Lloyd's Maritime and Commercial Law Quarterly
MISDIRECTED FUNDS: RESTITUTION FROM THE RECIPIENT
Peter Birks*
1. Introduction
When large sums of money are misdirected, it often happens that the person immediately responsible is not worth suing. The natural instinct is then to cast around for a defendant with a longer purse. The liability of a remoter recipient to return misapplied funds is thus a matter of some importance to any business but above all to banks and building societies, who are not only specially attractive defendants but also specially exposed to the risk of receiving, and identifiably receiving, misdirected funds. Some recent decisions in equity have begun to make it more difficult for the person properly entitled to reach the ultimate recipient of his funds. The merits of that policy are open to debate, but the method is suspect. It is beginning to be done by insisting that this restitutionary liability cannot attach in the absence of a high degree of fault.
This incipient but still patchy trend towards a liability which is not only fault-based but based on a high degree of fault conflicts with choices which the law has already made. It has only been able to creep in because, in the immaturity of the law of restitution, neither judges nor jurists have been able to see a clear view of the nature and the rationale of the recipient’s liability. The very idea that liability might be strict may surprise. A relevant analogy, though only an analogy, is the law of conversion. Suppose my car is stolen. It may pass through a dozen honest hands. No general defence of innocent receipt protects them from liability in conversion.
The law of restitution imposes a similar strict liability on the recipient of misdirected funds. For special circumstances, as we shall see, there are special defences, but there is no general defence of innocent receipt. Such a liability invariably stands in need of explicit explanation. It will otherwise inevitably gravitate towards fault, simply because a fault-based liability is easier to understand. The immediate purpose of this article is to counter that tendency by showing not only that the law has opted for strict liability but also that that option is rationally defensible.
There is also a larger purpose which has to do with the structure of the law of restitution. The structural proposition is, as will emerge in the discussion, that in the sequence of causes for restitution—enrichment unjust by reason of mistake, compulsion, failure of consideration, and so on—much more serious attention should be paid to a cause which so far has no conventional name but which can be called “ignorance”: i.e., enrichment which is unjust by reason of the plaintiff’s
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