Summary. The Court of Appeal has held that the rule that a claim for money repaid under a mistake of fact may fail if the payment is made in discharge of, and does discharge, a debt owed to the payee by a third party by whom the payer is authorised to discharge the debt will apply to electronic bank payments.
Background. The Court of Appeal has held that if a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact (Barclays Bank Limited v Simms [1980] QB 679). However, his claim may fail if amongst other things, the payment is made for good consideration, in particular if the money is paid to discharge and does discharge a debt owed to the payee by a third party by whom he is authorised to discharge the debt.
Facts. WF paid money that it owed to Independent Insurance by cheque which was then dishonoured. WF advised its bank, Lloyds, that a sum would be transferred into its account by CHAPS, and instructed that payment of the debt be made by CHAPS to Independent as soon as that sum arrived. No CHAPS payment arrived.
Instead WF paid three cheques into its account with Lloyds and instructed Lloyds to pay Independent "as soon as possible". The bank manager informed WF that payment could be made only after the cheques had cleared. Before the cheques cleared, two of the bank's employees made the CHAPS payment for the account of Independent in the mistaken belief that the cheques had cleared. A CHAPS transfer is an instantaneous electronic interbank transfer which is irrevocable between banks once made.
One of the cheques was subsequently dishonoured. Lloyds sought repayment of the funds from Independent. At first instance, the judge held that WF had not authorised the transfer and, since payment had been made under a mistake of fact, Lloyds was entitled to recover the money. Independent appealed.
The case turned on three issues:
Decision. The court considered the Barclays case in which a distinction was made between a cheque paid in the mistaken belief that there were sufficient funds or overdraft facilities to meet the cheque as against payment where the bank had overlooked notice of countermand. In the first case, the effect of the bank's payment is to accept the implied request for overdraft facilities. The bank will not be permitted to recover the money from the payee but has a right of recourse to its customer. In the second case, where the bank has overlooked notice of countermand, the bank's payment will be without mandate. The bank will have no recourse to its customer and the debt of the customer to the payee on the cheque is not discharged. In principal, the bank is entitled to recover the money from the payee unless the payee has changed its position in good faith or is deemed in law to have done so.
Lord Justice Waller noted that WF's request was to make an electronic transfer, as opposed to drawing a cheque. The request to draw a cheque is unqualified. When considering requests to make instructions by electronic transfer it must be considered whether the request to transfer the money was qualified. Whether or not this was the case turned on the construction of the phrase "be made as soon as possible". Independent argued that this phrase implied a qualification to make payment only as soon as possible without exposing WF to the risk of an onward payment uncovered by uncleared inward funds. This was rejected by the appeal judges who concluded that the restriction on payment until the cheques had been cleared was imposed by Lloyds and was not a qualification imposed on the bank's authority by WF. As a consequence it was held that Lloyds was not acting outside its actual authority.
Having found actual authority, the question of ostensible authority did not arise.
It was suggested by Lloyds that the law of restitution had moved on since Barclays case and that Independent had been unjustly enriched by the payment made to it by Lloyds. Lloyds submitted that if Independent was entitled to retain the money it would have received a windfall at the expense of Lloyds. Lord Justice Peter Gibson referred to the recent House of Lords decision in Kleinwort Benson v Lincoln City Council (FirstSource, PLC, 1998, IX(11), 55) where Lord Hope concluded a payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground.
The court held that Independent was entitled to receive the sum paid to it in discharge of the debt owed to it by WF.
Case: Lloyds Bank plc v Independent Insurance Company Limited, Court of Appeal, The Times, 3rd December, 1998 and New Law Publishing 298118602.