Briefing

Mistaken payments: Court of Appeal clarifies the change of position defence

When a business receives and acts on a payment that later turns out to have been made by mistake, which of the two innocent parties (the payor or the recipient business) should bear the resulting loss? The defence of ‘change of position’ is intended to address precisely that problem. In order to succeed, the recipient must show:

it has acted in good faith
it has changed its position in some way
but for the payment, it would not have so changed its position
it would now suffer substantial detriment if required to repay all or part of the sum received.

In Rasmala Trade Finance Fund v Trafigura Pte Ltd¹, the English Court of Appeal upheld Trafigura’s change of position defence, dismissing Rasmala’s appeal. In doing so, it provided useful guidance on the requirements of good faith, the relevance of risk allocation and the circumstances in which a lost commercial opportunity may constitute sufficient detriment.

Background

Between August 2017 and March 2018, Rasmala made five payments to Trafigura totalling approximately US$22.6 million, as a result of a fraud perpetrated by Farlin Energy & Commodities FZE (Farlin), which had separate commercial relationships with both parties. Farlin was a coal-trading customer of Trafigura struggling to remain within its credit limit and separately held a Murabaha financing facility from Rasmala to finance approved coal purchases.

Trafigura was led to believe by Farlin that Rasmala was providing finance on Farlin’s behalf, and that the payments could be applied towards any amounts Farlin owed, including outstanding demurrage from prior trades.

Trafigura’s practice when receiving payments from third parties was to require a tripartite agreement (TPA) recording the basis on which the funds could be applied. Farlin provided TPAs purportedly executed by Rasmala, but unbeknown to Trafigura, Rasmala’s signatures had been forged. Trafigura applied the five payments against Farlin’s outstanding debts, reducing its exposure and enabling it to continue trading. Rasmala later discovered the fraud and sought restitution of the payments as having been made under a mistake.

Commercial Court

At first instance, the Commercial Court accepted that Rasmala had made the payments under a mistake and that Trafigura had been unjustly enriched at Rasmala’s expense. However, it held that Trafigura had a complete defence of change of position. In reliance on the payments, which it honestly believed were valid and could be applied against Farlin’s indebtedness, Trafigura had continued trading with Farlin rather than ceasing business and pursuing recovery of the sums already due. The Court found this to be a substantial and irreversible detriment, making it inequitable to require repayment. It therefore dismissed Rasmala’s claim. Rasmala appealed.

Court of Appeal

The Court of Appeal dismissed Rasmala’s appeal, upholding Trafigura’s change of position defence. The judgment provides important guidance on the four aspects of the defence: i) good faith; ii) causation; iii) risk allocation; and iv) detriment.

Good faith

The Court of Appeal confirmed that good faith is primarily concerned with the recipient’s actual knowledge and understanding. The question is what the recipient knew, suspected or appreciated at the relevant time, rather than simply what a reasonable person ought to have discovered. Mere negligence is not sufficient to defeat the defence.

The Commercial Court had found that Trafigura neither knew nor suspected that the TPAs were invalid or that the payments might be repayable. Rasmala nevertheless argued that Trafigura had failed to act in a commercially acceptable manner because it should have contacted Rasmala directly to verify how the payments could be used.

The Court of Appeal rejected that argument. The communications structure had been established by Rasmala itself, with Farlin acting as its undisclosed agent and dealing directly with the supplier; Trafigura would not ordinarily have expected to communicate directly with its customer’s financier and by requiring TPAs, had already taken steps beyond normal market practice, particularly as Rasmala could equally have contacted Trafigura directly.

The Court of Appeal therefore considered the finding that Trafigura had acted in good faith to be “entirely justified and completely unassailable”.
Causation

The Court of Appeal clarified the causal connection required where the alleged change of position results from the recipient’s voluntary conduct. It held that a simple “but for” test is too simplistic in such cases. Instead, the recipient must show that it acted “on the faith of” the payment, in the bona fide belief that the payment was valid and could be treated as its own.

Rasmala argued that Trafigura had changed its position in reliance on the TPAs, rather than as a result of the payments themselves. The Court of Appeal rejected that distinction. The TPAs were the means by which Trafigura sought confirmation that the payments could be applied to Farlin’s liabilities. They therefore reinforced Trafigura’s belief in the validity of the payments, rather than displacing the causal connection between the payments and its decision to continue trading.
Risk allocation

The Court of Appeal also rejected Rasmala’s argument that Trafigura should bear the consequences of the TPAs turning out to be invalid. It held that risk allocation is not a separate element of the change of position defence: it is only relevant where it feeds into good faith, causation or the overall fairness of ordering repayment. Here, Trafigura had no reason to suspect that the payments or TPAs were invalid, so it had not knowingly taken on any such risk.

Importantly, the Court of Appeal distinguished between two questions: whether the TPAs were valid; and whether the payments were valid. Even if the TPAs turned out to be invalid by reason of having been fraudulently signed by Rasmala, that did not itself make Rasmala’s payments invalid. Since Rasmala had never effectively told Trafigura how the payments should be allocated, the ordinary principles governing allocation of payments between debtor and creditor continued to apply, meaning Trafigura could apply them against Farlin’s existing debts regardless of the TPAs.
Detriment

The Court of Appeal confirmed that a detriment for the purposes of change of position does not need to be capable of precise financial quantification. A substantial and irreversible loss of a commercial opportunity can be sufficient.

By continuing to trade with Farlin, Trafigura had lost the opportunity to cease trading earlier and pursue recovery of Farlin’s then-outstanding debts, including under its credit insurance. Rasmala argued that Trafigura was ultimately better off overall, by comparing its eventual net loss (around US$7 – 7.5 million) with Farlin’s debt to Trafigura before the fraud (around US$12 – 14 million). The Court of Appeal rejected this as an “apples to oranges” comparison. The appropriate comparison was between Trafigura’s position after the payments and the position Trafigura might have achieved had it stopped trading with Farlin and sought recovery of its debts due to Farlin having reached its credit limits at an earlier stage. Although the outcome of that counterfactual could not be determined precisely, the Court of Appeal held that this did not matter; the evidence was sufficient to show that Trafigura had suffered a substantial and irreversible lost opportunity.

Comment

The judgment provides important guidance on the scope of the change of position defence, particularly in the context of trade finance and third-party payment structures. It confirms that:

good faith turns principally on the recipient’s actual knowledge or suspicion
a voluntary change of position may be sufficiently connected to a payment where the recipient acts “on the faith of” that payment’s validity
a substantial and irreversible loss of commercial opportunity may amount to detriment even where its precise financial value cannot be determined.

The decision also has practical significance for parties using intermediaries in trade finance transactions. Where a payer deliberately routes its communications with the recipient through an intermediary, it may be difficult to argue later that the recipient should instead have sought direct confirmation on the application of the funds from the payer. Clear payment instructions and independently verifiable terms on how third-party payments are to be applied will help to avoid this risk.

If you would like to discuss any of the issues raised here, please do not hesitate to get in touch. We regularly advise trade finance and commodities clients on payment disputes and have particular experience in multi-party trade finance fraud claims.

This briefing was co-authored by Trainee Solicitor Michail Sarantellis.

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