“One cannot help regretting that where money is concerned, it is so much the rule to overlook moral obligations.” Sir Richard Malins, Ellis v. Houston (1878) L.R. 10
Mistakes happen. This is a universal truth. And sometimes one is the recipient of an unintended benefit through no fault of their own. But what about when money is received by mistake? The recipient’s moral compass is put to the test. To keep the windfall or to return it? Morality aside, the law of restitution generally favours its return.
There are numerous reported cases in which defendants were ordered to repay funds mistakenly paid to them by employers, banks, governments, estates, and lawyers.
In a Saskatchewan case, TD Canada Trust v. Mosiondz, 2005 SKQB 540 (CanLII), the plaintiff bank had mistakenly paid out a $10,000 mutual fund to the defendant. The funds rightfully belonged to the estate of the defendant’s deceased common law spouse and, under his Will, would pass to his children from a prior relationship. The bank discovered the error five months later and demanded the funds be returned. The defendant refused, taking the position she had received the funds in good faith, was entitled to them, and had spent them. The bank sued the defendant for recovery of the funds. The Court cited the Supreme Court of Canada decision in Garland v. Consumers’ Gas Co., [2004] 1 S.C.R. 629, stating:
“21) The case leaves no room for doubt that restitutionary causes of action are equitable, and are to be resolved upon the application of the principles relating to unjust enrichment. Iacobucci, J. sets out the test for unjust enrichment that has been well established in Canada. The cause of action has three elements: (1) an enrichment of the defendant; (2) a corresponding deprivation of plaintiff; and (3) an absence of juristic reason for the enrichment (Pettkus v. Becker, [1980] 2 S.C.R. 834, at p. 848; Peel (Regional Municipality) v. Canada, [1992] 3 S.C.R. 762, at p. 784).”
The Court found that the defendant had been enriched, the plaintiff had been deprived, and there was no juristic reason for the defendant to retain the funds.
In finding there was no juristic reason for the defendant to retain the funds, the Court again looked to the Garland decision:
“29) In Garland, supra, the Supreme Court endorsed the leading British case on the defence of “change of position” namely Lipkin Gorman v. Karpnale Ltd. (et. al.) [1992] 4 All E.R. 512 (H.L.) where Lord Goff stated at page 533:
… it is right that we should ask ourselves: why do we feel that it would be unjust to allow restitution in cases such as these [where the defendant has changed his or her position]? The answer must be that, where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of so requiring him to repay outweighs the injustice of denying the plaintiff restitution….”
In assessing the change of circumstances, the defendant bears the burden of proof to show why they should be entitled to retain the enrichment. It is not an easy burden to meet. The Court noted (at paragraph 30):
“[If] the expenditure is one the defendant would have made in any event then clearly the defence of change of circumstances is not established. If the change in circumstances occurs after the defendant has knowledge of the facts entitling the plaintiff to restitution, the defence is not made out.”
The Court also made reference (at paragraph 28) to the decision in National Trust Co. v. Newmaster (2003), 67 O.R.(3d) 310 (Ont.S.C.J.), in which the burden was described, in part, as:
“What are the kinds of “changed circumstances” that relieve an innocent recipient from returning funds credited to her in error? In the “bank error” cases, the circumstances are rare indeed: the recipient must be “innocent” in the sense of not realizing that she has actually been a “recipient” at all; no sensible person would ever believe that Lender had forgiven the loan unilaterally, for no reason at all. …”
The Court implicitly found the defendant was not “innocent”; she knew or ought to have known she had received the funds by mistake and spent them anyway.
The government is not immune to mistakes. (This might also be a universal truth.) In The Attorney General (Canada) v. Al-Zawati, 2015 ONSC 3676 (CanLII), the plaintiff government inadvertently sent a cheque for $194,000 to the defendant. The plaintiff realized the mistake within one month and sought the return of the funds. The defendant refused to return the money, taking the position that “since the government was negligent, they are estopped from retrieving the monies, some of which were spent on various items such as ‘food and school supplies for her daughters’.” The Court applied the unjust enrichment analysis and found the defendant liable to return the funds, noting (at paragraph 19):
“In general, the cases have held that where the payee has done nothing more than to expend the money on his or her own purposes, as the defendants did here, this does not afford a defence to a claim under a mistake of fact, even if the monies have been spent “beyond recall,” which is not the case here.”
The plaintiff sought interest on the outstanding debt. Despite expressing sympathy for the defendant’s personal misfortunes, the Court concluded it was appropriate to award interest, noting (at paragraph 36): “It should come as no surprise to Rima’a that interest was accumulating on the amount owed. I see no reason in law or equity to reduce the amount of interest payable on the outstanding debt. …”
The Court award substantial interest of $85,000 on the $194,000 debt, and went on to award costs against the defendant of $50,000.
In an Ontario case, Chase Payment Solutions v. 1191540 Alberta Inc., 2013 ONSC 4833 (CanLII), the plaintiff had mistakenly deposited $240,000, incrementally over a period of 34 months, into the defendant’s account. The defendant knew the funds were being deposited in error but allowed the deposits to continue. The defendant spent the funds before the error was discovered by the plaintiff. The defendant argued that the plaintiff should not be entitled to the return of funds because the plaintiff’s own negligence created their problem. The Court made short work of that defence, stating (at paragraph 40) “A plaintiff’s negligence is not a sustainable defence to an unjust enrichment claim.” The Court went on to find the defendant liable to repay the funds.
Closer to home, Ajudicator Slone dealt with unjust enrichment in Mira Nursing Home v. King-MacCallum, 2016 NSSM 35 (CanLII). The plaintiff employer, over the course of several years, had inadvertently overpaid the defendant employee and sought the return of roughly $2,000. Adjudicator Slone carried out a detailed assessment, applying the “two legal theories” of “money paid under honest mistake of fact” and “unjust enrichment.”
Assessing the matter under the “money paid under honest mistake of fact”, the Adjudicator (at paragraph 15) noted the criteria that must be met for a finding of liability, citing Wolfson v. Corkum, 1996 CanLII 5389 (NS SC):
“Money honestly paid under a mistake of fact can be recovered, even though the person paying it did not avail himself of the means of knowledge which he possessed … In the St. Rose case Dysart, J. set forth the criteria necessary to be met before money can be recovered by virtue of mistake of fact at pp. 712‑13:
‘First that the mistake is honest. There must be on the part of the person paying the money the genuine bona‑fide belief that certain facts exist which really do not exist. It is not what he ought to believe or what he ought to have learned. His laches or negligence will not of themselves affect his belief. …
The second condition is that the mistake must be as between the person paying and the person receiving the money. …
The third condition is that the facts, as they are believed to be impose an obligation to make the payment;
The fourth condition to recovery is that the receiver of the money has no legal or equitable or moral right to retain the money as against the payer. …’”
The Adjudicator went on to find that the employer fit the criteria. They had paid the funds (“even if carelessly”) in the honest belief the employee was entitled to receive them. The defendant employee was a party to the mistake, “in the sense that she pocketed the money.” The employer paid the funds under a believed legal obligation – that they owed the employee wages. And, there was no moral or equitable reason for the employee to keep the money.“Although it may seem unfair, the money was never hers to keep and this does not, in [the Adjudicator’s] view, amount to a sufficient right to defeat the Claimant’s right to recovery.”
The Adjudicator then assessed the matter under “unjust enrichment”, applying the Garland analysis noted above, concluding (at parapraph 19):
“Under this test, the Defendant also cannot overcome the Claimant’s right to recovery. She has clearly been enriched, in the sense that she received more money than she was due. The Claimant has been deprived of this money. Lastly, there is no “juristic” reason why the Defendant should be entitled to keep the money.”
The Adjudicator concluded that the Claimant succeeded on both grounds – mistake of fact and unjust enrichment.
It is fair to say that, when funds are paid to a recipient by mistake, and the recipient refuses to return the money, if litigation ensues, the Court is likely to order the recipient to repay the funds, in some cases with interest and costs. If you receive funds by mistake, particularly when you know or ought to know you are not entitled to the money, the authorities suggest the Courts will not be sympathetic to your refusal to repay them.
Needless to say, from a lawyer’s perspective, it is better not to make a mistaken payment in the first place. Safeguards like a payout checklist, and providing clear and careful instructions and supervision to a paralegal or assistant, are the best tools to prevent an inadvertent payment from occurring.