DAVID SECURITIES PTY LIMITED & ORS v COMMONWEALTH BANK OF AUSTRALIA

Judges:
Mason CJ
Brennan J
Deane J
Dawson J
Toohey J
Gaudron J
McHugh J

Court:
Full High Court

Judgment date: Judgment handed down 7 October 1992

Mason CJ, Deane, Toohey, Gaudron and McHugh JJ

This appeal is brought by the appellants against a unanimous judgment of the Full Court of the Federal Court of Australia. [1] (1990) 93 A.L.R. 271. That judgment, in part, dismissed the appeal of the appellants against an order by the trial judge in favour of the respondent, the Commonwealth Bank of Australia (``the Bank''), on its original cross-claim. To understand fully the context in which that cross-claim arose and the basis of the appellants' case in this Court, it is necessary to examine in some detail not only the financial transactions between the appellants and the Bank, but also the history of the litigation.

The facts and the proceedings

David Securities Pty. Limited (``David Securities'') and A. & T. Rahme & Sons Pty. Limited (``A. & T. Rahme'') were family companies controlled at all material times by Antoine and Therese Rahme. The companies carried on business as builders and property developers. At various times, Mr Rahme and the two companies had obtained finance from the Dee Why branch of the Bank, of which they had been customers for some years.

In late July 1984, Mr Rahme and his son, David, commenced discussions with Mr Craig, the manager of the Dee Why branch, with a view to obtaining finance for a property development. The course of negotiations between the parties as to the precise form of the borrowing arrangements is not directly relevant to this appeal; suffice to say that a foreign currency loan at a rate of interest lower than domestic rates was recommended and that Mr Craig also recommended that the Rahmes consult an accountant well versed in foreign loan transactions. As it turned out, Mr Craig referred Mr Rahme to Mr Morgan, a member of a firm of accountants, who thereafter advised the Rahmes during the course of negotiations with the Bank.

On or about 17 December 1984, two documents were executed by the parties: a loan agreement between David Securities and the Bank, pursuant to which David Securities exercised an option, recited in the agreement, of utilizing a revolving floating rate multi- currency facility; and an application by David Securities to the Bank for a revolving bills facility with foreign currency option. A drawdown notice for the full amount of the

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foreign currency loan - the Swiss franc equivalent of $A850,000 - was immediately given and approved. In March 1985, the Bank agreed to a request that A. & T. Rahme be permitted to draw down the full amount of the bills discount facility - the Swiss franc equivalent of $A800,000 - and, for this purpose, a loan agreement was executed by A. & T. Rahme and the Bank containing terms substantially similar to those in the earlier loan agreement with David Securities. A third, similar loan agreement was executed by A. & T. Rahme and the Bank on or about 10 October 1985. The loans were secured by registered mortgages given by David Securities and A. & T. Rahme, as well as unlimited personal guarantees from Mr and Mrs Rahme, which were further supported by registered mortgages of land under the Real Property Act 1900 (N.S.W.).

Almost immediately, the adverse fluctuation in exchange rates between the Swiss and Australian currencies resulted in financial losses for the appellants. Throughout 1985, 1986 and 1987, as the exchange rates continued to fluctuate, the appellants and the Bank were in regular dialogue, discussing the possibility of switching currencies (which was done) or bringing the loans back onshore. During this period, the first and second loans were rolled over. Also during this period, in about April 1986, the retainer of Mr Morgan's firm was terminated by the appellants. Eventually, in October 1987, the Bank wrote to the appellants, alleging default on the facilities and advising that no further switches in currency would be allowed.

The appellants commenced proceedings in the Federal Court of Australia against the Bank and Mr Craig and against Mr Morgan and two colleagues in his accounting firm. The appellants claimed damages, alleging that they had suffered significant losses by reason of their entry into the foreign currency borrowing arrangements. Their case against the Bank relied upon alleged misleading conduct and representations by Mr Craig and the Bank, contrary to ss. 52 and 53 of the Trade Practices Act 1974 (Cth), and allegations that the Bank had breached either a contractual obligation or a common law duty to advise of the dangers inherent in foreign currency loans or of the ways and means of minimizing losses accruing through adverse exchange fluctuations. The Bank cross-claimed against the appellants for the recovery of moneys allegedly still due under the borrowing arrangements. The appellants' case against Mr Morgan and his colleagues was framed in both contract and tort.

The trial judge, Hill J., dismissed the appellants' claims against the Bank and Mr Craig but, in a separate judgment, ordered that judgment on the cross-claim be entered for the Bank against David Securities in the sum of $US1,106,113.76, plus interest, and against A. & T. Rahme in the sum of $US286,632.58, plus interest. The trial judge also dismissed the appellants' claims against Mr Morgan and his colleagues on the ground that the breach of contract and the breach of tortious duty found against those respondents did not give rise to the loss suffered by the appellants.

The appellants appealed against both judgments of the trial judge. The Full Court (Lockhart, Beaumont and Gummow JJ.) dismissed all grounds of the two appeals in a joint judgment. The appellants now appeal to this Court against that part of the Full Court's judgment dealing with the appellants' challenge to the Bank's success on its cross-claim. For its part, the Bank has filed a Notice of Contention.

The issues in this Court

On the appeal to the Full Court of the Federal Court in respect of the cross-claim, the appellants argued that they were liable to pay only some of the moneys claimed by the Bank. Only one of the two grounds relied upon before the Full Court is argued here, namely, that cl. 8(b) in the loan agreements between David Securities and the Bank and A. & T. Rahme and the Bank was void by virtue of s. 261 of the Income Tax Assessment Act 1936 (Cth) (``the Act'') with the consequence that David Securities and A. & T. Rahme were entitled to a refund of certain moneys paid to the Bank by the companies pursuant to their supposed obligations under cl. 8(b). The appellants submitted that they were entitled to set off these liquidated amounts against the moneys claimed by the Bank because the amounts in question had been paid over under a mistake of law. The Full Court found that cl. 8(b) was rendered void by s. 261 of the Act and that the appellants had made a mistake of law or of mixed law and fact. [2] ibid., at pp. 302-304. However, by applying earlier authorities according to their traditional interpretation, the Full Court concluded that the appellants were not entitled to a set-off for the reason that an

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action for money had and received did not lie in cases of payment under a mistake of law. [3] ibid., at p. 305. The Bank's Notice of Contention filed in this Court challenges the Full Court's findings as to both the applicability of s. 261 of the Act and the existence of a relevant mistake.

Accordingly, there are three principal issues before this Court:

First issue: the applicability of s. 261

The party with which David Securities and A. & T. Rahme contracted in the loan agreements was expressed to be the ``COMMONWEALTH BANK OF AUSTRALIA of Suite 2204, 50 Raffles Place, Singapore''. As the loan moneys were provided by a branch of the Bank which carried on business in Singapore, it was assumed by the parties that the withholding tax provisions of the Act [4] Pt III, Div. 11A. were applicable to the income derived by the Bank as interest under the loan agreements. For their part, the appellants appear simply to have accepted what the respondent told them. By virtue of s. 128B(5) of the Act, liability to pay withholding tax, fixed by legislation at a rate of 10 per cent, [5] Income Tax (Dividends and Interest Withholding Tax) Act 1974 (Cth), s. 7(b). is imposed upon the person who derives the income - in this instance, the Bank. However, Pt VI, Div. 4 of the Act provides a mechanism for collection of the tax whereby the Australian resident making the interest payments (i.e., David Securities and A. & T. Rahme) must deduct the amount of the tax and pay it to the Commissioner. [6] ss. 221YL and 221YN of the Act.

The operation of the withholding tax provisions necessarily means that a non- resident lender receives less than the full amount of interest provided for in a loan agreement. Being aware of this problem and intent upon remedying it, the Bank included in its standard form foreign currency loan agreement a grossing-up provision which was intended to ensure that the Bank received its full contractual entitlement. Clause 8(b) of the loan agreements in this case provided:

``All interest payments hereunder shall be paid by the Borrower to the Bank without deduction of any tax or duty or other imposts of any kind whatsoever. Should the Borrower at any time be compelled by law to deduct any such taxes, duties or imposts from any payment to be made by the Borrower the Borrower will pay such additional amounts as may be necessary in order that the net amount received shall equal the full amount the Bank would have received had a deduction not been made or had payment not been made subject to such tax duty or imposts together with an aggregate sum equal to any additional taxes payable by the Bank in respect of any additional amounts (including amounts equal to such taxes) under this clause (including this obligation).''

As a consequence of the operation of this clause, the appellants paid out the amount of contractual interest (10 per cent of which was paid to the Commissioner) plus an additional amount under cl. 8(b) representing a further 11.1 per cent of what the Singapore branch of the Bank was due to receive after the Commissioner's share had been deducted. According to the evidence, the payments were made by the appellants first drawing a cheque payable to the Bank for the total amount of interest and tax; this cheque was deposited at the Dee Why branch. As the agent of the appellants, the Dee Why branch debited the appellants' account with the amount of the cheque, paid to the Commissioner the 10 per cent withholding tax and remitted the balance, representing the full amount of the contractual interest, to the Singapore branch. In this way, both the Commissioner and the Bank were satisfied. It is these additional amounts which the appellants submit were had and received by the Bank to their use. This submission was made on the basis that s. 261 of the Act rendered cl. 8(b) void.

As both the trial judge and the Full Court recognized, s. 261 is designed to protect mortgagors. It relevantly provides:

``261(1) A covenant or stipulation in a mortgage, which has or purports to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage... shall be absolutely void.

...

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261(5) For the purposes of this section, `mortgage' includes any charge, lien or encumbrance to secure the repayment of money, and any collateral or supplementary agreement, whether in writing or otherwise, and whether or not it be one whereby the terms of any mortgage are varied or supplemented, or the due date for the payment of money secured by mortgage is altered, or an extension of time for payment is granted.''

The term ``income tax'' in sub-s. (1) includes withholding tax payable under Pt III, Div. 11A of the Act. [7] s. 128A(4). Therefore, if the other elements governing the applicability of s. 261 are fulfilled, cl. 8(b) would be void.

The submissions of the Bank in support of its Notice of Contention raise three arguments against the application of s. 261: first, that each loan agreement was not a ``mortgage'' within the terms of s. 261(5); secondly, that cl. 8(b) is not a ``covenant or stipulation in a mortgage'' within the meaning of s. 261(1); and, thirdly, if cl. 8(b) is a covenant or stipulation in a mortgage, that it does not purport to have ``the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage''.

In reaching its conclusion that the loan agreements were collateral to the securities taken by the Bank and thus fell within the definition of ``mortgage'', the Full Court relied upon the definition of ``collateral'' given in Stardawn Investments Pty. Ltd. v. Comptroller of Stamps (Vic.) . [8] Stardawn Investments Pty Ltd v Comptroller of Stamps (Vic) (1983) 84 ATC 4097 , at p. 4100 . In that case, in the context of the Stamps Act 1958 (Vict.), Tadgell J. decided that one thing is collateral to another if it exists side by side with the other. In so doing, he rejected the submission of counsel that the word ``collateral'' necessarily involves the notion of the primacy of one thing over another.

In this case, however, the Bank argues that the notion of primacy is essential and that the mortgages given by the appellants as security for the loan were collateral to the loan rather than the other way around. But the prefix ``co-'' imports a sense of ``with'' or ``in addition to'', without any necessary concept of primacy or subordination. The Shorter Oxford English Dictionary definition, ``[s]ituated or running side by side, parallel'', which was quoted with disapproval by counsel for the Bank in this Court, may well be inapplicable to contractual agreements when interpreted in a spatial sense, but is quite apposite if construed as meaning ``related to'' or ``contributory''. In the case In re Athill, Athill v. Athill , which concerned the relation between different securities, Sir George Jessel M.R. stated: [9] In re Athill, Athill v Athill (1880) 16 Ch.D. 211 , at pp. 222-223 .

``Then why should we attribute to this word `collateral', which does not by itself necessarily mean `secondary', that meaning, when it is not so expressed in the contract itself? Where the word, as is admitted by the counsel for the Appellants, is at all events susceptible of the strict meaning of `parallel' or `additional', why should it have one meaning rather than the other if the nature of the transaction does not require us to depart from its literal meaning? It appears to me there is nothing whatever in these securities to compel us to say that the word `collateral' means in this case `secondary'.''

Collateral contracts are so called not because they are subordinate or of lesser importance (although they may well be, depending on the facts of the case), but because they impinge upon and are related to another contract. The primary/subordinate distinction is not supported by the case on which the Bank seeks to rely, Heilbut, Symons & Co. v. Buckleton , in which Lord Moulton stated [10] Heilbut, Symons & Co Ltd v Buckleton [1913] A.C. 30 , at p. 47 . that collateral contracts have ``an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract''. Once the notion of primacy is jettisoned, ``collateral'' must be understood in the sense of ``related to'' or even ``in addition to''. So understood, the word covers the present case.

The Bank next argues that, even if each loan agreement is a ``mortgage'', cl. 8(b) is not a ``covenant or stipulation'' within the meaning of s. 261(1). The Bank submits that cl. 8(b) creates no legal obligation because cl. 8(c) provides that a failure to pay the additional amounts pursuant to cl. 8(b) is not a breach of contract.

The word ``stipulation'' had a technical meaning in Roman law and in the Admiralty Courts, but long ago assumed the more common meaning of anything which forms a material provision of an agreement. [11] Bouvier's Law Dictionary , (1866), vol. 2, p. 549. In In re Jarvis and Burgess's Contract , Lowe J. used the word to refer generally to a promise. [12] In re Jarvis and Burgess's Contract [1932] V.L.R. 1 , at p. 3 . The word ``covenant'', however, retains the strict legal meaning of a promise under seal, although in general legal parlance it is used to denote any promise, whether contained in a deed or not. [13] Hayne v. Cummings (1864) 16 C.B.N.S. 421 , at pp. 426-427 [ 143 E.R. 1191 , at p. 1194 ]; see also Halsbury's Laws of England , 4th ed., vol. 12, par. 1539.

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To this extent, the meanings of the two words in s. 261(1) overlap. It may well be true, as the Bank submits, that a promise or covenant to do something creates no obligation if a failure to abide by it gives the innocent party no redress. That question can be left open for it is not the same as the issue which faces the Court in this case. While failure to pay the additional amounts under cl. 8(b) would not have amounted to a breach of contract by the appellants, the combined operation of cl. 8(b) and (c) would relieve the Bank of its obligation under cl. 2(d) to renew any advance or to replace any maturing bills in the event of non- payment by the appellants. Clause 8(b) thus directs the appellants - and, in so doing, uses the word ``obligation'' - to do something which, if not done, would result in non-renewal of the loans. To suggest that the appellants' promise under cl. 8(b) is somehow formal only and imposes no obligation is therefore to take too technical and restrictive a view of the agreement. The ability to sue upon breach may generally be considered an element of a ``covenant''. However, the absence of that element in this case does not have the effect that the appellants assumed no obligation upon agreeing to the clause. The clause specifically imposes an obligation and this fundamental feature is not altered by the fact that separate provision is made in the loan agreement to the effect that limited consequences will flow from non-compliance with this obligation.

The Bank raises another argument, that the covenant in cl. 8(b) nevertheless does not ``have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage''. Without cl. 8(b), the obligation to pay withholding tax rests on the Bank as a non- resident receiving income in the form of interest. Part VI, Div. 4 of the Act provides a mechanism whereby the Australian resident making the interest payments is given responsibility for deducting and remitting to the Commissioner the amount of the tax; this does not have the effect of transferring the statutory liability for payment, which remains imposed on the non-resident. Without cl. 8(b), the appellants would pay an amount of money representing the contractual interest and the Bank would pay - albeit through the agency of the appellants, as the collection mechanism requires - an amount of money representing the 10 per cent withholding tax. By virtue of cl. 8(b), the Bank sought to ensure that payment of both amounts of money came from the coffers of the appellants. While the statutory obligation to pay the withholding tax still lay upon the Bank, cl. 8(b) had the effect of obliging the appellants to bear the financial burden represented by the withholding tax. In these circumstances, it seems entirely apposite to conclude that the clause had ``the purpose or effect of imposing on the mortgagor the obligation of paying income tax''. Nevertheless, the Bank argues that the appellants were not paying income tax, but only ``additional amounts'' as described by the clause. This argument relies upon the judgment of Isaacs J. in Brett v. Barr Smith [14] Brett & Anor v Barr Smith & Anor (1919) 26 C.L.R. 87 , at p. 96 . where his Honour concluded that a covenant in a mortgage which allowed the mortgagors to pay interest at a reduced rate if they also paid an amount representing the mortgagee's income tax liability did not oblige the mortgagors to pay tax on interest at all, but merely to pay interest either at the express contractual rate or, upon certain conditions, at a reduced rate. Such a covenant, which would now be rendered void by s. 261(3) and (4), is quite different from the covenant in issue in this case. In cl. 8(b), the appellants were not presented with a choice but with a legal obligation to pay the additional amounts, nor were they given a discount for their pains as were the plaintiffs in Brett v. Barr Smith. The Bank demanded and received its full income and ensured that the appellants met the Bank's own tax liability. The construction of s. 261 contended for by the Bank is unnecessarily restrictive and would fly in the face of the legislative intention to provide protection for mortgagors. This argument must therefore be rejected.

Second issue: the sufficiency of the finding that there was a mistake of law

In its Notice of Contention, the Bank challenges the inference drawn by the Full Court of the Federal Court that the appellants paid the moneys sought to be reimbursed under a relevant mistake.

The appellants did not plead that they paid the moneys away under a mistake. In par. 30A of their further amended statement of claim the appellants pleaded that, in purported reliance on the terms of cl. 8 of the loan agreements, the Bank required the appellants to reimburse the Bank for interest withholding tax deducted by

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the Bank from interest paid by it on moneys borrowed overseas. In par. 66, the appellants referred to the Bank's claim for reimbursement of interest withholding tax deducted from interest paid by the Bank on moneys borrowed overseas in contravention of s. 261. And, in par. 67, the appellants sought an ``accounting for and a refund of all moneys claimed by and paid to the Bank in reimbursement of interest withholding tax''. Unfortunately, the pleading fails to make clear the legal basis on which this claim is made. In its defence, the Bank denied the appellants' entitlement to relief.

Notwithstanding that the pleadings did not throw up the specific issue whether the moneys in question were paid under a mistake, whether of fact or law, it is evident that the case was argued on that basis. Hill J. observed, with reference to the payments:

``These payments, if clause 8(b) was, as [a] result of s. 261, void, were paid by the borrowers under a mistake of law, the mistake being that clause 8(b) required the payment to be made. So far as appears the payments were not made under protest... and indeed, it is highly doubtful whether the borrowers' case, as pleaded, claimed at all a recovery of amounts wrongfully paid under the clause. However I am content to assume that such a case was pleaded.''

His Honour went on to hold that money paid under a mistake of law was not recoverable.

The appellants applied for leave to call evidence that the payments were made under a mistake. That application was evidently made during the course of addresses and was rejected, probably because his Honour was of the opinion that if the moneys were paid under a mistake, the mistake was one of law.

The Full Court said: [15] (1990) 93 A.L.R., at p. 303.

``Counsel for the bank submitted that the appellants had offered no direct evidence to the effect that without the mistake being made on their part, by regarding sub-cl 8(b) as valid rather than void, they would not have made payments pursuant to that sub- clause. However, in the circumstances of this case, there is sufficient evidence from which one can infer that the appellants would have made no payment but that which they regarded themselves as legally obliged to make pursuant to their contractual and security arrangements with the bank.''

Having regard to the way in which the case was conducted at the trial, the issue whether payment was made under a mistake was litigated. Whether there was evidence to support the inference drawn by the Full Court and the finding that appears to have been made by the primary judge is not an easy question to determine. That is because neither the primary judge nor the Full Court has identified the evidence which sustains the finding or gives rise to the inference. In the circumstances, we are not satisfied the evidence warrants the drawing of such an inference. Certainly the fact that the Bank required the payments to be made does not of itself warrant the drawing of such an inference, the more so since it is arguable that the appellants may have wished to ensure that there was a roll-over, whatever their belief as to the existence of an obligation to do so.

But this conclusion does not mean that the appeal should be dismissed. If the Court were to conclude that moneys paid under a mistake of law were recoverable, contrary to the views expressed by Hill J. and the Full Court of the Federal Court, the matter should be remitted to the primary judge to enable him to reconsider the appellants' application to call evidence on the issue of mistake. His Honour refused that application in a context where he considered that moneys paid under a mistake of law were not recoverable. If that view be mistaken, then the application should be considered afresh.

Third issue: if the moneys were paid by the appellants under a mistake, are the appellants entitled to restitution?

In considering this question, it is necessary to have regard to the nature of the mistake which, it is alleged, was made. In this respect the Full Court of the Federal Court stated: [16] ibid., at pp. 303-304.

``In the present case, the mistake related to the subsistence of the liability itself, and [was] not made simply because of what was or was not stated in the loan agreement or because of the existence of some related circumstance, such as the date on which a payment fell due. The mistake was as to the existence of s 261 and its operation to render void the purported contractual obligation in sub-cl 8(b). This was a mistake of law for the purposes of this particular field of discourse, or at least a mistake as to law mixed with fact...''

As Winfield makes clear, mistake not only signifies a positive belief in the existence of

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something which does not exist but also may include ``sheer ignorance of something relevant to the transaction in hand''. [17] ``Mistake of Law'', (1943) 59 Law Quarterly Review 327, at p. 327. A mistake of this latter kind, and one similar to the mistake allegedly made in this case, was found in J. & S. Holdings v. N.R.M.A. Insurance . [18] J & S Holdings v NRMA Insurance (1982) 41 A.L.R. 539 . In that case, the failure of a money lender to comply with an Australian Capital Territory ordinance regulating loan contracts meant that the loan contract was void in so far as it provided for payment of a rate of interest higher than 12 per cent. The borrower unsuccessfully sought repayment of the excess interest it had paid in compliance with the contractual provision for interest. The Full Court (Blackburn, Deane and Ellicott JJ.) concluded [19] ibid., at p. 547. that the borrower's mistake consisted of its ``ignorance of or inadvertence to the existence or operation of the general statutory provisions contained in s 12 of the Ordinance'' and denied recovery to the appellants on the basis of the so-called traditional rule that restitution is not available in cases of a mistake of law. Their Honours referred to various authorities in other jurisdictions, as well as to textbooks, which reject the rule, but having noted [20] ibid., at p. 550. that ``the distinction which has been drawn between mistake of fact and mistake of law has been subjected to much learned criticism and is often difficult to apply'', observed that, at least as far as the Federal Court was concerned, the distinction was ``firmly entrenched''. [21] ibid. Further, in that case, there was no insistence that the borrower show that it had protested before paying or that duress or involuntariness be proven in order for a finding of mistake to be made, though the Court referred to such matters in the context of when money paid under a mistake of law might be recoverable. Thus, in this case, the Bank's claim that the appellants paid the additional amounts without protest is of little consequence in itself.

The Full Court in the present case also applied what was seen as the traditional rule precluding recovery in a case of mistake of law, quoting the statement of Williams J. in York Air Conditioning and Refrigeration (A/sia.) Pty. Ltd. v. The Commonwealth : [22] (1949) 80 C.L.R. 11, at p. 30.

``A mistake in the construction of a contract is a mistake of law and payments made under a mistake of law cannot be recovered in an action for money had and received.''

Like the Full Court in J. & S. Holdings , their Honours noted the criticism which the rule has attracted but nonetheless felt constrained to apply it, observing that it is open only to the High Court to remove the distinction between mistakes of fact and mistakes of law. [23] (1990) 93 A.L.R., at p. 305.

The traditional rule

The Restatement of the Law of Restitution states: [24] American Law Institute, (1937), p. 179.

``Until the nineteenth century no distinction was made between mistake of fact and mistake of law and restitution was freely granted both in law and in equity to persons who had paid money to another because of a mistake of law.''

In Farmer v. Arundel De Grey C.J. stated: [25] Farmer v Arundel (1772) 2 Wm.Bl. 824 , at p. 825 [ 96 E.R. 485 , at p. 486 ].

``When money is paid by one man to another on a mistake either of fact or of law, or by deceit, this action [i.e. assumpsit] will certainly lie.''

However, in Bilbie v. Lumley , [26] (1802) 2 East 469 [102 E.R. 448]. Lord Ellenborough C.J. refused recovery of moneys paid under a mistake of law. An underwriter sought recovery of moneys from a successful insurance claimant whom he had paid, unaware that non-disclosure by the insured of essential facts at the time of entering the insurance contract relieved the insurer from liability. The underwriter was in possession of all the facts which would have allowed him to deny liability. After counsel was unable to name a case in which recovery had been allowed to a plaintiff who was aware of all relevant facts, Lord Ellenborough C.J. denied recovery on the basis of a maxim wholly inapplicable to the case, namely, ignorantia juris non excusat. This approach appears to have been based on an obiter dictum in the judgment of Buller J. in Lowry v. Bourdieu . [27] Lowry v Bourdieu (1780) 2 Doug. KB 468 , at p. 471 [ 99 E.R. 299 , at p. 300]; cf. the view Lord Ellenborough adopted in the later case, Perrott v. Perrott (1811) 14 East 423 , at p. 440 [ 104 E.R. 665 , at p. 671 ]. On its facts, the decision in Bilbie v. Lumley was probably correct because the payment appears to have been made voluntarily and not under any mistake at all. Only a few years before, in Cartwright v. Rowley , Lord Kenyon C.J. had stated: [28] Cartwright v Rowley (1799) 2 Esp. 722 , at p. 723 [ 170 E.R. 509 , at p. 510 ].

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``This action cannot be maintained, nor the money recovered back again by it: it has been paid by the plaintiff voluntarily; and where money has been so paid, it must be taken to be properly and legally paid; nor can money be recovered back again by this form of action, unless there are some circumstances to shew that the plaintiff paid it through mistake, or in consequence of coercion.''

This was not a case of mistake of law. The plaintiff had employed the defendant, an engine-maker, to make engines under the plaintiff's patent. While work was in progress, the plaintiff advanced money to the defendant, which he then sought to recover because the defendant had caused the plaintiff to miss a business opportunity by taking too long to complete the work. The plaintiff's payment was ``voluntary'' in the sense that he had known all the relevant circumstances and yet had chosen to pay the defendant rather than withhold payment or dismiss him. A similar concept of voluntariness was adopted by Chambre J., in dissent, in Brisbane v. Dacres , where he concluded [29] Brisbane v Dacres (1813) 5 Taunt. 143 , at pp. 159-160 [ 128 E.R. 641 , at pp. 647-648 ]. that the plaintiff was entitled to recover money paid under a mistake of law because he could not be said to have waived inquiry and chosen to settle the claim. In the same case, Gibbs J. took a similar approach in principle, holding that, if a person paid money in response to a claim when fully aware of all the facts, he or she was deemed to have submitted to the demand. [30] ibid., at pp. 152-153 [p. 645 of E.R.].

It is on the basis of such opinions as this that it has been suggested that Bilbie v. Lumley is authority for the limited proposition that payment made in settlement of an honest claim is irrecoverable. [31] Goff and Jones, The Law of Restitution , 3rd ed. (1986), pp. 118-119. However, rather than being confined to its facts, Bilbie v. Lumley became recognized as authority for the broad proposition that recovery will not be ordered of moneys paid under a mistake of law. It was followed by the majority in Brisbane v. Dacres where Gibbs J. said: [32] (1813) 5 Taunt., at p.152 [128 E.R., at p. 645].

``[W]here a man demands money of another as a matter of right, and that other, with a full knowledge of the facts upon which the demand is founded, has paid a sum, he never can recover back the sum he has so voluntarily paid.''

Bilbie v Lumley was distinguished in Kelly v. Solari , [33] Kelly v Solari (1841) 9 M. & W. 54 [ 152 E.R. 24 ]. a case allowing recovery of moneys paid under a mistake of fact. It thereby became entrenched as a decision denying recovery because the mistake of the plaintiff was one of law. Despite its dubious foundation, the principle gained such acceptance that Croom- Johnson J. said of it that it was ``beyond argument at this period in our legal history''. [34] Sawyer and Vincent v. Window Brace Ltd. [1943] 1 K.B. 32 , at p. 34 .

The respondent claims that the principle has also been accepted in this Court; however, an examination of the relevant cases, apart from the statement of Williams J. in York Air Conditioning , [35] (1949) 80 C.L.R., at p. 30. suggests that they may also be reconciled with the narrower principle of voluntary submission. In Werrin v. The Commonwealth , in which the plaintiff sought recovery of sales tax that he had paid upon secondhand goods sold by him, Latham C.J. stated: [36] (1937-1938) 59 C.L.R. 150, at p. 159. See also per McTiernan J. at p. 168.

``The principle appears to me to be quite clear that if a person, instead of contesting a claim, elects to pay money in order to discharge it, he cannot thereafter, because he finds out that he might have successfully contested the claim, recover the money which he so paid merely on the ground that he made a mistake of law.''

In South Australian Cold Stores Ltd. v. Electricity Trust of South Australia , [37] (1957) 98 C.L.R. 65. the plaintiff made monthly payments to the defendant of electricity charges assessed at an increased rate, then successfully challenged the validity of the Minister's order increasing the charges and sought recovery of the excessive charges paid over. Prior to making the monthly payments, the plaintiff had objected to the increased charge and had even declined to pay the extra amount pursuant to the first monthly account. In a unanimous judgment, the Court denied recovery. It stated: [38] ibid., at pp. 74-75.

``In the present case the only reason why the higher rates were not chargeable was because the formal requirements of the law were not observed by a third party for expressing or giving effect to the decision at which he had actually arrived. Neither he nor the trust were aware of his failure lawfully to exercise his authority. They were unaware because they did not perceive what was required or the true effect of what the document contained. On the side of the company it was simply taken for granted that somehow or another the charges might be lawfully made. This seems to fall outside the reason of the rule under which an action of money had [and] received lies in cases of payment by mistake. Under that rule the action is available when the payee cannot justly retain the money paid to him because it would not have come to his hands if it had not been for a false supposition of fact on the part of the payer causing the latter to believe that he was compellable to make the payment or at all events that he ought to make it. It is to be noticed that Parke B. in Kelly v. Solari ... defines the requisite

ATC 4667

mistake as `the supposition that a specific fact is true, which would entitle the other to the money, but which fact is untrue'. [39] (1841) 9 M. & W., at p. 58 [152 E.R., at p. 26]. According to the decision of Pilcher J. in Turvey v. Dentons 1923 Ltd. [40] Turvey v Dentons 1923 Ltd (1953) 1 Q.B. 218 . it is too restrictive to say that the fact would if true have entitled the payee to the money; and perhaps the word `specific' may also be too definite. But here there was nothing but an assumption that in some way or other the increased charge might lawfully be made and a readiness to comply with the payee's demand without more, a demand which but for formal defects in the authorisation would have been enforceable.''

More recently, as has been mentioned, the Full Court of the Federal Court has applied the principle against recovery. In the case of J. & S. Holdings , the Full Court quoted the above passage from South Australian Cold Stores and then stated: [41] (1982) 41 A.L.R., at p. 551.

``The insufficiency of mistake of law as the foundation of an action for recovery of money paid is commonly stated as a general principle or rule of law precluding any right of action in a case where the payment was voluntary.... It is preferable to frame the general rule in terms of insufficiency rather than in terms of preclusion. So stated, the general rule is that a mistake of law does not, on its own , found an action for the recovery of money paid: see, generally, Kiriri Cotton Co Ltd v Dewani .'' [42] [1960] A.C. 192, at pp. 204-205.

(emphasis added)

An important feature of the relevant judgments in these three cases is the emphasis placed on voluntariness or election by the plaintiff. The payment is voluntary or there is an election if the plaintiff chooses to make the payment even though he or she believes a particular law or contractual provision requiring the payment is, or may be, invalid, or is not concerned to query whether payment is legally required; he or she is prepared to assume the validity of the obligation, or is prepared to make the payment irrespective of the validity or invalidity of the obligation, rather than contest the claim for payment. We use the term ``voluntary'' therefore to refer to a payment made in satisfaction of an honest claim, rather than a payment not made under any form of compulsion or undue influence. If such qualifying, factual circumstances are considered relevant, the sweeping principle that money paid under a mistake of law is irrecoverable or even the Federal Court's modification of that principle to the effect that mistake of law does not on its own found an action for the recovery of money paid is broader and more preclusive than is necessary. As the authorities cited earlier in explanation of the term ``mistake of law'' make clear, the concept includes cases of sheer ignorance as well as cases of positive but incorrect belief. To define ``mistake'' as the supposition that a specific fact is true, as Parke B. did in Kelly v. Solari , [43] (1841) 9 M. & W., at p. 58 [152 E.R., at p. 26]. which was a mistake of fact case, leaves out of account many fact situations. A narrower principle, founded firmly on the policy that the law wishes to uphold bargains and enforce compromises freely entered into, would be more accurate and equitable.

The identification and acceptance of such a narrow principle is strongly supported by the difficulty and illogicality of seeking to draw a rigid distinction between cases of mistake of law and mistake of fact. The artificiality of this distinction and the numerous exceptions to it [44] Goff and Jones, op. cit., pp. 124-125. lie behind many of the calls for abolition of the traditional rule. Learned Hand J. called it ``that most unfortunate doctrine''. [45] St. Paul Fire & Marine Ins. Co. v. Pure Oil Co. (1933) 63 F. (2d) 771 , at p. 773 . The Supreme Court of Canada indicated its willingness to abolish the rule in its recent decision of Air Canada v. British Columbia , following the ``thorough, scholarly and damning analysis of the mistake of law doctrine'' [46] (1989) 59 D.L.R. (4th) 161, per La Forest J. at p. 191. by Dickson J. in his dissenting judgment in the earlier case of Hydro Electric Commission of Nepean v. Ontario Hydro . [47] (1982) 132 D.L.R. (3d) 193, at pp. 201-215. Western Australia and New Zealand have abolished the rule by legislation. [48] Property Law Act 1969 (W.A.), ss. 124 and 125 (s. 124 was applied in Inn Leisure v. D.F. McCloy (1991) 100 A.L.R. 447 ); Judicature Act 1908 (N.Z.), ss. 94A and 94B. The Law Reform Committee of South Australia [49] Report Relating to the Irrecoverability of Benefits Obtained by Reason of Mistake of Law , Report 84, (1984). and the Law Reform Commissions of New South Wales [50] Restitution of Benefits Conferred under Mistake of Law , Report LRC 53, (1987). and British Columbia [51] Report on Benefits Conferred Under a Mistake of Law , Report LRC 51, (1981). have recommended abolition of the rule, as has most recently the English Law Commission. [52] Restitution of Payments made under a Mistake of Law , Consultation Paper No. 120, (1991). Also very recently, the House of Lords has had occasion to refer to the strong criticism to which the traditional rule has been subjected. [53] Woolwich Building Society v. IRC [1992] 3 W.L.R. 366 , per Lord Keith of Kinkel at p. 374 ; Lord Goff of Chieveley at p. 384; Lord Slynn of Hadley at p. 417.

Commentators have been highly critical of both the fact versus law distinction and the traditional rule precluding recovery. Goff and Jones reject the rule and seek to reconcile the cases with a narrower principle. [54] op. cit., p. 119. Palmer is unable to find any reason to support treating restitution in cases of mistake of law any differently from cases of mistake of fact. [55] The Law of Restitution , (1978), vol. 3, § .14.27. Birks considers that the old rule cannot be justified and that recovery should be permitted

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in certain cases where there is a mistake of law. [56] An Introduction to the Law of Restitution , (1989), pp. 166-167. In Canada, the authors of a recent text on the law of restitution condemn the traditional rule and conclude that it is unnecessary to distinguish between mistakes of law and of fact in order to fulfil the policy in favour of the finality of dispute resolution. [57] Maddaugh and McCamus, The Law of Restitution , (1990), p. 255. As the same authors say, it ``would be difficult to identify another private law doctrine which has been so universally condemned''. [58] ibid., p. 256.

The criticism gains added impetus in Australia by virtue of the recognition by this Court in Pavey & Matthews Pty. Ltd. v. Paul of the ``unifying legal concept'' of unjust enrichment. [59] (1987) 162 C.L.R. 221, per Deane J. (with whom Mason and Wilson JJ. agreed) at pp. 256-257; see also Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation (1987-1988) 164 C.L.R. 662 , at p. 673 . As Dickson J. stated in Ontario Hydro : [60] (1982) 132 D.L.R. (3d), at p. 209.

``Once a doctrine of restitution or unjust enrichment is recognized, the distinction as to mistake of law and mistake of fact becomes simply meaningless.''

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.

In the light of our view that the decision in South Australian Cold Stores can in this Court be justified on a narrower basis and that the traditional rule was not necessary to the decision, there is no other decision of this Court which constrains us to adopt the traditional rule. 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. It would not, for example, extend to a case where the moneys were paid under a mistaken belief that they were legally due and owing under a particular clause of a particular contract when in fact they were legally due and owing to the recipient under another clause or contract. [61] Barclays Bank Ltd v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677 , per Goff J. at p. 695 : ``Of course, if the money was due under a contract between the payer and the payee, there can be no recovery on this ground''.

Having rejected the so-called traditional rule denying recovery in cases of payments made under a mistake of law, it is necessary to consider what principle should be put in its place. It would be logical to treat mistakes of law in the same way as mistakes of fact, [62] See Barclays Bank Ltd v. W. J. Simms Son & Cooke (Southern) Ltd. ; Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation . so that there would be a prima facie entitlement to recover moneys paid when a mistake of law or fact has caused the payment. Jurisdictions which have abolished the traditional rule by legislation have done so by stating that recovery should be allowed in cases of mistake of law in the same circumstances as it would be were the mistake one of fact (Western Australia and New Zealand).

The proposition that there should be a prima facie entitlement to recover moneys paid when a mistake of fact or law has caused the payment has not been universally accepted. Two alternative formulations of the basis of recovery have been proposed: first, that the person making the mistaken payment must have supposed that he or she was legally liable to make the payment; and, secondly, that the mistake of the person making the payment must have been a fundamental one. [63] Beatson, The Use and Abuse of Unjust Enrichment , (1991), p. 150. The first of these formulations can be subjected to the same criticism levelled at the traditional rule denying recovery in cases of mistake of law, namely, that it is illogical to concentrate upon the type of mistake made when the crucial factor is that the recipient has been enriched. To overturn the traditional rule and then replace it with a proposition incorporating the classic formulations of the liability approach by Parke B. in Kelly v. Solari [64] (1841) 9 M. & W., at p. 58 [152 E.R., at p. 26]. and Bramwell B. in Aiken v. Short [65] (1856) 1 H. & N. 210, at p. 215 [156 E.R. 1180, at p. 1102]. would be counter-productive. In Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. , Goff J. illustrated [66] [1980] Q.B., at pp. 690-695. how existing authority had moved beyond the narrow liability approach. In Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation , this Court implicitly accepted that view [67] (1987-1988) 164 C.L.R., at pp. 671-672. and we see no reason now to doubt that conclusion.

The second alternative formulation asserts that, in addition to being causative, the mistake must also be fundamental. This raises the question expressly left open in Westpac Banking Corporation . In that case, the Court stated: [68] ibid.

``[I]t is unnecessary, for the purposes of the present case, to investigate what constitutes a `fundamental mistake' for the purposes of the principle that money payable under a fundamental mistake of fact is prima facie recoverable by the payer: see, e.g., Porter v. Latec Finance (Qld.) Pty. Ltd. [69] (1964) 111 C.L.R. 177, at pp. 187, 190, 204. It can, however, be said that we can see no reason to doubt the correctness of the view expressed or implicit in the judgments in the courts below to the effect that the notion of

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`fundamental mistake' does not require either that the payer's mistake be shared by the payee or that the mistake be as to the existence of a fact which, if it had existed, would have resulted in the payee being under a legal obligation to make the payment: see Commercial Bank of Australia Ltd. v. Younis ; [70] Commercial Bank of Australia Ltd v Younis [1979] 1 N.S.W.L.R. 444 , at pp. 447-450 . Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. ; [71] [1980] Q.B., at pp. 686-694. Bank of New South Wales v. Murphett . [72] Bank of New South Wales v Murphett [1983] 1 V.R. 489 , at pp. 491-492, 494-495 . That having been said, it is preferable to leave for another day consideration of the question whether the requirement that the mistake be fundamental involves any more than that it appears that, without the mistake on the part of the payer, the payment would not have been made: cf., e.g., Porter [73] (1964) 111 C.L.R., at pp. 186-187, 204. and Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd. '' [74] [1980] Q.B., at pp. 694-696.

The requirement that the mistake be fundamental as well as causative is not as restrictive as the liability approach considered above, but it has been suggested that the requirement is still a worthwhile precaution against a potential flood of claims and consequent insecurity of receipts. [75] Birks, op. cit., p. 159. The notion of fundamentality is, however, extremely vague and would seem to add little, if anything, to the requirement that the mistake cause the payment. If the payer has made the payment because of a mistake, his or her intention to transfer the money is vitiated and the recipient has been enriched. There is therefore no place for a further requirement that the causative mistake be fundamental; insistence upon that factor would only serve to focus attention in a non- specific way on the nature of the mistake, rather than the fact of enrichment. If a strict approach is taken towards the issue of mistake so that a plaintiff bears the burden of establishing on the balance of probabilities that a causative mistake has been made, there would also be no need to appeal to the element of fundamentality as a limiting factor. So, the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment.

However, the respondent argues that a plaintiff should be required to prove that retention of the moneys by the recipient would be unjust in all the circumstances before recovery should be granted; if the circumstances of the case showed that it would not be unjust for the recipient to retain the money, the fact that the plaintiff could point to a causative mistake, whether of fact or law, would not assist the plaintiff. According to the respondent's submissions, moneys paid under a mistake of law could only be recoverable in so far as the recipient has been unjustly enriched at the expense of the payer, such that it would be unconscionable for the recipient not to give restitution to the payer. In support of this approach, the respondent relies, inter alia, on the recent decisions of this Court in Westpac Banking Corporation and Pavey & Matthews .

Although this alternative approach is not greatly different from that stated above, it does have important consequences in relation to the elements of the action which the plaintiff must plead and prove. It also appears to proceed from the view that in Australian law unjust enrichment is a definitive legal principle according to its own terms and not just a concept.

The two decisions of this Court just mentioned reject that approach. In Pavey & Matthews Deane J. stated: [76] (1987) 162 C.L.R., at pp. 256-257.

``To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate.... That is not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new or developing category of case...''

Accordingly, it is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair or unconscionable. Instead, recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality. As this Court stated in Westpac Banking Corporation : [77] (1988) 164 C.L.R., at p. 673.

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``In other words, receipt of a payment which has been made under a fundamental mistake is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution, in the sense of compensation for the benefit of unjust enrichment, to the person who has sustained the countervailing detriment...''

As La Forest J. stated in Air Canada v. British Columbia , [78] (1989) 59 D.L.R. (4th), at p. 192. the two species of mistake (i.e., fact and law) should be ``considered as factors which can make an enrichment at the plaintiff's expense `unjust' or `unjustified' ''.

The respondent's submission that the appellants must independently prove ``unjustness'' over and above the mistake cannot therefore be sustained. 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 recognizes would make an order for restitution unjust. [79] Westpac Banking Corporation (1987-1988) 164 C.L.R., at p. 673. 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.

The two ``defences'' upon which the respondent relies in this Court are, first, that the payments by the appellants were made for good consideration and, secondly, that in reliance upon receipt of the payments the respondent, in good faith, changed its position to its detriment. In the context of a mistake case, these ``defences'' were included in the well-known formulation of Goff J. in Barclays Bank. His Lordship stated: [80] [1980] Q.B., at p. 695.

``(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.''

The respondent argues that this is a case where the appellants, having accepted the benefit of performance by the respondent, now seek to recover part of the consideration promised for that performance, namely, the payments made referable to withholding tax. This argument and the respondent's attempt to analyze the facts on the broader basis of unjust enrichment rather than mistake specifically, already discussed, echo the view expressed by some writers that ``the true basal principle which enables recovery of money paid under a mistake, whether of fact or law, is `failure of consideration'''. [81] Butler, ``Mistaken Payments, Change of Position and Restitution'', in Finn (ed.), Essays on Restitution , (1990), p. 88. See also Matthews, ``Money Paid Under Mistake of Fact'', [1980] New Law Journal 587; National Mutual Life Association v. Walsh (1987) 8 N.S.W.L.R. 585 , at pp. 595-596 . It is unnecessary in the present context to assess the merits of this argument because, as we have stated, the more traditional approach, exemplified by the judgment of Goff J. in Barclays Bank and the decision of this Court in Westpac Banking Corporation , specifically provides for the ``defence'' of valuable consideration.

The respondent submits that it agreed to lend money to the appellants at the rate named in the loan agreements because of the appellants' agreement to pay the additional amounts pursuant to cl. 8(b). If it had known that these additional amounts were not payable, the respondent argues, it would have negotiated a different interest rate to ensure that its net return reached the required level. By not being charged this higher interest, the appellants have received consideration for the bargain. In the circumstances, they should not be allowed to take advantage of the chance to recover some of the money they had agreed to pay.

The difficulty in evaluating this argument lies in the fact that it depends primarily upon an assessment of the intention and purpose of the appellants at the time of entering the loan agreements and paying the additional amounts pursuant to cl. 8(b). By stating that the appellants contracted to pay the additional amounts without adverting to the question of whether they could legally be forced to pay, the respondent effectively submits that the appellants voluntarily submitted to payment. This entails the conclusion that the appellants

ATC 4671

either cannot truly be said to have made a mistake, as they knew what they were agreeing to - a proposition discussed above - or waived inquiry into the issue and paid the additional amounts with the intention to effect an absolute transfer.

It is necessary to examine closely the terms of the loan agreement and the course of events preceding its signing in order to discover what the payer gave and expected to receive by way of consideration. It is only by doing this that it can be ascertained whether the payment of the additional amounts was absolute or conditional. If the payment was conditional, it was subject to the original or continued existence of a particular subject-matter, such as an existing or future indebtedness or other obligation owed to the payee. [82] Porter v. Latec Finance (Qld.) Pty. Ltd. (1964) 111 C.L.R., at p. 205. In this case, the evidence suggests that the appellants agreed to pay and actually paid the amounts representing withholding tax because the respondent represented that the withholding tax on interest payments must be met by the appellants. Such representations may have caused the appellants to believe that cl. 8(b) took its form because of a general obligation on borrowers to pay the particular tax. When the matter is looked at in this light, it can be argued that the appellants agreed to pay the nominated interest rate as the price of the loan and further agreed to pay the additional amounts with which the Dee Why branch, as agent of the appellants, discharged what the appellants considered to be their own tax liability. However, the true situation was, of course, that the liability for payment of withholding tax fell upon the lender and that s. 261 avoided any attempt to pass this burden on to a borrower in circumstances such as the present. The appellants thus had no indebtedness in respect of withholding tax, the discharge of which could form consideration for the payments under cl. 8(b). Those payments were therefore not made for good consideration within the terms of the defence outlined in Barclays Bank and Westpac Banking Corporation .

The respondent, taking a different view of the contractual arrangements, asserts that all its pre- contractual statements concerning payment of withholding tax simply took the form of a contractual offer, which the appellants were at liberty to accept or to reject. Viewed from the angle of contract formation between equal and experienced parties, this is undoubtedly true. But we are not concerned in this case with what a hypothetical, experienced commercial person believed he or she was contracting for; in order to decide whether the appellants in this case have received consideration for payment of the additional moneys, we must ask what these particular appellants, in all the circumstances, thought they were receiving as consideration. In this context, consideration means the matter considered in forming the decision to do the act, ``the state of affairs contemplated as the basis or reason for the payment''. [83] Birks, op. cit., p. 223. And, as we have stated, the ``state of affairs'' existing in the appellants' minds was that the withholding tax was their liability.

So, in the context of failure of consideration, the failure is judged from the perspective of the payer. In Rover International Ltd. v. Cannon Film Ltd. , [84] [1989] 1 W.L.R. 912, at p. 923; see also Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] A.C. 32 , per Viscount Simon L.C. at p. 48 . Kerr L.J. stated:

``The question whether there has been a total failure of consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract. The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract.''

On the other hand, there has been an insistence that the failure of consideration be total. The law has traditionally not allowed recovery of money if the person who made the payment has received any part of the ``benefit'' provided for in the contract. [85] Hunt v. Silk (1804) 5 East 449 [ 102 E.R. 1142 ]; Whincup v. Hughes (1871) L.R. 6 C.P. 78 . However, as the passage already quoted from Rover International Ltd. demonstrates, the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact. Thus, in Rowland v. Divall , [86] Rowland v Divall [1923] 2 K.B. 500 . the plaintiff succeeded in an action for repayment of the purchase price of a car he had bought from the defendant, unaware that the car had been stolen before it came into the defendant's possession. The defendant resisted the claim with the argument that the plaintiff could not prove total failure of consideration because he had used the car for several months. The Court of Appeal, however, dismissed this argument on the ground that the plaintiff had not received ``any part of that which he contracted to receive - namely, the property and right to possession''. [87] ibid., at p. 507.

Similarly, in Rover International Ltd. itself, the plaintiff succeeded in its claim for

ATC 4672

restitution of payments made to the defendant even though the defendant had performed some of its obligations under the contract. The plaintiff was to dub and distribute films provided to it by the defendant and receive a share of the box office receipts as its payment. The plaintiff was also required to make substantial payments to the defendant in advance of recovering its share of the receipts. The defendant supplied the films to the plaintiff and the plaintiff made the pre-payments before breaching the contract. The plaintiff was then able to recover the pre-payments on the basis that the delivery and possession of the films were not what the plaintiff had bargained for; the ``relevant bargain'' was the opportunity to earn a substantial share of the gross receipts.

In cases where consideration can be apportioned or where counter-restitution is relatively simple, insistence on total failure of consideration can be misleading or confusing. In the present case, for instance, it is relatively simple to relate the additional amounts paid by the appellants to the supposed obligation under cl. 8(b) of the loan agreements. The appellants were told that they were required to pay withholding tax and the payments that they made were predicated on the fact that, by so doing, they were discharging their obligation. Such an approach is no different in effect from the cases under the old statutes of usury whereby a borrower could recover from the lender the excess interest which the lender was prohibited from stipulating or receiving. [88] e.g., Bosanquett v. Dashwood (1734) Cases T. Talbot 38 [ 25 E.R. 648 ].

In this case, the Bank must prove that the appellants are not entitled to restitution because they have received consideration for the payments which they seek to recover . It does not avail the Bank to argue that the appellants were provided with the loan moneys agreed. Indeed, the severability of the loan agreement into its relevant parts would seem to be accepted by the Bank for it submitted that the appellants' consideration for agreeing to pay the additional amounts under cl. 8(b) was the Bank's agreement not to charge a higher interest rate. In circumstances where both parties have impliedly acknowledged that the consideration can be ``broken up'' or apportioned in this way, any rationale for adhering to the traditional rule requiring total failure of consideration disappears.

It might be said that to order restitution in the present case would, in the absence of any other defences, confer something in the nature of a windfall upon the appellants at the expense of the respondent. This possible result flows from the fact that, having proven mistake, the appellants are prima facie entitled to recovery and the respondent bears the onus of proving why an order for restitution would be unjust. Given the conclusion we have reached upon the issue of mistake and consideration, we need not examine the appellants' argument, based upon Lord Denning's judgment in Kiriri Cotton Co. Ltd. v. Dewani , [89] [1960] A.C., at p. 204. that the Bank was primarily responsible for the mistaken payment or the argument that the payment should be recoverable because it was made pursuant to a contractual obligation rendered void by statute. However, factors of the kind outlined in Kiriri reinforce our conclusion as to the purposes of the parties when entering the loan agreement. The respondent knew of the existence of s. 261 and understood its potential reach even if it was not aware that it invalidated cl. 8(b). It acknowledged drafting cl. 8(b) with s. 261 in mind. In circumstances where the party in the best position to order its affairs in the light of specialist advice has deliberately chosen to charge a particular interest rate and seek additional amounts by virtue of separate provision in the loan agreement, there is no injustice to that party in ordering recovery. Otherwise the policy of s. 261 would be defeated.

The respondent next submits that an order for restitution would be unjust because it has changed its position. The defence of change of position has not been expressly accepted in this country. In Westpac Banking Corporation , the Court referred to the displacement of prima facie liability by ``some adverse change of position by the recipient in good faith and in reliance on the payment''. [90] (1987-1988) 164 C.L.R., at p. 673. The issue did not, however, arise for decision in that case. In this country, conflicting views have been expressed. In Bank of N.S.W. v. Murphett , [91] [1983] 1 V.R., at p. 496. Crockett J. thought change of position was a defence. However, in National Mutual Life Association v. Walsh , [92] (1987) 8 N.S.W.L.R., at pp. 598-599. Clarke J. concluded that the English Court of Appeal decision in Baylis v. Bishop of London [93] Baylis v Bishop of London [1913] 1 Ch. 127 . ruled out the acceptance of such a defence in the case before him. In England, there is strong authority in favour of acceptance of the defence, viz. the judgment of Kerr L.J. in Rover International Ltd. , [94] [1989] 1 W.L.R., at p. 925. Barclays Bank [95] [1980] Q.B., at pp. 695-696. and most importantly the recent decision of the

ATC 4673

House of Lords in Lipkin Gorman v. Karpnale Ltd. [96] [1991] 2 A.C. 548, at pp. 558, 568, 578-580. In the last case, Lord Bridge of Harwich, Lord Ackner and Lord Goff of Chieveley held that English law should recognize the defence, although they declined to define its scope. Text writers, [97] Goff and Jones, op. cit., pp. 46-47; Birks, op. cit., pp. 414-415; Beatson, op. cit., pp. 155-160. such as Goff and Jones and Birks, also support the existence of the defence, particularly in view of the inflexibility of the related doctrine of estoppel, as evidenced by Avon C.C. v. Howlett [98] Avon CC v Howlett [1983] 1 W.L.R. 605 . where the Court of Appeal held that estoppel could not operate pro tanto. And, in Canada [99] Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd. (1975) 55 D.L.R. 1 . and the United States, [100] Restatement of the Law of Restitution , § . 69(1). the defence of change of position has been recognized. Section 125(1) of the Property Law Act 1969 (W.A.) and s. 94B of the Judicature Act 1908 (N.Z.) also provide for this defence.

If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt . [101] Birks, op. cit., p. 410. In the jurisdictions in which it has been accepted (Canada and the United States), the defence operates in different ways but the common element in all cases is the requirement that the defendant point to expenditure or financial commitment which can be ascribed to the mistaken payment. [102] Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd. (1975) 55 D.L.R. (3d), at p. 13; Grand Lodge, A.O.U.W. of Minnesota v. Towne (1917) 161 N.W. 403 , at p. 407 . In Canada and in some United States decisions, the defendant has been required to point to specific expenditure being incurred because of the payment. Other cases in the United States [103] e.g., Moritz v. Horsman (1943) 9 N.W. 868 . allow a wider scope to the defence, such that a defendant can rely upon it even though he or she cannot precisely identify the expenditure caused by the mistaken payments. In no jurisdiction, however, can a defendant resort to the defence of change of position where he or she has simply spent the money received on ordinary living expenses.

The difficulty lying in the path of acceptance or detailed explication of the defence in this case is that the facts which might give rise to a plea of the defence and thus require a decision by this Court were not adduced in the courts below. As mistake of law was only briefly raised by the appellants in the Federal Court, the respondent addressed no argument in support of the defence of change of position. Only in this Court were submissions made by the parties on this issue. In its written outline of submissions, the respondent puts its case thus:

``In the present case, on the occasion of each rollover, the respondent changed its position by acceding to the appellants' request to `rollover' a rollover which it would not have been bound to do, by the operation of clause 8(c). The respondent, thereby incurred a liability for withholding tax which it otherwise would not have incurred. If the respondent is now obliged to repay amounts to the appellants, it will be out of pocket.''

Counsel for the respondent submits that an inference should be drawn that, having regard to the terms of the bargain, it would have exercised whatever contractual rights were open to it to ensure the performance of its bargain. The short answer to this submission is that there is simply an insufficient basis in the evidence for reaching this conclusion.

The respondent should not be penalized for failing to provide evidence in support of the defence before the lower courts; it had no reason to fight the case on that basis. The case should be remitted to the trial judge for consideration of this issue.

In the result we would allow the appeal, set aside the order of the Full Court of the Federal Court in so far as it relates to the appellants' appeal on the cross-claim and in lieu thereof allow that appeal to the Full Court and set aside the order of the trial judge made 14 June 1989. We would remit the case to the trial judge for determination, in accordance with the judgment of this Court, of the following issues:

As the appellants were successful in this Court with their submissions as to the construction of the loan agreements, the interpretation of s. 261 of the Act and the issue of mistake of law, the Bank should pay the appellants' costs of this appeal. However, in view of the fact that the appellants' appeal to the Full Court of the Federal Court succeeded on only one of many issues, we would decline to make any order as to costs in respect of that appeal.

Footnotes

[1] (1990) 93 A.L.R. 271.
[2] ibid., at pp. 302-304.
[3] ibid., at p. 305.
[4] Pt III, Div. 11A.
[5] Income Tax (Dividends and Interest Withholding Tax) Act 1974 (Cth), s. 7(b).
[6] ss. 221YL and 221YN of the Act.
[7] s. 128A(4).
[8] Stardawn Investments Pty Ltd v Comptroller of Stamps (Vic) (1983) 84 ATC 4097 , at p. 4100 .
[9] In re Athill, Athill v Athill (1880) 16 Ch.D. 211 , at pp. 222-223 .
[10] Heilbut, Symons & Co Ltd v Buckleton [1913] A.C. 30 , at p. 47 .
[11] Bouvier's Law Dictionary , (1866), vol. 2, p. 549.
[12] In re Jarvis and Burgess's Contract [1932] V.L.R. 1 , at p. 3 .
[13] Hayne v. Cummings (1864) 16 C.B.N.S. 421 , at pp. 426-427 [ 143 E.R. 1191 , at p. 1194 ]; see also Halsbury's Laws of England , 4th ed., vol. 12, par. 1539.
[14] Brett & Anor v Barr Smith & Anor (1919) 26 C.L.R. 87 , at p. 96 .
[15] (1990) 93 A.L.R., at p. 303.
[16] ibid., at pp. 303-304.
[17] ``Mistake of Law'', (1943) 59 Law Quarterly Review 327, at p. 327.
[18] J & S Holdings v NRMA Insurance (1982) 41 A.L.R. 539 .
[19] ibid., at p. 547.
[20] ibid., at p. 550.
[21] ibid.
[22] (1949) 80 C.L.R. 11, at p. 30.
[23] (1990) 93 A.L.R., at p. 305.
[24] American Law Institute, (1937), p. 179.
[25] Farmer v Arundel (1772) 2 Wm.Bl. 824 , at p. 825 [ 96 E.R. 485 , at p. 486 ].
[26] (1802) 2 East 469 [102 E.R. 448].
[27] Lowry v Bourdieu (1780) 2 Doug. KB 468 , at p. 471 [ 99 E.R. 299 , at p. 300]; cf. the view Lord Ellenborough adopted in the later case, Perrott v. Perrott (1811) 14 East 423 , at p. 440 [ 104 E.R. 665 , at p. 671 ].
[28] Cartwright v Rowley (1799) 2 Esp. 722 , at p. 723 [ 170 E.R. 509 , at p. 510 ].
[29] Brisbane v Dacres (1813) 5 Taunt. 143 , at pp. 159-160 [ 128 E.R. 641 , at pp. 647-648 ].
[30] ibid., at pp. 152-153 [p. 645 of E.R.].
[31] Goff and Jones, The Law of Restitution , 3rd ed. (1986), pp. 118-119.
[32] (1813) 5 Taunt., at p.152 [128 E.R., at p. 645].
[33] Kelly v Solari (1841) 9 M. & W. 54 [ 152 E.R. 24 ].
[34] Sawyer and Vincent v. Window Brace Ltd. [1943] 1 K.B. 32 , at p. 34 .
[35] (1949) 80 C.L.R., at p. 30.
[36] (1937-1938) 59 C.L.R. 150, at p. 159. See also per McTiernan J. at p. 168.
[37] (1957) 98 C.L.R. 65.
[38] ibid., at pp. 74-75.
[39] (1841) 9 M. & W., at p. 58 [152 E.R., at p. 26].
[40] Turvey v Dentons 1923 Ltd (1953) 1 Q.B. 218 .
[41] (1982) 41 A.L.R., at p. 551.
[42] [1960] A.C. 192, at pp. 204-205.
[43] (1841) 9 M. & W., at p. 58 [152 E.R., at p. 26].
[44] Goff and Jones, op. cit., pp. 124-125.
[45] St. Paul Fire & Marine Ins. Co. v. Pure Oil Co. (1933) 63 F. (2d) 771 , at p. 773 .
[46] (1989) 59 D.L.R. (4th) 161, per La Forest J. at p. 191.
[47] (1982) 132 D.L.R. (3d) 193, at pp. 201-215.
[48] Property Law Act 1969 (W.A.), ss. 124 and 125 (s. 124 was applied in Inn Leisure v. D.F. McCloy (1991) 100 A.L.R. 447 ); Judicature Act 1908 (N.Z.), ss. 94A and 94B.
[49] Report Relating to the Irrecoverability of Benefits Obtained by Reason of Mistake of Law , Report 84, (1984).
[50] Restitution of Benefits Conferred under Mistake of Law , Report LRC 53, (1987).
[51] Report on Benefits Conferred Under a Mistake of Law , Report LRC 51, (1981).
[52] Restitution of Payments made under a Mistake of Law , Consultation Paper No. 120, (1991).
[53] Woolwich Building Society v. IRC [1992] 3 W.L.R. 366 , per Lord Keith of Kinkel at p. 374 ; Lord Goff of Chieveley at p. 384; Lord Slynn of Hadley at p. 417.
[54] op. cit., p. 119.
[55] The Law of Restitution , (1978), vol. 3, § .14.27.
[56] An Introduction to the Law of Restitution , (1989), pp. 166-167.
[57] Maddaugh and McCamus, The Law of Restitution , (1990), p. 255.
[58] ibid., p. 256.
[59] (1987) 162 C.L.R. 221, per Deane J. (with whom Mason and Wilson JJ. agreed) at pp. 256-257; see also Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation (1987-1988) 164 C.L.R. 662 , at p. 673 .
[60] (1982) 132 D.L.R. (3d), at p. 209.
[61] Barclays Bank Ltd v. W. J. Simms Son & Cooke (Southern) Ltd. [1980] Q.B. 677 , per Goff J. at p. 695 : ``Of course, if the money was due under a contract between the payer and the payee, there can be no recovery on this ground''.
[62] See Barclays Bank Ltd v. W. J. Simms Son & Cooke (Southern) Ltd. ; Australia and New Zealand Banking Group Ltd. v. Westpac Banking Corporation .
[63] Beatson, The Use and Abuse of Unjust Enrichment , (1991), p. 150.
[64] (1841) 9 M. & W., at p. 58 [152 E.R., at p. 26].
[65] (1856) 1 H. & N. 210, at p. 215 [156 E.R. 1180, at p. 1102].
[66] [1980] Q.B., at pp. 690-695.
[67] (1987-1988) 164 C.L.R., at pp. 671-672.
[68] ibid.
[69] (1964) 111 C.L.R. 177, at pp. 187, 190, 204.
[70] Commercial Bank of Australia Ltd v Younis [1979] 1 N.S.W.L.R. 444 , at pp. 447-450 .
[71] [1980] Q.B., at pp. 686-694.
[72] Bank of New South Wales v Murphett [1983] 1 V.R. 489 , at pp. 491-492, 494-495 .
[73] (1964) 111 C.L.R., at pp. 186-187, 204.
[74] [1980] Q.B., at pp. 694-696.
[75] Birks, op. cit., p. 159.
[76] (1987) 162 C.L.R., at pp. 256-257.
[77] (1988) 164 C.L.R., at p. 673.
[78] (1989) 59 D.L.R. (4th), at p. 192.
[79] Westpac Banking Corporation (1987-1988) 164 C.L.R., at p. 673.
[80] [1980] Q.B., at p. 695.
[81] Butler, ``Mistaken Payments, Change of Position and Restitution'', in Finn (ed.), Essays on Restitution , (1990), p. 88. See also Matthews, ``Money Paid Under Mistake of Fact'', [1980] New Law Journal 587; National Mutual Life Association v. Walsh (1987) 8 N.S.W.L.R. 585 , at pp. 595-596 .
[82] Porter v. Latec Finance (Qld.) Pty. Ltd. (1964) 111 C.L.R., at p. 205.
[83] Birks, op. cit., p. 223.
[84] [1989] 1 W.L.R. 912, at p. 923; see also Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] A.C. 32 , per Viscount Simon L.C. at p. 48 .
[85] Hunt v. Silk (1804) 5 East 449 [ 102 E.R. 1142 ]; Whincup v. Hughes (1871) L.R. 6 C.P. 78 .
[86] Rowland v Divall [1923] 2 K.B. 500 .
[87] ibid., at p. 507.
[88] e.g., Bosanquett v. Dashwood (1734) Cases T. Talbot 38 [ 25 E.R. 648 ].
[89] [1960] A.C., at p. 204.
[90] (1987-1988) 164 C.L.R., at p. 673.
[91] [1983] 1 V.R., at p. 496.
[92] (1987) 8 N.S.W.L.R., at pp. 598-599.
[93] Baylis v Bishop of London [1913] 1 Ch. 127 .
[94] [1989] 1 W.L.R., at p. 925.
[95] [1980] Q.B., at pp. 695-696.
[96] [1991] 2 A.C. 548, at pp. 558, 568, 578-580.
[97] Goff and Jones, op. cit., pp. 46-47; Birks, op. cit., pp. 414-415; Beatson, op. cit., pp. 155-160.
[98] Avon CC v Howlett [1983] 1 W.L.R. 605 .
[99] Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd. (1975) 55 D.L.R. 1 .
[100] Restatement of the Law of Restitution , § . 69(1).
[101] Birks, op. cit., p. 410.
[102] Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd. (1975) 55 D.L.R. (3d), at p. 13; Grand Lodge, A.O.U.W. of Minnesota v. Towne (1917) 161 N.W. 403 , at p. 407 .
[103] e.g., Moritz v. Horsman (1943) 9 N.W. 868 .

 

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