It is easier than ever to make personal or business payments. We can choose to use electronic funds transfers (EFTs), contactless payments, PayPal, Apple Pay, Bankers' Automated Clearing System (BACS), Clearing House Automated Payment System (CHAPs) and so many more. However, as we enjoy all this comfortable convenience, there is always a nagging concern: what if I make a mistake? What if I type in the wrong account number or amount? Alternatively, what if I do not actually owe the sum that is taken from my account? Will I ever recover my money?
Mistaken payments
A mistaken payment is different from a fraudulent transaction, which is where a person or business is tricked into paying money to a criminal's account, rather than the genuine account that they intend to credit. It is usually an accidental transfer of money to a stranger who has no entitlement to it. This may happen because of a mistake made by the individual or business making or requesting a payment, or by their bank. It is also called a ‘misdirected payment’ or, in banking terminology, ‘misapplied funds’.
Such frustrating errors may occur in everyday situations when we are trying to contribute to a gift for a friend or to donate to a charity. Alternatively, they may happen in significant or life-changing transactions, such as when a pensioner lost his £193000 inheritance money after giving the paying solicitor the incorrect sort code for his account.
Mistaken payments may also be made to people or businesses who are known to us, but who are not, in fact, owed money by us. A standing order may not have been revoked even though a contract with a utility has ended, or a direct debit may be made from your account after a flight or hotel booking is validly cancelled.
The mistake when making payment may be one of fact, such as thinking that a bill is outstanding when it has already been paid, or a mistake of law. For example, paying certain taxes or other statutory amounts without realising that these are not legally allowed to be charged.
May a mistaken payment be recovered?
Even though the payment mistake may be entirely your own, if, by receiving your money, a person or business has been unjustly enriched at your expense, the law allows you to recover your money. ‘Restitution’ is the legal remedy that allows the reversal of such an injustice. The recipient of the mistaken payment may repay you voluntarily, or you may have to institute more formal legal action to successfully recover your loss.
You can recover the full value of the enrichment that has been enjoyed at your expense. This means both the amount of the money that was paid and possibly its use value while it was erroneously held. In certain situations, courts have allowed compound interest and bank charges to be reclaimed.
» … if the overpayments were made over a long period of time, perhaps because of a payroll error, or if the overpayment was made some months before and has only recently been discovered, an employer is advised to work out with the employee how best to repay the mistaken amounts «
What to do if a mistaken payment is made
As almost all payments are made directly or indirectly from our bank accounts, the first thing to do once you realise that a mistaken payment has been made is to contact your bank. In most cases, banks cannot simply reverse the payment but should begin acting within the sector's misdirected payments recovery framework to give you the best opportunity to recover the money. Banks processing digital transactions through the payment services faster payments and Bacs (about 95%) must act within 2 working days of being alerted. Where the recipient does not dispute that the money was sent to them by mistake, it will be returned to you by the bank within 20 working days. If, for some reason, this is not possible, your bank should advise you on what action you may next take.
How to recover a mistaken payment
Reversing a payment ultimately needs the cooperation of the recipient of the money, so the successful recovery of a mistaken payment will usually depend on whether you know the identity of the recipient. If you mistakenly paid a person or business twice or paid the incorrect customer, the recipient is clear, and contacting them directly as soon as possible will probably successfully resolve the situation. However, if you mistakenly transferred money to a stranger's account, they need to consent to a reversal of the payment, and, therefore, you need the support of your bank and the receiving bank to contact that person and persuade them to allow the money to be repaid. The receiving bank may also freeze an amount equal to the mistaken payment in the recipient's account.
If the recipient refuses to return the money, you need to obtain their details to pursue the matter. These should be requested in writing from your bank, giving them a reasonable amount of time to respond to you. If the bank refuses to provide these details on data protection grounds, you will need to get a court order compelling the bank to disclose this information. A solicitor is best placed to assist you with this. Once you have these details, you may contact the recipient directly. If the recipient continues to refuse to repay the money, you need to take legal action against them.
When the recipient is an employee
A mistaken payment may have been the overpayment of an employee's salary through an administrative or computational error. Employment law protects employees from unlawful deductions from their wages, but expressly allows employers to recover an overpayment of salary or expenses. However, if the overpayments were made over a long period of time, perhaps because of a payroll error, or if the overpayment was made some months before and has only recently been discovered, an employer is advised to work out with the employee how best to repay the mistaken amounts. It will depend on the extent of the mistake, but the employee may have believed that they were entitled to the money and, in good faith, they have spent it, or at least adjusted their lifestyle so that they now rely on receiving the higher amount. Prompt discovery and action will always be best.
May a recipient ever keep the money?
Usually, recipients cannot keep the money. You may only keep money that was intended to be deposited into your account. If it was paid by mistake, you cannot keep it. If you refuse to return it, or if you spend it, you may face a criminal charge. If you notice an unexplained payment in your account, you should contact the bank immediately to investigate it and have it reversed. Failing to do this may not only result in a charge of theft but may be assisting in money laundering if the funds have been obtained illegally.
However, there are some situations where a recipient may keep a mistaken payment. The first is if the recipient has experienced a detrimental change of circumstances linked to the unjust enrichment since the payment was made, and it would be inequitable to force repayment. Usually, this means that the money has been spent, and the recipient has no way of repaying the money. However, there must be a credible argument as to why the recipient believed that the money could be kept and spent, otherwise, it would simply be theft. For example, a part-time bank worker who was overpaid £7500 a year for 3 years won a court case to keep her windfall by successfully arguing she had assumed the increase was a promised pay rise.
Another defence to a claim for repayment is that the recipient assumed that the money was ‘good consideration’ for a debt that was owed. Courts allowed an insurance company to keep money paid mistakenly to it by a bank that believed its customer had sufficient funds in its account, as the customer, an insurance agent, owed the insurance company the amount that was paid. The consequent problem of lack of funds lay between the bank and its customer.
A recent, notorious example of funds being allowed to be retained occurred in 2020 in New York, when Citibank, in the process of making an annual interest payment to lenders of its customer, Revlon, mistakenly also repaid the capital of the loans in an amount of almost $900 million (Cowley, 2021). Some lenders voluntarily repaid this amount, but those who did not were allowed to retain the money, as the court considered that this discharged valid debts. If this case had occurred in the UK, our courts may have reached a similar conclusion.
What can be expected in the future
In 2020, the Payment Systems Regulator began requiring the UK's largest banks to introduce ‘confirmation of payee’ to prevent scams and accidentally misdirected payments (Payment Systems Regulator, 2020). The aim is to protect consumers and businesses from fraud and mistaken payments by letting them know if the account name they have entered matches the account name of the recipient. More banks will adopt this service.
As cash continues to decline as a payment method, both the banking industry and Government are under pressure to provide better safeguards to protect customers. Nevertheless, vigilance and quick action also continue to be the best defence against mistaken payments.