What do you do if you have made a payment, or received a payment, by mistake?
Will you always be able to retrieve the payment, or are there some circumstances where the party who has received the mistaken payment can refuse to pay it back?
This article will discuss your rights if you make a payment by mistake, or you receive a mistaken payment.

What is a ‘mistaken’ payment?

Before we consider these issues, we need to be clear on what is meant by ‘mistaken’ payment. From a legal point of view, there are two types of ‘mistake’. One is a mistake of fact and the other is a mistake of law.

A mistake of law can be described as an erroneous belief or understanding as to the applicable law and its effects.  An example of a mistake of law payment is where you thought you had a legal obligation to make a payment, you made that payment, but you had no legal obligation to do so.[1]

A mistake of fact is defined as a mistaken belief other than a mistake of law. That is, a belief regarding a particular fact which is not correct.[2] An example of a mistake of fact payment may be where you sell a piece of land for $15,000 but the purchaser is of the mistaken view that the purchase price for that piece of land is $15,000 per acre and pays you on that basis.

Mistaken payment at law – will the money have to be repaid?

In some cases the Courts have decided that although funds have been paid to a party by reason of mistake at law, the recipient is not required to repay the funds.
The starting position is that where such a payment has been made, the money will have to be repaid, unless the recipient of the money can establish a defence which means that they do not have to repay the funds.[3]
This article considers one such defence, being the “change of position” defence.

The “change of position” defence

1. A recipient of money paid by reason of mistake at law will be able to establish a defence of “change of position” if it can prove the following:[4]

1. They have changed their position in in a way that is legally or practically irreversible, or at least would be significantly difficult to reverse, such as making a large business asset purchase;
2. The change in position referred to above was made by them in reliance on the payment;
3. They changed their position in good faith; and
4. Their change in position was aligned with their knowledge of the facts and circumstances in relation to the payment.What this means is that, in order to rely upon the change of position defence, the recipient of the money must prove that they acted on the receipt of the money, in good faith, and in a way that changed their position.[5]

A recipient will find it difficult to prove that they have acted in “good faith” where they know or suspect they do not have a valid claim to the payment and then change their position in reliance on that payment in any event.[6]

The change of position because of the payment should be evident,[7] alternatively, where specific expenditure incurred because of the payment can not be precisely identified, something more than spending money on “ordinary living expenses” must be shown to demonstrate the required change in position.[8]

As outlined below, a similar defence to the common law “change in position” defence is also found in property law legislation.

Defences in sections 124 and 125 of the Property Law Act

Section 124 of the Property Law Act 1969 (WA) (Property Law Act) provides a legislative basis to recover a payment that has been paid by mistake of law, regardless of whether the mistake was one of law and/or of fact. The Court has held that the change of position defence in common law “sits alongside” the Property Law Act provisions.[9]

Where a party realises that they have made a payment by mistake, they can rely on this section of the Property Law Act in a bid to recover the money.

When deciding whether to order the recipient to repay the money, the Court will consider the principles set out in section 125 of the Property Law Act (which principles are similar to those referred to above in the context of the common law defence of “change in position”).

Section 125 of the Property Law Act states:

Relief … in respect of any payment made under mistake, whether of law or fact, shall be denied wholly or in part if the person … received the payment in good faith and has so altered his position in reliance on the validity of the payment that in the opinion of the Court, having regard to all possible implications in respect of the parties (other than the plaintiff or claimant) to the payment and of persons acquiring rights or interests through them, it is inequitable to grant relief, or to grant relief in full. [emphasis added]

As can be seen from the terms of section 125 of the Property Law Act above, the Court will also take into account the interests of third parties who may have acquired “rights or interests” through the party who has received the payment when considering whether the money should be repaid.

Lavan comment

When you make any payments of money you should make sure that the details of the payment are correct, and also, that you are clear on the nature and extent of your legal obligation to make any such payment.

Also, upon realising that you may have made a payment by mistake, you should immediately inform the recipient and also tell them that they should not take any steps to change their position in reliance on that payment and to immediately refund the payment.

Likewise, if you have received a payment and you are unsure as to whether the payment has been made by mistake, or the basis on which you are entitled to such a payment, you should take immediate steps to clarify whether you have an entitlement to the payment.

To discuss mistaken payments further, please contact Lavan partner Cinzia Donald on 9266 6755 or Cinzia.donald@lavan.com.au.

You can also contact Lavan’s special counsel Amanda Kailis on 9288 6623 or Amanda.kailis@lavan.com.au or Quadrant Advisory’s managing director Paul O’Farrell on 9288 6607 or ofarrell@quadrantadvisory.com.au to discuss litigation or banking matters.

[1] David Securities Pty Ltd & Ors v Commonwealth Bank of Australia [1991-1992] 175 CLR 353.

[2] Butterworths Australian Legal Dictionary.

[3] David Securities Pty Ltd & Ors v Commonwealth Bank of Australia [1991-1992] 175 CLR 353, 379.

[4] Alpha Wealth Financial Services Pty Ltd & Ors v Frankland River Olive Co Ltd [2008] WASCA 119 [202].

[5] David Securities Pty Ltd & Ors v Commonwealth Bank of Australia [1991-1992] 175 CLR 353, 385.

[6] Alpha Wealth Financial Services Pty Ltd & Ors v Frankland River Olive Co Ltd [2008] WASCA 119 [202].

[7] David Securities Pty Ltd & Ors v Commonwealth Bank of Australia [1991-1992] 175 CLR 353, 385.

[8] David Securities Pty Ltd & Ors v Commonwealth Bank of Australia [1991-1992] 175 CLR 353, 386.

[9] Alpha Wealth Financial Services Pty Ltd & Ors v Frankland River Olive Co Ltd [2008] WASCA 119 [193].