Scottish Equitable

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Case No. DMC/INS/01/01
Scottish Equitable plc v. Derby
English Court of Appeal: March 2001: ILR 7 May 2001

Although this case was set in an insurance context, it concerned recovery of money paid under a mistake of fact. An insurance company had paid the holder of one of its pension policies some £172,000 more than he was actually entitled to. In defence to the claim for recovery of the money, the policyholder claimed that he had ‘changed his position’ in reliance on the payment and that it would not be equitable to require him to repay it. He also claimed that the carelessness of the insurance company – which had given rise to the overpayment in the first place – precluded it from recovering the overpayment.

The court held that carelessness was not a bar to the recovery of money paid under a mistake of fact. The court also held that the defence of ‘change of position’ was not available to the policyholder in respect of policy proceeds spent in reducing his mortgage, on the grounds that the mortgage would, in any event, have had to be repaid in accordance with its terms. The policyholder had not therefore acted to his detriment in paying it off early. The court did allow the defence in reference to some £9,700 which the policy holder had spent in making modest – but unvouched – improvements to his life-style. There was no issue regarding the remainder of the overpayment. This had been spent in procuring a pension from another pension provider, which was willing to unwind its position. In consequence, the policyholder would receive the pension to which he would have been entitled, had no mistake been made, and (presumably) the balance of the funds representing the overpayment would be returned to the original insurance company.

DMC Rating Category: Developed


In June 1995 Mr. Derby decided to take the benefits due to him under a pension policy he had effected with Scottish Equitable. Scottish Equitable duly paid £202,000 under the policy, £51,400 direct to Mr. Derby and the balance to an alternative pension provider, Norwich Union. Of the amount paid directly to him, Mr. Derby spent £41,700 paying down his mortgage and the balance of £9,700.

Some sixteen months later, in October 1996, Scottish Equitable found that it had overpaid Mr. Derby to the extent of about £172,500, since it had failed to take into account payments already made to Mr. Derby under the policy in 1990.

The Claims
Scottish Equitable claimed the total overpayment from Mr. Derby on the grounds that the money had been made under a mistake of fact. Mr. Derby refused to repay it, claiming that a) Scottish Equitable had been careless in making the overpayment and that carelessness precluded their recovering the money and b) he had ‘changed his position’ in reliance on the payment and it would therefore be inequitable for him to have to repay it.

The Court of Appeal concerned itself only with the payment of £51,400 made to Mr. Derby, since the Norwich Union had agreed to ‘unwind’ its policy and substitute it by a new one, based on the true figure that should have been paid to it. We assume from the report of the case that the overpayment was returned by Norwich Union direct to Scottish Equitable.

The Judgment
The court upheld the decision at first instance that the carelessness of Scottish Equitable in making the overpayment was not a bar to its recovery. "The judge (of first instance) was making a contrast between carelessness, however, culpable, and the situation where the paying party is on inquiry but consciously decides to pay without further inquiry. In this case Scottish Equitable did take steps to investigate the matter. Its investigation was inadequate, but there was no deliberate waiver of inquiry."

The defence of change of position had evolved in the House of Lords case of Lipkin Gorman [1991] 2 AC 548. In his judgment in that case, Lord Goff had said: "…. 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 requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position…… I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things."

The court recognised that the defence of change of position afforded the court more flexibility than the defence of ‘estoppel by representation’ that had been developed in earlier cases. "There were two main objections to that sort of approach. First, estoppel required there to have been a representation made by one party on which the other had placed reliance and acted to his detriment but in many cases involving a dishonest third party (such as Lipkin Gorman itself) the true owner had done nothing that could possibly be regarded as the making of a representation……… Second, estoppel was…. an ‘all-or-nothing defence." That is why Lord Goff in the Lipkin case had said: "Considerations such as these provide a strong indication that, in many cases, estoppel is not an appropriate concept to deal with the problem."

In the present case, the court upheld the decision at first instance, by which:
a) the £9,700 spent by Mr. Derby in improving his life-style was not recoverable – a point which Scottish Equitable conceded once the judge found that Mr. Derby had spent the money unaware that it had been paid to him in error;
b) the £41,700 spent in paying down the mortgage was recoverable, on the grounds that it was not a change of position. "In general, it is not a detriment to pay off a debt which will have to be paid off sooner or later."

On the question of estoppel by representation, the court considered the present case fell within the exception recognised by the Court of Appeal in the case of Avon County Council v. Howlett. It also asked the question whether "estoppel by representation [will] wither away as a defence to a claim of restitution of money paid under a mistake of fact? It can be predicted with some confidence that with the emergence of the defence of change of position, the court will no longer feel constrained to find that a representation has been made, in a borderline case, in order to avoid an unjust result."

Cases applied: Kelly v. Solari [1841] 9 M&W 54
Cases considered: Avon County Council v. Howlett [1983] 1 WLR 605: Lipkin Gorman [1991] 2 AC 548: Phil Collins v. Davis [2000] 3 AE Rep. 808


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