Joint account-holders held bank accounts with Citibank and NAB. Citibank transferred money from their account on a fraudulent instruction to NAB, which then paid the money out also on a fraudulent instruction to three people living in the Philippines. The customers sued for damages against both banks on the basis that moneys were paid out of their accounts without their knowledge or authority. Those proceedings were settled and the customers were made whole. In these proceedings, each bank claims relief against the other. The question is which bank should bear the loss. Citibank claims repayment of the money from NAB on the basis of unjust enrichment. NAB pleads change of position by virtue of having paid away the funds on the faith of the receipt. Neither bank claims negligence in acting on the fraudulent instructions.
The Law – Change of Position
A bank which receives a mistaken payment and disburses it can only bring itself within the change of position defence if it shows that at the time of the disbursement it had a valid receipt that would entitle it to deal with the receipt as it did and that information must have come from the payer.
The court held that while the withdrawal was the fraud of the imposter, NAB nevertheless recognised the receipt as valid. It did so because the receipt was credited to the plaintiffs’ account as a consequence of the information in the SWIFT communication. Had it not recognised this validity, it would have not paid away the money. The court noted that there was no assertion of any negligence or failure by NAB to meet banking practice. While both banks were duped, Citibank paid out first without the customers’ authority as a result of which NAB credited the customers’ account rendering it vulnerable to the fraud to which it succumbed. The court found that it would be inequitable for Citibank to be made whole at the expense of NAB.
The court held that NAB’s defence succeeded and Citibank was to bear the loss.