MERCEDES-BENZ (NSW) PTY LTD v NATIONAL MUTUAL ROYAL SAVINGS BANK LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY, CLARKE and SHELLER JJA 27 February, | April 1996 [1996] NSWCA 363 FRAUD — misappropriation of funds — mistake of fact — conversion — defence of change of position — Cheques and Payments Orders Act 1986 s95(1) Mercedes-Benz (MB) brought proceedings against National Mutual Royal Savings Bank (NMRB) to recover money paid to it under mistake of fact through MB's payroll system, and to seek damages for conversion of a number of cheques. NMRB defended the first claim on the basis that it had by expenditure or financial commitment changed its position in good faith, and second in respect of some of the cheques in reliance on s95(1) of the Cheques and Payments Orders Act 1986. Palmer AJ upheld these defences, and MB appeals against this decision. MB argued that NMRB's expenditure and financial commitment were tainted by negligence or knowledge of the facts which had led to the irregularity and that the defence of change of position was not available to NMRB or partial restitution should be ordered. MB also submitted that NMRB should not be protected by s95(1) because it had acted negligently, even if in good faith. HELD 1. The trial judge's finding, which was not challenged on the appeal, that NMRB was under no duty to MB to do anything more than it did meant that there was no relevant wrongdoing. Nor was there any irregularity known to the respondent of the kind that would deprive it of a change of position defence. The finding of Palmer AJ should not be disturbed. David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Australia and New Zealand Banking Corporation Ltd v Westpac Banking Corporation (1988)164 CLR 662 at 681-2. 2. Nothing occurred in the course of opening the new accounts which would have put NMRB on enquiry that the new accounts were opened fraudulently or by mistake. Accordingly the respondent discharged the onus of establishing a defence under s95(1) of the Cheques and Payments Orders Act 1986. This ground of appeal must fail. ORDER Appeal dismissed with costs Priestley JA Sheller JA's reasons, which I have had the benefit of reading in draft, fully cover all the matters necessary to be dealt with in deciding this case. As I agree with his reasons, I add only that I also agree with the orders he proposes. Clarke JA I agree with the reasons and orders of Sheller JA. Sheller JA INTRODUCTION The appellant, Mercedes-Benz (NSW) Pty Ltd (MB), appeals from a decision of Palmer AJ of 8 September 1992, in proceedings in which MB sued the respondent, National Mutual Royal Savings Bank Ltd (NMRB), to recover money (the Second Schedule payments) paid by MB to NMRB under mistake of 2 UNREPORTED JUDGMENTS fact and damages for the conversion of some twenty-seven cheques (the Third Schedule payments). NMRB successfully defended these claim on the basis that it had paid away the money received and thereby changed its position in good faith and that, in respect of some of the cheques, s95(1) of the Cheques and Payment Orders Act 1986 absolved it from liability. MB appeals against the trial judge's decision upholding these two defences. FACTUAL BACKGROUND Shortly after employing Mrs Beverley Rae as a general ledger clerk in August 1983, MB appointed her paymistress. She had no previous experience or training, beyond a one week course, in operating payroll systems. Mrs Rae was responsible for the maintenance of all employment records necessary to support a calculation of the payroll, including records of the allowances, commissions and other amounts payable to employees as well as records of leave taken and terminations of employment. She prepared the weekly payroll showing all adjustments which might be appropriate in respect of tool and clothing allowances, sales commissions, holiday pay and so on. When she was appointed paymistress all wages were paid weekly in cash. However after a wages robbery at the Melbourne office of a related company, the directors of MB decided that wages would no longer be paid in cash and set about exploring an alternative means of payment. A number of financial institutions were approached. Finally MB adopted a payroll system provided by the United Permanent Building Society. In March 1987 NMRB acquired the building society. I shall refer to both as NMRB. In January 1985 NMRB officers went to MB's head office and explained how the scheme operated to the staff. While there they interviewed and obtained from each employee an application form for the opening of an account signed in the presence of the interviewing officer. These application forms were processed at NMRB's head office and a plastic account card together with a PIN number, enabling operation of the account, were mailed to each employee at the address shown in the relevant application form. Palmer AJ found that during discussions between NMRB staff, Mr Dessaix (then MB's company secretary and general administration manager) and Mrs Rae in January and February 1985, Mr Dessaix told Mrs Bowley (then business development manager of NMRB for the Liverpool District) that if NMRB had any queries about the operation of the payroll scheme they should be directed to Mrs Rae as MB's paymistress. The new system came into effect in late January 1985. Between February 1985 and July 1988, Mrs Rae fraudulently misappropriated almost $1.5 million of her employer's funds. Palmer AJ described how the payroll scheme operated. Every Wednesday a computer printout was prepared showing the name of each of MB's employees, the employee's account number with NMRB and the amount to be paid to the employee, including adjustments for commissions, allowances, holiday pay, termination pay and so on. Mrs Rae was responsible for the accuracy of the information in the computer printout. MB drew a cheque for the total amount to be paid to its employees on its bank, Australia and New Zealand Banking Group Ltd (ANZ), in favour of NMRB. On Wednesday afternoon Mrs Rae delivered to NMRB at its Bass Hill agency a copy of the computer printout payroll list together with MB's cheque for the total amount. By arrangement with MB, before NMRB cleared and collected MB's payroll cheque, by way of advance to MB, NMRB credited to each employee's account as shown on the payroll list the amount to which that employee was shown to be entitled so that, by the next day, WRERCEDES-BENZ (NSW) PTY LTD v NATIONAL MUTUAL ROYAL SAVINGS BANK LTB (Sheller JA) Thursday, the employee was able to withdraw cash from his or her account at the Bass Hill agency of NMRB or from any other of its branches or agencies. NMRB then recouped itself for the advance to MB out of the payroll cheque when cleared. All the accounts for employees were opened at the Bass Hill agency of NMRB. There were administrative difficulties with opening accounts in the way originally used. MB had a high turnover in staff. New employees at head office and other branches found it inconvenient to come into the Bass Hill agency for interviews and to sign application forms for the opening of their accounts. New employees were also experiencing delay in receiving their plastic account cards and PIN numbers through the mail and as a result were delayed in obtaining access to their wages. This produced discontent amongst employees. In February 1985 MB's union representatives, Mrs Bowley, Mr Greenaway (then district manager of NMRB), Mr Dessaix and Mrs Rae met to find a solution. As a result, at the request of the union representatives and with Mr Dessaix's support, a new procedure was instigated for opening accounts. Mrs Rae was supplied with a number of account application forms and undertook to have each new employee fill in and sign the form. The form required not only the personal particulars and signature of the employee but also the designation of a "key word" required for the account holders protection as further proof of identity. Mrs Rae took the completed form to the Bass Hill agency of NMRB and was issued with a plastic account card and a folder containing the PIN number of the account, which she delivered to the employee. Very quickly Mrs Rae started using the payroll system to defraud MB. In February 1985 an employee started work on a Monday and Mrs Rae opened an account for him with NMRB. On Tuesday the pay information relating to him was fed into the computer which compiled the payroll list. On Thursday the employee's pay was deposited in his account with NMRB. In the meantime the employee had left his employment with MB. Mrs Rae held his plastic account card and his PIN number but the employee never inquired about his wages. Mrs Rae saw how easy it would be for her to take fraudulent advantage of the payroll system. She did not alter the computer records to show that the employee had left the company and retained the employee's account card and PIN number. Wages continued to be paid into the account which she then withdrew. Thereafter Mrs Rae devised three different methods to defraud the system. First she took advantage of a surplus in the total payroll amount which resulted from direct payments by cheque to sales persons of commissions the amounts of which were also included in the next payroll printout. Mrs Rae's duty was to correct the payroll printout entries by hand so as to deduct the amounts already paid by cheque. This she did not do thereby leaving the surplus as part of the total payroll amount for the week. To divert this surplus to herself she opened accounts with NMRB for non-existent employees by filling in, signing and delivering to the Bass Hill agency application forms containing false names and particulars and receiving, supposedly on behalf of the new employee applicants, the relevant account cards and PIN numbers Each week she knew the amount of the surplus in the computer printed payroll list for sales commissions already paid. She divided this amount up amongst the bogus employees, writing in as "adjustments" at the foot of the pages in the lists the names and account numbers of the bogus employees and the amounts to be paid to them. Those amounts were added into the total amount for the payroll cheque for that week and were in due 4 UNREPORTED JUDGMENTS course credited by NMRB to the respective bogus accounts. $1,225,049.85 (the Second Schedule payments) were fraudulently diverted to Mrs Rae in this way. The second method of fraudulent misappropriation took advantage of Mrs Rae's practice of opening bogus accounts with NMRB in names which had the same initials and surnames as genuine, existing MB employees. For example, Mrs Rae opened a bogus account in the name "Gloria Veronica Savage", there being a genuine MB employee by the name of Gregory Vernon Savage. The name for the bogus account which Mrs Rae inserted in the payroll lists was, "G Savage" or "G V Savage". The account number credited with any fraudulent payment was the account number of "Gloria Veronica Savage" not that of Gregory Vernon Savage. Mrs Rae procured cheques to be drawn in favour of the bogus employees having the same initials and surnames as genuine employees, ostensibly in respect of sales commissions, which she then banked into the bogus accounts she operated. Commonly, for their convenience, Mrs Rae banked genuine commission cheques into the accounts of genuine employees on their behalf, so that the banking of fraudulently obtained cheques into the bogus accounts did not in itself excite comment from NMRB staff. By this method Mrs Rae fraudulently obtained $41,442.23 (the Third Schedule payments). The compromise of claims arising from Mrs Rae's third method of obtaining fraudulent method of payments means that it is unnecessary to describe it. MB's claim based on payment under mistake of fact was for the amount of the Second Schedule payments and its claim for conversion of cheques for the amount of the Third Schedule payments. This claim was either admitted or not pressed in respect of all but six cheques totalling $8,366.06. This remnant of the claim Palmer AJ held defeated by s95(1) of the Cheques and Payment Orders Act. NEGLIGENCE MB alleged NMRB was negligent and claimed damages. According to MB's particulars, NMRB's duty of care arose from its experience and knowledge in the operation of payroll deduction schemes and MB's want of such experience, and from NMRB's knowledge that the risk of fraud and misappropriation of money was enhanced if proper steps were not taken to verify the identities of persons on whose behalf accounts were opened with NMRB. In particular MB referred to the delivery of PIN numbers and account cards to persons other than the person in whose name the account had been operated. MB alleged that NMRB was in breach of its duty in failing to advise and warn MB about the risk of dishonesty and about measures and safeguards to minimise it. I have done no more than briefly summarise what MB claimed with far greater particularity. Palmer AJ dealt with MB's claim in negligence resulting in the loss of the amounts represented by the Second Schedule payments under two heads; whether NMRB owed a duty to advise MB of the possibility of fraud and whether NMRB operated the payroll scheme negligently. As to the first his Honour said that a contention that, merely because NMRB might reasonably have foreseen the possibility of loss to MB through fraudulent use of bogus accounts, NMRB owed MB a duty of care to prevent such loss by warning or other positive action, was untenable. His Honour said that the relevant evidence simply came to this: "In February 1985 the Secretary and General Administration Manager of MB, Mr Dessaix, made, or approved of, a request to NMRB to vary the payroll scheme procedure by entrusting to another senior officer of the company, its paymistress Mrs Rae, the opening of new accounts for employees. It was common knowledge that Mrs Rae had responsibility for all aspects of WRERCEDES-BENZ (NSW) PTY LTD v NATIONAL MUTUAL ROYAL SAVINGS BANK LTB (Sheller JA) administration of the company's payroll. No-one then had any reason to question Mrs Rae's honesty. No advice as to the risks which might be involved in the new procedure was sought or given. NMRB acceded to MB's request." In those circumstances his Honour held that no duty to advise could be imposed upon NMRB. As to the second head his Honour said that, as he had found, it was MB which specifically requested NMRB to follow a specific procedure for MB's own convenience, in circumstances in which MB did not seek, or rely upon, any advice from NMRB as to the risks involved in that procedure. "If MB, on its own volition, directs NMRB to follow a procedure involving a risk which depends upon the honesty of its own employees and the adequacy of its own internal control systems and NMRB faithfully complies with such direction then it seems to me that MB alone bears the risk of any loss which may arise from its employees' dishonesty and the inadequacy of its control system." Palmer AJ found that in complying with the express direction of MB to permit Mrs Rae to open accounts on behalf of new employees NMRB did not breach any duty of care to MB, so that its case in negligence on this ground also failed. MB abandoned its appeal against the dismissal of its claims in negligence. I have referred to it because it has some significance when I come to consider NMRB's defence of change of position. UNJUST ENRICHMENT This part of the appeal proceeded from Palmer AJ's findings that, as a result of the mistaken belief that the bogus accounts inserted in the payroll lists belonged to genuine employees, MB paid, as part of the weekly payroll cheque to NMRB, the amounts shown as remuneration for their services to which they were properly entitled. NMRB recouped itself for the advances it had made to the employee's accounts out of the payroll cheque when cleared. The mistake was accepted as making NMRB's enrichment at MB's expense unjust. In David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (a decision handed down after Palmer AJ's judgment) the majority of the High Court at 379 stated the consequence. "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. Before that prima facie liability is displaced, the respondent must point to circumstances which the law recognises would make an order for restitution unjust; Australian and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 673. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust." At 385 their Honours said that a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. "\..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. The common element in all cases is the requirement that the defendant point to expenditure or financial commitment which can be ascribed to the mistaken payment." 6 UNREPORTED JUDGMENTS MB accepted that the crediting of an equivalent of the amounts mistakenly included in the payroll cheque to the bogus accounts was an expenditure or financial commitment which could be ascribed to the mistaken payment. MB's point was that NMRB's expenditure and financial commitment were tainted by mala fides or wrongdoing. In Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 the House of Lords accepted that English law recognised that the defence of change of position in good faith was available against restitution claims based on the unjust enrichment of the defendant. MB relied in particular upon passages in the speech of Lord Goff of Chieveley. At 579 his Lordship answered the question, why in some cases it would be unjust to allow restitution, by saying that where "an INNOCENT defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full," [my emphasis] the injustice of requiring him to pay outweighed the injustice of denying the plaintiff restitution. At 580 his Lordship said: "T am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer." MB submitted that NMRB was not an innocent defendant and was in the sense used by Lord Goff "a wrongdoer". A little later in his speech at 580 Lord Goff said: "At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full." MB submitted that even if there was a change of position that defence permitted partial restitution based on the comparative faults of the payer and the payee. In the present case it was submitted that the fault of NMRB was greater or at least as great as that of MB. As I have said MB abandoned its appeal against his Honour's conclusion that NMRB owed no duty to prevent the loss by warning or other positive action or to advise against the risks of the amendment of the scheme which allowed Mrs Rae to open new accounts for new employees. Even so MB submitted that NMRB was a wrongdoer in a sense which meant either that the defence of change of position was not available to it or that at least partial restitution should be ordered. The argument seemed to me to amount to a restatement of part of MB's unsuccessful negligence case. Palmer AJ answered the question of what sort of wrongdoing, what sort of irregularity known to the payee, would deprive the payee of a change of position defence as follows: "In the context of an intermediary's charge of position defence it has been established since the decision in Snowdon v Davis (1808) 1 Taunt 359; [127 ER 872] that an agent is directly accountable to a payer, notwithstanding payment by the agent on to his principal, if the agent was either directly involved in the wrongdoing whereby the payment was made to him on behalf of his principal or else had knowledge of the facts constituting that wrongdoing: see eg Steele v Williams (1853) 8 Ex 625; [155 ER 1502]; Miller v Aris (1800) 3 Esp 231; [170 ER 598]; Townson v Wilson (1808) 1 Camp 396; [170 ER 997]; Sharland v Mildon (1846) 15 LJ Ch 434; WRERCEDES-BENZ (NSW) PTY LTD v NATIONAL MUTUAL ROYAL SAVINGS BANK LT (Sheller JA) Smith v Sleap (1844) 12 M and W 585; [152 ER 1332]; Oates v Hudson (1851) 6 Ex 346; [155 ER 576]; Ex parte Edwards, In re Chapman (1884) 13 QBD 747; Owen and Co v Cronk [1894] 1 QB 265. The "wrongdoing" of the agent in such cases has ranged from threatening to execute a writ for distraint, as bailiff, upon the wrong person in order to obtain payment (Snowdon v Davis), to collecting the assets of a deceased estate as agent for a person known by the agent to be an executor de son tort (Sharland v Mildon), to paying over to his principal money received by a solicitor from a debtor in consideration of adjournments of a bankruptcy petition presented against the debtor by the solicitor on behalf of his principal (In re Chapman). In each of these cases it will be seen, firstly, that the wrongdoing which defeated the change of position defence was directly and immediately causal in the payment coming into or leaving the agent's hands and, secondly, that the facts constituting the wrong were actually known to the agent: see esp Sharland v Mildon at 435; In re Chapman at 750, 752; Owen and Co v Cronk at 274. It was, no doubt, to this line of authority that Lord Goff in Lipkin Gorman and the High Court in ANZ v Westpac were referring in the observations which I have noted above. In my opinion, these considerations are as apt to a non-intermediary payee as to an intermediary payee in order to determine whether the payee is entitled to rely upon a change of position in good faith. I emphasise that in my view it is not sufficient merely that the payee has received or disposed of the payment in direct consequence of a 'wrong' done to the payer, even if the payee has in some way been involved in the wrongdoing. What is crucial to the good faith element of the defence is whether the payee had actual knowledge of all the facts constituting the wrongdoing or else had knowledge of such facts as would reasonably raise a suspicion of wrongdoing so that the payee was put upon enquiry. This principle is clearly illustrated in Owen and Co v Cronk. In that case trustees for debenture holders appointed the defendant under the debenture as receiver to conduct a company's business. The manager of the business wrongfully compelled the plaintiffs, who were debtors of the business, to pay more in discharge of their debt than they were obliged to pay. The payment was received by the defendant receiver and paid to the trustees for the debenture holders without any knowledge on his part mat the money had been improperly obtained from the plaintiffs. The plaintiffs sought to make the defendant personally liable for repayment. The Court of Appeal unanimously held that the defendant had received the money as agent for the trustees and, having paid it on to his principals without knowledge of the fact that it had been wrongfully obtained, he was not liable to the plaintiffs. At 274 Lopes LJ observed that had the defendant, as agent, had knowledge of the wrong before payment to his principals then he would have been accountable to the plaintiffs." The link between a wrongdoing, which may defeat a payee's defence of change of position, and the considerations relevant to an agent's defence that money received on behalf of and paid on to the principal under mistake, is illustrated by the High Court's judgment in Australia and New Zealand Banking Corporation Ltd v Westpac Banking Corporation at 681-2, to which Palmer AJ referred. where their Honours said: "....on balance, both authority and principle support the conclusion that an agent who has received money on his principal's behalf will, without more, have a good defence if, before learning that the money was paid under fundamental mistake, he has 'paid it to the principal or done something equivalent' thereto: see 8 UNREPORTED JUDGMENTS Rahintoola v Nizam of Hyderabad [1958] AC 379 at 396, 406; Goff and Jones, Law of Restitution, 3rd ed, 707. The rationale of such a general rule can be identified in terms of the law of agency and of notions of unjust enrichment. If money is paid to an agent on behalf of a principal and the agent receives it in his capacity as such and, without notice of any mistake or any irregularity in the payment, applies the money for the purpose for which it was paid to him, he has applied it in accordance with the mandate of the payer who must look to the principal for recovery....If the matter needs to be expressed in terms of detriment or change of position, the payment by the agent to the principal of the money which he has received on the principal's behalf, of itself constitutes the relevant detriment or change of position." MB argued that NMRB was a wrongdoer because it had failed to advise MB and had allowed the payroll scheme to continue to operate knowing that this left open the door to fraud. NMRB permitted Mrs Rae to open accounts and permitted her to have possession of the tools to operate them. On the one hand it was argued that this was wrongdoing and on the other an irregularity, of which NMRB knew and which contributed to NMRB's receipt of the mistaken payments. It was enough that NMRB knew of the facts which could breed the irregularity. MB did not have to show that NMRB knew of the irregularity. The word "wrongdoer" should not be equated to a person who had committed an actionable wrong. It extended to a person whose culpable conduct contributed to the mistake. These submissions are in part met by his Honour's finding that NMRB complied with MB's express direction to permit Mrs Rae to open accounts on behalf of new employees and in doing so did not breach any duty of care to MB. His Honour found that NMRB was under no duty to MB to do anything more than it did. Against such a finding it is simply a misuse of language to describe NMRB as culpable or a wrongdoer. The irregularity in the present case was the inclusion in the total amount of the payroll cheque of amounts not payable to MB's employees but to bogus accounts. It cannot be said that NMRB knew of this irregularity because it knew the way in which the payroll system operated and may be taken to have known that if a dishonest person decided to steal money from MB that person could manipulate the system to achieve the object. MB called our attention to the cases to which Palmer AJ referred. Miller v Aris was a case where a prisoner recovered from a prison Governor a sum paid in excess of what the Governor was entitled to demand. Townson v Wilson is authority for the proposition that a person who gets money into his hands illegally cannot discharge himself by paying it over to another. Snowdon v Davis concerned an action for money had and received to recover back money which had been obtained through compulsion, under colour of process, by an excess of authority. It was held recoverable even though paid over. Smith v Sleap concerned the recovery of money wrongfully paid under protest. In Sharland v Mildon it was held that the agent of an executor de son tort, who collected assets, knowing them to belong to the testator's estate and that his principal was not the legal personal representative, made himself liable to account as executor de son tort notwithstanding he had duly accounted for his receipts to his principal. In Oates v Hudson a solicitor refused to give up title deeds to the plaintiff unless expenses for which the plaintiff was not liable were paid. This was held not a voluntary payment to the solicitor in his character of agent so that he was liable in an action for money had and received notwithstanding he had paid over the amount to his client. Steele v Williams concerned the recovery of money paid to WRERCEDES-BENZ (NSW) PTY LTD v NATIONAL MUTUAL ROYAL SAVINGS BANK LTB (Sheller JA) a parish clerk on an illegal demand, colore officii and Ex parte Edwards the receipt by the solicitor of a petitioning creditor, as his agent, of various sums of money from the debtor during successive adjournments of the hearing of a bankruptcy petition. The solicitor having received the money with notice of the act of bankruptcy, the payment by him was a wrongful act and he was liable to repay the money to the trustee in bankruptcy and was not discharged by the payment to his own principal. To my mind these cases demonstrate that an agent's knowledge that moneys have been received illegally or without any right thereto will make the agent liable to disgorge to the payer the equivalent to that received, even though the agent has accounted for the proceeds to the principal. They are illustrations far removed from the facts of this case. MB also referred to Hardy v American Express Co (1902) 65 NE Reporter 375, a decision of Mr Justice Holmes when Chief Justice in the Supreme Judicial Court of Massachusetts. Goods were consigned to the plaintiffs from Paris. The defendant carrier was to deliver the goods to the plaintiffs at Boston on the plaintiffs' paying for the goods and charges. The defendant's agent, knowing but without disclosing that the goods had arrived in Boston showing signs of wet damage, called on the plaintiffs, presented a bill and asked for a cheque for the amount in controversy. The plaintiffs had been notified that the goods were landed and that money would be needed to get them through the customs house. The sum was paid in ignorance of any trouble. Later when the goods were delivered the plaintiffs discovered the damage. Before the plaintiffs made any claim on the defendant, the defendant paid on the amount received from the plaintiff to the consignor. There were said to be grounds for maintaining that in point of law the defendant obtained the money by false representations or an unjustifiable suppression of the truth. The Court was of opinion that the defendant was subject to a duty when, knowing what it had been notified, it asked for and received the sum paid. At 376 Holmes CJ mentioned some of the old English cases to which I have referred and said that the defendant had knowingly received the money without right and therefore was under a personal obligation to the plaintiffs, unless and until it was excused by conduct on their part which estopped them from setting up their claim. Whatever may be the merits of the view that the defendant was under any duty to the plaintiffs, the outcome depended upon the finding that the defendant had knowingly received the money without right. That is not the present case. In my opinion on the facts as he found them, Palmer AJ rightly upheld NMRB's defence of change of position and this part of the appeal fails. THIRD SCHEDULE PAYMENTS This leaves for consideration the question whether NMRB was protected by s95(1) of the Cheques and Payment Orders Act from MB's claim based on conversion in respect of the five cheques. The subsection provides: "(1) Where - (a) a bank, in good faith and without negligence - (i) receives payment of a cheque for a customer; or (ii) receives payment of a cheque and, before or after receiving payment, credits a customer's account with the sum ordered to be paid by the cheque; and (b) the customer has not title, or has a defective title, to the cheque, the bank does not incur any liability to the true owner by reason only of having received payment of the cheque." 10 UNREPORTED JUDGMENTS MB made no submission that NMRB had acted otherwise than in good faith but asserted that it had acted negligently. The question, relevantly, was whether NMRB had without negligence credited Mrs Rae's bogus accounts with the sum ordered to be paid by MB's cheque in favour of its employees where Mrs Rae had no title to the cheque. If the answer to this question was in the affirmative, as Palmer AJ concluded, NMRB incurred no liability to MB by reason only of having received payment of the cheque and crediting the account. In Commissioners of Taxation v English Scottish and Australian Bank Ltd [1920] AC 683 at 688 Lord Dunedin, delivering the judgment of the Privy Council, posed the question as whether there was negligence on the part of the bank in collecting the cheque. It was not a question of negligence in opening an account, though the circumstances connected with the opening of an account might shed light on the question of whether there was negligence in collecting a cheque. In that case a person opened an account with the bank after going through what was described as the usual procedure of giving his name and address and signing the signature book. He paid in an amount in cash and obtained a cheque book. Thereafter a stolen cheque was handed in with a pay in slip to be credited to the account which was done. Their Lordships accepted that the test of negligence was whether the transaction of paying in any given cheque, coupled with the circumstances antecedent and present, were so out of the ordinary course that it ought to have aroused doubts in the bankers' mind, and caused them to make inquiry. In that case it was argued that the bank ought not to have collected a cheque for a customer who was of such recent introduction and about whom they knew nothing. As was pointed out there was, however, nothing suspicious about the way the account was opened. In Marfani and Co Ltd v Midlands Bank Ltd [1968] 1 WLR 956 Diplock LJ, as he then was, explained at 971 the need for the statutory exception to liability. The bank's contract with its customer requires it to accept possession of cheques delivered to it by the customer, to present them for payment to the banks upon which the cheques are drawn, to receive payment of them, and to credit the amount thereof to its own customer's account. "If the customer is not entitled to the cheque the customer delivers to the bank for collection, the bank, however innocent and careful it might have been, would at common law be liable to the true owner of the cheque for the amount of which it receives payment either as damages for conversion or for money had and received." At 972 his Lordship said: "Where the customer is in possession of the cheque at the time of delivery for collection and appears upon the face of it to be the 'holder', ie the payee or endorsee or the bearer, the bank is, in my view, entitled to assume that the customer is the owner of the cheque unless there are facts which are, or ought to be, known to him which would cause a reasonable banker to suspect that the customer was not the true owner." In the present case the cheques were drawn by MB in favour of named payees, crossed and marked 'not negotiable' and deposited by Mrs Rae with NMRB for collection and the crediting of the proceeds to the bogus accounts in the names of the payees. MB argued that NMRB opened the bogus accounts without a face to face interview with the proposed account holder and without requiring independent identification and entrusted the charge cards and PIN numbers for such accounts to Mrs Rae. Palmer AJ said: WRERCEDES-BENZ (NSW) PTY LTD v NATIONAL MUTUAL ROYAL SAVINGS BANK LTD (Sheller JA) "Tn the present case, the identity of the new employees was vouched to NURB by Mrs Rae who was expressly held out by Mr Dessaix, the General Administration Manager of MB, as the person responsible for the payroll scheme to whom all enquiries by NMRB were to be directed. The method of identification was proposed by MB itself, obviously a well established and reputable company. In my opinion, NMRB would be well entitled to assume that MB was satisfied that the vouching of identity entrusted to Mrs Rae would be undertaken honestly and diligently. Similarly, NMRB would be entitled to assume that MB was satisfied that the account charge cards and PIN numbers for the accounts could be safely entrusted to Mrs Rae for delivery to the new employees." His Honour was satisfied for reasons he gave that nothing occurred in the course of the opening of the new accounts which would reasonably have put NMRB upon inquiry as to whether any new account was opened fraudulently or by mistake. He held that NMRB had discharged the onus of establishing a defence under s95(1) in respect of these cheques. For the reasons his Honour gave I agree. This ground of appeal also fails. CONCLUSION In my opinion the appeal should be dismissed with costs. This makes it unnecessary to consider the respondent's cross appeal, which was filed by leave of the Court, and was directed to whether MB was in breach of a duty of care to NMRB and alternatively whether MB was vicariously liable for Mrs Rae's fraudulent misrepresentations. Appeal dismissed with costs. Counsel for the Appellant: DF Rofe QC/V Gray Solicitors for the Appellant: Malcolm Johns and Co Counsel for the Respondent: RBS MacFarlan QC/AS Bell Solicitors for the Respondent: Minter Ellison Morris Fletcher