Alan L Tyree

Payment under a mistake of law

Introduction

"Once a doctrine of restitution or unjust enrichment is recognised, the distinction as to mistake of law and mistake of fact becomes simply meaningless."1

The High Court seems to have adopted the above view in David Securities Pty Ltd v Commonwealth Bank of Australia.2 A loan agreement between the parties provided for interest to be paid without deductions of any taxes. The contract also called for the borrowers to provide 'additional amounts' in the event that the borrowers were obliged to deduct any taxes from such payments. The Court held that s261 of the Income Tax Assessment Act 1936 (CTH) had the effect of avoiding this part of the contract.3

The appellant borrowers had in fact made payments of the type referred to in the voided clause of the contract. If those payments were made as a result of a misconstruction of the contract, then the payments were made under a 'mistake of law'.4 Such payments have been thought to be unrecoverable, but there has always been a strong body of academic and judicial criticism of the supposed rule.5 The Court has now held that the rule forms no part of the law of Australia. It now seems that the only remaining areas of uncertainty relate to the circumstances in which the enrichment is not 'unjust' or, put another way, circumstances which provide a defence to recovery.

The 'Unifying Concept'

As is well known the High Court adopted the 'unifying concept' of unjust enrichment in Pavey & Matthews Pty Ltd v Paul.6 Unjust enrichment is not a principle of law on its own but rather a framework for considering and understanding traditional legal rules. However, if the grounds for a recovery order lie in the concept of unjust enrichment then the circumstances in which the enrichment was gained relate only to the question of the justice of the case.7

Although the adoption of the unifying concept of unjust enrichment certainly makes it easier to abandon the rule against recovery of money paid under a mistake of law, the rule had always been built on a flimsy foundation. The origins of the rule appear to lie in dicta by Lord Ellenborough CJ in Bilbie v Lumley8 where he denied recovery on the basis that 'ignorance of the law is no excuse'. As noted by Dawson J, a person seeking restitution for money paid under a mistake of law is not attempting to avoid the law but to avail himself or herself of the law.9

There have also been attempts to justify the rule on policy grounds. Treating mistake of law as a separate category is necessary it is argued because 'the uncertainty of the law and the overruling of decisions by later cases or on appeal would infect many payments with a provisional quality incompatible with orderly commerce.'10 There is the further problem that a mistake of law may have consequences for a whole class of cases whereas a mistake of fact is likely to be specific to the one payment or at least to the parties in a single dispute. These policy arguments do not justify the total prohibition of recovery but do suggest that we may need to consider the precise limitations of recovery which is allowable.

Is a 'mere' mistake of law recoverable?

The entire Court considered that a payment which has been caused by a mistake of law is sufficient to give rise to a prima facie obligation on the part of the payee to make restitution.11 The majority judgment rejects two additional requirements that have been suggested. The first, that the mistake must be such as to make the payer suppose that he or she is legally liable to make the payment, is dismissed as resting on the same fallacy as the original rule, namely, that the crucial factor is the enrichment rather than the type of mistake.12

The second proposed additional requirement, also rejected by the majority, is that the mistake of the payer must be a 'fundamental' mistake. This requirement was also rejected on the grounds that it adds little to the requirement that the payment be made under a mistake. Either the mistake caused the payment, in which case most people would say that it is 'fundamental', or it did not. Further, the requirement once again directs attention to the nature of the mistake rather than to the nature of the enrichment.13

'Voluntary' payments

The majority judgment examined a number of previous cases where the traditional rule had been applied and found that, with one exception, the actual outcome of the cases could be explained on the basis that the payment had been 'voluntary'. As in the case of payment under a mistake of fact, 'voluntary' payments cannot be recovered.

The problem is that the notion of 'voluntary' is somewhat more elusive when applied to cases of payments made under a mistake of law. Its natural meaning of a payment which is not made under compulsion or some form of undue influence since such a meaning cannot explain cases such as South Australian Cold Stores Ltd v Electricity Trust of South Australia.14 The majority defined 'voluntary' to mean a payment made in satisfaction of an honest claim.15

But placing an artificial interpretation on a word is not usually a satisfactory solution, a point raised in the judgment of Brennan J. In his view 'voluntary' should retain its usual meaning as describing the state of mind of the payer.16 Some limitation must be placed on the right to recover in order to achieve a degree of certainty in past transactions. Brennan J proposes that the limitation be that the payment is not recoverable if the defendant honestly believed, when learning of the payment, that he or she was entitled to retain the payment.17

Defences

The payee may retain the payment by showing that the 'enrichment' is not unjust.18 This is not to be considered in the abstract, but rather the circumstances are such that the law considers that ordering restitution would be unjust to the defendant. The defendant in David Securities argued two such defences, that there had been consideration given for the payment and that there had been a change of position in reliance on the payment.

The question of consideration is to be viewed from the perspective of the payer and, where the consideration can be apportioned, the defence must show that the payer is not entitled to restitution because consideration has been received for the payments which the payer seeks to recover.19

Change of position seems finally to have been authoritatively accepted as a defence. There had been previously conflicting authority,20 and the High Court had previously left the issue open.21

Conclusions

The old inflexible rule had little to recommend it, and most of us will be grateful to the Court for removing it from Australian law. Although the decision of the majority purports to treat mistakes of law and mistakes of fact on the same basis, it is clear that the interpretation of 'voluntary' introduces a distinction by the back door. The approach of Brennan J to this problem seems more direct since it approaches the policy questions openly while still allowing the normal meaning to be attached to the word 'voluntary'.

Alan L Tyree
Landerer Professor of Information Technology and Law
University of Sydney

1 Hydro Electric Commission of Nepean v Ontario Hydro (1982) 132 DLR (3d) 193 at 209.

2 (1992) 66 ALJR 768.

3 This aspect of the decision is discussed at (1993) 4 JBFLP 53.

4 York Air Conditioning & Refrigeration (A/asia) Pty Ltd v The Commonwealth (1949) 80 CLR 11.

5 There is a summary of such opposition in the majority judgment at page 776.

6 (1987) 162 CLR 221.

7 As noted by the majority (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ) at page 776.

8 (1802) 2 East 469; 102 ER 448.

9 At page 788.

10 per Brennan J at page 784.

11 Brennen J at page 784; Dawson J at page 788.

12 At page 777; but the type of mistake, or rather the circumstances surrounding the mistake might be relevant for determining if the enrichment is 'unjust'.

13 At page 777.

14 (1957) 98 CLR 65.

15 At page 775.

16 At page 785.

17 At page 786.

18 At page 778.

19 At page 780; see also Rover International Ltd v Cannon Film Ltd [1989] 1 WLR 912.

20 Bank of NSW v Murphett [1983] 1 VR 489 holding that the defence was available; National Mutual Life Association v Walsh (1987) 8 NSWLR 585. In the latter case, Clarke J believed that he was prevented by the English Court of Appeal decision in Baylis v Bishop of London [1913] 1 Ch 127. Presumably the House of Lords decision in Lipkin Gorman v Karpanale Ltd [1991] 2 AC 548 would have removed that obstacle.

21 Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662.