Legal Practice Briefing No. 9

Number 9

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.

Mistake

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.

Unlawful Payments

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.

1. (1992) 175 CLR
353

2. Auckland Harbour
Board V The King [1924] AC 318

3. [1992] 3 WLR
366

4.Hungerfords
v Walker (1988) ALR 119; Trimboli v Department
of Social Security (1989) 86 ALR 64

5.Goff and Jones, The
Law and Restitution, 2nd ed, p545

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

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.

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