VSC case on restitution and good faith change of position

By Legal Eagle

For those small number of readers who are “restitutionally inclined”, you may be interested to hear of a recent decision of the Victorian Supreme Court concerning the change of position defence in TRA Global Pty Ltd v Kebakoska [2011] VSC 480.

The case arose when Ms Kebakoska was made redundant by her employer, TRA Global. The company advised her that she was entitled to a redundancy payment equivalent to 12 weeks’ pay under the Federal Award, and paid her $27,318.48. It later became evident that she was not entitled to that money (meaning that it was paid by mistake). Prima facie the employer would have a right to seek restitution of the payment as it was paid by mistake and Ms Kebakoska was arguably unjustly enriched at the employer’s expense.

Ms Kebakoska tried to argue that it was a ‘voluntary submission of an honest claim’ pursuant to David Securities, but she failed in that regard because there was no evidence that there was a conscious choice on the part of the company to pay the money regardless of what might be a mistake of law.

However, she succeeded in her claim for good faith change of position in reliance upon the receipt. Ms Kebakoska had attempted to get unemployment benefits when she did not get a new job soon after being redundant, but Centrelink (the government agency which administers social security payments in Australia) advised her that she was not entitled to unemployment benefits for a time because she had the 12 week redundancy payment (this is known as an “income maintenance period” ). She then spent the redundancy payments on living expenses while she was looking for a new job. It is sometimes said that “ordinary living expenses” are more likely to be a reversible benefit, meaning that the good faith change of position defence does not apply, but this was not the case here.  At [31] – [32], Osborn J said:

In my view, the evidence clearly established a change of position on the part of the employee. That change was relevantly comprised of three interrelated elements:

(a) the disclosure of the redundancy payments to Centrelink;

(b) the consequential denial of unemployment benefits to the employee; and

(c) the expenditure of redundancy payments on living expenses in these circumstances.

The appellant submits that this is a case where no relevant change of position occurred because the money received was spent on living expenses. In my view, this is not a case where the employee ‘simply spent the money received on ordinary living expenses.’ The employee disclosed receipt of the redundancy payment when she applied for unemployment benefits and suffered a refusal of her application as a result. The employee changed her position as a result of the mistaken redundancy payment and thereby suffered a direct financial loss. Each of grounds 1 to 3 contained in the notice of appeal fails on the facts…

Osborn J also considered whether estoppel had been displaced in this area by the change of position defence. The judge found that estoppel still persisted as a separate defence to a claim in unjust enrichment. Thus the magistrate at first instance had been entitled to find in the alternative that the employer was estopped from recovering the mistaken payment because Ms Kebakoska had relied to her detriment on the representation that she was entitled to the money.

35 Comments

  1. kvd
    Posted October 10, 2011 at 4:28 pm | Permalink

    Sigh away LE. I read the case link, right down to the bottom, and sighed myself when I read “For the above reasons the appeal must be dismissed. I will hear counsel with respect to the question of costs”

    Do counsel be paid for arguing the question of costs? Could take a while, or a pile 😉

  2. Posted October 10, 2011 at 5:26 pm | Permalink

    The concept of redundancy payments would be palatable if there was a corresponding “resignation payment” from employees to an employer they may just up & resign from.

    As it is, the existing concept sux.

  3. Adrien
    Posted October 10, 2011 at 5:29 pm | Permalink

    I’m not totally alone in the world.

    Just because we’re not sayin’ don’t mean we’re not reading. I’ve read it 3 times okay.

  4. kvd
    Posted October 10, 2011 at 5:38 pm | Permalink

    [email protected] both sides seemed to act in good faith, and suffered for it. I can see where you’re coming from, but it’s not as if the employee was presented with a choice, and you’re in danger of discounting the need to find a new job, dislocation, uncertainty, etc.

    How much value does your group place on those indeterminates?

  5. Posted October 10, 2011 at 5:45 pm | Permalink

    We are currently debating whether she should have been able to keep the whole lot, because what she would have received if she had taken unemployment benefits would have been a lot less.

    That’s the bit I was wondering about. I would have thought she’d have to have a further argument/evidence of a change of position regarding the additional amount. The rest of it seemed quite reasonable. Restitution seems like something you’d want to allow ample defences for, particularly where payments are accepted in good faith. I’m also wondering how easy it would have been for her to argue her case had she simply presumed she would be ineligible for payments and not received a clear denial. Does simply being legally ineligible for payment constitute damage, or does one actually have to be rejected?

    As it is, the existing concept sux.

    Just think of it as a forced employee-savings scheme where you get to keep the interest.

  6. kvd
    Posted October 10, 2011 at 6:12 pm | Permalink

    LE that other case. That’s a bit like receiving stolen goods I think. How could that beneficiary have any sort of interest if the will was forged? Is this another of your Law v Justice threads where I always pick the wrong side? 😉

  7. Posted October 10, 2011 at 6:39 pm | Permalink

    kvd,

    I think the key point is that if the receiver of the goods/money was forced to pay back the entirety of the value of what they received, and they would be in a worse position (e.g. due to being ineligible for Centrelink payments) than if they had never received it in the first place then its unjust to make them pay back the full amount. It’s not exactly equitable for the law to step in and cause net harm to a party that wasn’t responsible or had any control over the circumstances.

  8. Posted October 10, 2011 at 7:16 pm | Permalink

    My sympathies are all with Ms Kebakoska. She accepted her employer’s statement of her entitlements in good faith. She certainly should not be made worse off by their mistake. After all, telling her what she was entitled to suggested they had looked into the matter, and it was hardly in their interest to overpay her. So, absence of any information to the contrary, she had no reason to not accept their statement and payment.

  9. Posted October 10, 2011 at 7:49 pm | Permalink

    All sympathies with Ms K.

    However it is the employer who is out of pocket. I’ve missed the part where TRS Global is fixed up for what seems to be a problem not of their making.

  10. Posted October 10, 2011 at 7:51 pm | Permalink

    Despis #8: I’m not familiar with redundancy, it has never been a part of any job I’ve held. Now that I employ people I’ve still never encountered it.

    The part I’m missing: If it is a forced employee savings scheme, how much is the employee kicking in? And who gets to keep the interest, the employee or employer?

  11. Posted October 10, 2011 at 7:58 pm | Permalink

    Is there a case for restitution from CLink to TRS Global?

  12. Posted October 10, 2011 at 8:14 pm | Permalink

    Yes LE, I can see why/how the decision was ..er.. arrived at.

    Take home message for employers: Don’t rush in to pay redundancy payments.

    I’m with Henry2.

  13. Posted October 11, 2011 at 4:28 am | Permalink

    I would point out that I am (in a small way) an employer.

  14. RipleyP
    Posted October 11, 2011 at 11:47 am | Permalink

    I haven’t had chance to read the full materials so my comments need be considered as mildly ignorant.

    From the lazy not read perspective I do agree with the outcome but possibly not with the thrust of the decision as it seems unfair on everyone in the case of a mistaken payment. The stumbling block seems to be a situation where a win/win is not possible.

    I agree with the outcome as the belief it was her money may have encouraged the recipient to live a lifestyle commensurate with the payment. So a calculation of difference between social security and redundancy may not have been fair as the spending would not have occurred but for the payment.

    I would wonder if the court considered the idea of which party was more able to bear the loss which I sometimes think creeps into judicial thinking under the equitable areas.

  15. Posted October 11, 2011 at 12:18 pm | Permalink

    LE, I don’t know whether I’ve raised this with you before, but I’ve been wondering about a particular set of circumstances which have arisen in Queensland.

    A while back, the Department of Health (Queensland Health as it styles itself) adopted a new payroll management system. It didn’t work and, I think, still doesn’t work properly.

    The problem stretched out over many months and was big news in Queensland. At the start, some people weren’t getting paid at all. Others were getting paid wrong amounts.

    One of the major problems rested in the incapacity of the system to cope with the large volumes of variations to payments each week. Queensland Health employs lots of casuals and also pays lots of overtime. The hours people worked were not getting processed quickly enough for them to be paid.

    One result is that a lot of people were overpaid many times. In one case, a doctor was actually overpaid more than $100K.

    Leaving aside the doctor, a lot of people were overpaid smaller amounts week to week.

    The Queensland Government then launched an effort to recover overpayments. As far as I am aware there is no legislative basis for such recovery so I assume the only right to recovery is mistaken payment, but it occurs to me that it was a mistake the first time, but after that they were aware of the risk that people would be overpaid. It seems to me that you can’t say it’s a mistaken payment if you make the payment when aware that you might not be obliged to pay some or all of the amount. That sounds to me to be a calculated risk.

    What do you think?

  16. Posted October 11, 2011 at 12:19 pm | Permalink

    The other thing which occurs to me is that it would be difficult, given the widespread publicity of the problems, for an employee to rely on a change of position defence. It seems odd that the defence can be blown away by knowledge of the risk, but not the cause of action.

  17. Posted October 11, 2011 at 2:41 pm | Permalink

    Oh sure, I don’t think that COP is available. I’m more interested in whether you can claim to have mistakenly made a payment in the circumstances I’ve described (i.e., knowing that there’s a risk you’ll overpay and making the payment anyway).

  18. kvd
    Posted October 11, 2011 at 3:05 pm | Permalink

    Nick you can argue the fine points all you like, but somewhere in there should be recognition that the employee turned up for work, knowing it might (temporarily) result in miscalculated pay, but relying upon the practical fact that it would eventually be sorted out, and that their employer was acting in good faith.

    Employers aren’t all bad, neither are employees. In the end, I hope it got sorted, and I hope the employees are still employed. Sometimes lawyers get in the way of what’s ‘real’.

  19. Posted October 11, 2011 at 5:19 pm | Permalink

    I had a look at Goff & Jones. Kelly v Solari seems to support the proposition that if you make the payment with knowledge that you may not be obliged, you can’t later recover.

  20. Posted October 11, 2011 at 8:00 pm | Permalink

    Nick, that’s not the way I read the cases. If you look at David Securities [36]

    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 you focus on the first sentence, overpaying employees with the knowledge the payroll system isn’t spitting out the right numbers could be fit the voluntary payments. Firstly though, I think that instituting a systematic payroll system represents a query into, not an assumption about the validity of the obligations and a clear indication of intent only to pay in respect of valid obligations. However, the second sentence makes it clear that this only applies to ‘satisfaction of an honest claim’ anyway, e.g. if the employee had claimed $X for H hours overtime and the employer had paid without checking their legal obligations. The key point about the uncertainty about obligation is to do accepting the payee’s claims on face value (i.e. there is an apparent agreement over the amount owed), rather than about accepting the fallibility of your own efforts.

    As far as I read that case the law only has a constraint of causation, as per paragraph 47:

    The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution.

    Looking at Kelly v Solari, (Parke, B):

    The position that a person so paying is precluded from recovering by laches, in not availing himself of the means of knowledge in his power … I do not think it can be sustained in point of law. If, indeed, the money is intentionally paid, without reference to the truth or falsehood of the fact, the plaintiff meaning to waive all inquiry into it, and that the person receiving shall have the money at all events, whether the fact be true or false, the latter is certainly entitled to retain it. [emphasis added]

    I’m not sure you could argue that an organisation spending millions on a payroll system, even in light of how flawed it apparently is, could be said to be waiving all inquiry and paying out money without reference to the truth. Similarly if you read Lord Abinger’s judgement, his ‘third case’ of forgetting facts is very roughly analogous to the way the correct ‘facts’ are submitted by employees but the payroll system still makes a mistake in payment calculations.

  21. Posted October 11, 2011 at 8:40 pm | Permalink

    In a way I think any defence on part of the overpaid employees is going to be based on an assessment that the employer negligently implemented or operated the payroll system, that that negligence caused a certain amount of frustration or mental anguish in the employees, and therefore any overpayment represents some form of just or natural compensation for that mental anguish. Unfortunately from the employees point of view, the common law (as far as I’ve learnt so far) doesn’t seem too caring about frustration and mental anguish and so is unlikely to equate the two in terms of justice. This is particularly so if you consider that some employees will be overpaid while other will be underpaid; is it really a just outcome if the overpayments are only given to some employees while all suffer the consequences of the flawed system?

  22. Posted October 12, 2011 at 11:51 am | Permalink

    LE, the way I read the voluntary submission is that it’s a recognition of the potential for the parties’ conduct to create a quasi-contractual* and new legal obligation to pay or right to be paid, independent of any pre-existing obligation or right. That’s why I see the claim by the payee/defendant as an important element in voluntary submission.

    The payee’s claim to payment is essentially an offer, which if the payer accepts/agrees and gives consideration by actually paying could be seen to create a contract. This then gives the payee a legal right to the money. I see the possibilities listed in that quote from Hookway as simply clarifying what actions on the part of the plaintiff/payer could be considered as agreeing to the claim of the payee about the payer’s obligation.

    I see similar elements in the way the estoppel defence is described. There’s an offer in the way the payer makes representation of their obligation to pay or have paid, then the payee accepts (the ‘good faith’ part) and gives consideration (the ‘change of position’ part). Once those elements are present, it could be seen as granting the payee a new legal right to the money; a legal right that voids any claim of unjust enrichment. The estoppel defence seems to be how the TRA Global case was decided (see paragraph 5) and why no partial restitution was granted, roughly in line with Lorenzo at 13. If I remember a lecture from last semester correctly, I believe the estoppel is part of equity and thus the court has the discretion of whether it should apply or not (i.e they’ll consider if it’s a fair outcome).

    Common to both of these seems to be that the payee must have a reasonable belief that the payer had accepted the obligation as stated, rather than simply been acting to fulfil a pre-exisitng obligation. In the context of a knowingly flawed payroll system, I’m not sure that an employee could claim to have that reasonable belief. Also, from a policy point of view, it could trigger a SATP type knee-jerk reaction on the part of employers everywhere to shut-down their payroll system every time there is a hiccup that suggests that payments might not be entirely necessary. This outcome is hardly likely to be preferable for either the employees or the employers involved.

    That said, I do think there might be room for some sort of nominal component to the change of position defence, to both compensate the payee for their trouble and also discourage people from making payments recklessly.

    * I haven’t studied any contract law yet, so I may be completely off base.

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