Legal Practice Briefing
7 February 1994
RECOVERY OF OVERPAYMENTS
In dealing with claims for the recovery of money the courts in Australia and overseas have sought to apply legal rules based upon what at first sight appears to be a simple principle: that if a person gives something of value to another, the receiving party should be entitled to keep what has been given unless it would be unjust to do so.
The law of restitution which has developed over the past two hundred years in England and Australia has become anything but simple. However, the High Court has recently moved to clear away some of the complexity that has developed in the law of restitution so that the basic principle referred to above can be more readily understood and applied.
In relation to overpayments by the Commonwealth, Parliament has in some cases made specific provision for recovery by the Commonwealth (for example, Part 5.2 of the Social Security Act 1991). More generally, the Audit Act 1901 and the Finance Directions made under that Act normally require the recovery of the overpayment if possible.
In the absence of a statutory provision for recovery, the recovery is subject to the general law. It is the operation of the general law which is the subject of this briefing.
WheniIs an Overpayment Recoverable?
Generally, an overpayment may be recovered if:
- the agreement (if any) between the parties provides for repayment;
- the agreement (if any) between the parties was aborted for reasons outside their control;
- the payment was procured dishonestly or wrongfully;
- the payment was made by mistake;
- the demand for the payment by a government agency was made without lawful authority;
- the payment was made without required Parliamentary authority;
- the payment was made under duress or undue influence;
- the payment was made for a consideration which had totally failed;
- for some other reason, it would be unjust or unconscionable for the payee to retain the payment.
Commonly, the reason for an overpayment by the Commonwealth is a mistake. It was that type of case that the High Court dealt with inDavid Securities Pty Limited and Others v Commonwealth Bank of Australia(1). Before that decision, a somewhat artificial distinction had been drawn between cases of a mistake of fact, where recovery was generally possible, and a mistake of law, where recovery was generally not possible.
The High Court held that this distinction should no longer form part of Australian law. Henceforth, a payer is prima facie entitled to recover money paid under a mistake if it appears that the money was paid in the mistaken belief by the payer that he or she was under a legal obligation to pay it or that the payee was legally entitled to payment. However, the payer would not be entitled to recover the money paid if the payee had adversely changed his or her position in good faith in reliance upon the payment. According to Brennan J a payee would also be entitled to retain a payment if the payee honestly believed, when he or she learned of the payment, that he or she was entitled to receive and retain the money. Neither is recovery possible if payment was made of an honest claim without regard to whether the payment was legally required or not.
In reaching this decision the High Court sought to restate the general principles applicable to recovery of money in cases of unjust enrichment, as a unifying legal concept.
The Court said that an enrichment is unjust, and recovery of money is therefore available, not by reference to some subjective evaluation of what is unfair or unconscionable but rather where, objectively, there exists some factor such as mistake, duress or illegality that would make it unjust for the payee to be permitted to retain the money. There is no need for the payer to prove 'unjustness' over and above mistake. The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the payee to make restitution. But if the payee can point to some other factor, such as an adverse change of position in reliance upon the payment, which, objectively, would make it unjust for him or her to have to repay the money, he or she will not be obliged to do so.
Another principle supporting recovery of overpayments sometimes relied upon by the Commonwealth is theAuckland Harbour Board(2) Principle. That case is authority for the proposition that an amount paid by the Commonwealth out of consolidated revenue without a valid appropriation may be recovered. This could occur if a condition on which money was appropriated by statute had not been met at the time of the payment or if the money was paid out by mistake, even though not otherwise recoverable.
Recovery under this principle is limited to persons who have received money directly or indirectly from the Commonwealth. The principle does not displace the ordinary principles of contract law and is subject to a possible exception where the payee has given fair value (for example, the supply of goods or services) in return for the payment.
Unlawful Demands for Payment
The general right of recovery in cases of unjust enrichment may of course be employed against the Commonwealth. This would be so if the Commonwealth were to demand a payment in circumstances where it had no authority to do so and the payee made the payment in the mistaken belief that the Commonwealth was entitled to receive it. InWoolwich Equitable Building Society v Inland Revenue Commissioners(3) the UK House of Lords held that money paid by a person to a public authority in the form of taxes or other levies paid pursuant to an ultra vires (that is, beyond power) demand by the authority is prima facie recoverable by the person. This represented a significant extension to the common law which had previously only admitted recovery of money exacted under an unlawful demand by a public authority where the payment had been made under a mistake of fact or under limited categories of compulsion.
The House of Lords held that a reformulation of the law of restitution was warranted. This was because of the nature of a demand for tax or similar impost on the citizen by the State, with the perceived economic and social consequences of non-payment stemming from the inequality of the parties' respective positions, and the unjust enrichment falling on the State where the citizen paid an unlawful demand to avoid those consequences. The reformulation recognises a prima facie right of recovery based solely on payment of money in accordance with an ultra vires demand by a public authority.
That decision is wholly consistent with the decision of the High Court in David Securities. It would be likely to be followed by an Australian court in an appropriate case.
Interest on Overpayments
Some Commonwealth legislation makes provision for the Commonwealth to pay or receive interest on overpayments. Also, where a person takes legal proceedings to recover an overpayment, the courts generally have authority to award interest on the sum for which judgment is given. In other circumstances, however, a person has no general entitlement to receive interest, unless the person could establish loss or damage because of a breach of contract or other legal wrong which deprived him or her of the use of his or her money(4).
The Finance Directions made under the Audit Act make provision for the settlement of claims against the Commonwealth as a legal liability (Finance Direction 21). In settling claims for interest as a legal liability careful consideration needs to be given to the legal principles applicable to payment of interest. Where there is no legal liability to pay interest, payment of interest could only be made voluntarily as an act of grace payment.
Defences to Actions to Recover Overpayments
The defence of change of position is referred to above, in connection with the High Court's decision in David Securities. The essence of this defence is that if a person receives money in good faith and changes his or her position in reliance on the receipt of the money, so that he or she would suffer loss if required to repay the money, restitution will not be required. To compel the recipient to refund, when for example, money has been paid to him or her by mistake would in circumstances of a change of position by the recipient make the recipient 'the sufferer and insurer of the payer's error'. Accordingly, in such circumstances 'the loss should lie where it has fallen' and 'an innocent recipient should not be forced to repay money after his position has been altered in good faith'(5).
It is also clear from the High Court's judgment in David Securities that the recipient will have a good defence if the payment was made voluntarily. The payment is voluntary if the payer chooses to make the payment notwithstanding a belief that payment is not legally required, or without regard to any lack of obligation to pay, provided that the payment is not made under duress or undue influence.
A payee can also show that repayment would be unjust if the payment was made for good consideration. In this context consideration means 'the state of affairs contemplated as the basis or reason for the payment'.
Other defences which a payee might take advantage of include estoppel and set-off. An estoppel could arise because of a misrepresentation by the payer to the payee. In many cases a claim of estoppel will be a corollary of the defence of change of position, the allegation being that the change of position was induced by the conduct of the payer. However, estoppel is not a defence to a claim based on the Auckland Harbour Board Principle. Depending on the circumstances, set-off could be available where the payee and payer are mutually indebted to each other.
Naturally, a defendant payee could take advantage of defences which are generally available in legal proceedings, such as the relevant statute of limitations imposing a time limit on the commencement of proceedings.
Write Off and Waiver
As mentioned above, generally the Commonwealth has a duty to seek to recover payments which the recipient was not entitled to receive and is not entitled to retain. However, section 70C of the Audit Act permits the Minister for Finance, or a delegate of the Minister, to write off irrecoverable debts or overpayments, or debts or overpayments where recovery would be uneconomical. That section also empowers the Minister or a delegate of the Minister to waive the right of the Commonwealth to recover an amount due to it. Waiver extinguishes the debt whereas write off is merely a bookkeeping entry and the debt remains due to the Commonwealth.
An amount may be written off as irrecoverable if there is some legal impediment to recovery or where the payee does not have the means to repay the amount. Recovery is uneconomical if the process of recovery or attempted recovery or the completed recovery would result directly in a net financial disadvantage to the Commonwealth. This would most commonly occur where the expense of recovery would exceed the amount to be recovered.
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The material in this briefing is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact the Legal Practice before any action or decision is taken on the basis of any of the material in this briefing.