Financial transactions happen every day all around the world. Interestingly, whether you’re buying a bottle of water or entering into a multi-million-dollar contract, many of the same basic rules apply. Among those rules are ones that govern what happens if you accidentally overpaid someone. It’s important to know what your obligations are when you pay another party because in some situations you may be out the money. While the general rule is that you can get back money mistakenly paid to someone, this rule does not apply if the overpayment falls under the “voluntary payment doctrine.” 

What is the Voluntary Payment Doctrine?

This doctrine bars recovery of payments that were made by someone operating with full knowledge of all relevant facts and not as a result of fraud or a mistake of law or fact. 

The party who received the accidental payment or overpayment and is objecting to returning the money must demonstrate that the paying party had full knowledge of the relevant facts when making the payment. For example, in an action where the defendant alleged he overpaid legal fees, a New York court found that the defendant did not have “full knowledge of the facts” necessary to invoke the doctrine because a statement he received did not itemize legal fees.

When Will a Mistake Allow You to Recover Your Money?

If you made a mistake of law or fact, you may be able to get back your money. A mistake of law is one that involves a misunderstanding regarding the law or its application to a specific act or transaction. A mistake of fact is simply an erroneous belief about anything other than the law and how it applies to a situation. When we use the word “mistake,” we’re usually thinking of a mistake of fact. An example could be misunderstanding someone’s job roles and responsibilities. 

Importantly, only material mistakes of law or fact will bar the voluntary payment doctrine from applying. A material mistake is one that involves something that is central to the purpose of the contract. This means that if you made a mistake that was not material, you will not be able to recover payments that you already made. 

However, there is an exception. If the party who received the payment has changed its position to such an extent that forcing that party to return the money would be inequitable, money paid under a mistake of fact cannot be recovered.

Generally, courts are reluctant to allow parties to recover if the overpayment was a result of their own willful ignorance and lack of due diligence. Therefore, to avoid this problem, it is imperative to know and fully understand your legal obligations when it comes to remitting payments of any kind. If you’re unclear about something, raise that issue sooner rather than later and seek independent counsel to help you discern exactly what is required of you. 

How Do You Protest the Accidental Payment or Overpayment?

If you realize you made a mistake, you need to act right away. Courts presume that all payments are voluntary. However, the voluntary payment doctrine may be overcome by a timely protest. To do so, the party that made the payment must do something to affirmatively show that it took steps indicating it was reserving its rights. The party that receives what it perceives to be an improper demand for money has the burden of taking that position at the time the money is demanded and must litigate the issue before, rather than after, payment is made. Timely protests must be in writing as well. 

In any transaction, it’s very important to discuss your legal obligations with an attorney to ensure that you adequately understand what is required of you to avoid legal problems. However, if you find yourself in one of these situations on either side, contact one of our knowledgeable attorneys to help you protect your rights.