#6779 - David Securities Ltd V. Commonwealth Bank Of Australia - Restitution of Unjust Enrichment BCL

David Securities Ltd v. Commonwealth Bank of Australia

Facts

David Securities Pty. Limited ("David Securities") and A. and T. Rahme and Sons Pty. Limited ("A. and 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… with a view to obtaining finance for a property development negotiations were started with the bank… the manager of the bank referred the claimants to Mr Morgan, a member of a firm of accountants, who thereafter advised the Rahmes during the course of negotiations.

Two documents were executed by the parties: a loan agreement between David Securities and the Bank; an application by David Securities to the Bank for a revolving bills facility with foreign currency option.

The controversial provision (cl. 8) in the loan agreement was intended to ensure that the bank did not suffer the consequence of withholding tax that would have to be normally paid by the bank… 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. The relevant clause (cl. 8) read: “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.” 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.

However, clause 8 of the loan agreement was void under s. 261 of the Trade Practices Act is Australia which read: “(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.”

Though this action, the claimants seek to recover the amount of tax paid by then as per their obligations under Clause 8.

Holding

Recovery of payments made under mistake of law

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.

Commentators have been highly critical of both the fact versus law distinction and the traditional rule precluding recovery…. 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.

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.

Objections to the pure causal analysis

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, ...