A person who receives money as the result of a mistake made by someone else is not entitled to keep the money. The position with money paid by mistake is much the same as if you find a £20 note in the street. The money received by mistake does not belong to you as it would not have been paid other than for the mistake. The person paying the money by mistake can claim the money back, and it is a claim which is likely to be upheld by a court. There is however one towering exception. That is where the recipient of the money has ‘changed their position’.This defence was confirmed in the House of Lords case in 1992 of Lipkin Gorman v Karpnale. Lord Gough stated that it would be available to ‘a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution or restitution in full’.
Therefore, an innocent person who has received money in the honest belief that he was entitled to it and then spent it may not have to repay.
The first requirement is to show that there was no knowledge that a mistake had been made. The payer must have made a statement of fact as to entitlement and this must have led to the honest belief that the money was the recipients to spend as he wished. He must have received it in good faith and without suspicion that there had been a mistake.
There must then be a link between the recipient’s change in financial position and the receipt of the mistaken money. Thus, if the money was spent on usual household expenses when you had just lost your job that may not be enough. A ‘but for’ test will be applied. The question to be asked is ‘would the expenditure have been incurred but for having received the money?’ If not and if the belief it belonged to you is genuine, then you would not be required to repay.