The recent decision of the Hong Kong High Court (the ‘HKHC’) in Credit One Finance Limited v Yeung Kwok Chi & Others is worthy of the attention of the common law world. The HKHC followed a ‘but for’ test developed by English courts and established that reliance on receipt of enrichment is not a necessary ingredient of the change of position defence. This case not only marks itself the first Hong Kong case discussing the role of reliance in the change of position defence but also offers a comparative study of the laws of unjust enrichment in the common law world. As observed by this note, this case also reflects an underlying divergence between, on the one hand, English and Hong Kong laws of unjust enrichment and, on the other hand, the law of unjust enrichment in Australia in terms of the change of position defence. In addition to the clarification of the legal position, this case comes with practical implications for innocent defendants in receipt of benefits and serves as an important reminder to financial institutions on the importance of anti-money laundering and fraud investigations.
Introduction
The defence of change of position to a restitutionary claim founded on unjust enrichment was authoritatively accepted as part of English law for the first time in Lipkin Gorman (a firm) v Karpnale Ltd.
1
Lord Goff formulated the change of position broadly as a defence ‘available to a person whose position has so changed that it would be inequitable in all circumstances to require him to make restitution or alternatively to make restitution in full’.
2
Since then, attention has moved to the ingredients of this defence. One concerns the role of reliance and there are two main views.
3
The narrow view requires that the enriched defendant must have detrimentally relied on the receipt to alter his position.
4
The alternative wide view proposes that detrimental reliance should not be necessary and that the defendant should have a defence where he can prove a causal link between the receipt of the benefit and the change of position,
5
which has been supported by the English Court of Appeal in Scottish Equitable plc v Derby.
6
Recently, the issue of whether reliance is a necessary ingredient of the defence of change of position has come before a Hong Kong court for the first time in Credit One Finance Limited v Yeung Kwok Chi & Others.
7
The Hong Kong High Court (the ‘HKHC’) adopted the wide view, deciding that reliance on enrichment should not be a necessary ingredient of the change of position defence in all cases.
8
This case is of significance as, since then, more recent Hong Kong decisions have repeatedly followed the wide view of the defence, which appears to become the settled legal position in Hong Kong.
9
Further, from the perspective of comparative studies, Credit One reflects an underlying divergence between, on the one hand, the English and Hong Kong laws of unjust enrichment and, on the other hand, the law of unjust enrichment in Australia in terms of the change of position defence. In particular, it is interesting to see that the Hong Kong court implicitly joined this ‘wide view vs narrow view’ debate by rejecting the Australian jurisprudence and distinguishing the Australian cases submitted by the parties from Credit One.
The decision of Credit One: Alignment between Hong Kong
and English approaches
Case facts
In Credit One, the disputes arose when a son stole his mother's identity to borrow money from a financial institution (as lender) and defaulted on the loan. The son executed for himself and purportedly on behalf of his mother one loan agreement between the lender and the son and the mother (as borrowers).
10
The lender issued two cheques deposited into the son and mother's joint bank account (the ‘Joint Account’).
11
The son then transferred the money from the Joint Account to his own bank account.
12
It was undisputed that the mother had no knowledge of the loan documents and the deposits and withdrawals from the Joint Account pursuant to the loan documents.
13
The son then defaulted on the loan and the lender commenced legal proceedings against the son and mother for the outstanding balance under the loan or alternatively under the law of unjust enrichment.
14
When defending against the lender's unjust enrichment claim based on mistake as the unjust factor, the mother argued that because money was withdrawn from the Joint Account by the son shortly after the payments by the lender without her knowledge, she was not enriched or should not be liable to repay because of a change of position.
15
The lender contended that the mother's defence of change of position had not been made out because the mother had no knowledge of the payments into her account and could not have relied on the payments to change her position.
16
The key question of law was whether reliance on receipt is a necessary ingredient of the defence of change of position in this case.
17
The acceptance of the wide view
Since Lipkin Gorman, the Court of Final Appeal of Hong Kong, the supreme court in Hong Kong after the handover in 1997, has followed this decision in terms of the recognition of the principle of unjust enrichment.
18
More specifically, Hong Kong courts have repeatedly referred to and followed Lord Goff's broad formulation for the change of position defence.
19
The HKHC in Credit One concluded that ‘the fact that Lord Goff's formulation of the change of position defence in Lipkin Gorman has hitherto been consistently followed in Hong Kong is a reflection that Hong Kong courts have treated Lord Goff's remarks as having the greatest persuasive effect’.
20
In particular, the HKHC referred to Lord Bingham and Lord Goff's description of Lipkin Gorman in Dextra Bank & Trust Co Ltd v Bank of Jamaica as having adopted ‘a broad approach based on practical justice, and to have avoided technicality’ and considered the defence of change of position as founded on ‘a principle of justice in respect of a benefit received by him [the defendant] in circumstances in which it would be inequitable to pursue that claim, or to pursue it in full’.
21
These observations have also been followed by Hong Kong courts.
22
Having examined the development of unjust enrichment law and, more specifically, the change of position defence in Hong Kong, the HKHC stated that in deciding whether a defendant's change of position defence should succeed, the fundamental issue is the justice or injustice of enforcing a restitutionary claim regarding a benefit conferred, but the courts must proceed based on principles rather than sympathy.
23
The HKHC confirmed that for the operation of the defence, undoubtedly it is necessary for a defendant to establish a causal link between the receipt of the benefit and his change of position
24
and the appropriate test of causation should be the ‘but for’ test in Credit One.
25
The HKHC referred to Professor Graham Virgo's wide interpretation of the causation that can be established in either one of the two ways: (a) where it can be established that the defendant no longer retains the specific benefit which was received from the plaintiff or (b) where the defendant's position has changed in other ways as result of his or her reliance on the validity of the receipt of the benefit from the plaintiff.
26
The HKHC also agreed with Mummery LJ's remark in Commerzbank AG v Price-Jones that ‘[in] deciding whether the particular circumstances render it inequitable to require the recipient of an overpayment to make full restitution, the need for a sufficient causal link should not be narrowly applied’.
27
With the emphasis on the broad interpretation of causation, it is unsurprising that the HKHC concluded that ‘the insistence of having reliance as a necessary ingredient of the change of position defence in all cases would be too rigid and inhibitive to the development of the defence, which would seem contrary to the sentiments expressed by Lord Goff in Lipkin Gorman as repeatedly followed by the Hong Kong courts’.
28
As pointed out by HKHC,
29
this view is consistent with National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd, in which the New Zealand Court of Appeal considered:
if money or property which has been paid or transferred to an innocent recipient is stolen, fraudulently misappropriated, lost or destroyed, there will be a change of circumstances which makes full restitution inequitable, but which will not have come about as a result of anything the recipient has done in reliance on the payment or transfer. Circumstances such as these obviously should be embraced within the concept.
30
As such, the HKHC held in Credit One that the mother's change of position defence should succeed as the mother's position would not have changed but for the receipt of money from the lender and there was a sufficient causal link between the receipt of benefits by the mother and her change of position.
31
There is thus no need for the mother to establish her reliance on the receipt of benefits.
32
Such a broad approach was also recently endorsed in Delta Petroleum (Caribbean) Ltd v British Virgin Islands Electricity Corp (British Virgin Islands), where the Privy Council referred to Scottish Equitable and reiterated that ‘there is no reason why relevant changes in position should be restricted to those which have come about through decisions made and steps taken voluntarily in reliance on the receipt of a benefit’.
33
HKHC's defence of the wide approach
In addition to the HKHC's affirmative recognition of the wide view that reliance is not an element for the change of position defence in all cases, it is noteworthy that the HKHC attempted to distinguish those English authorities that purported to challenge this wide view. For example, in Streiner v Bank Leumi (UK) plc,
34
a case with similar facts as Credit One, money was paid into the defendant's account with a Maltese bank, which then paid the money over to his business associates pursuant to an order by the Maltese court.
35
Leggatt J held that the change of position defence was not available because the defence ‘cannot operate without some form of reliance on the payment by the person whose position is said to have changed’.
36
However, according to the HKHC, Leggatt J's decision about the defence of change of position in Streiner was necessarily obiter.
37
Such a conclusion should be a reasonable one, as the change of position was only raised in a contingent claim and was not a core issue. More importantly, noting that Streiner was decided before the landmark case of Lipkin Gorman, the HKHC made a bold statement that it would be preferable ‘to continue following that broad principle as refined in subsequent cases, as opposed to any pre-Lipkin Gorman observations on the application of the change of position defence’.
38
Such a statement echoed the views of some leading scholars who described Streiner, together with some other English cases, as ‘unsatisfactory’ because such a strict reliance rule would ‘leave a good faith defendant unprotected where he receives a benefit which is then stolen or destroyed’.
39
Similarly, in the Privy Council's recent decision in Delta Petroleum, Lord Leggatt (who happens to be the son of Leggatt J in Streiner) relied on Scottish Equitable to reject a strict reliance rule and stated that ‘there is no reason why relevant changes in position should be restricted to those which have come about through decisions made and steps taken voluntarily in reliance on the receipt of a benefit’.
40
In light of the above, the HKHC's decision in Credit One should be applauded as it is the first Hong Kong case embracing the wide view that reliance is not a necessary element for the change of position defence, especially where the innocent recipient's enrichment has been subsequently lost, destroyed, stolen or depreciated in value. Such a binding judicial authority in Hong Kong, together with the recent development in English law, will contribute to the appeal and receptivity of the ‘wide view’ in the common law world.
The divergence between the Hong Kong/English approach
and the Australian approach
As noted by the HKHC, the issue of whether reliance is a necessary ingredient of the defence of change of position arises most prominently in cases where the enrichment that the defendant has received has subsequently been lost, destroyed, stolen, or has depreciated in value.
41
In Australia, such similar situations would be categorised as ‘independent changes of position’, where the change of position arises through a supervening act or event independent of the defendant.
42
When evaluating the ‘wide view’ confirmed in Scottish Equitable, the HKHC in Credit One also considered some Australian authorities raised by the plaintiff that claimed to support a ‘narrow view’, which required the defendant's detrimental reliance to raise the defence of change of position.
43
In David Securities Pty v Commonwealth Bank of Australia, Mason CJ, Deane, Toohey, Gaudron and McHugh JJ stated ‘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’.
44
However, the HKHC pointed out that the facts of David Securities involved only a ‘defendant-instigated change of position’ by referring to the view of Justice James Edelman and Professor Elise Bant.
45
Therefore, this identification of reliance as a core requirement in David Securities should not affect the conclusion in Credit One saying that reliance is not always required, especially where the change of position occurred by some act independent of the defendant. As Professor Bant stated, the decision made in David Securities should not constitute ‘an insurmountable barrier’ to the principled application of the defence to independent changes of position.
46
Nevertheless, in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd, Hayne, Crennan, Kiefel, Bell and Keane JJ, did make an express criticism of Lipkin Gorman saying that ‘Lord Bridge of Harwich, Lord Ackner and Lord Goff said that the defence should be recognised by English law but declined to define its scope’.
47
Here, it is noteworthy that there is a clear divergence between the English/Hong Kong and Australian approaches in the modern law of unjust enrichment. To some extent, the Australian judges (at least implicitly) tried to purge the influence of Lipkin Gorman from Australia as they made it clear that ‘whether English cases subsequent to Lipkin Gorman have taken a wider view of the defence, one which eschews a requirement of detrimental reliance in favour of a mere causal link, cannot alter what was said in David Securities regarding the defence’.
48
Although it appears that some Australian judges were determined to defend their ‘narrow view’, the legal position on this question of law still remains unsettled in Australia. According to Justice Edelman and Professor Bant, as the High Court of Australia has not yet been confronted directly the cases on ‘independent change of position’ (i.e. change of position arising from the actions of a third party or a natural event, ‘it is difficult to see any reason of principle or policy which would prevent the Australian courts from adopting the English approach to recognise an independent change of position in cases such as loss, theft, or depreciation’.
49
Therefore, the aforementioned Australian authorities may at best serve as weak authorities to support the narrow view that reliance is a necessary element for the change of position defence. This view was also shared by the HKHC, which implicitly joined this academic debate between the ‘narrow view’ and ‘wide view’ and expressly ‘declined to hold that reliance is always necessary for the operation of the change of position defence’.
50
Concluding remarks
To evaluate the ramifications of adopting the wide view, an immediate question to ask is what are the unsatisfactory consequences arising from the narrow view? To some extent, those pre-Lipkin Gorman cases such as Streiner are unsatisfactory because a strict reliance rule would leave a good faith defendant unprotected in cases such as loss, theft, or depreciation due to a third party's acts or a natural event.
51
This happened in an older Hong Kong case, Hua Rong Finance Ltd v Mega Capital Enterprises Ltd,
52
where the claimant issued a cheque for $1.5 million to a fraudster who purported to act for the defendant, deposited the cheque into the defendant's bank account and then withdrew all the money and disappeared.
53
The wide view that no reliance is required for the change of position defence does cure the strictness of the narrow view in these real-life examples where the defendants could not have acted in reliance on the receipt of money. After all, in deciding whether a defendant should be entitled to successfully rely on a defence of change of position, ‘the fundamental issue is the justice or injustice of enforcing a restitutionary claim in respect of a benefit conferred’.
54
Further, as shown in the recent case law in Hong Kong, even a financial institution may by itself become a third party unknowingly receiving and transferring misconceived funds as an intermediary.
55
In theory, such a financial institution could still make full use of the protection offered by the ‘wide view’ against any unjust enrichment claims from the parties whose funds have been misplaced. Having said that, given their commercial expertise and complexity, financial institutions should still be cautioned to conduct robust due diligence and anti-money laundering investigations on the sources of funds received from clients to better protect their position when raising the change of position defence. In any event, the pivot of the defence of change of position is about whether it would be inequitable in all circumstances to make restitution, which is subject to the court's case-by-case evaluation and discretion.
56
In light of the above, the HKHC's decision in Credit One should be applauded, as it has made clear that reliance on enrichment is not a necessary ingredient of the change of position defence in all cases under Hong Kong law and has reaffirmed Hong Kong courts’ support for a broad formulation of this defence established by Lipkin Gorman and the subsequent authorities. Such a legal certainty is crucial as the courts must proceed on the basis of principle, and not sympathy, ‘in order that the defence of change of position should not disintegrate into a case-by-case discretionary analysis of the justice of individual facts’.
57
Further, from the perspective of comparative study, the HKHC also extensively examined authorities in the wider common law world, including Australia and New Zealand, which could, according to the former Chief Justice Andrew Li, ‘provide a flourishing market place of ideas for dealing with the challenging legal issues of our times’ in Hong Kong.
58
