments made by the finance companies to Finchill. 6 In my opinion, there was no relevant contract between either finance company and Finchill and, if the appellants are entitled to succeed, it is on a basis other than that pleaded. 7 Sanwa, GIO and Finchill were each the subject of a fraud committed by Pierre El Haj, a director of Alpha. Sanwa had two transactions. In May 1995, Mr El Haj sought finance from Sanwa for the supply by Finchill to Alpha of certain pallet and shelving equipment, the finance to be provided by means of a lease arrangement. Mr El Haj provided Sanwa with an invoice issued by Finchill specifying the equipment to be provided for a price of $34,865. The invoice was directed to Sanwa and noted that delivery was to be made to Alpha. On the following day, a cheque for $34,865 was drawn by Sanwa in favour of Finchill or bearer. 8 In February 1996, there was a similar transaction with respect to a new freezer room, a condensing unit and an evaporator coil for a price of $83,900. In respect of Finchill's invoice, Sanwa, on 6 February 1996, drew a cheque of $83,900 in favour of Finchill or bearer. 9 So far as GIO was concerned, Mr El Haj sought finance by means of an asset purchase arrangement. The amount involved was $49,800. GIO's cheque was dated 25 September 1995 and was drawn in favour of Finchill or order. No invoice was tendered in evidence but evidence was given by an officer of GIO that GIO would not have acted without having an invoice from Finchill in its files. That evidence was accepted by the trial Judge. 10 Accordingly, the position was that Mr El Haj represented to Sanwa that Alpha proposed to order goods from Finchill. As I have mentioned, he sought finance from Sanwa by way of lease arrangement. Sanwa agreed to provide that finance. The appropriate lease agreements were executed. Sanwa drew its cheques in favour of Finchill or bearer. So far as GIO was concerned, the transaction was an asset purchase arrangement. The agreement was executed and GIO drew its cheque in favour of Finchill or order. Neither finance company had any direct communication with Finchill. 11 In each of the three transactions, the relevant cheque was handed by the finance company to Mr El Haj for delivery to Finchill. 12 In his evidence, Mr Pandol spoke of the first transaction involving the supply of pallet shelving for $34,865. The trial Judge summarised his evidence as follows:- "The first defendant met the principals of Alpha through his accountant in 1995. In relation to the first goods he said that Pierre El Haj from Alpha came to his premises to obtain some pallet shelving and asked for a written quote addressed to Sanwa as he was borrowing money from Sanwa. At Pierre El Haj's request he subsequently made some changes to the quote. Pierre El Haj later came to his premises and said that he had asked Sanwa to make out the cheque to the second defendant but he had found someone who could deliver immediately and requested the first defendant to endorse the cheque, which he did. On cross examination the first defendant added that El Haj had said that Sanwa had okayed the transaction.

On cross examination the first defendant agreed that he understood that the effect of endorsing the cheque was to make the proceeds payable to Alpha rather than Ezray [Finchill]". 13 Mr Pandol denied that he endorsed the later two cheques. He said that Mr El Haj had, at various times, requested quotes for a freezer room and for other equipment but that he had not placed an order. 14 The trial Judge found that Mr Pandol had endorsed each of the three cheques making them payable to Alpha. The cheques were paid into Alpha's bank account and were met on presentation. Some moneys were paid by Alpha to Sanwa and GIO under the lease and the asset purchase arrangements. However, Alpha was insolvent and in liquidation at the time of the trial. 15 On the evidence before her, the trial Judge held:- "I find that the first defendant as a director of the second defendant prepared the documents which were forwarded to Sanwa and which have the word invoice on them. I further find that the first defendant prepared these documents at the request of Alpha Foods. However, regardless of the precise wording on the documents, I accept that the defendants did not believe that the goods had been ordered at that stage and that the documents were prepared in that form to assist Alpha to obtain finance from Sanwa. I also accept that the defendants were, at that stage, anticipating that an order would, at some time, be placed. I also find that the first defendant endorsed the cheques payable to Alpha at the request of Alpha. …

… I find that the circumstances leading up to the finalisation of the loan for the third goods, other than the financier's internal procedures, were similar to the other two transactions and that the first defendant as a director of the second defendant prepared the document which was forwarded to GIO, that it was prepared at the request of Alpha, that the defendants did not believe that the goods had been ordered at that stage and that the document was prepared to assist Alpha to obtain finance and that the first defendant later endorsed the cheque payable to Alpha at the request of Alpha." 16 As the trial Judge found, Mr El Haj committed a fraud. By making false representations, he persuaded Mr Pandol to endorse each of the three cheques to Alpha. The goods, which were the subject of the leasing agreements between Sanwa and Alpha and of the asset purchase agreement between GIO and Alpha, were not ordered and were not delivered. 17 The case put by counsel for the appellants was that each endorsement by Mr Pandol of a cheque constituted the acceptance by Finchill of the cheque and gave rise to a contract as between the finance company and Finchill for the delivery of the goods in accordance with the invoice which Finchill had prepared. In my opinion, no such contracts were formed. Mr Pandol had dealings only with Mr El Haj. Without there being an order from Alpha to Finchill for the goods, the whole substratum on which any contractual relationship could exist fails. There being no contract as between Alpha and Finchill, there could be no contracts as between the finance companies and Finchill. 18 Giles J expressed a similar view in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420. In that case, Hunter BNZ Finance Ltd ("Hunter") was the financier, C G Maloney Pty Ltd ("Maloney") was the defrauding party and Indent Imports Pty Ltd ("Indent") was the supplier. It had been proposed that Hunter would purchase goods from Indent and lease them to Maloney. As a result of Maloney's false representations, Indent had endorsed cheques coming from Hunter with the words, "Please pay C G Maloney" or "Please pay C G Maloney Pty Ltd". Giles J held that there was no contractual relationship between Hunter and Indent. At p 431, his Honour said:- "I do not think that Indent was a party to the transactions. In the circumstances I have set out above, Maloney was not the agent of Indent to bring about a sale of goods from Indent to Hunter. Mr Johnston and Mr Roberts dealt only with Mr Maloney, and knew of Indent, of the purported availability and sale of the goods, and of the destination of the cheques, only from what they were told by Mr Maloney orally or by provision of the invoices. 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)." 19 The case put for each appellant at the trial must therefore fail. However, it would, in my opinion, be unduly simplistic to decide the matter on the state of the pleadings at the trial. The evidence at the trial showed clearly that Finchill endorsed over to Alpha three cheques which it was not entitled to endorse and that Finchill thereby received payments which it was not entitled to receive. This is not a case where some defence could have been raised below which was not raised. The relevant facts were elicited in the evidence and referred to in the findings of the trial Judge. 20 The delivery of each cheque operated as a conditional payment, the payment being complete at the time when the cheque was accepted by Finchill, subject to non-fulfilment of the condition that the cheque be paid on presentation. See National Australia Bank Ltd v KDS Construction Services Pty Ltd (In liq) (1987) 163 CLR 668 at 676. In the present case, the cheques were so met. 21 The trial Judge held that there was no point at which the proceeds of any of the cheques were made available to Finchill and that the moneys were never received by Finchill. 22 These findings overlook the point that each cheque was a negotiable instrument. In each case, Finchill negotiated the cheque and endorsed it in favour of Alpha. By accepting delivery of the cheques and endorsing them, Finchill exercised the power of the holder in due course (see ss 28 and 29 of the Cheques Act 1986 (Cth)). By endorsing the cheques, Finchill purported to confer title to the cheques on Alpha. However, Finchill's own title was voidable and, by the statement of claim in each of the proceedings, that title was voided. 23 In Hunter BNZ Finance Ltd v C G Maloney Pty Ltd, Giles J made the following relevant findings at p 431:- "As a matter of principle, it seems to me that the transactions did give to Indent title to the cheques. Hunter intended that the cheques should go to Indent; Maloney intended that the cheques should go to Indent; and while Indent did not, on the facts before me, play any greater part than that of temporary holder of the cheques, Indent intended to receive the cheques (and then indorse them to Maloney or Mr Maloney, in this case the latter). Indent was an existing rather than fictional entity. Even though Hunter's intention was the result of the fraud practised upon it, there was a passing of property in the cheques."

His Honour continued at p 434:- "In the present case regard must be had to two matters. The first is that Indent was a volunteer. Indent gave nothing to Hunter or Maloney in return for the cheques, and in the view that I take was not a party to any transaction with Hunter. The second is that, although unknown to Hunter, Indent received the cheques only in order to, and in fact to, pass them on to Mr Maloney, and thus in a capacity akin to agent for Maloney or Mr Maloney.

Because of these two matters, it does not seem to me that rescission would cause any injustice to Indent."

And at p 437:- "The answers to these questions result in my acceptance of the position that the voidable title to the cheques which Indent obtained was avoided when Hunter rescinded the transactions by bringing these proceedings. Bringing the proceedings can constitute rescission: see, eg, Clough v London and North Western Railway Co (at 36); Alati v Kruger (at 222); the claim to damages for default under the lease agreement should be read as a fall-back position; cf Alati v Kruger (at 222) and Bosaid v Andrey [1963] VR 465 at 486." 24 This approach was approved by Bleby J in Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd (2000) 155 FLR 267. Bleby J said that the circumstances of the case before him were remarkably similar to those in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd. At p 273, Bleby J said:- "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." 25 Bleby J held, however, that, in the case before him, Orix Australia Corporation Ltd was not entitled to avoid the passing of title to the supplier of the goods, M Wright Hotel Refrigeration Pty Ltd. At p 275, Bleby J said:- "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." 26 In the present case, the finance companies were entitled to rescind the title which Finchill took and they did so effectively by their statements of claim. The circumstance of the change of position which influenced the decision in Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd does not apply in this case. Finchill did not supply any of the goods which were the subject of its invoices or otherwise provide consideration for the payments received. 27 In David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, it was held by Mason CJ, Deane, Toohey, Gaudron and McHugh JJ that a payer of moneys is prima facie entitled to recover moneys paid under a mistake, although it is a defence to such a claim that the payee has adversely changed his position in reliance on the payment. At p 375, their Honours said:- "If the ground for ordering recovery is that the defendant has been unjustly enriched, there is no justification for drawing distinctions on the basis of how the enrichment was gained, except in so far as the manner of gaining the enrichment bears upon the justice of the case.

… For the reasons stated above, the rule precluding recovery of moneys paid under a mistake of law should be held not to form part of the law in Australia. In referring to moneys paid under a mistake of law, we intend to refer to circumstances where the plaintiff pays moneys to a recipient who is not legally entitled to receive them."

At p 378, their Honours further said:- "So, the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment."

At p 379, their Honours said:- "Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognizes would make an order for restitution unjust ((1988) 164 CLR, at p 673)." 28 Brennan J took an even broader view at p 393. His Honour said:- "When a defendant receives a payment which he has no right to receive and which the plaintiff has paid to him by mistake, the injustice of the defendant's enrichment does not depend on the nature of the mistake that caused the payment to be made. Whether the plaintiff made a mistake of law or a mistake of fact, the defendant, having no right to receive the payment, is unjustly enriched by its receipt."

Dawson J expressed views similar to those of Mason CJ, Deane, Toohey, Gaudron and McHugh JJ. 29 On the facts found in the present case, the finance companies had a right of recovery against Finchill arising from both the conversion of their cheques, Finchill's title to the cheques having been voided by the statements of claim in the proceedings, and the principles of unjust enrichment. The payments made were made on the footing that the goods specified in Finchill's invoices were to be delivered by Finchill to Alpha. As Finchill was aware, at the time Mr Pandol endorsed the cheques, that it had no order from Alpha to supply the invoiced goods, Mr Pandol ought not to have accepted and dealt with the finance companies' cheques. It matters not that Mr Pandol may have acted in good faith and as a result of the fraud committed upon Finchill and upon the finance companies by Mr El Haj. Finchill, through Mr Pandol, dealt with the cheques in the circumstance that it had no entitlement to do so. 30 As between the finance companies and Finchill, there are no facts upon which it should be found that recovery by the finance companies would be unjust. Although the cheques were handed to Mr El Haj for delivery to Finchill, Mr El Haj was not a general agent for the finance companies and had no authority, actual or ostensible, to make the representations which he did. When Mr Pandol chose to accept and deal with each of the cheques, he did so at Finchill's risk. Because Alpha had not ordered the invoiced goods and Finchill did not intend to deliver them, Finchill had no right to deal with the finance companies' cheques. This is not a case where Finchill changed its position on the faith of the cheques. 31 I see no defence to the finance companies' claims other than to the extent that payments were made under the finance agreements. Payments were made for some time by Alpha in accordance with the finance agreements. Such a circumstance also arose in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd. Giles J dealt with this issue at pp 451-452 without deciding the point. In my opinion, the payments which Sanwa and GIO received from Alpha must be taken into account whether or not the cause of action be looked at as damages for conversion of the cheques or recoupment of unjust enrichment on the part of Finchill. In either event, there was a loose circle of moneys flowing from the finance companies to Finchill to Alpha and back to the finance companies. Insofar as restitution is concerned, it would be unjust not to take these payments into account. Insofar as damages are concerned, the moneys received reduced the amount of each finance company's loss. 32 The submission of Senior Counsel for the appellants on this point was that it was inappropriate to take the payments made by Alpha into account as, the transactions being void, the finance companies were not entitled to them. However, in looking to the issue of damages and to the issue of unjust enrichment, the fact that the finance agreements may have been void does not affect the position that the receipt of the moneys by the finance companies reduced their damages and reduced the sum which it would be just to claim from Finchill. 33 Since these reasons for judgment were drafted, my attention has been drawn to the recent decision of the High Court of Australia in Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68. had I had the advantage of perusing the reasons of their Honours, I would have cited their Honours' comments rather than the passages in David Securities Pty Ltd v Commonwealth Bank of Australia which I have set out above. However, no purpose would now be served by delaying judgment to effect such changes. 34 Having read the reasons for judgment in Roxborough v Rothmans of Pall Mall Australia Ltd, I am satisfied that the approach to liability I adopted was correct. I am also satisfied that it is proper to reduce the amount for which judgment is given by reference to the sums which were paid by Alpha under the finance agreements. That is because, there having been "a loose circle of moneys flowing from the finance companies to Finchill to Alpha and back to the finance companies", to use my words, the appellants have already recovered from Finchill some of the moneys which Finchill is bound to repay. 35 Accordingly, I would propose the following orders:-

(ii) The judgment and orders of the trial Judge are set aside;

(iii) The parties are to bring in agreed minutes of order as to the judgment sums within seven days of the date of judgment;

(iv) In the absence of agreement, the parties are to re-list the matter for future directions prior to 21 December 2001;

(v) The respondent is to pay each appellant's costs of the trial and of the appeal but is to have a certificate under the Suitors' Fund Act 1951 (NSW), if so entitled. 36 The parties should have the opportunity to confer and, if possible, to agree as to the sums which should be deducted from the amounts of the proceeds of the cheques. **********

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Suitors' Fund Act 1951(NSW)

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