Payment by Bank Under Mistake: Whether Recoverable?

Section 72 of the Indian Contract Act provides that a person to whom money has been paid by mistake must repay or return the same to the person who has made such payment.

Implied law: If one pays money to his friend intentionally and the friend receives it without any agreement. That is called a contract implied in law a constructive contract or quasi-contractual obligation. However a person pays money to another person in the proper case of mistake, that former person returns the money to the person who paid him money. The courts in India regard held that such receipt by an unconnected person was inequitable to retain it.

The equitable principle enables the person to recover the money mistakenly paid. In this case, as in quasi-contractual obligations generally, is the principle of enrichment: “One shall not be allowed to unjustly enrich himself at the expense of another;” or, as it is usually stated in the common law, “One shall not unjustly profit at the expense of another.”

Section 72 of the Indian Contract Act, 1872 states that if someone is paid money or receives something by mistake, under coercion, or as a result of fraud, they must return or repay it. This includes mistakes of fact or law, or if the payment or delivery was obtained through fraud, misrepresentation, or undue influence.

A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

Legal decisions: on payments made by mistake:

Bank of India Vs T.R.Arora on 31.08.1999 Delhi High Court (Equivalent citations: 2000IVAD(DELHI)588, 86(2000)DLT371, ILR1999DELHI341, (2000)126PLR65)

The defendant had a current account with the plaintiff bank at its Jhandewalan Extension Branch. On 3.6.1983, due to a mistake/clerical error on the part of the bank, an excess amount of Rs. 1.00 lakh had been credited to his current account. The defendant on 4.6.1983 had issued a cheque in this account for withdrawing Rs.1.00 lakh and purchased a bank draft in favour of M/s. Bombay Oil Industries Pvt. Ltd. His account was so debited and the bank draft was issued. The Bank discovered the above mistake in August 1984 and asked the defendant orally as well as in writing to deposit the said amount with the plaintiff bank which was not done. A letter of demand dated 27.2.1985 and then legal notice dated 22/24.7.1985 were saved on the defendant claiming a sum of Rs. 99,479.97 due in his current account. This having not been paid, the plaintiff has filed this suit with interest @ 18% per annum for the period 3.6.1983 to 31.3.1985 and thereafter @ 17.5% per annum till the filing of the suit being the prevalent rates of interest charged by the bank. Accordingly, the plaintiff has filed the present suit.

The suit was instituted on 24.10.1985 and though the defendant as pleaded in his written statement had offered that he was prepared to make payment in installments, the defendant did not pay any amount either to the plaintiff bank or in the Court. A letter dated 3.7.1996 was sent by the defendant to the plaintiff bank which was placed on record wherein the defendant had offered to pay Rs. 99,479.97 plus Rs. 5,000/- in four equal installments. Still, no payment was made for almost two years although liability to pay the principal amount was not disputed. This amount could have been paid without prejudice. However, this was taken as an admission, and a decree for recovery of these two amounts, i.e., Rs. 99,479.97 and Rs.5,000/- was passed under Order 12 Rule 6 CPC on May 20, 1998, and these two amounts were paid on 22.5.1998, using two bank drafts. These payments have been made and accepted without prejudice to the rights and contentions of the parties.

The Hon’ble High Court in its judgment ruled that Section 72 of the Indian Contract Act is attracted which provides that a person to whom money has been paid by mistake must repay or return the same to the person who has made such payment, accordingly decreed and a decree is passed in favour of the plaintiff and against the defendant:

(1). for recovery of Rs. 1,51,319.61;

(2). for pendente lite interest* from the date of institution of the suit till the date of the decree @ 17.5% per annum on the principal amount of Rs. 99,479.97;

(3). For future interest at the same rate of 17.5% per annum on the principal amount of Rs. 99,479.97 till realization. The Hon’ble Court also ruled that the adjustment shall be given in the decretal amount of the amounts of Rs. 99,480/- and Rs. 5,000/- paid by the defendant using two bank drafts in Court on 22.5.1998 which amount the plaintiff will be entitled to adjust first towards the interest that accrued due under this decree. 

[*Pendente lite interest means interest that a borrower owes on the principal amount during the pendency of a suit. It can be paid in three stages: Viz. (i) Before the suit: From the date the cause of action arises to the date the suit is filed, (ii) From the date of filing the suit to the date of decree: and (iii) From the date the suit is filed to the date of the decree and From the date of the decree to the date of payment of the interest: From the date of the decree to the date the interest is paid]

2. In N.V. Joseph Vs. Union of India, a Division Bench of the Kerala High Court has held that “ordinarily interest cannot be claimed merely because money has been detained as a result of the defendant’s acts or misconduct. But if it is possible to invoke a rule of equity by establishing the existence of a state of circumstances which attracts the equitable jurisdiction, there can be no doubt that interest can be allowed”. In that case, the defendant had received the remittances of salary after the termination of his post over one year which was being paid by mistake and when after 12 months demand was made of him for repayment, he chose to remain quiet. It was held that the amounts were paid by mistake, principles of equity were attracted and the defendant must pay the amounts so paid with interest.

3. In Mafatlal Industries Ltd. Vs. Union of India & Ors., a Constitution Bench of the Supreme Court has also held that Section 72 of the Contract Act is based on and incorporates a rule of equity and equitable consideration would be application in its application.

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