By Professor Elise Bant
What is the change of position defence and why is it important?
The change of position defence provides nuanced protection to good faith defendants who irreversibly change their position in reliance on receipt of an impugned benefit (such as a mistaken payment) from a plaintiff. Since its recognition a little over two decades ago by the High Court of Australia in David Securities Pty Ltd v Commonwealth Bank of Australia  HCA 48, the change of position defence has assumed a position of great importance within the Australian law of unjust enrichment. Its recognition has enabled courts to take a more principled approach to the operation of unjust factors such as mistake, obviating the need for fine and ultimately insupportable distinctions between different types of mistake that traditionally operated to restrict defendants’ restitutionary liability at the expense of legitimate claims by plaintiffs. Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd  HCA 14 provides a stark illustration of why a change of position defence may be important, as the respondents received mistaken payments from the appellant as a result of the involvement of a third party fraudster. In reliance on those payments, they changed their position in various important ways. Unless they were successful in their pleaded defence, they would be placed in a worse position than they occupied prior to their receipt. In finding in favour of the respondents, the High Court has considered the rationale of the defence, whether it applies to non-reliance based changes of position, whether changes of position must always be valued in terms of specific monetary sums and the interplay between change of position and other defences such estoppel and the agent’s defence of payment over.
How did change of position become relevant in this case?
AFSL (a financier) was induced by a fraudster (S) to make payments to a number of businesses, including Hills and Bosch, for the purchase of non-existent equipment. S advised Hills and Bosch that the payments were for the discharge of debts owed to them by his companies (the ‘company debts’). In reliance on their receipts, Hills and Bosch treated the company debts as discharged, continued to trade with the companies and gave up the opportunity to pursue remedies in enforcement proceedings against the companies or their directors. Both recipients also gave up the opportunity of taking other steps to better their position, such as by seeking security from third parties.
At first instance, it was accepted that the payments made by AFSL were made pursuant to a mistake induced by S and were prima facie recoverable. The question was whether the defendants had defences of change of position. Einstein J rejected Hill’s change of position defence, on the ground that forgoing a decision to take recovery action against S’s companies or their directors was too speculative, particularly given their precarious financial positions. On the other hand, Bosch’s defence succeeded as, in reliance on its receipt, it had consented to setting aside default judgments handed down in its favour against the companies and their directors. This was considered to constitute a ‘real detriment’ because it involved the extinguishment of a legal claim.
Both Hills and AFSL appealed. The New South Wales Court of Appeal held unanimously that the pleaded changes entitled both Hills and Bosch to complete defences of change of position. The changes were ‘irreversible’ as, by the time the fraud came to light and the plaintiff gave notice of its mistake, the company debts had been treated as discharged and the various steps of enforcement or securing of the debt could not now be taken, or taken effectively. Both Allsop P and Meagher JA considered that it was unnecessary to prove the precise value of the debts discharged by the payments. In any event, both Allsop P and Meagher JA noted that the difficulties in proving the precise value of the changes (what would or could have been obtained as a consequence of enforcement proceedings, or obtaining security from third parties, for example) were a direct consequence of the timing and duration of the plaintiff’s mistake and should not redound to the disadvantage of the recipients.
How were the issues framed before the High Court?
The question of the extent to which a defendant must prove the value of any pleaded change of position, particularly where the pleaded change consists of a foregone opportunity, or loss or rights or property, lay at the heart of the appeal before the High Court. On the facts of the case, the pleaded changes were of two main types. First, the respondents (Hills and Bosch) argued that they had used the payments to discharge debts owed to them by the fraudster’s companies or (if it makes a difference) treated receipt of the monies as having discharged the companies’ debts. Before the High Court, the appellant argued that it was necessary for the respondents to have demonstrated that those debts were valuable as a matter of practical reality (beyond their face value) and thus the extent to which their discharge ‘disenriched’ the respondents. Moreover, it was alleged that the debts were potentially reversible by action taken against the third party company and the respondents had not proven otherwise. Secondly, and more broadly, the respondents’ abandonment of various potential actions to seek recovery of the debts or, (in the case of Bosch) to consent to set aside judgment in their favour in relation to the debts, also required proof of value. It was argued that this should be done in the same manner and to the same standard as is required, for example, in cases of professional negligence. On the appellant’s case, the prospects of recovery elsewhere were extremely limited because of the impecuniosity and in some cases insolvency of the fraudster’s companies and the bankruptcy of their directors. Moreover, they denied that the fraudster’s wife, who had given security to AFSL for debts owed to it, would have been prepared to do the same for the respondents.
In response, the respondents made two main arguments. This first submission accepted that detriment must be proven but averred that, although a precise amount could not be placed on the pleaded changes, they roughly equated to the value of the payments received. In particular, the respondents alleged that they had discharged debts owed by the fraudster’s companies in reliance on their receipt or (if it means something different) treated the debts as discharged. In so doing, they gave up the opportunity to recover the debts elsewhere. At the time of discharging the debts, the debts were valuable and might well have been fully recovered, potentially from the company debtors but also through the fraudster’s wife, who subsequently was prepared to give security to AFSL over the family home. In that sense, AFSL took the benefit of the opportunity given up by the respondents. These broader changes were not capable of precise valuation, because of the passage of time that followed the discharge of the debts and because it involved ‘a complex unravelling of completely hypothetical dealings between the parties’.
More controversially, however, the respondents argued that, in any event, it is not always necessary to value detrimental changes of position for the purposes of the defence. They argued that a better analogy was with estoppel rather than tort, where it is well accepted that detriment can consist of non-pecuniary changes of position, provided that is substantial. Similarly, they said, in the case of change of position, provided that the detriment is substantial, where valuation is very uncertain or impossible, the defence should be permitted in full. This is particularly important in loss of opportunity cases which are necessarily dealing with complex and fictional hypothetical scenarios. The pro tanto operation of the defence normally allows the defence to operate in a nuanced way, so as to return the defendant to their prior position but not to leave it unjustly enriched. In the circumstances of this case, however, the respondents could not be returned to the position they occupied prior to the receipt of the payments from AFSL unless the defence operated completely.
‘Disenrichment’ rejected in favour of an equitable approach to the defence
Broadly speaking, the High Court accepted the second and more controversial submission of the respondents. In so doing, they rejected in no uncertain terms the proposition that the rationale of the defence lies in the concept of ‘disenrichment’. English courts and commentators have generally favoured a disenrichment analysis of the defence, whereby the defence operates only to the extent to which a defendant remains ‘net’ enriched following their change of position (see eg, Dextra Bank & Trust Co Ltd v Bank of Jamaica  UKPC 50). The likely reason for the English preference for ‘disenrichment’ is that the approach appears more certain and predictable than approaches based on high-level concepts such as ‘unconscionability’. The High Court by contrast unanimously considered that the disenrichment analysis was overly restrictive. In essence, while accepting that disenriching changes of position might well attract the defence, the adoption of disenrichment as the informing criterion for its operation was seen wrongly to exclude relevant changes of position that are difficult or impossible to value. Moreover, it artificially constricts the considerations that inform the defence, contrary to the equitable foundations of both the unjust enrichment concept and the defence of change of position. The stress placed by the High Court upon the equitable nature of unjust enrichment is a striking feature of the case and one which warrants a post in its own right.
What then constitutes a relevant change of position for the purposes of the defence? Each judgment agreed that the defendant should be protected where his change of position made it ‘inequitable’ for the plaintiff to recover wholly or in part. The question of course remains how to determine when that normative standard will be satisfied.
French CJ’s practical criterion of ‘irreversible detriment’
For French CJ, the practical exercise of applying the defence in accordance with the required equitable standard of ‘inequitability’ is assisted by the concept of ‘irreversible detriment’, which looks to ‘detriment suffered by the defendant at the point of demand for recovery’ (at –). As his Honour then explained (at –), in this case, at the point at which the appellant demanded repayment, the respondents had irreversibly lost any prospect of recovering some or all of the moneys owed to them. And it was impossible (due to the passage of time) to determine what might have been recovered had they not treated the debts as paid and given up their various avenues of recovery. His Honour considered that this sort of elaborate and potentially expensive enquiry might be appropriate in the context of certain torts, but is wholly inapt in the very different context of change of position.
The plurality’s criterion of ‘the equitable doctrine of detriment’ (and the relevance of irreversibility)
The latter view was also shared by the plurality (Hayne, Crennan, Kiefel, Bell and Keane JJ), who emphasised that ‘restitutionary claims are not founded upon a wrong done to the payer’ (at ). Calling instead on the ‘equitable doctrine concerning detriment’ (at ) which underpins estoppels, their Honours eschewed any approach to determining the availability of restitutionary remedies which require a ‘mathematical assessment of enduring economic benefit’. The concept of detriment at play in estoppel is more broad than purely compensable losses and is not to be understood in a narrow or technical way. ‘So long as it is substantial, it need not consist of expenditure of money or other quantifiable financial detriment …’ (at ). The law of estoppel is concerned to avoid this more broadly conceived detriment that would be suffered by the defendant if the plaintiff were to resile from the assumption on which he changed his position. So too change of position serves to protect a defendant from ‘the detriment that would flow from the change of position if the plaintiff were permitted to recover payments as mistakenly made where they have been applied by the defendant’ (at ).
Applying this approach to the case at hand, the plurality emphasised that the respondents had changed their position with consequences which were ‘irreversible as a practical matter of business’ (at ). In those circumstances, ‘the disadvantages that would enure to [the respondents] if they were required to repay the monies that each received from AFSL are such that it would be inequitable to require them to do so’ (at ).
Gageler J’s analysis of change of position as estoppel
Gageler J in a separate judgment took the insights from estoppel one step further, arguing that, properly understood, change of position is but a particular manifestation of the modern Australian law of estoppel. In particular, his Honour considered (at –) that (1) estoppel is not confined to assumptions induced by representations, but can encompass other categories of ‘induced assumption from which departure would be unconscionable’; (2) the doctrine now operates at law as in equity as a substantive rule of law; and (3) as such, it is not confined to an all-or-nothing operation where to do so would be disproportionate to a measurable detriment. While refusing to decide whether change of position is ultimately to be assimilated to estoppel, his Honour considered (at ) that coherence in the law was properly enhanced if the defence operates where two conditions are met:
The first condition is that the defendant has acted (that is, done something the defendant would not otherwise have done) or refrained from acting (that is, not done something the defendant would otherwise have done) in good faith on the assumption that the defendant was entitled to deal with the payment which the defendant received … The second condition is that, by reason of having so acted or refrained from acting, the defendant would be placed in a worse position if ordered to make restitution of the payment than if the defendant had not received the payment at all. The detriment constituted by that difference in position need not, in every case, be financial or pecuniary. If financial or pecuniary, it need not, in every case, be established with precision. It can be an opportunity forgone. It must, in every case, be shown by the defendant to be substantial.
Importantly, his Honour further explained, at , that:
Where the defence is so established, the prima facie entitlement of the defendant is to maintain the assumption on which the defendant acted and, on that basis, to retain the whole of the payment. That entitlement is qualified to the extent that retention of the whole of the payment can be shown to be disproportionate to the degree of the detriment. Where the detriment is financial or pecuniary, can be quantified, and is less than the amount received, the entitlement of the defendant to retain the payment is reduced pro tanto.
A welcome clarification, but more questions remain
At least in so far as it concerns the change of position defence, this decision is most welcome in a number of respects. It confirms that change of position is properly understood as an independent defence, rather than simply operating to negate or prevent a finding that the defendant was enriched by the original receipt. This latter ‘absent element’ conception of the defence, encouraged under the ‘disenrichment’ analysis, is contrary to precedent and principle. As explained at length elsewhere (Elise Bant, ‘Rights and Value in Rescission: Some Implications for Unjust Enrichment’ in Donal Nolan and Andrew Robertson (eds), Rights and Private Law (Hart Publishing, 2012) 609) its adoption potentially results in the plaintiff’s prima facie right to restitution being determined by reference to the net benefit surviving at the date of hearing. This arguably shifts the point at which the cause of action is complete from (in general) the moment of receipt of the benefit to the time of trial. This is contrary to established authority (see especially David Securities Pty Ltd v Commonwealth Bank of Australia  HCA 48). Moreover, on this analysis, the change of position defence tends to collapse into the primary claim, becoming a mere mechanism for identifying the surviving, actionable enrichment.
The High Court’s decision also tends to support the view articulated repeatedly and forcefully by Australian courts: that an important guiding consideration for the application of the defence is whether the pleaded change of position is irreversible (for a list of cases, see Elise Bant, The Change of Position Defence (Oxford University Press, 2009) 131). As expressed by the Western Australian Supreme Court of Appeal in Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd  WASCA 119 at , in order for the defence to apply ‘the recipient must have changed his or her position, and the change must be legally or practically irreversible or there must be significant difficulties in reversing the change’. The irreversibility criterion emphasises (as the High Court also concluded) that the concept of a ‘detrimental’ change of position properly extends well beyond pecuniary changes. It is well established in the context of estoppel but is also found in other equitable doctrines such as rescission and the agent’s defence of payment over. (See Bant, The Change of Position Defence, chs 2, 3 and 4).
The High Court’s desire to situate change of position within its broader doctrinal context is also most welcome. It was always (in this author’s view) unlikely that change of position was a wholly modern invention and the detailed historical and contextual analyses undertaken in this case which serve to demonstrate that point are scholarly and illuminating. Appreciation of the connections and distinctions between change of position and other private law defences can only promote clarity and consistency in the law. As Gageler J stated (at ), ‘the coherence of the law is enhanced if commonality of concepts results, so far as possible, in commonality of principal’. In this regard, recognition that estoppel and change of position have much in common leaves the door open in subsequent cases to consider other important issues, such as whether the defendant’s reliance must be reasonable (an issue left open by the High Court).
However, estoppel, important as it is, is not the only equitable or common law doctrine the principles of which are relevant to informing change of position. For this author, the pity (understandable though it is in the light of the parties’ submissions) is that the High Court’s process of ‘locating’ change of position within its broader legal and equitable landscape did not extend to incorporating consideration of the valuable insights to be obtained from other relevant sources such as the agent’s defence of payment over (mentioned by French CJ at –) but not developed) and the equitable doctrine of rescission. As mentioned above, those areas (among other matters) confirm the importance of the criterion of irreversibility. But the equitable doctrine of rescission is a particularly rich source of principle to inform application of the defence of change of position. Rescission has long addressed the relevance of defendant changes of position to claims for restitution of transferred benefits through the concept of restitutio in integrum, and mediated those changes through pecuniary orders including conditional orders and allowances (see Bant, ‘Rights and Value in Rescission’, 622–34). As a source of relevant principle, rescission suggests some somewhat different outcomes on key issues than might be drawn from estoppel.
For example, an important question yet to be squarely addressed by Australian courts is whether detrimental changes of position that occur independently of the defendant but as a consequence of the original receipt (what might be termed ‘independent’ changes of position) should also count for the purposes of the defence. Examples of independent changes of position are where a received benefit has spontaneously devalued, been stolen or destroyed. Taking estoppel as the primary (or sole) informing doctrine suggests that only reliance-based changes should count, with the result that such changes of position must be excluded from the ambit of the defence. This is a view seemingly shared by the plurality in Hills Industries at  and Gageler J at .
But closer inspection both of estoppel and rescission supports a difficult conclusion. In estoppel and in change of position, the requirement of reliance is a requirement of causation, namely that the representation or receipt must have caused the defendant’s decision to change her position. It does not follow from this that independent changes of position should not count for the purpose of change of position, provided that a sufficient causal link between the receipt and the pleaded change is established. In cases of independent changes of position, reliance is not the relevant causal link. Rather, causation will be resolved through the application of the ‘but for’ test (but for my receipt of the benefit, the thief would not have stolen it). Glancing sideways, rescission offers many examples of non-reliance based changes which have been taken into account by courts in making orders for restitution and counter-restitution following rescission. Extension of the change of position defence to such circumstances in cases of simple restitution will prevent an otherwise meritorious defendant from being put in a worse position than he occupied prior to his receipt through the order for restitution, a primary aim of the defence both as conceived by the plurality and by Gageler J. There seems no reason in principle why this sort of change should be left out of the equation in the context of the change of position defence: indeed, the consequence of so doing is to limit artificially the scope of the defence in circumstances where equitable principle (as seen in the light of the doctrine of rescission) does not demand it. Nor is there any obstacle in terms of authority to adopting this approach. David Securities did not involve an independent change of position, so there was no need for the High Court in that case to consider non-reliance based changes of position.
In summary, there is a great deal of interest and importance for the defence of change of position in this High Court decision. In particular, the decision takes a valuable first step towards attaining a more coherent law of defences applicable to claims in unjust enrichment. It is to be hoped that further opportunities will arise to consider the place of the defence in the broader scheme of the private law including, but not limited to, the doctrine of estoppel.
AGLC3 Citation: Elise Bant, ‘Change of Position in the High Court: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd’ on Opinions on High (9 May 2014) <http://blogs.unimelb.edu.au/opinionsonhigh/2014/05/09/bant-hills-industries>.
Elise Bant is Professor of Law at Melbourne Law School.