Recovery of moneys paid by employer’s mistake

It is surprising how many times I have been involved in recovering moneys paid to an employee by mistake or resisting attempts by an employer to recover the same from an employee.

The basic principle is that moneys which are paid over pursuant to a mistake of law are not recoverable but moneys paid over by reason of a mistake of fact   are recoverable, subject to the doctrines of unjust enrichment and the “change of position defence”.

The ‘change of position’ defence was first recognised by the High Court of Australia in David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48.  In broad terms, the recipient of monies paid by mistake can rely on the change of position defence and resist repaying the relevant monies if he or she can show that he or she has changed his or her position in good faith in reliance on his or her receipt of the relevant funds.

Here is an extract of a case.

“The respondent puts its claim in the following terms:

Where, as here, the payment of recall is made by mistake of law, the party mistakenly paying the amount may prima facie recover it, subject to a reasonable reliance “change of position” “defence” that might be argued by the payee (here, the Applicant).

(Footnote omitted.)

For this proposition it relies principally on David Securities at 376, 379-80, 384-86 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ), 396-400 (Brennan J) and 401-406 (Dawson J). It also relies on Australian Financial Services and Leasing Pty Limited v Hills Industries Limited [2014] HCA 18; 253 CLR 560 at [23] (French CJ), [81] (Hayne, Crennan, Kiefel, Bell and Keane JJ), [106] and [155]-[157] (Gageler J) and Southage Ply Ltd v Vescovi [2015] VSCA 117; 321 ALR 383 at [50]-[68].

David Securities concerned two family companies (one of which was David Securities), which engaged in property development. David Securities took out a foreign currency loan with the respondent (the Commonwealth bank) for the purpose of property development activities. The second family company also entered into two related loans with the bank, enabling it to draw down funds obtained through the foreign currency loan. The loans were secured by registered mortgages given by the two family companies, as well as unlimited personal guarantees from the husband and wife who controlled the companies, and were also supported by registered mortgages of land under the Real Property Act 1900 (NSW). The loans were subject to adverse currency fluctuations almost immediately and the companies suffered heavy financial losses. They brought proceedings (in negligence, contract and under ss 52 and 53 of the then Trade Practices Act 1974 (Cth)) against their financial advisers and against the bank. At 361-362, in the reasons of Mason CJ, Deane, Toohey, Gaudron and McHugh JJ, the issue in the appeal was set out:

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. 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 action for money had and received did not lie in cases of payment under a mistake of law. 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.

(Footnotes omitted.)

At 367, the plurality note that, 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.” That is not the case in this proceeding. The respondent consciously elected not to argue that it had paid the recall payments under a mistake of law, despite, in substance, contending the applicant did not have a legal entitlement to recall payments.

It was in David Securities that the High Court determined what it called the “traditional rule” – that monies paid under a mistake of law should not be recoverable – should no longer, in its broad form, be part of Australian law: at 376. Rejecting (at 378-379) several qualifications suggested in various authorities, the Court held that the nature of the mistake (whether of fact or law) is not the governing consideration. It expressed the correct principle in the following terms (at 378):

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.

In the present proceeding, the respondent’s claim on this basis cannot succeed because there was no evidence led as to the reason, or reasons, the respondent commenced paying the applicant additional allowances from 30 July 2012. I made this clear in the liability judgment at [22]-[23]:

Aspects of this agreed position between the parties are somewhat puzzling, at least insofar as the respondent’s submissions on the contentious issues are concerned. Initially, the respondent contended that the new telephone allowance, to which I have referred at [14] above, came into effect on 18 September 2012, and also appeared to contend that the applicant should have been paid this allowance rather than a three hour recall allowance, after this date.

It appears the respondent contends that although from approximately August 2012 it did in fact pay the applicant a recall allowance for performing the duties as set out in the agreed statement of facts, it was not obliged to do so and the applicant was overpaid in respect of these amounts. The amounts were not quantified and the respondent did not seek any repayment from the applicant nor explain by way of evidence why it sought no such repayment. Nor did it explain by way of evidence why it decided to commence paying the applicant such allowances in mid-2012.

If anything, the position adopted by the respondent in this proceeding (until the cross-claim application) was that it made the payments despite believing the applicant was not entitled to them. Of course, in any given employment situation, there may be a multitude of reasons an employer would do this – including to keep a valuable employee from leaving, or as an alternative to litigating a claim. There are many plausible reasons, none of which were the subject of any evidence.

Further, although it was barely mentioned, I do not consider these circumstances demonstrate any unjust enrichment of the applicant at the expense of the respondent: see generally Pavey and Matthews Pty Ltd v Paul [1987] HCA 5; 162 CLR 221 on the “unifying legal concept” of unjust enrichment at 256-257 (Deane J, with whom Mason and Wilson JJ agreed); see also Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation [1988] HCA 17; 164 CLR 662 at 673. The applicant did not claim for most of the period during which she was paid additional allowances by the respondent: that is, she was paid three hour recall allowance from 30 July 2012 to 20 October 2014, and her claim period commenced from 17 September 2012, so the overlap is only two months or so.

Although Ms Lindner’s evidence provides some comparison between the applicant’s overtime entitlements and the payments of recall allowance, what is missing, as I have noted, is any evidence about why the respondent paid the applicant recall allowance at all, when it defended these proceedings on the basis no recall allowance was payable.

Accordingly, there is no evidentiary basis for any claim by the respondent of unjust enrichment.

  1. In summary, the claim has insufficient prospects of success, is not supported by the necessary evidence about whether the respondent paid the recall allowance believing the applicant was entitled to it, is made too late in the proceeding, has been the subject of at least two inconsistent positions by the respondent during the course of the trial, and was the subject of an express concession by counsel for the respondent during the course of the trial which then formed the basis on which both the Court and the applicant proceeded thereafter. Finally, the respondent (and the applicant) were on notice about the Court’s concerns on the issue of overtime during the liability hearing. For example, the following exchange took place between counsel for both parties and I:

HER HONOUR:   Well, that’s why I keep coming back to this, but nobody wants to embrace it, so I’m not sure how far I can take it.

HER HONOUR:   Why isn’t it overtime?  …”

Polan v Goulburn Valley Health (No 2) (2017) FCA 30 delivered 31 January 2017 per  Mortimer J