I. CRITICISM
4.1 From the foregoing it will be apparent that the existing law is clearly unsatisfactory. It has been subject to constant criticism.1 The reasons are summarised below.2
A. The General Rule is not in Harmony with Restitutionary Principles
4.2 The rule contradicts the rationale underlying recovery of moneys paid under mistake of fact and creates an irrational and artificial distinction between payments made under a mistake of law and those made under a mistake of fact. This means that the rule prevents equal justice in like cases. Australian law now appears to have adopted the general principle of unjust enrichment as the unifying element underpinning the law of restitution.3 Certainly the law permitting recovery of money paid under mistake of fact is based on such a concept,4 as are some of the exceptions to the rule in Bilbie v Lumley recognised in the present law. It offends widely held views of what is fair and just for a person to make a windfall out of another’s mistake. Where money has been paid under mistake, the payee has received a benefit that was not due and which the payer did not intend to confer. Whatever the nature of the mistake, it is unjust for the recipient to retain the money, unless some specific ground of defence such as change of position or estoppel precludes recovery. Naturally, where the money was paid in settlement of an honest claim or where the payment is tainted with certain types of illegality, then it may be appropriate to refuse recovery of the mistaken payment, but in those circumstances different policy matters intrude. Where there is mistake alone it is quite unreasonable to differentiate between different types of mistakes.
B. The General Rule Cannot be Supported on Policy Grounds
4.3 The reasons advanced to support the rule in Bilbie v Lumley are untenable. Lord Ellenborough in that case stated that:
every man must be taken to be cognizant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried out. It would be urged in almost every case.5
4.4 Two separate but related reasons are advanced in this terse statement of the policies underlying the general rule. The first, namely that everyone is deemed to know the law, is however obviously spurious. It is at most a presumption of law meaning no more than that “no one is to be excused for wrongdoing on the ground that he is ignorant of the law”,6 a proposition in the criminal law which is itself no longer absolute.7 Such a presumption is unhelpful and misleading in determining whether or not money paid under mistake of law should be recoverable. In the cases under discussion, the plaintiff has done no wrong but merely seeks to have returned that to which in conscience he or she is entitled. Furthermore, it has been suggested that:
it does in truth, seem that if one paying must be presumed in all cases to do so with a full knowledge of his liability, it is only fair to presume also that the payee received it with a full knowledge that he had no right to accept, the consequence of which would be that, if he knew a gratuity was not intended, his acceptance would constitute legal fraud.8
Where the welfare and safety of the public is involved, the very purpose of the criminal law would be stultified if a defendant could raise ignorance of the law as a defence. In the area of recovery of money it is difficult to see any reason for a legal policy that should compel the law to treat the plaintiff as if he or she did actually know the law. For the reasons summarised in para 4.2 the law’s policy should be to prevent unjust enrichment by one person where that is the result of another’s mistake, in the absence of any defence such as change of position or estoppel which would make it inequitable to allow recovery.
4.5 Secondly, Lord Ellenborough suggested that the general rule was necessary because otherwise there would be a floodgate of litigation.9 However, as the Law Reform Commission of British Columbia has pointed out, to say that mistake of law would be “urged in every case” is unsatisfactory in that it confuses the right to plead a cause of action with the right to succeed.10 The paucity of cases coming before courts in New Zealand, Western Australia and those jurisdictions in the United States where the general rule has been abolished suggests that Lord Ellenborough’s fears are unfounded. In many areas in the law judges or juries have to determine issues of knowledge or intent. In view of the availability of discovery and interrogatories and the fact that the onus of proving mistake lies upon the plaintiff we believe that the courts would be quite able to distinguish true and false claims when they were advanced in this context. If , on the other hand, Lord Ellenborough was simply objecting to a principle that might increase the judicial workload, such a cause for constraint has not blocked a multitude of other judicial and statutory reforms. It is not the object of the law to prevent the litigation of just claims. It is hard to see how there may be a greater temptation to plead mistake of law than mistake of fact, yet the “floodgate” argument has not precluded relief in that area. In any event we do not accept that repeal of the rule in Bilbie v Lumley would increase the judicial workload. By avoiding arid disputes such as whether a mistake is as to fact or law, or whether a case falls within one of the many exceptions to the general rule, such a reform could be expected to result in a net saving of judicial time (see also para 4.8).
4.6 In Brisbane v Dacres Gibbs J suggested a further reason for the general rule:
He who receives [the money] has a right to consider it as his without dispute: he spends it in confidence that it is his; and it would be most mischievous and unjust if he who has acquiesced in the right by such voluntary payment, should be at liberty, at any time within the statute of limitations, to rip up the matter, and recover back the money. He who received it is not in the same condition: he has spent it in the confidence it was his, and perhaps has no means of repayment.11
Of course the same could have been said in relation to the payee who seeks to benefit from a mistake of fact. But while the past inadequacy of the common law defences to actions for the recovery of money paid under mistake may explain the retention of the rule in Bilbie v Lumley,12 it is anomalous that judicial reform has not to date proceeded along the lines of extending the defences and rejecting the general rule. Some of the statutory reforms that have been introduced (see Appendix C) address Gibbs J’s argument by enacting a change of position defence (New Zealand and Western Australia), or allowing the court to order that repayment be made in instalments (Western Australia). For reasons which we develop later (paras 5.38-5.41) we think that the common law has now accepted an appropriate change of position defence (the details of which are being worked out in the usual common law manner) and that the further policy reason advanced by Gibbs J for the general rule is no longer generally valid, if it ever was.
C. The Law is Uncertain and Complex
4.7 The rule is uncertain in its application. The distinction between mistake of law and mistake of fact is practically impossible to define and extremely difficult to draw in any given case. The elements of fact and law are so closely intertwined that any attempt to separate them cannot but involve a certain amount of arbitrariness”.13 This complexity promotes disputes and litigation, and makes the law less accessible to litigants of modest means.
D. The Rule and its Exceptions Lack a Rational Basis
4.8 The elaborate cluster of artificial distinctions and exceptions to the general rule and the readiness to label some mistakes of law as mistakes of f act attest to the extent of judicial unease about the rule.14 It may be true that many of the injustices of the general rule are met by passing through the gateway of one of the exceptions in appropriate cases. But such an approach makes the law costly and inaccessible. Furthermore, when both critics and courts openly acknowledge the use of technical devices and arbitrary distinctions to evade the general rule, the resulting damage is not only the unfair results which may ensue where the law is unevenly applied, but also a weakening of the inherent authority of the law.15 The time comes when the law should discard fictions and restate itself on a rational basis.16 An American writer commenting on the application of the general rule in Texas and its rejection in Kentucky has stated:
But if the test of a law is in its results, it may be asked what difference does it make whether the courts, as in Kentucky, frankly admit that they correct mistakes of law, or, as in Texas, first deny that they do so in general, then cover up the rule with exceptions, so long as the plaintiff with a meritorious case gets the relief to which in justice he is entitled. The problem, however, is not so simple. In the first place, in so far as they are practicable, there is great social value in scientific rules and in consistent and smoothly working legal machinery. The Texas rule exacts for its enforcement the double price of first drawing the difficult distinction between law and fact and then, assuming the mistake is one of law, of drawing the distinction between the general rule and. its exceptions.17
II. OPTIONS FOR REFORM
4.9 The general rule seems firmly entrenched in Australian common law (see para 2.12). Whilst the High Court could decide to reverse it, there is no indication of any moves to raise the issue in that forum. Since the ‘present law is manifestly deficient for the reasons given earlier in this chapter, legislative reform is appropriate. Reforms enacted or proposed in other jurisdictions are now considered.
A. United States Models Field Code
4.10 The first statutory reform in the United States was enacted in California in 1872 in s1578 of its Civil Code:
Mistake of law constitutes a mistake, within the meaning of this Article, only when it arises from:
The Californian reform was modelled on a civil code completed in 1865 by Field which the New York legislature adopted, but which the New York governor vetoed, with the result that it did not become law. A number of other American states have adopted similar provisions.19
4.11 However the Field Code is uncertain in its scope, and gives little judicial guidance in the area with which this report is concerned. Courts in the different states which have used the Field Code as their statutory model have variously held that it merely declared the rule in Bilbie v Lumley; it allowed recovery only if the payment was involuntary; it only applied to rescission of a contract entered into under a mistake of law; and that it applied to recovery of payments made under a mistake of law as opposed to merely contracts.20 Apart from this obvious confusion about the nature of the statutory reform, commentators are generally agreed that the Field Code does little more than restate the existing law so far as recovery of money or other benefits transferred under mistake of law is concerned.21
New York
4.12 Based on a 1942 provision22 which was enacted following a report and recommendation of the New York Law Revision Commission,23 s3005 of the New York Civil Practice Law & Rules provides:
When relief against a mistake is sought in an action or by way of counterclaim, relief shall not be denied because the mistake was one of law rather than one of fact.
The section deliberately knocks away a juridical basis for denying relief against a mistake, without providing any guidance as to how or in what circumstances such relief is to be granted. It may also be noted that it extends to all forms of relief against mistake and that it extends to contracts as well as the simple payment of money. The provision by its breadth of scope thus invites the creation of separate rules governing mistakes of law in particular areas, rather than creating a uniform method of dealing with mistakes in the law of restitution.
4.13 The inappropriateness and unhelpfulness of the New York model is, in our view, shown by the 1957 decision of the New York Court of Appeals in Mercury Machine Importing Corp v City of New York.24 Certain taxes levied under a New York statute were held to be illegally levied since the law was unconstitutional when applied to interstate business. Despite the words of the 1942 statute, the Court applied the pre-existing common law, holding that taxpayers who paid the taxes without protest and not under duress were not entitled to a refund of money paid; and, further, that voluntary payments of a tax made under a mistake of law could not be recovered. The Court held that the provisions of the statute empowered the court to act only in appropriate cases involving a mistake of law. The statute did not require, they said, that mistakes of law should be treated in all instances as though they were mistakes of f act. It merely removed a technical obstacle against granting relief for mistakes of law.
4.14 We agree with one commentator’s criticism of the New York statute as interpreted by the Court of Appeals:
The effect of the Mercury case, and the essential disadvantage of the New York provision, is the fact that it does not do away with the mistake of law and mistake of fact distinction.... Instead of doing away with one distinction, the reform provision has compounded the matter such that the court is now obliged to follow a two-stage procedure. First, the court must decide whether the mistake is a mistake of law or a mistake of fact, and second, if it is decided that the mistake is a mistake of law, the court then must decide whether it is one of the ‘appropriate cases’ within the area of mistake of law that justifies recovery. This new artificiality will either create a further ‘hairsplitting’ distinction to get the case to fit into that ‘appropriate’ area of mistake of law, or it will be ignored altogether and the old trick of arguing that the mistake of law is in fact a mistake of fact will be used to arrive at the same conclusion.25
4.15 We consider that, in view of the apparent fixity of the general rule in Australian common law (para 2.12), a statutory reform should give some guidance as to when recovery of money paid under mistake of law should be permitted. We think it is appropriate to give that guidance if statutory relief is confined to recovery of money (and other benefits: paras 5.10-5.16) paid or transferred under mistake of law, leaving the general law of mistake in contract to continue to be worked out at common law or by an appropriate statutory reform.26 As we point out in para 4.17 and explain in detail in the next chapter, the New Zealand and Western Australian models to which we now refer provide this guidance. Whether the detailed rules they embody are entirely necessary or desirable will also be considered in the next chapter.
B. New Zealand and Western Australian models
4.16 In 1958 the New Zealand Judicature Act 1900 was amended by inserting ss94A and 94B to provide relief in respect of payments made under mistake of law. This reform was proposed by the New Zealand Law Revision Committee.27 These provisions were adopted, with some changes, by Western Australia in 1962.28 The full texts of these amendments are set out in Appendix C. Unlike the New fork provision which extends to contractual mistake generally, the sections are restricted to relief sought in respect of “any payment that has been made under mistake”. They thus address squarely the rule in Bilbie v Lumley.
4.17 The sections also differ from the New York model in that they require a hypothetical gateway to be demonstrated as a prelude to relief. It is stated that where “relief could be granted if the mistake was wholly one of fact, that relief shall not be denied by reason only that the mistake is one of law whether or not it is in any degree also one of fact”. We shall hereafter refer to this as the general reform.
4.18 The statutes then provide various exceptions or qualifications to the statutory relief made available by the general reform. Relief is not available in certain cases where the mistake is the result of a change in the law;29 a change of position defence of general application has been enacted;30 and, in Western Australia, the Court is expressly empowered to order repayment by instalments.31 We shall hereafter refer to these as the statutory qualifications to the general reform.
4.19 In its Report on Benefits Conferred under a Mistake of Law (1981) the Law Reform Commission of British Columbia reviewed the English and Canadian law on this topic and recommended reform along the lines of the general reform embodied in the New Zealand and Western Australia provisions (para 4.17). The Commission was critical of the statutory reforms enacted in the United States and concluded that the Australasian legislation “provides a generally workable model for legislative reform”.32 It did, however, propose that reform in British Columbia should extend beyond payments of money to mistaken transfers of other forms of property, and it was not in favour of the statutory qualifications in the Australasian models. At this stage there has been no announcement on the implementation of these proposals.33
4.20 The Law Reform Committee of South Australia has recommended the general reform referred to in para 4.17 with a slight formal modification.34 It has also recommended the creation of a statutory change of position defence and a power to order repayment by instalments.35 It has also proposed the enactment of a provision that would ensure that the defences which are generally available to a person sued to recover a mistaken payment should apply where the payment is made by the government.36
4.21 The discussion before and after the passing of the New Zealand and Western Australia provisions and the proposals advanced in the reports of the Law Reform Commission of British Columbia and the Law Reform Committee of South Australia enables us to address, in the next chapter, the specific issues relating to the details of statutory reform.
FOOTNOTES
1. See for example C M Stadden “Error of Law” (1907) 7 Colum L Rev 476; S J Stoljar The Law of Quasi-Contract (1964) at 43; Lord Goff of Chieveley and G Jones Law of Restitution 3rd ed (1986) at 117-119; Corbin on Contracts (1960) vol 3 paras 616-617; G E Palmer The Law of Restitution vol III (1978) para 14.27 notes 7 and 8 (and authorities there cited).
2. We have drawn particularly on the discussion by the Law Reform Commission of British Columbia Report on Benefits Conferred Under a Mistake of Law (1981) at 58-67; the Law Reform Committee of South Australia Report Relating to the Irrecoverability of Benefits Obtained by Reason of Mistake of Law (1984) at 5-8, 18-20; G H L Fridman and J G McLeod Restitution (1982) at 166-174; and Dickson J in his dissenting judgment (Laskin CJC concurring) in Hydro Electric Commission of Township of Nepean v Ontario Hydro (1982) 132 DLR (3d) 193 at 201-211.
3. Pavey & Matthews Pty Ltd v Paul (1987) 69 ALR 577. Compare Daly v The Sydney Stock Exchange Ltd (1986) 60 ALJR 371 at 373 per Gibbs CJ.
4. See for example R E Jones Ltd v Waring & Gillow Ltd [1926] AC 670 at 696 per Lord Sumner; Commercial Bank of Australia Ltd v Younis (1979) 1 NSWLR 444 at 450 per Hope JA for Court of Appeal.
5. Bilbie v Lumley (1802) 4 East 467 at 472 (102 ER 448 at 449-450).
6. Iannella v French (1968) 119 CLR 84 at 113 per Windeyer J; Krahe v TCN Channel Nine Pty Ltd (1986) 4 NSWLR 536 at 546 per Hunt J.
7. See cases such as Kiriri Cotton Co Ltd v Dewani [1960] AC 192 where a party to an illegal transaction may be relieved on the basis that the parties were not in pari delicto.
8. H F Wright “Should’Money Paid Under a Mistake of Law be Recoverable?” 9 Virsinia L Rev 126 at 128, quoted by Law Reform Commission of British Columbia, note 2 at 58.
9. See also Rogers v Ingham (1876) 3 Ch D 351 at 356-7 per James LJ.
10. Law Reform Commission of British Columbia, note 2 at 58-59.
11. 5 Taunt 143 at 152-3 (128 ER 641 at 645)
12. See Caroline A Needham “Mistaken Payments: A New Look at an Old Theme” (1978) UBC Law Rev 159 at p173. See further para 5.34
13. Caroline A Needham; note 12 at 172. See also paras 3.2-3.6.
14. See also paras 1.3 and 3.20.
15. Law Reform Committee of South Australia, note 2 at 19.
16. See Commissioner for Railways (NSW) v Cardy (1970) 104 CLR 274 at 285 per Dixon CJ; United Australia Ltd v Barclays Bank Ltd [1941] AC I at 29 per Lord Atkin.
17. B Smith “Correcting Mistakes of Law in Texas” (1931) 9 Texas L Rev 309 at 318, quoted by Law Reform Commission of British Columbia, note 2 at 58.
18. See now 8 West’s Cal. Code Ann para 1578 (1973). The Californian law on the subject is discussed in B E Marean “Restitution for Money Paid Under Mistake of Law” (1968) 19 Hastings LJ 1225.
19. Montana, Oklahoma, North Dakota and South Dakota. See Donald J Lange “Statutory Reform of the Law of Mistake” 18 Osgoode Hall LJ, (1980) 428 at 466.
20. Id at 466-467.
21. Id at 466-467; B E Marean “Restitution for Money Paid Under Mistake of Law” (1968) 19 Hastings LJ 1225 at 1228; Lord Goff of Chieveley and G Jones, note 1 at 118 n9.
22. Para 112-f of the Civil Practice Act.
23. New York Law Review Commission, Legislative Document (1942) No 65 (B).
24. 3 NY 418, 144 NE 2d 400, 1655 NY Supp 2d 517.
25. Donald J Lange, note 19 at 469. We note that the Law Reform Commission of British Columbia appears to take a different view on this point: Note 2 at 69.
26. As to mistake of law in contract generally, see further para 5.18. For a detailed exposition of the distinction between restitution (with which this report is concerned) and contract, see Peter Birks An Introduction to the Law of Restitution (1985), esp at 44-48.
27. B J Cameron “Payments Made Under Mistake” (1959) 35 NZLJ 4. Papers supplied to the Commission by the New Zealand Department of Justice, Wellington show that the Law Review Committee intended to follow the lines of the solution adopted in the New York model, although for reasons given in paras 4.16 and 4.17 of this Report there were significant differences in the New Zealand legislation.
28. Sections 23 and 24 of the Law Reform (Property, Perpetuities and Succession) Act 1 96 2 , which were subsequently repealed and reenacted as ss124 and 125 of the Property Law Act 1969 (WA).
29. New Zealand, s94A(2); Western Australia, s124(2).
30. New Zealand, s94B; Western Australia, s125(1).
31. Section 125(2).
32. Law Reform Commission of British Columbia, note 2 at 73.
33. Letter from the Chairman of the Law Reform Commission of British Columbia, 18 November 1986.
34. Law Reform Committee of South Australia, note 2 at 29-30.
35. Id at 31-32.
36. Id at 32-33.
