Gregory Mitchell on thwarted attempts to change bank law

Gregory Mitchell QC is a barrister at 3 Verulam Buildings.

An important decision by the Court of Appeal has halted attempts to change the law on recovering money mistakenly paid out by banks.

Lloyds Bank electronically transferred #162,000 to Independent Insurance Company, in respect of a debt owed to them by the bank's customer, WF Insurance Services. Unfortunately, the bank had failed to spot that its customer had insufficient cleared funds in its account to make the payment.

In the resulting case, Lloyds Bank v Independent Insurance Company, the county court and then the Court of Appeal heard argument on the correct meaning of the term "instructions", and whether or not the debt had been discharged, before determining whether the bank had authority to transfer the money.

At trial in the county court the judge held that even though the payment paid off a bona fide debt owed by the bank's customer, the money was repayable because the bank did not have authority to pay and had made a mistake about the balance in its customer's account.

However, the judge's decision was overturned by the Court of Appeal, which decided to apply the decision of Goff J in Barclays Bank v Simms [1980].

Goff J held that money paid under a mistake of fact was prima facie recoverable, subject to three defences, one of which is that "the payment is made for good consideration, particularly if the payment is made to discharge, and does discharge, a debt owed to the payeeor by a third party by whom he is authorised to discharge the debt".

The Court of Appeal held that the bank did have authority in the circumstances to pay on behalf of its customer.

It was submitted by the bank that Independent had been unjustly enriched at the expense of the bank – whether or not there was authority for the payment and so Independent should pay the money back to the bank.

However, the Court of Appeal rejected the bank's submission on the basis that the debt had been discharged and so a restitutionary remedy was no longer available.

Whether or not this case goes to the House of Lords remains to be seen.