Mistaken payments by banks – think twice before going on that shopping spree...

05 June 2009

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In light of the recent New Zealand case of payment by mistake involving a couple who fled with millions of dollars after the accidental deposit of NZ$10 million into one of their accounts, it is an appropriate time to consider the case of Shields v Westpac Banking Corporation [2008] NSWCA268 (17 October 2008) which also involved a payment by mistake scenario.

The facts

The appeal related to Einstein J’s decision in Westpac Banking Corp v Ollis [2007] NSWSC 956. The circumstances giving rise to Westpac’s claim can be briefly summarised as follows:

• Between June 2005 and January 2006, Mr Ollis drew cheques to the value of approximately $11 million due to a mistake in relation to an anomaly caused by Westpac not cancelling or suspending Mr Ollis’s auto-transfer replenishment facility at a time when it had frozen his personal account while pursuing Mr Ollis for recovery of a $36,000 personal loan.
• Mr Ollis transferred almost $5 million of Westpac’s money to Ms Shields (with whom Mr Ollis was in a de facto relationship) and Koala Development Pty Ltd (Koala) (of which Ms Shields was a director).

The primary judge held that Westpac’s mistake was fundamental and precluded the formation of an intention to transfer money to Mr Ollis.

It was further held that Mr Ollis knew of the ‘glitch’ in Westpac’s computer system and that he had no intention to repay the money to Westpac. Accordingly, it was held that he was defrauding Westpac and that the stolen money was trust money.

Einstein J further held that Ms Shields and Koala received trust property from Mr Ollis for no consideration and, due to Ms Shields’ intimate involvement with the financial affairs of Mr Ollis, with actual notice of the facts giving rise to the trust.

The appeal

On appeal, Mr Shields and Koala argued that Einstein J had erred in respect of certain matters, including:

• in holding that the circumstances in which Mr Ollis drew upon his accounts with Westpac constituted larceny;
• in finding that the consent of Westpac to the drawings was vitiated by mistake, or alternatively, in holding that any mistake of Westpac was a fundamental mistake such as to make the drawings of Mr Ollis larceny;
• In finding that Ms Shields and Koala held property on trust for Westpac; and
• In finding that Ms Shields and Koala held property subject to a charge in favour of Westpac.

Counsel for the appellants argued that the bank’s mistake was not fundamental, precluding the existence of an intention to transfer money to Mr Ollis. It was submitted that when Mr Ollis presented a cheque, Westpac had the option of either declining to honour the cheque or to honour the cheque. Westpac chose to honour the cheques.

It was further submitted that the bank’s computer was functioning correctly and there was no ‘computer glitch’. Each of the transactions was rejected by the computer system but subsequently permitted due to the actions of bank officers.

It was further argued by the appellants’ counsel that as Mr Ollis had not tried to conceal where the money went, the reasonable inference was that he intended to repay the money (and therefore Einstein J’s finding that Mr Ollis had in effect stolen the money was erroneous).

Whilst Hodgson JA (with whom Spigelman CJ and MacFarlan JA agreed) took the view that what had occurred could not accurately be described as a ‘computer glitch’, he held that the payment of moneys to Mr Ollis involved mistakes which were fundamental in nature and that Westpac did not intend to transfer money to Mr Ollis.

Hodgson JA found that despite the possibility that Mr Ollis may have intended to repay Westpac at some later time once he reaped the rewards of the transactions, this did not preclude the finding that Mr Ollis intended to defraud Westpac and that he had stolen the money.

It was held that Einstein J was correct to hold that a trust of the money arose immediately, and it did not matter whether the trust was characterised as a resulting or a constructive trust (the latter being capable of arising in the absence of a court order where the trust arises immediately). Accordingly, the appeal by Ms Shields and Koala was dismissed with costs.

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