Law of Restitution

Introduction

There is no doubt that the purpose of the law of restitution is to prevent unjust enrichment. However, some scholars argue that the normative basis for mistaken transfer should be corrective justice. It is fiercely argued by Saprai that corrective justice cannot be the normative basis for the whole field of restitution, but could only be the basis for wrongdoings. Moreover, as regards unjust enrichment, Krebs and Burrows hold similar points of view to Dannemann, and with regard to mistaken transfer cases it is better to assume that the normative basis is the ‘tests’ developed by the judges from the cases in courts.

Orthodox English law takes a narrow view on the basis of mistaken payment. Dannemann observes that according to the restitution law in England, mistake as a ground for unjust enrichment owes much to the condictio indebitati . This situation would keep the normative basis far away from the legal ground reasoning. As a result, the traditional basis of the supposed liability mistake test would fail to provide an effective remedy. The recent prima facie causation test could therefore be one improvement. By reviewing relevant cases and analysing mistake of fact and mistake of law, this essay would attempt to argue that the efforts of scholars and judges have wrought an improvement in the normative basis for restitution of mistaken payment and the theory of corrective justice would not suitable to be the normative basis.

To demonstrate this, Section 2.0 would argue that mistaken payment should be the core case of mistaken transfer, which is the preliminary ground in support of this essay. Section 3.0 will argue with regard to mistake of fact why the causation test could be better than the liability mistake test and analyse their content. Section 4.0 will focus on the mistake of law. Section 5.0 will criticise the theory of corrective justice.

 Mistaken Payment: The Core Case of Mistaken Transfer

According to Birks, the case of mistaken payment should be the core case of unjust enrichment, where the claimant has a claim to recover money paid mistakenly to the defendant. Birks defines his category of unjust enrichment as comprising all cases that are ‘materially identical’ to this core case. If the defendant is paid money by mistake, he is bound to reimburse the same sum of money to the claimant. This is true even in the case where the mistake is spontaneous. In the case of Kelly v Solari , the claimant overpaid through bona fide forgetfulness.

There are, in principle, two reasons to suggest mistaken payment should be the core case of mistaken transfer. The first justification is that in a case where the claimant pays the defendant money by mistake, there should be no duty on the innocent defendant to return the sum of money. It is impossible to reverse the benefit by contract since there is no such contract, owing to the lack of a promise or an agreement. Similarly, it could not be a matter of tort to give the reason why the defendant has a duty to return the money. It is obvious, and no doubt the defendant did nothing wrong to the claimant since the defendant is a passive payee only in that case and did not breach any duty owed to the claimant.

The second reason why mistaken payment should be the core case of restitution for mistaken transfer is the elimination of contractual remedy and tort remedy would bring us to the second reason. It is because the mistaken payment is a pure unjust enrichment case without any other causes of action. It should be clear why the mistaken payment should be regarded as the core case of mistaken transfer.

The Basis for Restitution for Mistake of Fact

From the liability test to the causation test

The nature of the supposed liability test

The traditional view regarding restitution of mistake was that if it was a ‘liability mistake’, the mistake transfer could be recovered. This means the mistake transfer could be claimed for restitution if it is based on a fact which, even if it is a false belief, would bring certain legal liability. A transfer without that basis cannot be recovered. According to Erbacher, the transfer ‘must have been made with the intention of discharging a legal obligation’.

The most essential case regulating the ‘supposed liability’ test is Kelly v Solari. The claimant insurance company did not apparently notice the insurance policy had lapsed since the deceased defendant had failed to pay the premium in time. Therefore the defendant received money which was overpaid by the claimant through bona fide forgetfulness. After analysing the case, the court decided a new trial should be ordered to verify whether the money was paid entirely by spontaneous mistake. If so, the money could be recoverable. The judgement made by Parke B lays down a classic interpretation of the supposed liability test.

It should be the core of a classic normative basis for restitution of mistaken transfer. We can see that in common law there are so many cases which could be regarded as the successors to that test. Perhaps one of the significant cases deserving of attention is Aiken v Short . The case happened a decade after the Kelly case when the supposed liability test was widely accepted by the English courts. In the Aiken case the claimant bank thought it had acquired certain property from a third party, subject to a charge in favour of the defendant. The claimant paid the third part the fund in order to maintain the property in good condition. It was revealed, however, that the third party, de facto, did not have the ownership of the property. The court rejected the application by the claimant since the mistake through which the claimant paid the defendant could not be one of ‘supposed liability’. In that case Bramwell B further expatiated on the supposed liability test in his judgement

It should be clear that if the fact according to which the transfer made was true, the claimant should be entitled to choose to pay or not. A claimant may only recover a mistaken payment, however, if the mistake pertains to his liability to pay. Hence, we could simply draw the conclusion that, according to the supposed liability test, restitution is only available if a claimant paid money while under the mistaken belief that he was under a legal liability to pay the defendant.

Exceptions to liability mistake: Non-liability mistakes

The supposed liability test has some exceptions. That is because the test fails to cover all the aspects of everyday life. According to Burrows, these exceptions could be called as non-liability mistake test. The category of non-liability mistake is based on the extended meaning of the supposed liability. For example, it could be the transfer which is bound by the responsibility to a third party or it could even extend to the mistake transfer based on, despite legal liability, moral obligation. Birks, however, described a third kind which was without any sense of obligation restitution. From the traditional perspective, the non-liability test should belong to the supposed liability test which is regarded as a supplementary basis for mistake transfer.

Improvement: the prima facie causation test

English jurists have never stopped trying to find a suitable normative basis. The Barclays case turned out to be a watershed. According to Neuberger J, the supposed liability test has come to a dead end, since the causation test would be a better substitution and a reasonable assessor of all the mistakes of fact, even mistakes of law. It was Lord Goff who initially applied the causation test. In the Barclays case, the claimant bank overlooked a customer’s stop payment order, and consequently paid a cheque and tried to recover the money from the payee. After he rejected the submissions in the Morgan case, Lord Goff set out two general principles of the prima facie causation test.

After the first application of the prima facie causation test by Lord Goff, a series of cases applied it. Especially after the House of Lords approved this in principle in the case of Kleinwort Benson v Lincoln City Council , the causation test has been implicitly or expressly accepted in the English courts for arguing the case of unjust enrichment, especially mistaken payment cases. Whereas previously plaintiffs relying on mistake had to show that they had laboured under a mistake of fact, plaintiffs are now equally entitled to recover on the ground that they had mistaken the law.

The defects of the liability test and the improvement of the causation test

As argued by Birks, the judgement by Bramwell B has gone to extremes as regards recovery from restitution. Also, the restriction of the mistake is too opaque for the courts to distinguish whether the mistake is a liability mistake or not. This is no doubt why Scrutton LJ thought this test rather troublesome. Take donation for instance: there is certainly no such liability to pay. How can the poor transferor recover his money if the donation is made by mistake, i.e. mistake of the purpose of the donation? Additionally, how could the transferor be repaid if the payment is made from gifts, generosity or even a sense of moral obligation?

We should accept that there are some drawbacks with the supposed liability test. First, as mentioned in Section 3.1.1, the supposed liability test would prevent too many applications for restitution if the cases are based on controversial grounds. The test would fail to provide enough protection for the victim of a non-liability transfer. Let us take a look at the case of Morgan v Ashcroft which is about a bookmaker recovering his overpaid money from a client. Although the transfer in this case was based on an alleged overpayment of gambling debts, Greene MR followed the dictum of Bramwell B strictly. He believe the transfer was irredeemable since it was made as a promise rather than as a compulsory legal liability.

The attitude of Scott LJ to the wagering contract is, however, less unconditional. He left an open possibility that there may be cases where a donor who makes a gift ‘under a definite mistake of person to be benefited, or of the substantial nature of the transaction’ might be repaid.

Second, the limitation of the scope of restitution would hinder the law from providing enough certainty to the claim to balance both parties. As argued by Beatson and Bishop. English law would be quite inefficient and incoherent. According to the traditional test, if the transfer is based on liability mistake, the claimant will certainly have a concern less valid than that of the defendant. The defendant, however, should take every care to testify the mistake is not a liability mistake. In contrast, if the mistake is other than a liability mistake, the consequence would be the opposite. Also, Birks insisted that the supposed liability test was unfair since it sought to do justice to only one side. The situation would be even more difficult if the transferor had evidence to testify to the mistake.

Third, the traditional basis of liability mistake was overly concerned with the protection of the security of payments. It failed, however, to pay enough attention to whether the benefit was due to the defendant. If the defendant acted in good faith, the test would function effectively. But it would fail to provide enough protection to the mistaken claimant if the defendant was not acting in good faith. According to Burrows, the causation test could give enough supplementary effectiveness to the orthodox English law of restitution.

Mistake of Law

Mistake of law tells a different story from mistake of fact. Before the case of Kleinwort Benson, an application for restitution paid under a mistake of law would always be rejected. Only claimants in a few exceptional cases succeeded. The reason why the recovery failed, according to Birks, is because the payment under mistake of law is regarded as voluntary, as initially expressed by Gibbs J in the case of Brisbane v Dacres .

That judgement, however, was widely criticised. The House of Lords delivered its ground-breaking decision in the Kleinwort Benson case which overruled the traditional basis that a claimant cannot recover his payment if it was made under a mistake of law.

But the Kleinwort Benson case was therefore restored for further argument. In the Nurdin and Peacock case, Neuberger J expressed the view that after the Kleinwort Benson case, if the original payment was made under a mistake of law, it could apply the same defence as that applied where the payment was made under a mistake of fact. Some scholars argued that it cannot distinguish between mistake of fact and mistake of law. More jurists, however, believe that the improvement made by the case is necessary and important.

First, there should be no difference between mistake of fact and mistake of law. According to Krebs, the only question which could trigger restitution by mistake is if the defendant could be entitled to the transferred assets. In this regard, as mentioned in Section 3.1.3, the prima facie causation test could be the basis of the restitution of mistaken transfer.

Second, the English law should require an unjust factor which should be over and above the legal ground and substantialise the normative basis. We could infer from Lord Hope’s judgement in the Kleinwort Benson case, that the English law has to apply principles to cover the insufficiency of the legal ground. According to Burrows, after the Kleinwort Benson case, the causation test could be applied directly as a legal ground, which could fill the gap between the cases and the principles.

Criticising the theory of Corrective Justice

The theory of corrective justice was initially demonstrated by Aristotle, who believed that it should be the aim of the law. Argued by De Jesus, the aim of private law remedy is to reverse which means turn the status back to the antecedent state of affairs before the wrong doing. Contemporarily, L Smith would advocate the theory of corrective justice for the whole of restitution which is an extension of the theory of Wernrib who would apply corrective justice with its normative elements from Kantian philosophy. The corrective justice would almost focus on freedom and its protection.

However, to some extent, there are some problems with applying the theory of corrective justice on unjust enrichment. Firstly, in unjust enrichment, the Kantian Right could only be effective unless the enrichment of the defendant is through the loss of the plaintiff. It should be corrected to suit the needs of mistaken payments. Thus, corrective justice may trigger restitution due to aforementioned in Section 3.0 and 4.0. However, L Smith attempted to solve this problem by restoring the primary objective of unjust enrichment, which means the reversal of the assets. Nevertheless, argued by De Jesus the modified theory has lost the inherent nature of Kantian Right and failed to cover all the fields of restitution neither.

Second, it is hard to establish a legal grounding on restitution if applied the corrective justice theory on mistake payments. According to the supposed liability test, there should be no infringement on the claimant if his payment based on no liability. Then payments in the circumstances of gifts or pro bono could not be remedied. Compared with the causation test, it is clear that corrective justice would bring in more disputations.

Last but not least, argued by Saprai, one of the significant problems of the theory is the unbalance nature of the reason given for why the transaction is unjust. The theory would fail to provide enough aggressive for both parties. As aforementioned in Section 3.2, it would bring in unjust judgement for either party. In the core case of mistaken transfer, the non-wrongdoing could only apply corrective justice to explain the presence of a normative basis on the claimant’s side but not the defendant. Nevertheless, it dose not necessarily establish a defence for the defendant not to reverse the profit, de facto, it would burden more responsibility upon the claimant. Argued by Finnis, the normative basis for mistaken payments is just a fact.

Conclusion

It should be clear that the core case of mistaken transfer should be mistaken payments, in other words, mistake by fact or mistake by law. Before the Barclays case, however, it was quite complicated for claimants to find suitable and sufficient methods to protect their profits under mistaken payments. Even the courts made conflicting judgements owing to the opaque basis for mistaken payment. Nevertheless, thanks to efforts made by jurists, it is implicit and explicit that the normative basis for restitution in the core case of mistaken transfer has been changed and is developing. The prima facie causation test could have the potential to provide a clear and unified basis for restitution in mistaken transfer. Also, as aforementioned, it has amended some inherent defects in traditional English law.

As argued by some jurists, however, the causation test still has its own defects which cannot answer legal reasoning. Also, modern English law is still slower than other laws in building up a legal system of restitution. After the Barclays case and the Kleinwort case, however, there is no doubt that the English courts would act more than think. Therefore, it is clear that there is an improvement in the normative basis for restitution of mistaken payment, and it can be expected to improve further, ex aequo et bono.

Bibliography

Books:

Andrew Burrows and Others, Cases and Materials on the Law of Restitution (2nd edition, Oxford University Press, Oxford 2007) Chapter 3

Andrew Burrows, The Law of Restitution (2nd edition, Butterworths, Croydon 2002)

Ernest Weinrib, The Idea of Private Law (Harvard University Press， Cambridge, Mass. 1995).

Graham Virgo, The Principles of the Law of Restitution (2nd edition, Oxford University Press, Oxford 2006) Chapter 8

John Finnis, Natural Law and Natural Rights (Clarendon, Oxford 1980), 36-42

Keith Mason, Restitution Law in Australia (Butterworths, Sydney 1996)

Lord Goff of Chieveley and Gareth Jones, The Law of Restitution (The Common Law Library, 7th edition, Sweet & Maxwell, London 2007) Chapter 3 and 4

Peter Birks, An Introduction to the Law of Restitution (Clarendon Press, Oxford 1985)

Peter Birks, Unjust Enrichment (Oxford University Press, Oxford 2003)

Sharon Erbacher, Australian Restitution Law (2nd edition, Cavendish Publishing, London 2002)

Tariq Baloch, Unjust Enrichment and Contract (Hart Publishing, Oxford 2009) Chapter 3

Thomas Krebs, Restitution at the Crossroads: a Comparative Study (Cavendish Publishing, London 2001) Chapter 3

W. Cornish, and Others (eds), Restitution: Past, Present and Future (Hart Publishing, Oxford 1998)

Articles:

Andrew Burrows, ‘Contract, Tort and Restitution – A Satisfactory Division or Not?’ (1983) 99 Law Quarterly Review 217

Duncan Sheehan ‘What is a Mistake?’ (2000) Legal Studies 538

Ernest Weinrib, ‘Restoring Restitution’ (2005) 91 Virginia Law Review 861

Gerhard Dannemann, ‘Unjust Enrichment by Transfer’, (2001) 79 Texas Law Review 1837

Graham Virgo, ‘Recent Developments in Restitution of Mistaken Payments’ [1999] 3 The Cambridge Law Journal 478

J. Beatson, W. Bishop, ‘Mistaken Payments in the Law of Restitution’ [1986] 2 The University of Toronto Law Journal 149

Lionel Smith, ‘The Province of the Law of Restitution’ (1992) 71 Canadian Bar Review 672

Lionel Smith, ‘Restitution: The Heart of Corrective Justice’ (2001) 79 Texas Law Review 2115

Lionel Smith ‘Restitution for Mistake of Law’ [1999] Restitution Law Review 148.

M. McInnes, ‘Unjust Enrichment: A Reply to Professor Weinrib’ [2001] Restitution Law Review 29

P Mattews, ‘Money Paid Under Mistake of Fact’ [1980] NLJ 587

Peter Birks, ‘The Recovery of Carelessly Mistaken Payments’ (1972) 25 Current Legal Problems 179

Peter Birks, ‘Mistake of Law’ [2000] Current Legal Problems 205

Prince Saprai, ‘Restitution without Corrective Justice’ See on www.trinitinture.com/documents/saprai.pdf

Sonja Meier and Reinhard Zimmermann, ‘Judicial Development of the Law, Error Iuris, and the Law of Unjustified Enrichment: a View from Germany’, (1999) 115 Law Quarterly Review 556

Stephen Smith; ‘Justifying the Law of Unjust Enrichment’ (2001) 79 Texas Law Review 2177

William A. Keener,‘Recovery of Money Paid under Mistake of Fact’ (1887) 5 Harvard Law Review 211

Cases:

Aiken v Short 156 ER 1180; (1856) 1 Hurlstone and Norman 210

Barclays Bank Ltd v W. J Simms Son & Cooke (Southern) Ltd. and Another [1980] QB 677

Bilbie v Lumley and Others 102 ER 448

Brisbane v Dacres (1813) 5 Taunt. 143

Hazell v Hammersmith and Fulharn LBC ,[1992] 2 AC 1

Holt v Markham [1923] 1 KB 504

Kelly v Solari 152 ER 24; (1841) 9 Meeson and Welsby 54

Kleinwort Benson v Lincoln City Council [1999] 2 AC 349

Kleinwort Sons & Co v Dunlop Rubber Co (1907) 97 LT 263

Lady Hood of Avalon v Mackinnon [1909] 1 Ch. 476

Larner v London County Council [1949] 2 KB 683

Morgan v Ashcroft [1938] 1 KB 49

Nurdin and Peacock Plc v DB Ramsden and Co. Ltd [1999] 1 All ER 941

Ogilvie v Littleboy (1899) 15 TLR 294

RE Jones Ltd v Waring and Gillow Ltd [1926] AC 670