The borrowers have executed a contract of sale and initially only require finance for the deposit. The deposit proposed is in the form of a bank guarantee. Typically where the bank provides a bank guarantee it requires the borrower to deposit a sufficient sum to be held on term deposit as security for the guarantee. The borrowers indicate they will be able to deposit the required sum. They fill out a loan application form which is accepted by the lender.
The borrowers are given a loan agreement to take away to consider and sign. Assuming the borrowers will soon sign the documentation, and before the term deposit is set up, the loans officer arranges for a bank guarantee to be drawn up and submits it to the vendor’s solicitor as stakeholder. The borrowers become aware the bank has provided the guarantee.
Time passes. The borrowers fail to attend settlement. The bank receives a demand from the vendor’s solicitor calling on the bank guarantee. The bank upon receiving the demand, tries unsuccessfully to locate the relevant lending files and critically, a copy of the loan agreement signed by the borrowers. There is no term deposit. The loans officer has left the employ of the bank and cannot assist in locating the relevant files.
The bank has no option other than to pay on demand in accordance with the bank guarantee.1
The bank has no recourse to any security to recoup the amount it has paid. Worse still it cannot locate a document signed by the borrowers evidencing that they undertook to repay any amount the bank was required to pay under the bank guarantee.
Demands on the borrowers go unsatisfied. In the absence of the necessary loan documentation the bank is unable to pursue the simple debt recovery proceeding it would ordinarily commence.
In those circumstances what remedies, if any, are available to the bank to recoup the moneys it has paid out?
Courts have recognised equitable and restitutionary remedies to account for and enable recovery of payments to third parties which discharge the debts of others, payments otherwise made under compulsion, and payments made under a mistake where there may be impediments to recovery against the immediate recipient.2
A brief outline of some of these remedies follows, commencing with what has been referred to variously as the Liggett defence, or Liggett doctrine.
The Liggett Doctrine
What has become known as the Liggett doctrine derives from the decision of Wright J in B Liggett (Liverpool) Ltd v Barclays Bank Ltd.3
The equitable doctrine has been described as applying where a person who pays the debts of another without authority is allowed the benefit of the payment.4 Further, the person may recover that benefit.5
In Liggett’s case Barclays Bank was sued by its customer for monies had and received after the bank in breach of the customer’s mandate paid cheques signed by only one of the required two director signatories. The cheques were applied in payment of the customer’s trade creditors. At common law the bank did not have a defence where it simply paid the debts of another without authority.
The cheques in question were found to have discharged a legal liability incurred by the company. In those circumstances Wright J noted the “general principle of equity” as follows6:
“The equitable principle has been applied beyond question over and over again to cases where an agent not having the authority of his principal has borrowed money as on behalf of his principal. Under those circumstances at common law the principal cannot be sued and cannot be made to repay the amount so borrowed, but in equity it has been held that to the extent that the amount so borrowed has been applied in payment of the debts of the principal, the quasi lender is entitled to recover from the quasi borrower.
…
The ground is sometimes put in this way, that the lender or the quasi lender is subrogated to the rights of the creditor who has been paid off. That, obviously, is not precisely true, because no question of subrogation to securities can arise in such a case.
…
… I think that the equity that I have been referred to ought to be extended even in the case where the cheque which was paid was paid out of the credit balance, and was not paid by way of overdraft, so that the banker will be entitled to the benefit of that payment if he can show that that payment went to discharge a legal liability of the customer. The customer in such a case is really no worse off, because the legal liability which has to be discharged is discharged, though it is discharged under circumstances which at common law would not entitle the bank to debit the customer.”
Liggett’s case has been cited and followed in Australia on a number of occasions.7
The Liggett doctrine would arguably apply to the above example. The bank paid the sum of the deposit, by call upon the bank guarantee, which was an obligation of the borrowers pursuant to the contract of sale.
If the bank was not an actual lender then under the terminology of Wright J in Liggett, it was a quasi lender entitled to recover from the quasi borrower.8
While the Liggett doctrine has been referred to as a defence9, there is authority in New Zealand for it giving rise to a distinct and autonomous cause of action.10
It has been said that the Liggett doctrine is founded in principles of unjust enrichment.11 The enrichment to which the equity is intended to prevent is the benefit of a legally discharged debt.12
Giles J, writing extrajudicially, considered that unconscionability offers the most promising basis for a Liggett defence.13 In any event the principles of unjust enrichment provide other bases for recovery.
Unjust enrichment
The accepted elements of a claim for unjust enrichment are:
(a) an enrichment of the defendant;
(b) at the expense of the plaintiff;
(c) which enrichment is unjust.14
Enrichment is established in the above example by the fact that prior to the provision of the bank guarantee the borrowers were liable to pay a sum by way of a deposit. After the payment of the sum pursuant to the bank guarantee that contractual obligation was satisfied.
The provision of the bank guarantee, being an unconditional promise to pay, exposed the bank at all times to a call upon the guarantee which, unless the borrowers provided the necessary security in the form of a term deposit, would be at the expense of the bank.
The unjust element would be established by a number of factors. The bank was not an officious intervener. It provided the bank guarantee following a request by the borrowers and an application for finance to the bank.
In such circumstances it would be open to contend that it would be unconscionable to permit the borrowers to avoid their contractual liability to pay the deposit, where they knew or would likely have known that the bank guarantee would be called upon as a consequence of their failure to attend settlement.
There are arguably other restitutionary grounds available to recover the amount of the payment under the bank guarantee in the above example.
The Right to Recoupment: Compulsory Discharge of Another’s Liability
In general, anybody who has under compulsion of law made a payment which discharges a primary liability of another is entitled to be reimbursed by that other.15
What were known as the common or indebitatus counts were pleading devices at common law to assist in the recovery of debts. These included an action for money had and received, quantum meruit or quantum valebat. They are considered to be the origin of modern restitutionary claims.16
The common count of money had and received by the defendant to the use of the plaintiff could be availed of where there had been a total failure of consideration.17 It can arise where a plaintiff has paid money on the basis that the defendant would render a performance (in the above example the provision of security in the form of a term deposit) amounting to the agreed return for the payment under a contemplated contract which never comes into being, which gives rise to total failure of consideration.18
The common law provides a right of recovery if two requirements are met: first, the failure of consideration must be total. Second, there must be no contrary provision in the contract.
Money Paid
The principal use of the count for money paid was where the plaintiff, at the request of the defendant, discharged a debt owed by the defendant. If the defendant requested the plaintiff to pay off the debt or to provide a guarantee, the plaintiff was able to recover the payment from the defendant by way of reimbursement of the debt.19
In Israel v Foreshore Properties Pty Ltd (in liq) (1980) 30 ALR 631, the High Court held that the principle entitled the paying party to an indemnity from the requesting or benefiting party.
Equitable Estoppel
Arguably the above example also provides a basis for recovery of the payment under the bank guarantee on established principles of equitable estoppel.
In this case it could be argued that:
- The bank assumed the borrowers would provide and maintain the necessary security in the form of a term deposit and would otherwise be liable for a payment made by the bank if required under the bank guarantee;
- The borrowers induced the bank to adopt that assumption and expectation by applying for the bank guarantee and indicating they would provide a term deposit as security;
- The bank acted by providing the bank guarantee in reliance on the assumption and expectation created by the borrowers;
- There was evidence the borrowers knew that the bank had provided the bank guarantee;
- The bank’s action in complying with its obligation under the bank guarantee occasioned it detriment in making a payment without security against which to recoup the amount of the payment;
- The borrowers failed to attend settlement and act to avoid the detriment thus exposing the bank to a payment, and refused to repay the bank the amount of the payment.
Further it would be unjust, unfair or unconscionable to permit the borrowers to have the benefit of the discharge of their indebtedness to the vendor under the sale contract without accounting to the bank.
It would be argued that the minimum equity to do justice would be an order for recovery against the borrowers of the amount of the payment made by the bank.
Conclusion
If a person makes a payment under a mistake of fact, prima facie the payer can recover the amount of the mistaken payment from the payee.20 But if there are practical or legal impediments to recovery against the immediate payee there may be remedies for recovery against others if they benefited from the payment.
The remedies outlined above are typically not the first weapon called upon in the litigator’s armoury for recovery of a debt. Their existence however should be kept in mind if all of the necessary elements to perfect a cause of action for recovery at common law are unavailable.
G.D. Sheahan
Endnotes
1 The bank guarantee being as good as cash: per Stephen J in Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 457.
2 For example, there may be a defence of change of position: Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1979] 3 All ER 522.
3 [1928] 1 KB 48.
4 Chitty on Contracts, 28th edn, 1999 p.304 para [34-317]5
5 Baker, C “Recovery of Mistaken Payments Under the Liggett Doctrine: a Banker’s “Plan B” (2002) 13 JBFLP 259 at 260.
6 At pp. 60-64.
7 Majesty Restaurant Pty Ltd (In Liq) v Commonwealth Bank of Australia Ltd (1998) 47 NSWLR 593; Bank of New South Wales v Murphett [1983] VR 489; Christianos v Westpac Banking Corporation Ltd (1991) 5 WAR 336; Brybay Pty Ltd v Esanda Finance Corp Ltd [2002] WASC 309.
8 Liggett , supra, at p.60
9 For example Giles R D “The Liggett Defence: In search of a basis” [2000] 15(9) ABLB 140.
10 Westpac Banking Corporation v Rae [1992] 1 NZLR 338 at 345; Baker op cit at pp.262-263.
11 Baker, op cit at 260 -262.
12 Per Baker, op cit at pp. 260,263-4.
13 Giles R D “The Liggett Defence: In search of a basis” op cit at pp.146-147.
14 Mason & Carter “Restitution Law in Australia”, Butterworths, 1995 para [203]; Goff & Jones “The Law of Restitution” Seventh edn, para [1-016] at p.16; Baker op cit p.263.
15 Moule v Garrett (1872) LR 7 Ex 101 at 104; Goff & Jones op cit, para 15-001; Mason & Carter op cit paras [624]-[625] at pp.208-209.
16 See Halsbury’s Laws of Australia, para [110-11660]
17 Halsbury’s, supra, at [110-11665]
18 See also Roxborough v Pall Mall Australia Limited (2001) 208 CLR 516.
19 See Halsbury’s Laws of Australia, para [370-20]; Brittain v Lloyd (1845) 153 ER 683 at 687-8; Hutchinson v Sydney (1854) 156 ER 508; Israel v Foreshore Properties Pty Ltd (in liq) (1980) 30 ALR 631 at 636.
20 Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1979] 3 All ER 522.
