I. THE PROBLEM

1.1 A general rule precluding recovery of moneys paid under mistake of law is part of the common law in Australia. Its operation can be seen in the following example. A and B have a contract under which A is required to pay $10,000 to B upon B delivering a computer with certain specifications to C. If A makes a payment under the mistaken belief that B has delivered the computer to C, A can recover the payment by a legal action called “money had and received”. But if A, misunderstanding the effect of the contract, makes a payment knowing the condition of the computer that has been delivered to C but because of A’s misunderstanding of the contractual terms believing wrongly that it met the contractual specifications, the payment is irrecoverable. Although A would not have made the payment in either case had the true situation been known, recovery is allowed in the first case because the mistake is categorised as one of fact, and denied in the second because it is categorised as one of law.

1.2 The general rule that moneys paid under a mistake of law (as opposed to a mistake of fact) are irrecoverable has become firmly entrenched despite the fact that it originated in Lord Ellenborough’s own mistake of law in Bilbie v Lumley.¹ The rule in Bilbie v Lumley has excited intense disagreement as to its proper formulation and has been attacked on many grounds. Starting with criticism of the misconception of the prior law that spawned the rule, the bases of this attack include the following.

• The rule is unjust because people are unable to recover moneys paid by mistake, even where such payments result in the unjust enrichment of the payee.
• It is artificial and arbitrary to attempt to create a dichotomy between mistakes of fact and mistakes of law.
• Having let the rule that one cannot recover money paid under mistake of law take hold, the courts have created a series of exceptions lacking any logical basis other than to sidestep the rule in the interests of doing justice between parties.
• Even outside the recognised list of exceptions to the rule at common law, courts of equity have on occasion suggested that they might disregard the rule.
• The result of these developments in case law is that there is much uncertainty as to whether a benefit conferred by mistake can be recovered.

1.3 One more often encounters the “luxuriant undergrowth of exceptions to the general rule”² than applications of the rule itself. Indeed the long list of such exceptions is regarded by most commentators as the surest sign that the rule is unsatisfactory, and certainly indicates that the operation of the rule is now greatly limited. Whilst it may be going too far to say that the numerous exceptions to the rule are of “such wide scope that as a practical matter the courts can, when they wish, evade its application”³ it is true that the exceptions are many and extensive.

1.4 These difficulties with the rule have led to proposals for its modification or abolition. These models for reform are considered in Chapter 4.

II. THIS REFERENCE

1.5 This is the eleventh report in the Community Law Reform Program. The Program was established by the then Attorney General, the Hon F J Walker QC MP, by letter dated 24 May 1982 addressed to the Chairman of the Commission. The letter contained the following statement:

This letter may therefore be taken as an authority to the Commission in its discretion to give preliminary consideration to proposals for law reform made to it by members of the legal profession and the community at large. The purpose of preliminary consideration will be to bring to my attention matters that warrant my making a reference to the Commission under s10 of the Law Reform Commission Act, 1967.

The background and progress of the Community Law Reform Program are described in greater detail in the Commission’s Annual Reports since 1982.

1.6 The reference originated in a suggestion made on behalf of the Supreme Court Rule Committee that consideration be given to adopting ss93A and 94B of the Judicature Act 1908 (New Zealand) by letter dated 17 December 1984 from the Chief Justice of New South Wales the Honourable Sir Laurence Whistler Street KCMG to the Attorney General the Honourable T W Sheahan BA, LLB, MP. The Chief Justice indicated that the Rule Committee had taken the view that the proposal was outside its proper scope in that it involved a matter of substantive law which could have comparatively wide significance. On behalf of the Rule Committee the Chief Justice invited the Attorney General to consider whether it would be appropriate to refer the matter to the Law Reform Commission as part of its Community Law Reform Program. A useful Memorandum on the subject prepared by the Secretary of the Rule Committee was provided. The matter was brought to the Commission’s attention by the Attorney General in February 1985 and, following preliminary investigation, a reference was sought by the Commission in May 1985. By letter dated 25 June 1985 the Attorney General referred to the Commission for enquiry and report:

1. The law relating to the recovery of money paid under a mistake of law, including the law relating to defences to claims for such recovery;

2. Any incidental matter.

1.7 Ms Heather Armstrong, a Legal Officer of the Commission, did the background research and provided a working draft of the report. A Division consisting of the former Chairman Mr Keith Mason QC, Mr Paul Byrne, Ms Helen Gamble and the Honourable Mr Justice Andrew Rogers was constituted on 7 May 1986. A draft report, prepared by the former Chairman, was examined and revised by the Division in late 1986 and early 1987.

1.8 The draft report, including the proposed form of legislation, was then submitted to a number of persons and organisations with particular interest in the topic for comment. The State Bank of New South Wales, the Local Government Association of New South Wales, the Shires Association of New South Wales and the Australian Bankers Association indicated general agreement with the draft report in the form submitted. The Commission is particularly grateful for the detailed responses it received from Ms Caroline Needham, barrister, Miss Celia Caughey, solicitor of New Zealand, the New South Wales Treasury and the New South Wales Department of Finance which in turn led to some further modification of the draft report. The Commission also acknowledges with thanks the assistance of Mr Michael Orpwood, Deputy Parliamentary Counsel, who drafted and redrafted the Bill which now forms Appendix A.

1.9 In this report we consider:

• the development of the rule denying recovery of moneys paid under mistake of law (Chapter 2);
• the operation of the rule (Chapter 3);
• criticism of the rule and options for reform (Chapter 4); and
• recommendations for reform (Chapter 5).

1.10 One possibly related topic is the effect of contributory negligence on restitutionary claims such as those to recover payments made under mistake. The whole question of the possible extension of the defence outside claims in tort is being considered in another reference in the Community Law Reform Program.

1. (1802) 2 East 469 (102 ER 448). The source and nature of the error and the way in which, by the early nineteenth century, it had become embedded in the common law are discussed in William E Knutson “Mistake of Law Payments in Canada: A Mistaken Principle?” (1979) 10 Manitoba LJ 23 at 23-26. For a contrary view as to the origin or-the general rule, see R J Sutton “Kelly v Solari: The Justification of the Ignorantia Juris Rule” (1966) 2 NZUL Rev 173.

2 . J McCamus “Restitutionary Recovery of Moneys Paid to a Public Authority Under a Mistake of Law: Ignorantia Juris in the Supreme Court of Canada” (1983) 17 UBCLR 233 at 235.

3. Law Reform Commission of British Columbia Report on Benefits Conferred Under a Mistake of Law (1981) at 13.