The Law of Restitution for Mistaken Payments: An Economic Analysis

Dhammika Dharmapala
Nuno Garoupa

Abstract

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. The aim of this paper is to develop a general conceptual framework for the economic analysis of the core example of restitution - mistaken payments. We develop a formal model in a parsimonious setting with two buyer-seller pairs, with low (high) transaction costs within (across) pairs. This model generates several novel insights, based on the idea that mistaken payments to strangers impose a “transaction tax” on contracting parties. It sheds new light on distortions generated by the change of position defense, and on the rationale for the discharge for value doctrine (which was implicated in the recent highly controversial Citibank case). We show that full restitution is socially optimal when harm is unilateral, and partial restitution is generally optimal when harm is bilateral. We also propose a hypothetical decoupling regime that would (if it were feasible) lead to more efficient outcomes than would partial restitution. The decoupling regime is intended as a thought experiment that can arguably shed light on some of the foundational debates surrounding the law of restitution.