The Law of Restitution for Mistaken Payments: An Economic Analysis

The law of restitution and unjust enrichment has emerged as an important and independent branch of private law globally but has attracted relatively little economic analysis. This article develops a model of the core example of restitution—mistaken payments—in a parsimonious setting with two pairs of buyers and sellers and low (high) transaction costs within (across) pairs. The framework is based on the idea that mistaken payments to strangers impose a transaction tax on contracting parties. We show that full (partial) restitution is socially optimal when harm is unilateral (bilateral). The model generates several novel insights, shedding new light on the rationale for partial restitution, distortions generated by the change-of-position defense, and the discharge-for-value doctrine (implicated in the recent widely discussed case involving a large mistaken payment by Citibank). Taking account of moral obligations complicates the economic analysis but does not undermine the main results.