Supreme Court of Canada
Nepean Hydro Electric Commission v. Ontario Hydro, 1982 CanLII 42 (SCC), [1982] 1 SCR 347
The Hydro Electric Commission of the Township of Nepean (Plaintiff) Appellant;
and
Ontario Hydro (Defendant) Respondent.
1981: April 1 and 2; 1982: March 2.
Present: Laskin C.J. and Martland, Dickson, Estey and Lamer JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Restitution—Mistake of law—Money had and received because of mistaken belief as to law—Refund sought—Whether or not monies recoverable—The Power Corporation Act, R.S.O. 1970, c. 354, ss. 7, 39, 58, 76, 82.
Respondent collected $921,463 from power bills that were not ‘lawful’ in that the demand for payment was not authorized by the Act governing respondent’s operations. No legal, moral or other obligation to make the payments existed; respondent exacted them and appellant paid them by mistake. The Ontario Court of Appeal upheld the trial judge’s dismissal of appellant’s action to recover the payments and respondent’s counterclaim for amounts not paid by the appellant. The legal concepts of ‘mistake of law’ were central to those decisions.
Held (Laskin C.J. and Dickson J. dissenting): The appeal should be dismissed.
Per Martland, Estey and Lamer JJ.: The law of mutual mistake applies. The circumstance is one of unauthorized acts and of mutual mistake with respect to them. Any exception to the general rule barring recovery of moneys paid in an illegal transaction when the parties are not in pari delicto does not apply because neither party has committed a delict and no wrongful conduct in the sense of actions contrary to statutes or public policy has taken place. Duress was not involved. Appellant cannot recover under the principles enunciated in Kiriri. The Act here was not passed for appellant’s benefit; nor did it impose more duty on the respondent than on the appellant; nor did it impose a duty on respondent “for the protection of the appellant. None of the authorities indicated any basis for the merging of the principles applicable to mistake of fact and mistake of law, and the need for certainty in commerce and in
[Page 348]
public transactions demanded that that ancient distinction be maintained.
As neither appellant nor respondent had authority to “accumulate” surplus assets, the concept of unjust enrichment was not easily associated with their relationship.
Per Laskin C.J. and Dickson J., dissenting: Where money is paid under a mistake and there is no ground to claim it in conscience, the party may recover it back. The unfortunate doctrine that monies paid under a mistake of law are not recoverable should not be perpetuated. Exceptions have eroded the doctrine to the point of making the distinction between mistake of fact and of law useless, and rather than further emasculating the rule with yet another exception, the two “types” of mistake should be put on the same footing. The reason for the rule against recovery of monies paid under a mistake of law, namely, stability of contractual relations, has insufficient force to justify the rule. Money should be returned if, on general principles of equity, it would be unjust to retain it. In this case honesty and common justice require that the defendant repay the plaintiff.
[Kiriri Cotton Co. Ltd. v. Dewani, [1960] A.C. 192; Green v. Portsmouth Stadium, Ltd., [1953] 2 All E.R. 102; Hastelow v. Jackson (1828), 8 B.&c. 221; Smith v. Bromley (1760), 2 Doug. 696; 99 E.R. 441; Browning v. Morris (1778), 2 Cowp. 790; 98 E.R. 1364; Lowry and Another v. Bourdieu (1780), 2 Doug. 468; 99 E.R. 299; Moses v. Macferlan (1760), 2 Burr. 1005; 97 E.R. 676; Bilbie v. Lumley and Others (1802), 2 East 469; 102 E.R. 448, Langton and Others v. Hughes and Another (1813), 1 M.&S. 593; 105 E.R. 222; Brisbane v. Dacres (1813), 5 Taunt. 143; 128 E.R. 641; Rural Municipality of Storthoaks v. Mobil Oil Canada, Ltd., [1976] 2 S.C.R. 147; Eadie v. The Corporation of the Township of Brantford, [1967] S.C.R. 573; Maskell v. Horner, [1915] 3 K.B. 106; Harse v. Pearl Life Assurance Company, [1904] 1 K.B. 558, considered; Kelly v. Solari (1841), 9 M. & W. 54; The Dominion Bank v. The Union Bank of Canada (1908), 40 S.C.R. 366; Knutson v. The Bourkes Syndicate and Others, [1941] S.C.R. 419; The Municipality of the City and County of St. John et al. v. Fraser‑Brace Overseas Corporation, et al., [1958] S.C.R. 263, referred to.
[Page 349]
APPEAL from and notice to vary (cross appeal) a judgment of the Ontario Court of Appeal (1980), 27 O.R. (2d) 320, 107 D.L.R. (3d) 257, dismissing an appeal and cross-appeal from a judgment of Craig J. dismissing appellant’s action for the return of money paid and respondent’s counterclaim for further charges. Appeal and notice to vary (cross-appeal) dismissed, Laskin C.J. and Dickson J. dissenting.
D.K. Laidlaw, Q.C., and R.J. McComb, for the appellant.
R.F. Wilson, Q.C., and Peter D. Lauwers, for the respondent.
The reasons of Laskin C.J. and Dickson J. were delivered by
DICKSON J. (dissenting)—Ontario Hydro collected $921,463 from The Hydro Electric Commission of the Township of Nepean (“Nepean”) under power bills which the trial judge found were not “lawful”; the demand for payment was not authorized by the Act governing the operations of Ontario Hydro. Nepean was under no legal, moral or other obligation to make the payments. The Ontario Court of Appeal agreed. The members of this Court hold the same view. Ontario Hydro exacted the payments by mistake and Nepean paid by mistake. Nepean wants its money back. It would seem to be a simple case. To the layman, the issue would be a clear one. Nepean should succeed. Good conscience and plain honesty would require Hydro to repay. To the lawyer trying to follow confused and contradictory authority the matter is not that simple. Two courts, applying what they conceive to be the law, have denied Nepean recovery. And now the issue is before this Court, by leave.
Nepean has been buying power from Ontario Hydro since 1964. From 1966 to 1973, Nepean paid the said sums totalling $921,463 to Ontario Hydro. Nepean thought the bills were properly authorized but in 1974 realized this might not be the case. In 1974 Nepean alleged that these sums
[Page 350]
were not a ‘cost’ which Ontario Hydro could pass on to its customers within the meaning of The Power Corporation Act of Ontario, R.S.O. 1970, c. 354, as amended. Nepean brought an action for recovery of the sums paid. In turn, Ontario Hydro brought a counterclaim, seeking payment of certain sums totalling $359,512 alleged owing by Nepean for the period 1974 to 1978.
I
The background to the case is complex. The capital works funding of Ontario Hydro is obtained through borrowing. The borrowing was financed initially through payments by user municipalities to a ‘sinking fund’. Explicit statutory authority for payments to the sinking fund was contained in s. 76 of The Power Corporation Act. The price payable for power by any municipal corporation included:
(c) an annual sum sufficient to form in forty years, with interest at 4 per cent per year, a sinking fund for the repayment of the advances made by the Province of Ontario under this Act for the cost of the works, for the repayment of any other indebtedness incurred or assumed by the Corporation in respect of the cost of the works, and for the restoration of any reserve or other funds of the Corporation utilized for the payment of the cost of the works;…
By the 1950’s, the original user municipalities had made sinking fund contributions for the forty years contemplated by this section. Ontario Hydro felt that some mechanism should be available to recognize the fact that these utilities had fulfilled their sinking fund obligations. This was achieved by recognizing a notional ‘equity’ that the subscribers had obtained in the assets of Ontario Hydro, and showed up in billings as a credit called ‘matured sinking fund’.
Nepean bought into the system in 1964, at which time the ‘matured sinking fund’ provision was still in effect.
[Page 351]
Before 1966, the sinking fund relief was calculated on the basis of the original cost of fixed assets in service. In 1965, it was thought that debt retirement, and consequently any relief from debt retirement, should be based not on assets in service but rather on actual debt outstanding at the time. Under this new plan, debt retirement charges would be related to present debt, and would be charged to subscribers proportionately to load.
At the same time, however, Ontario Hydro continued to believe that some recognition should be given to those utilities which had contributed to the sinking fund for many years. In 1966, the amount of these contributions totalled more than $500 million. Ontario Hydro decided that these past contributions could best be recognized through a payment called ‘return on equity’. The return on equity was calculated as 4 per cent of a municipality’s previous payments into the sinking fund. This meant an annual payout of 4 per cent of $500 million, or approximately $20 million in 1966.
This ‘return on equity’ had to be financed. The method chosen was to levy a charge called ‘cost of return’. This charge was based on the amount of load used by a subscriber.
The trial judge, Mr. Justice Craig, described the result in these words:
…Ontario Hydro did not gain or lose by these computations. It was not a cost incurred; but the effect on individual municipalities or their utilities varied greatly because the older and larger municipalities or utilities that had acquired a large “equity” in the system received a greater return than their share of the “cost of return”; whereas the newer fast-growing municipalities or utilities, like Nepean, with a small “equity” and rising power demands, were charged more for the “cost of return” than they received from the “return on equity” [(1978), [22 O.R. (2d) 137, at p. 143].
[Page 352]
At trial there was some discussion about the support given to proposed changes by the Ontario Municipal Electrical Association (OMEA), an association composed of the municipal and utility customers of Ontario Hydro. Nepean was a member of the Association. Ontario Hydro did not claim that OMEA was agent for Nepean or that it had authority to bind Nepean in any way.
Following the introduction of the system and until the year 1973 Nepean had paid to Ontario Hydro a net amount of $921,463; that is the difference between the “cost of return” paid by Nepean in the total amount of $1,360,311 and the amount credited as “return on equity” during that period, namely, $438,848.
II
At trial, Mr. Justice Craig dismissed both the claim of Nepean and the counterclaim of Ontario Hydro. He held that the charge of a ‘cost of return’ on equity was not authorized by s. 76 of The Power Corporation Act, the basic statutory authority dealing specifically with the cost of power to municipalities and their utilities. Section 76 provides that the price payable for power by any municipal corporation is the “cost to the corporation… of supplying and delivering power to the municipal corporation, including the municipal corporation’s proportion” of the cost of operation, maintenance, depreciation, insurance, administration interest, expenses of debt service and contributions to the sinking fund to which I have earlier referred. Mr. Justice Craig held:
In my opinion, for the reasons hereinafter stated, the individual municipalities or their utilities did not acquire an “equity” in the plant or works of Ontario Hydro outlined in s. 76(c); but even if they did acquire any “equity” it would be vague and uncertain; and would not give rise to any rights of any kind unless Ontario Hydro stopped its operations completely. In particular Ontario Hydro would not be authorized to pay a return on any such alleged “equity” to be charged against other municipalities or their utilities [supra, at p. 145].
[Page 353]
Later, he said:
It is admitted by Ontario Hydro that there is not any contractual or statutory obligation upon Ontario Hydro to levy a cost of “return of equity”; and no contractual or statutory right on any municipality or utility to a “return on equity”. The evidence tendered by Ontario Hydro indicated that the system “return on equity”/“cost of return” was based on a concept (rather than a reality that municipalities or their utilities had acquired an equity in the facilities of Ontario Hydro); and the witness Knowty for Ontario Hydro acknowledged that it was an adjustment between municipalities to recognize that one had been in the system longer than another—and that it was a matter of “fairness” between municipalities [supra, at pp. 146-47].
Mr. Justice Craig concluded that Ontario Hydro was not empowered or authorized to charge for the cost of return on equity because it was not a cost of supplying and delivering power under s. 76 and not otherwise authorized under any other section such as s. 7(3) and (4), s. 58 or s. 82. The trial judge dealt with these latter sections in the following manner:
As to section 7(3)(a), for the reasons stated earlier, charging for a “return on equity” is not an “expenditure” related to the cost of power; and in any event it is not one for which Ontario Hydro “has had other proper authority”; under section 7(3)(b) it is not an “expenditure” in connection with the generating, distribution or supply of power…”; under s. 7(4) it does not come within “expenses”.
With reference to s. 58, this section is in the nature of a basket clause; and in my opinion charging for a “return in equity” resulting in off-setting debits and credits does not involve “the generation, transmission, distribution, supply, sale and use of power…”. In my view s. 58 is not intended to apply to billings to municipalities and utilities which are specifically dealt with by s. 76.
Turning now to s. 82, it is my opinion that the three subsections deal with adjustments of only those amounts that are properly payable by municipalities or utilities under ss. 76 to 81. (For the purpose of this case ss. 77 to 81 are of no significance) [supra, at p. 149].
[Page 354]
Hydro, a creature of statute, must find authority for any rights which it seeks to exercise in its governing statute. The right here sought to be exercised was conspicuously missing from that statute.
Mr. Justice Craig held that Nepean had made payments under mistake of law and was therefore not aware of its rights. The payments of $921,463 were made to Ontario Hydro under mistake of law on the part of both Nepean and Ontario Hydro; that is, a mistake in the interpretation of The Power Corporation Act. Estoppel had been pleaded but counsel for Ontario Hydro did not present any argument that this doctrine would have any application to the case, as Nepean did not make any representation of fact.
Nepean sought to recover on the basis, firstly, that the money was not paid voluntarily but rather under compulsion or practical compulsion; and, secondly, that Ontario Hydro had the duty and obligation to administer The Power Corporation Act and was therefore primarily responsible for the mistake and accordingly Nepean and Ontario Hydro were not in pari delicto. Mr. Justice Craig held that the payments were voluntary in a legal sense and therefore the claim for return of the money on the ground of compulsion or practical compulsion failed. On what may loosely be referred to as the in pari delicto point the judge held that Ontario Hydro was responsible for the proper application and interpretation of s. 76 of The Power Corporation Act; Ontario Hydro had the primary obligation and responsibility to observe the requirements of The Power Corporation Act; and particularly of knowing what charges can be imposed upon municipalities and their utilities; it had the burden of administration of the Act. It was understandable, in the first instance at least, that Nepean would assume that Ontario Hydro was not acting without authority. In the result the judge held that the parties were not in pari delicto in that the primary responsibility for the mistake was upon Ontario Hydro; and Ontario Hydro had innocently and mistakenly misled
[Page 355]
Nepean into thinking that these charges were properly authorized.
Nepean was, however, denied recovery on the claim for money “had and received to the use of the plaintiff for the reason that Ontario Hydro did not receive any benefit or beneficial interest of any kind, from the ‘return of equity/cost of return’ payments. While Hydro received the payments from Nepean they were credited to other municipalities or their utilities in the form of lower power bills. The alternative basis for liability—unjust enrichment or restitution—failed, in the opinion of the judge, for three reasons: (i) Ontario Hydro did not receive a benefit; (ii) Ontario Hydro would be unable to recover the amount of any judgment from the municipalities or utilities who received benefits from the overpayment by Nepean; (iii) Nepean had ample opportunity to investigate its legal rights and take legal advice in the first year or two of the system, rather than waiting eight years. I shall have more to say about these matters later in the judgment.
On appeal, MacKinnon A.C.J.O., speaking for the Court of Appeal of Ontario, in a short oral judgment, held that Mr. Justice Craig had correctly interpreted The Power Corporation Act in denying Ontario Hydro power and authority to make the impugned charges of $921,463. The Court agreed that the payments made under mutual mistake of law were not made under the compulsion of urgent or present necessity or under ‘practical compulsion’ so as to permit recovery of the monies. Finally, the court held that (i) assuming, without deciding, that the trial judge was correct in his conclusion that the parties were not in pari delicto and (ii) accepting for the purpose of argument that the principles applicable for an order for the recovery of monies paid under a mistake of law are the same as those applicable for an order for the recovery of monies paid under a mistake of fact once it is established that the parties were not in pari delicto, the court could not say that the
[Page 356]
trial judge erred in concluding it would be ‘inequitable’ to order Ontario Hydro to repay the monies paid to it under the mistake of law.
III
I turn first to the authority of Ontario Hydro to charge for ‘cost of return’. I may say that I am in agreement with Mr. Justice Craig and the Ontario Court of Appeal that the payments for ‘cost of return’ made by Nepean were not authorized under the Act. I find the reasoning of Mr. Justice Craig on this point compelling. The Act entitled Ontario Hydro to charge for the cost of supplying and delivering power to its subscribers. The ‘cost of return’ was not a cost incurred by Ontario Hydro in connection with the delivery and supply of power. Rather, it was a levy designed to recognize payments which had been made in the past by certain municipalities. The whole return/cost system was based on a fiction. It involved Ontario Hydro playing the role of a corporate Robin Hood, taking from certain users and giving to others. As counsel for Nepean submits in his factum, the cost of supplying power would be identical, regardless of whether the charges for ‘cost of return’ were levied or not.
As Mr. Justice Craig pointed out, there is no statutory basis for the position of Ontario Hydro. The whole concept of certain utilities building up ‘equity’ in the assets of Ontario Hydro is a concept created by Ontario Hydro in its attempt to be ‘fair’ to certain users. The statute gives Ontario Hydro certain limited rights. These rights enable it to charge for the cost of supplying power. Ontario Hydro cannot, however, take from one user and give to another because it sees this as ‘fair’. Redistributive schemes are not within its authority.
In my opinion, therefore, the appeal falls to be decided on the basis that Ontario Hydro did not have legal authority to levy charges for ‘cost of return’ from its subscribers.
[Page 357]
It was alleged at trial and on appeal that the money paid by Nepean was paid under a mistake of law. It is often said that money paid under a mistake of law is not recoverable. Indeed, Mr. Justice Craig makes this statement in his judgment and regards it as so self-evident that he does not even cite authority to support it. I would now like to address that point.
IV
The immediate difficulty one faces in any discussion of mistake of law is that to which Professor Winfield has referred (“Mistake of Law” (1943), 59 L.Q.R. 327) namely, when we ask what is the distinction between “law” and “fact” no exact answer is discoverable in the law reports. “The reason for this is that the intrinsic difficulty of laying down any hard and fast line separating the two ideas is so great as to make the task a practical impossibility” (at p. 327). As Roland Champness has noted in his work Mistake in the Law of Contract (1933), the statement often made that relief is given against mistake of fact but not against mistake of law is not completely correct in either of its propositions, adding at pp. 8-9:
Thus Stirling, J., in the case of Allcard v. Walker, (1896) 2 Ch. 369, at p. 381, is reported as having said: “It is not accurate to say that relief can never be given in respect of a mistake of law. It was laid down by Turner, L.J., in Stone v. Godfrey (1854), 5 D.M. & G. 76, at p. 90, that this Court [the Chancery Division] has power to relieve against mistakes of law as well as against mistakes in fact, and this statement was recognised in the judgments of the members of the Court of Appeal in Rogers v. Ingham (1876), 3 Ch. D. 351, and particularly by Mellish, L.J. (at p. 357), who refers to it and explains it in the following phrase: That is to say, if there is any equitable ground which makes it, under the particular facts of the case, inequitable that the party who received the money should retain it.’ “
The distinction between a mistake of law and a mistake of fact in contract law is commonly regarded as having been made in the case of Bilbie v. Lumley and Others (1802), 2 East 469; 102 E.R. 448 by Lord Ellenborough C.J. when, over-
[Page 358]
turning a line of precedents running back two hundred years, he said at p. 472:
Every man must be taken to be cognizant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case. In Lowrie [sic] v. Bourdieu, money paid under a mere mistake of law (was endeavoured to be recovered back), and there Buller J. observed that ignorantia juris non excusat, &c.
There is a rule of law that in certain cases ignorance of law excuses no one; but there is no presumption that every one knows the law. The maxim ignorantia juris non excusat, &c. has no relevance to the case of a man seeking to recover back money paid by him in misapprehension of his legal rights, although it has often been so cited and misapplied. The “hasty and ill-considered utterance of Lord Ellenborough” as it was termed by Lord Wright (Legal Essays and Addresses, Preface xix (1939)), however, quickly crystallized into the rule that money paid under a mistake of law may not be recovered, whereas an action lies for the recovery of money paid under a mistake of fact.
Nine years after Bilbie v. Lumley, Lord Ellen-borough did not hesitate to hold (Perrott and Others v. Perrott (1811), 14 East 423; 104 E.R. 665) that a deed cancelled under mistake as to the legal effect of a will was not to be regarded as cancelled. “And when once”, said he at p. 440, “it is established, as it clearly is, that a mistake in point of fact may also destroy it, it seems difficult upon principle to say that a mistake in point of law, clearly evidenced by what occurs at the time of cancelling should not have the same operation”. This correct statement of law seems to have been overlooked by later authorities and Lord Ellen-borough’s instanter and erroneous statement in Bilbie v. Lumley survived. The apparent simplicity of the distinction between law and fact had immediate judicial appeal and generated a voluminous jurisprudence despite the “falsity of. [its] foundation” (note, (1931) 45 Harv. L. Rev. 336, at p. 337). As Professor Williston has observed, the rule distinguishing mistake of law from mistake of fact
[Page 359]
is founded on no sound principle (Williston on Contracts (3rd ed.), vol. 13, para. 1581, at p. 536).
Professor Foulke writing in (1911), 11 Columb. L.R. 299 had this to say at p. 320:
The distinction between mistake of law and mistake of fact originated in the year 1802, in the notion that the maxim that everyone is presumed to know the law is of general application, and the distinction is still generally observed by the courts. Although some of the greatest lawyers have studied the matter attentively, no one of them has been able either to draw the distinction between a mistake of fact and a mistake of law, or to discover the principle upon which relief will be withheld in case of mistake of law. There are, therefore, good reasons for disregarding the distinction as a mere notion originating in a dictum incomprehensible to the greatest minds, having no support in reason, producing hopeless confusion, and incapable of practical application. It has therefore been assumed in the discussion that there is no reason, at least so far as the law of contract is concerned, for distinguishing between a mistake of law and a mistake of fact.
Until the decision in Bilbie v. Lumley, no distinction had been made between mistake of fact and mistake of law and money paid under a mistake of law was recoverable both in law and in equity (Restatement of the Law of Restitution (1937), “Introductory Note”, at p. 179). The popularity of Lord Ellenborough’s distinction was no doubt due in part to its coincidence with the beginning of a “period of rigidity in contract law” as Professor Waddams has called it, which also saw the suppression of the law of restitution, (Waddams, The Law of Contracts (1977), at p. 213). “The notion of absolute sanctity of contract cannot live with a flexible system of granting relief against unjust enrichment, for the two sets of principles come too often into conflict” (ibid.) Having become firmly enrooted during the course of the nineteenth century as an immutable rule of the common law of contract, it has continued to flourish and sow confusion in this century. The English courts have been loathe to disturb the rule itself, all the while weaving a complicated web of exceptions and qualifications. Although some commentators have postulated that the very tenacity of
[Page 360]
the rule is sufficient proof of its reasonableness, others have commented that the distinction between mistake of law and mistake of fact has been used as a substitute for adequate analysis of a problem (see Palmer, The Law of Restitution (1978), vol. III, para. 14.27, at p. 338). It is, as Corbin has termed it, a “handy rule”. “When a court is convinced that restitution should not be decreed, in the pressure of work it is likely to seize upon the first plausible rule that comes handy; and the reader surely well knows how handy the ‘mistake of law’ rule has become” (Corbin on Contracts (1960), vol. 3, para. 617, at p. 756).
Legal writers and jurists have roundly condemned the rule. Cheshire (Cheshire and Fifoot’s Law of Contract (1976), 9th ed.) would appear to uphold the distinction in a passage at p. 641 but in the paragraph immediately following at pp. 641-42 we read:
But while, upon the weight and length of authority, the distinction, it is feared, must still be maintained, the exact demarcation between fact and law has never been determined. All that can be done in the present context is to indicate, by a citation of opposing instances, the considerations present to the minds of judges when they seek to make the distinction. A mistake as to the particular transaction for which or as to the particular individual to whom the money is paid is clearly one of fact.
As I have noted, Lord Ellenborough rested his distinction as to a mistake of law and a mistake of fact upon the maxim ignorantia juris non excusat. The maxim is a statement of the general applicability of rules of law and operates to preclude individuals from seeking to excuse themselves from criminal or other liability. Lord Ellenborough imported into the law of contract a maxim of criminal or public law. As Lord Wright has written, one cannot escape the application of a rule of law by pleading ignorance of it, adding:
Lord Ellenborough, however, stated as a dogma that every man must be taken to be cognizant of the law. Whatever force may be given to this in criminal law, it
[Page 361]
is clearly not true as a general proposition. It is not only against principle and early authority but against common sense, and has been consistently disavowed by great judges, though often repeated by some who should have known better. The result has been a great confusion in the law relating to transfers by mistake of law, so that the actual position in England would be difficult precisely to define [Legal Essays and Addresses (1939), at p. 43].
That the maxim has no place in civil actions was stated in Lansdown v. Lansdown (1730), Mos. 364, at p. 365; J. & W. 205: “That maxim of law, Ignorantia juris non excusat, was in regard to the public, that ignorance cannot be pleaded in excuse of crimes, but did not hold in civil cases”.
The courts will not enforce illegal contracts. A person with knowledge of the facts who has paid money under an illegal contract cannot recover it (Langton and Others v. Hughes and Another (1813), 1 M.&S. 593; 105 E.R. 222); an obvious rule of public policy. Relief is given however where an innocent party seeks to redress a bargain which is in fact prohibited by statute. The maxim ignorantia juris non excusat would preclude recovery, participation in the transaction being conduct that the legislator has decided must be discouraged, if not sanctioned. The injustice which would often result is at times tempered by application of the doctrine of in pari delicto.
There is a distinction to be drawn between illegal contracts and contracts entered into under mistake of law. The public policy issues are not the same and the application of an essentially punitive maxim should not preclude the court from giving redress. In the case of contracts entered into under mistake of law: “Rather than trying to escape the consequences of a rule of law, the plaintiff is seeking to escape consequences that would not have occurred had the law been known and observed. In a general sense it can be said that he seeks to bring the situation into conformity with the rule of law, by asserting rights based upon it” (Palmer, The Law of Restitution (1978), vol. III, para. 14.27, at p. 340). Thus the maxim ignorantia juris
[Page 362]
non excusat cannot serve as the foundation for the rule barring recovery.
The modern justification for the existence of the rule against recovery of monies paid under a mistake of law has been the stability of contractual relations. The rule though is often used as a handy means of disposing of cases where, in fact, recovery of money should be barred, and would be, under a more searching analysis of the case.
The adoption of the rule at the beginning of the nineteenth century occurred at a time when the spirit of the law was becoming opposed “to such idealistic formulations as ‘aequum et bonum’” (Anson’s Law of Contract, 25th ed. (1979), at p. 646). This change in spirit was nourished by the prevailing philosophical, political and economic ideologies of the nineteenth century, the premise being that partners to a contract are enlightened individuals exercising discrimination and free will and courts should not disturb their contractual relations. Stability of contractual relations resulted from this policy of judicial non-interference; stability of contractual relations then became the justification for judicial non-interference. “The attempt in the last century and a half to establish the sanctity of contracts as an absolute value has led to the suppression of open recognition of relief for mistake” (Waddams, The Law of Contracts (1977), at p. 212). The reasoning of Mellish L.J. in Rogers v. Ingham (1876), 3 Ch. D. 351 (C.A.) is representative of this trend in contract law; see also Re Saxon Life Assurance Society (1862), 2 J. & H. 408; 70 E.R. 1117.
The principle of sanctity of contract implies the assumption of risk by the parties of the consequences of contracting, again an implication perfectly consonant with the supremacy of free will and enlightened self-interest. But, as Professor Waddams points out at pp. 213-14:
…an examination of the cases shows that, as with unconscionability, so with mistake, contract values are
[Page 363]
not absolute and must be weighed against other considerations.
Everyone is against unjust enrichment, just as we are all in favour of enforcement of valid contracts. If the contract is enforceable, then the enrichment cannot be unjust. But if the enrichment is unjust then the contract must be unenforceable. The circle is inextricable. Unjust enrichment is no formula for easy solutions. But it does, it is suggested, provide a useful framework in which to strike the necessary balance.
Certainty in contractual relations cannot be the sole and overriding principle guiding the courts. As has been pointed out by innumerable authors and judges:
It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep [Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Limited, [1943] A.C. 32, at p. 61 per Lord Wright].
Certainty in commerce and in public transactions would seem to be better served by the non-recognition of a rule which sows confusion and which has so little to recommend it.
Although the venerability of the distinction between mistake of fact and mistake of law is often paid lip service, legal commentators have for a long time been calling for its elimination and the judges have been eroding its force by means of numerous exceptions and qualifications. Corbin states emphatically that its “time has come”:
In spite of the many decisions and dicta pro and con—indeed, because of them, it is believed that the time has come to say that the exceptions now make the rule, that social policy requires that mistake of law and mistake of fact be treated alike, and that in granting relief for mistake the attention of the court should be directed to the other factors in the case [Corbin on Contracts (1960), vol. 3, para. 616, at p. 752].
Palmer calls the distinction “unfortunate” and believes “the law of mistake could be administered
[Page 364]
more justly without it” (The Law of Restitution (1978), vol. Ill, para. 16.4, at p. 467). These are American authorities. Goff and Jones, however, in their major British text, also would eliminate the distinction between mistake of law and mistake of fact, with one exception:
In our view the principle in Bilbie v. Lumley should only preclude recovery of money which was paid in settlement of an honest claim. Any other payment made under a mistake of law should be recoverable if it would have been recoverable had the mistake been one of fact [The Law of Restitution, 2nd ed. (1978), at p. 91].
It is true that the general rule is often expressed in terms of non-recovery. However Goff and Jones are of the view that this proposition is based on an erroneous reading of Bilbie v. Lumley. They argue, convincingly, that Bilbie v. Lumley was a case in which a payment was made in settlement of an honest claim. Payment made in these circumstances is irrecoverable, even if later events indicate that the payor was foolish to have acceded to the request for payment. However, the authors do not believe that Bilbie v. Lumley and those cases which followed, should be taken to establish the broad proposition that ail payments made under a mistake of law are prima facie irrecoverable. Goff and Jones suggest the general test, which I would adopt, that the money should be returned if, on general principles of equity, it would be unjust to allow the recipient of the benefit to retain it. In short, the question of mistake of law should be seen as just one more category in the general law of unjust enrichment. If the defendant has been unjustly enriched at the expense of the plaintiff, then he should be forced to disgorge the benefit. Goff and Jones are, in fact, espousing the adoption of the solution found in the Restatement of the Law of Restitution, para. 44.
Professor Fridman echoes the American authorities who see the distinction between mistake of law and mistake of fact as one whose time has come:
[Page 365]
This [referring to the decision in Solle v. Butcher], it is suggested, indicates how narrow and indistinct is the line between fact and law in some, if not indeed, many instances. In view of this perhaps the time has come to eradicate from the law, at least in certain circumstances, this particular distinction [The Law of Contract in Canada (1976), at p. 88].
Professors Reiter and Swan in their recent text, Studies in Contract Law, speak of the difficulties of determining what is a mistake of law and what is a mistake of fact:
The impossibility of indicating what is a mistake of law and what is a mistake of fact forces any analysis of mistake to take the same view of all mistakes—mistakes of law as well as mistakes of fact. To deny relief because the mistake is one of law is simply to say that that risk was on the party who suffered the loss. This tacit risk allocation must be justified. No general rule to provide for an allocation of such risks can be laid down as each case must be decided on its own facts and with reference to the broad range of factors that have been already mentioned (at pp. 231-32).
Various means of avoiding the application of the rule precluding recovery of money paid under mistake of law have developed, the most obvious one being to characterize the mistake as one of fact. This was the technique used in Solle v. Butcher, [1950] 1 K.B. 671 (C.A.), the “artificiality” of which Cheshire has commented on (Cheshire and Fifoot’s Law of Contract, supra, at p. 644). (See also George (Porky) Jacobs Enterprises Ltd. v. City of Regina, [1964] S.C.R. 326 per Hall J.)
Another technique has been to engraft upon an already vague distinction (that between law and fact) an equally vague distinction between “general law” and “private right”; the so-called test formulated by Lord Westbury in Cooper v. Phibbs, Cooper, and Others (1867), L.R. 2 H.L. 149. The maxim ignorantia juris non excusat it is said, and thus the rule barring recovery of money paid under mistake of law, has no application where there is a private right involved as opposed to a question of the applicability of the general law. This is undoubtedly a more correct usage of the maxim. Thus a “[p]rivate right of ownership is
[Page 366]
a matter of fact; it may be the result also of matter of law; but if parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is, that the agreement is liable to be set aside as having proceeded upon a common mistake” (Cooper v. Phibbs, supra, at p. 170). The private rights/general law distinction is really a variation on the judicial technique of characterizing mistakes of law as mistakes of fact.
Courts have also allowed money paid under a mistake of law to be recovered where the payment is not a “voluntary” payment. This is not surprising and is consonant with the strictest interpretation of the sanctity of contractual relations. Contracts are entered into by free and enlightened individuals acting in their own self-interest. Fraud, duress, oppression, undue influence, “compulsion” as it has been termed, vitiate the contract and the courts will remedy the wrong, irrespective of whether or not there has been a mistake of law. Thus in Farmer v. Arundel (1772), 2 Black W. 824; 96 E.R. 485, De Grey C.J. said at pp. 825-26:
When money is paid by one man to another on a mistake either of fact or of law, or by deceit, this action will certainly lie. But the proposition is not universal, that whenever a man pays money which he is not bound to pay, he may by this action recover it back. Money due in point of honour or conscience, though a man is not compellable to pay it, yet if paid, shall not be recovered back: as a bonâ fide debt, which is barred by the Statute of Limitations.
In Bize v. Dickason and Another (1786), 1 T.R. 285; 99 E.R. 1097, Mansfield C.J. expressed the principle in these words at pp. 286-87:
[T]he rule had always been, that if a man has actually paid what the law would not have compelled him to pay, but what in equity and conscience he ought, he cannot recover it back again in an action for money had and received. So where a man has paid a debt, which would otherwise have been barred by the Statute of Limitations; or a debt contracted during his infancy, which in
[Page 367]
justice he ought to discharge, though the law would not have compelled the payment, yet the money being paid, it will not oblige the payee to refund it. But where money is paid under a mistake, which there was no ground to claim in conscience, the party may recover it back again by this kind of action.
This principle of Lord Mansfield seems to have been transformed into the proposition enunciated by Craig J. in this case [at p. 156] that “money paid voluntarily (and not paid under protest) under a mutual mistake of law is not recoverable…” Such a proposition is simply untenable. Money paid under a mistake of law (or fact for that matter) would rarely be paid under protest; the parties under a mutual mistake of law assume that the money is, in law, due and owing.
A further judicial development to circumvent the rule barring recovery under mistake of law is what might be termed the Kiriri principle (Kiriri Cotton Co. Ltd. v. Dewani, [1960] A.C. 192). Basically it allows a party to benefit from a “protective statute” and to recover money paid under a mistake of law, where the “law” in question is a statute whose purpose is to protect his interests. This is surely a common sense proposition. It is impossible to know all the law, presumptions and maxims to the contrary notwithstanding. To deprive a citizen of the benefit of a statute designed precisely for his protection solely because he is unaware of its existence is an absurdity.
Finally, the most significant judicial development in the area of mistake of law is not an exception or qualification to the rule but rather the resurgence in English and Canadian jurisprudence of the doctrine of restitution or unjust (or unjustified) enrichment. The Fibrosa decision, and Lord Wright’s reasons in particular, marked the “modern revival of restitution as a flexible and growing system” (Waddams, The Law of Contracts (1977), at p. 213, n. 6). Once a doctrine of restitution or unjust enrichment is recognized, the distinction as to mistake of law and mistake of fact
[Page 368]
becomes simply meaningless.
This Court has applied the doctrine of restitution or unjust enrichment in the case of the Corporation of the County of Carleton v. Corporation of the City of Ottawa, [1965] S.C.R. 663. In this case the County of Carleton had mistakenly paid for the maintenance of an indigent whose maintenance, pursuant to by-law and agreement, was properly the responsibility of the City of Ottawa. There was no discussion as to the existence of a mistake of law (responsibility under the by-law or the several agreements providing for social welfare) or a mistake of fact (the solicitor for the County of Carleton had neglected to include this particular indigent in a list of welfare cases delivered to the City of Ottawa). The action was based and decided upon the doctrine of restitution. Citing Lord Wright’s famous statement in the Fibrosa case Hall J. held at p. 669 that:
The respondent [City of Ottawa] by the act and fact of annexation and by the terms of said Exhibit 11, para. 10 assumed responsibility for the social service obligations of the appellant [County of Carleton] to the residents of the area annexed, and the fact that one welfare case was inadvertently omitted from the list cannot permit the respondent to escape the responsibility for that case. To paraphrase Lord Wright, it is against conscience that it should do so.
Were it not for the fact that an action for recovery exists for money paid under a mistake of fact, there might be an argument that a rule precluding recovery of money paid by mistake serves a legitimate purpose; the rule assures the finality of transactions. A hard rule, but an unambiguous one. However, as Palmer has written:
The policy against reopening settled transactions has insufficient force to lead to a refusal of restitution of money paid in the belief that it is owed when it is not. This is clear if the mistake is one of fact, and no reason is suggested or is present to support a different view because the mistake is one of law [Palmer, The Law of Restitution (1978), vol. III, para. 14.27, at p. 342].
[Page 369]
By allowing an action for recovery of money paid under mistake of fact the courts have recognized that the finality of transactions is not an absolute value. With the greatest respect for those of contrary view, I am of opinion that the distinction between mistake of law and mistake of fact serves no useful purpose. The commentators have been unable to find a real basis for its existence and have been unsparing in their criticism of it. And in other legal systems the distinction does not exist. The Quebec Civil Code, basing itself on the French Civil Code, sets out the rules applicable to recovery of money not due with precision and clarity in arts. 1047 and following. Article 1047 reads:
Art. 1047. He who receives what is not due to him, through error of law or of fact, is bound to restore it; or if it cannot be restored in kind, to give the value of it.
If the person receiving be in good faith, he is not obliged to restore the profits of the thing received. [Emphasis added]
The Quebec codifiers in 1866 were very careful to guard against the unwarranted importation of the distinction between mistake of law and mistake of fact into Quebec law.
The policy question which must be determined is whether this Court wishes to recognize, and to perpetuate, what has been rightly referred to by Judge Learned Hand as “that most unfortunate doctrine” (St. Paul & Marine Ins. Co. v. Pure Oil Co., 63 F.2d 771 (2d Cir. 1933), at p. 773), and by Patterson (“Improvements in the Law of Restitution” (1954-55), 40 Cornell L.Q. 667, at p. 676) as the “monstrous mistake of law made by Lord Ellenborough” or whether we should apply to claims for relief on the ground of mistake of law the same criteria and principles that would apply to a mistake of fact. Unless the contract or payment is tainted with illegality there is no compelling reason why recovery of payments made under mistake should be denied simply by reason of the fact that the mistake is one of law rather than one of fact.
I should prefer to reach this result by putting mistakes of law and mistakes of fact on the same footing rather than by increasing the number of
[Page 370]
exceptions engrafted on the rule and which have already, to a great extent, emasculated the rule. One author (32 Harv. L. Rev. 283) has noted ten exceptions to the rule, which he characterized as a “decrepit doctrine unsupportable on principle, and unjust in its operation” (at p. 285). The tendency to further extension is to be noted in two decisions of this Court (George (Porky) Jacobs Enterprises Ltd. v. City of Regina, supra, and Eadie v. The Corporation of the Township of Brantford, [1967] S.C.R. 573). Professor McTurnan in a lengthy article, “An Approach to Common Mistake in English Law”, (1963), 41 Can. Bar Rev. 1, writes at p. 34:
It would be best to abolish the mistake of law rule, place mistakes of law and of fact on an equal footing, and recognize that with mistakes of law the principle of conscious ignorance or conscious assumption of risk will often prevent relief. The next best course—perhaps the one the courts are taking—would be to expand the exceptions and thereby deny relief for a mistake of law only where the risk legitimately belonged to the bargain.
The true doctrine must surely be that enunciated by Lord Mansfield in Bize v. Dickason, supra, at p. 287:
…where money is paid under a mistake, which there was no ground to claim in conscience, the party may recover it back…
V
If the distinction between mistake of fact and mistake of law is eliminated then any discussion of in pari delicto is really unnecessary. Mr. Justice Craig spent considerable time attempting to show that there was a primary obligation on Ontario Hydro to interpret the statute and therefore Nepean was not ‘in pari delicto’. The analogy was drawn to Kiriri Cotton, where a tenant who had made a payment under an illegal contract was found not to be ‘in pari delicto’ with the landlord; therefore the tenant was entitled to recover the illegal premium. The general rule is that money paid under an illegal contract is not recoverable. Therefore, it was necessary for the courts to find that the parties were not ‘in pari delicto’ in order for the tenant to recover the benefit.
[Page 371]
I agree with the judge at trial that the primary obligation for interpretation of the relevant issue rested on the shoulders of Ontario Hydro. An analogy can be drawn between this case and the case of Eadie v. The Corporation of the Township of Brantford, supra. In the Eadie case, a township had demanded payment of sums under certain by-laws which were subsequently declared ultra vires. This Court held that the township was under a duty to the taxpayers of the municipality; when it exacted payment of money on the basis of an illegal by-law, then it was not in pari delicto with the taxpayer who was required to pay.
VI
This leaves what is perhaps the most difficult issue of the case. It is simply this: are there any equitable reasons which preclude recovery by Nepean? This question is crucial whether one adopts the approach which I would prefer or the ‘in pari delicto’ analysis of the Ontario Court of Appeal and of Mr. Justice Craig. As the trial judge recognized, even if the parties are not ‘in pari delicto’ the court may still deny recovery if there are equitable considerations weighing in favour of the recipient.
In my view honesty and common justice require that Ontario Hydro repay Nepean the monies paid in the mistaken belief that Ontario Hydro had the authority to exact them. Three courts have found that Ontario Hydro was not entitled to receive the money; what reasons of policy justify retention of it by Ontario Hydro?
I do not find persuasive the argument that Nepean should not recover because, it is said, some municipalities or their hydro utilities were under-billed and in the result Ontario Hydro did not benefit directly. This was simply another error on the part of Ontario Hydro, the financial impact of which should in justice be borne by Ontario Hydro. There is ample authority to support the view that it is not enough that the recipient has “spent the money beyond recall” (per Denning L.J. in Lamer v. London County Council, [1949] 2 K.B. 683, at p. 688, cited by Martland J. in Rural
[Page 372]
Municipality of Storthoaks v. Mobil Oil Canada, Ltd., [1976] 2 S.C.R. 147, at p. 166).
Mr. Justice Craig held that equities did not oblige Ontario Hydro to refund the money. With respect, I think he was wrong. In reaching his conclusion he relied on three “important matters”. I should like to deal with each in turn.
The first matter was that Ontario Hydro did not receive a benefit. The point here was that the payments or credits given by Ontario Hydro for return on equity balanced the payments or debits exacted for cost of return. Thus, it is said, Ontario Hydro, as such, was not enriched by the receipt of a benefit. This is no answer to Nepean’s claim. As between the parties, Nepean, in paying its power bills, in fact conferred a benefit on Ontario Hydro. I agree with counsel for Nepean that the determination as to whether Ontario Hydro received a benefit should be made in relation to the transactions between Nepean and Ontario Hydro rather than in relation to the ultimate position of Ontario Hydro under the new power costing system. At trial the question was raised as to what would be the position of Ontario Hydro and the other municipalities and their respective hydro commissions if Mr. Laidlaw, counsel for Nepean, were successful. The following exchange took place between the court and Mr. Wilson, counsel for Ontario Hydro, at pp. 208-09 of the appeal case:
HIS LORDSHIP: Mr. Wilson, is there any possibility that these municipalities should be parties, if the result of this case would affect them?
MR. WILSON: Well, My Lord, that thought has not entered my mind, but I think, under the relevant legislation, while originally the contract was made with the municipality, the legislation empowers the particular municipality set [sic] set up a Commission, and that Commission is the entity which deals with Ontario Hydro under the two Acts that we are discussing.
HIS LORDSHIP: What would happen if Mr. Laidlaw is successful?
[Page 373]
MR. WILSON: Well, I hate to think of it. I have thought of it, but in any lawsuit you always think of the good and the bad, and I can assure you that there will be a very complex set of problems arise. I don’t know that it will be helpful to explore them with Your Lordship at this stage.
Certainly, the municipalities in the same position of [sic] Nepean, if it [sic] successful, will actually make a claim, and the question will then arise as to the right of Ontario Hydro to recoup itself as against the other municipalities, who, on balance, had a net credit.
And the problem is so extensive and involves so much money, that apart from the question of statute of limitations, acquiescence, and delay, which are legal questions, Your Lordship would have to deal with, if he thought—came to the conclusion that Nepean’s got a legal right, there would still be a considerable amount, because, on balance, there’s thirty million dollars in the same position as Nepean’s claim here, in the overall figure for the system.
The same point arose again at p. 244 of the appeal case:
MR. LAIDLAW: And I think I understand what Your Lordship’s problem was. Sure the older municipalities would be worse off, if I’m right.
HIS LORDSHIP: That’s right. The older municipalities, or some municipalities had a reduction in bills.
MR. LAIDLAW: Sure they did, at my expense and that is the whole point of the case.
HIS LORDSHIP: The other municipalities aren’t here.
MR. LAIDLAW: Well I’m not suing them. It is the Hydro that took it from me. That is their problem.
I do not think it is any answer in law for Ontario Hydro to say to Nepean “True, we took your money unlawfully but we do not have to repay it because we mistakenly paid it out to other people”. The fact is that Ontario Hydro did receive, and did have the use and benefit of Nepean’s money. What it did with it is, as Mr. Laidlaw said, a problem for Ontario Hydro. The mere spending of the money is not, of itself, sufficient to establish a defence (Rural Municipality of Storthoaks v. Mobil Oil Canada Ltd., supra). The authorities are clear that for a defendant to succeed he must show a detrimental change of position as a result of the payment, something which Ontario Hydro is
[Page 374]
unable to show. Difficulty in restoring the parties to their original position will not be reason for denying recovery where the ground for relief is well established. See the well-known case of Earl Beauchamp v. Winn (1873), L.R. 6 E. & I. App. 223 (H.L.) Two passages of the headnote read:
Where, in the making of an agreement between two parties, there has been a mutual mistake as to their rights, occasioning an injury to one of them, the rule of equity is in favour of interposing to grant relief.
The Court of Equity will not, if such a ground for relief is clearly established, decline to grant relief merely because, on account of the circumstances which have intervened since the agreement was made, it may be difficult to restore the parties exactly to their original condition.
That case concerned mistake as to rights and interests under a grant of land. The fact that the mistake upon which the plaintiff founded his equity was one which had existed for more than sixty years did not defeat his claim, nor did the fact that the plaintiff knew or had the means of knowing what his rights were and that at all events his mistake was one of law. The plaintiff succeeded in his action.
Holt v. Markham, [1923] 1 K.B. 504, is a different type of case. The plaintiff had led the defendant to believe that he, the defendant, might treat the money as his own, and in that belief the defendant had altered his position by spending the money. The defendant had spent part of the money in a company which had since gone into liquidation. It was held that the plaintiffs were estopped from alleging that it was paid under a mistake. In the case at bar it was neither pleaded nor argued that Nepean was estopped.
If Ontario Hydro changed its position for the worse by distributing to some utilities monies illegally collected from others (or by undercharging the former) it was not prompted by any action on the part of Nepean or by reason of the payment from Nepean. If Ontario Hydro is in a difficult position it is not due to Nepean. The general
[Page 375]
principle to be applied in these situations is that enunciated by Denning L.J. in Larner v. London County Council, [1949] 2 K.B. 683 at pp. 688-89:
Speaking generally, the fact that the recipient has spent the money beyond recall is no defence unless there was some fault, as, for instance, breach of duty—on the part of the paymaster and none on the part of the recipient.
VII
A second matter was taken into account by Craig J. in denying Nepean’s claim. He said at pp. 161-62:
Secondly, the circumstances of this case are quite unusual. While Nepean was improperly charged it is legitimate to look at the source of funds to satisfy any judgment that might require Ontario Hydro to repay Nepean. I do not prejudge or intend to prejudge or influence any possible further litigation that might arise between Ontario Hydro and any other municipality or utility arising out of the payments pursuant to the “return on equity”/”cost of return” concept; but it is not in dispute that the only ultimate source of funds available to Ontario Hydro to satisfy such a judgment would be from those same customers (municipalities and utilities) who have already received the benefits or incurred the losses under “return on equity”/”cost of return”. Can Ontario Hydro apportion the amount of any such judgment against only those municipalities or utilities who received the benefits resulting from overpayment by Nepean? In my opinion it cannot do so. I have held that the payments by Nepean were made under mistake of law; and similarly Ontario Hydro acted under mistake of law in charging these payments and crediting them to the other municipalities or utilities. Clearly Ontario Hydro cannot claim compulsion, duress, oppression or lack of delictual parity against these municipalities or utilities so as to give rise to a claim for return of money paid under mistake of law; therefore, in my opinion, Ontario Hydro would be unable to recover the amount of any such judgment against these municipalities and utilities only (whether by way of apportionment in the power bills or otherwise). It is impossible to restore the status quo ante. It follows that all those municipalities and utilities (and the evidence indicates that there is a substantial number) that have been overcharged already, in the same way as Nepean, would be required to pay their proportionate share (with those who benefited) to satisfy any judgment in favour of Nepean. This
[Page 376]
would really impose a double penalty on some municipalities and utilities.
I have some difficulty with the reasoning in the foregoing passage. The judge says that the case is unusual. That can be said of most cases. The statement is then made that Nepean was improperly charged. This merely expresses in another way the illegality and unlawfulness of the charge Ontario Hydro levied against Nepean. The judge then says that notwithstanding the impropriety of the charge it is legitimate to look at the source of funds to satisfy any judgment that might require Ontario Hydro to repay Nepean. Ontario Hydro did not plead that it lacked the funds to satisfy any judgment that Nepean might obtain or that it could not meet a judgment. Ontario Hydro’s ability to pay was not discussed at trial. It will be recalled that the trial judge raised with counsel for Ontario Hydro the position of the other municipalities, and whether they should be parties. Counsel replied that that thought had never entered his mind. The court pursued the matter by inquiring what would happen if Nepean were successful. Counsel replied that he hated to think of it, “I can assure you that a very complex set of problems arise”. Counsel concluded “I don’t know that it will be helpful to explore them with Your Lordship at this stage”. The complex problems were not explored at that stage or at any other stage of the trial.
In the case of Baylis v. Bishop of London, [1913] 1 Ch. 127, the Bishop resisted a claim for monies paid to him by mistake on the ground that he had applied the money in a proper manner and that it was inequitable that he should be made to repay when he could not himself recover from those to whom he had paid it. The Court of Appeal rejected this contention and held that the Bishop must repay the money. See also In re Diplock. Diplock v. Wintle (And Associated Actions), [1948] Ch. 465 (C.A.), aff’d. [1951] A.C. 251.
[Page 377]
In my view the trial judge in denying Nepean’s claim was wrong in law in considering the possible source of funds to satisfy any judgment Nepean might obtain. We have not been referred to any case, and I know of none, where the court has applied what amounts to a “means” test and a plaintiff, without fault, has been denied recovery because of doubt as to the “source of funds” to satisfy the judgment.
Even if this were a proper consideration in law it is apparent from the transcript that the “very complex set of problems” to which Mr. Wilson referred was neither identified, quantified nor subjected to examination and cross-examination. Without evidence on this point, and argument from all concerned including those who were beneficiaries of the return of equity/cost of return concept and from those who suffered thereby it is impossible to know in what manner and from what source Ontario Hydro might properly pay any judgment recovered against it by Nepean. Such speculation is both unwise and unnecessary in the present litigation.
Counsel for Nepean submits that the courts below mistakenly concluded that the primary method of redress available to Ontario Hydro as against the “net recipients” under the new power costing system would be by way of an action to recover money paid under a mistake in law. He says that remedy would not be available or appropriate to Ontario Hydro because Ontario Hydro did not make a payment to the “net recipients”; the “net recipients”, by reason of mistaken calculation of the cost of power, were the undercharged and Ontario Hydro has the authority under the Act to correct errors in its power bills and thereby adjust their cost of power to the correct amount and collect same (The Power Corporation Act, R.S.O. 1970, c. 354, ss. 58 and 76). He submits that by appropriate adjustment to power costs to correct and collect undercharges, Ontario Hydro can raise the money required to reimburse Nepean and other customers with similar claims. In the
[Page 378]
alternative, payment by Ontario Hydro in the discharge of such obligations is an expenditure “necessary… in carrying on… the operations of (Hydro)…” within s. 7(3)(b) or a “cost of operation” for the purposes of s. 16(a) of the Act. As such, they are properly includable in the cost of power to be charged to municipalities and utilities which, and to the extent that they received a benefit under the illegal power costing scheme (The Power Corporation Act, R.S.O. 1970, c. 354, ss. 7(3)(a) and 76). Accordingly, counsel for Nepean submits, the status quo ante can be achieved, perhaps not without administrative difficulty, throughout the entire Hydro system. Counsel may be correct in these submissions or he may not be correct. We do not have to decide. The point is that the courts below without pleadings, without evidence, without argument and in the absence of other utilities directly affected speculated on the consequences of a judgment in favour of Nepean against Ontario Hydro.
VIII
The third reason given by the trial judge in concluding that the “ties of natural justice and equity are against Nepean” (at p. 162) is this:
Thirdly, in balancing the equities between the parties I find that Ontario Hydro was acting bona fide, although under mistake of law. While all of the elements of acquiescence and estoppel are not present so as to give rise to a defence on either of those grounds, Nepean was aware from the outset that Ontario Hydro was passing on the benefits of the “return on equity”/”cost of return” system to other municipalities or their utilities annually. Nepean had ample opportunity to investigate its legal rights and take legal advice in the first year or two of the system—rather than waiting eight years.
[Page 379]
Counsel for Nepean conceded that Nepean’s claim is barred by The Statute of Limitations except with respect to the six years preceding the date of the issue of the writ on the 13th day of December, 1974. The judge held that the defence of laches is only allowed where there is no statutory bar: Halsbury’s Laws of England, 4th ed., vol. 16, para. 1476, p. 998, referring to Re Pauling’s Settlement Trusts. Younghusband v. Coutts & Co., [1961] 3 All E.R. 713, affd. [1964] 1 Ch. 303 (C.A.), at p. 353, where Wilberforce J. stated at p. 735:
There being an express statutory provision, providing a period of limitation for the plaintiffs’ claims, there is no room for the equitable doctrine of laches.
Mr. Justice Craig stated at p. 151: “It is, therefore, my view that the action for repayment is not barred by the doctrine of laches. On the question of acquiescence, no authority was cited to me by counsel for Ontario Hydro”.
Having rejected the defences of laches, acquiescence and estoppel the judge finds Nepean at fault in failing to act and to investigate its legal rights and take legal advice in the first year or two of the system. Why? It is obvious that Nepean had opportunity to take legal advice at an early date but why should it have done so when on the judge’s earlier findings the parties were not ‘in pari delicto’; Ontario Hydro was responsible for the proper application and interpretation of its Act; Ontario Hydro had primary responsibility of knowing what charges could be imposed upon municipalities and their utilities, and Ontario Hydro had misled Nepean into thinking that the charges were properly authorized. The judge found that Nepean did not support the proposed charges and had objected consistently thereto. Why then, and when, did an obligation fall upon Nepean to incur legal expenses in making an independent investigation as to the statutory powers of Ontario Hydro? What we are talking about is not some general rule of law which could be presumed to be a matter of common knowledge but rather a highly technical deduction from facts and law, both
[Page 380]
involving fields of special learning.
Nepean’s claim should not be defeated on the ground that Nepean made a voluntary payment. As the authors of Goff and Jones, The Law of Restitution, state at p. 31:
The principle of voluntary payment has no application where there is something in the recipient’s conduct “which shows that he is the one primarily responsible for the mistake”…
There is no doubt a head of public policy which recognizes the need to preserve the validity of compromises freely entered into under advice but we are not here concerned with the compromise of a doubtful right or with a family arrangement releasing rights under a will.
I would allow the appeal, set aside the judgments of the courts below and direct payment by Ontario Hydro to The Hydro Electric Commission of the Township of Nepean of the sum of $921,463 with costs throughout. I would deny the motion of Ontario Hydro to vary the decision of the Court of Appeal for Ontario assuming that, lacking leave to appeal, Ontario Hydro was entitled to address the Court on the point. I would hold that Ontario Hydro’s charges and credits on account of “cost of return” and “return of equity” are not authorized under The Power Corporation Act, R.S.O. 1970, c. 354, and the Act does not entitle Ontario Hydro to receive and disburse such charges and credits.
The judgment of Martland, Estey and Lamer JJ. was delivered by
ESTEY J.—The Ontario Court of Appeal found that neither the appellant, The Hydro Electric Commission of The Township of Nepean, nor the respondent, Ontario Hydro, could recover, either retrospectively or prospectively, moneys paid or owing on account because both obligations arose by reason of a mutual mistake of law. From this disposition the appellant comes to this Court principally on the submission that, be it mistake of law or mistake of fact, the appellant should succeed because the parties to the mistake were not in pari
[Page 381]
delicto and therefore a court should not apply any further tests in the sense of equity as between the parties. The respondent, by notice to vary, seeks in effect to cross-appeal from the dismissal of the respondent’s claim against the appellant for unpaid charges under the scheme for the years 1974 to 1978 inclusive. The hearing in this Court proceeded on the assumption (without deciding) that the respondent had the right to advance the cross-appeal.
Both courts below have found that there is no provision under The Power Corporation Act, R.S.O. 1970, c. 354, (“the Act”), for the scheme adopted by the respondent in 1966 for the inclusion in its billing for electricity delivered to the local hydro agencies of a charge or a credit calculated with reference to the total outstanding debt of the respondent and shared as between the distribution agencies on the basis of the electrical load delivered to each of them by the respondent in the year in question. This scheme was a successor plan to one adopted and carried on for years prior to 1966 which has no relevance here other than with regard to the calculation of the charges and credits arising under the scheme. Both schemes were apparently devised to give credit to a municipality for its past contributions towards the assets of the system built up over the years by the respondent. The appellant for some years was opposed to the scheme because it was said to favour older local public utilities and to discriminate against the newer utilities. The complex details surrounding the computation by the respondent of a charge entitled “Cost of Return” based on total outstanding indebtedness of the respondent, and a credit “Return on Equity” based on prior debt retirement payments need not be reviewed here as a detailed understanding of the plan is not necessary to a resolution of this dispute. In total the “Cost of Return” charged to all utility customers of the respondent equalled the “Return on Equity” credits granted under the scheme to the public utility customers by the respondent. The calculation of these charges and credits was made under the scheme after all the usual accounting procedures had been taken in order to determine
[Page 382]
the cost of electricity (as defined in the Act) delivered to the customer. Both the courts below found no authority in the Act for the scheme. As will be seen, I have reached the same conclusion. Hence a more detailed review of the history and workings of the scheme will serve no purpose here. There is no dispute between the parties as to the amounts of money claimed in the appeal and the cross-appeal. Finally, as regards quantum claimed by the parties in their respective claim and cross-claim, there is reference only to the years 1968 to 1974, the earlier years being barred by the limitations period contained in The Limitations Act, R.S.O. 1970, c. 246. It should perhaps be noted (although it has no bearing on these proceedings) that the 1966 scheme was again revised after the period in question in this litigation and has now been phased out.
In its cross-appeal the respondent makes claim to the sum of $359,512 being the net difference between credits and charges made by the respondent against the appellant in the years from 1974 to May 23, 1978 inclusive, which sum includes nine percent interest from the date of the various billings making up the account to the date of trial. In order to dispose of the counter-claim it is necessary to examine, although only briefly, the statutory provisions upon which the respondent relies in making this claim. Those provisions are found in ss. 58, 76 and 7(3)(a) of the Act. Section 58 provides as follows:
- The purposes and business of the Corporation include the generation, transmission, distribution, supply, sale and use of power and, except with respect to the exercise of powers requiring the prior authority of the Lieutenant Governor in Council under this Act, the Corporation has power and authority to do all such things as in its opinion are necessary, usual or incidental to the furtherance of such purposes and to the carrying on of its business.
It is the respondent’s submission with reference to this section that the establishment of a scheme for the recognition of accrued “equity” in the respondent’s system related to debt retirement by its cus-
[Page 383]
tomers falls within the corporation’s power and authority “to do all such things as in its opinion are necessary, usual or incidental…to the carrying on of its business”. It must be borne in mind when appreciating the operation of this scheme that the respondent has already, in its accounting and in its billing of its customers, made provision for the recovery in its charges for electricity sold of all those expenditures incurred in the generation and distribution of electricity. The trial judge found s. 58 inapplicable because:
…this section is in the nature of a basket clause; and in my opinion charging for a “return in equity” resulting in off-setting debits and credits does not involve “the generation, transmission, distribution, supply, sale and use of power…”. In my view s. 58 is not intended to apply to billings to municipalities and utilities which are specifically dealt with by s. 76.
The Court of Appeal concluded that the trial judge had correctly interpreted all the sections of the Act advanced by the respondent in support of its scheme. I, with respect, also agree with the comments of the learned trial judge.
I turn now to s. 76 which provides as follows:
- Notwithstanding anything in any general or special Act passed before the 3rd day of April, 1928, or in any contract entered into before the 3rd day of April, 1928, and, except where under the terms of any such contract power is to be supplied to a municipal corporation at a fixed price, the price payable for power by any municipal corporation is the cost to the Corporation, as determined by it, of supplying and delivering power to the municipal corporation, including the municipal corporation’s proportion, as adjusted by the Corporation, of,
(a) the cost of operation, maintenance, depreciation and insurance of the works and the cost of administration of the Corporation;
(b) interest and expenses of debt service and interest credited on the balances remaining from time to time to the credit of reserve accounts established under this Act;
(c) an annual sum sufficient to form in forty years, with interest at 4 per cent per year, a sinking fund for the repayment of the advances made by the Province of Ontario under this Act for the
[Page 384]
cost of the works, for the repayment of any other indebtedness incurred or assumed by the Corporation in respect of the cost of the works, and for the restoration of any reserve or other funds of the Corporation utilized for the payment of the cost of the works; and
(d) an amount to be determined by the Corporation for the purposes of sections 14 and 16 and clause c of section 15.
Under the scheme adopted by the respondent in 1966 the local hydro distribution agencies were assessed a charge calculated on the basis of the total outstanding debt of the respondent. Prior to 1966 this charge was made to the local hydro distribution agencies on the basis of the total assets of Hydro. The share of the individual local distribution agency was calculated with reference to the quantity of electricity or load taken from the respondent by the local authority. At the same time, in the 1966 plan the local authority was given a credit for the total debt retirement payments or a deemed “equity” acquired by the local authorities by reason of payments made under the pre-1966 debt retirement program. The difference between the charge and the credit with respect to debt retirement under the 1966 charge is what is here in issue. The following table sets out the arithmetic result as between the appellant and the respondent during the periods from 1966 to the date of the action.
Return on Equity
Cost of Return
1966
(24,041.00)
105,407.00
1967
(28,357.00)
125,560.00
1968
(36,826.00)
140,988.00
1969
(46,274.00)
153,499.00
1970
(56,334.00)
179,965.00
1971
(68,206.00)
197,848.00
1972
(81,776.00)
214,755.00
1973
(97,034.00)
237,289.00
438,848.00
1,360,311.00
438,848.00
921,463.00
[Page 385]
The total difference between the charge and the credit is the net amount of $921,463 of which the appellant may claim only that portion not statute barred. In any case, the parties are agreed on the amounts in issue.
As will be seen above, s. 76 authorizes the respondent to charge the municipal corporation “the cost…of supplying and delivering power”. Nowhere in the section is there anything approaching a precise legislative authorization for the 1966 scheme. The trial judge concluded with reference to the proper interpretation of s. 76:
…clearly the “price payable for power” must be a “cost to the Corporation… of supplying and delivering power”. Therefore, with reference to the amounts charged by Ontario Hydro (represented by “return on equity”/”cost of return”), unless they are a cost of delivering and supplying power they are not authorized by s. 76.
It is unnecessary to prowl through the statutory origins of these provisions, as for example The Power Commission Amendment Act, 1909, 1909 (Ont.), c. 19, and the agreements thereby validated because, whether or not the local distribution authority acquired an equity in law or in fact in the assets of Ontario Hydro, nothing in s. 76 can be found to support or authorize the post-1966 scheme for charges and credits between the respondent and the local distribution authority. There is no question but that the title to the assets of the respondent is in law in the respondent free and clear of any and all claims in law or equity by the local distribution authority. Section 39(4) of the Act provides:
- …
(4) The Corporation may, upon such terms as it considers proper, sell, lease or otherwise dispose of any property, real or personal, that it finds unnecessary for its purposes.
Furthermore, we are not concerned with whether or not the post-1966 scheme was instituted in order to do justice between various hydro users with respect to an accumulated credit or an accumulated charge between the parties arising
[Page 386]
out of the pre-1966 plan. The simple question before this Court is whether or not s. 76 and the related sections of the Act can support the charges made by the respondent to the appellant. It is to be noted that s. 76, as in the case of s. 58, includes a discretion in the respondent to determine the cost of supplying and delivering power. As in the case of s. 58, however, this flexibility granted by the statute must be construed in the context of the balance of the section and cannot, in my opinion, be extended to authorize or support the post-1966 scheme of charges or credits with which we are here concerned. With respect, I agree once again with the learned trial judge with respect to the inapplicability of s. 76 as the basis for this 1966 scheme.
I turn therefore to the remaining statutory provision stated to be relevant on this matter, namely s. 7(3)(a) and (b), which provides as follows:
- …
(3) Any expenditure heretofore or hereafter incurred by the Corporation,
(a) for works or services in carrying out the directions of the Lieutenant Governor in Council or for which the Corporation has had other proper authority and that has not already been included in the cost of power to municipal corporations under contract with the Corporation but that, in the opinion of the Corporation, has proved or may ultimately prove beneficial to municipal corporations under contract with the Corporation for a supply of power, or to municipal corporations that may from time to time thereafter enter into such contracts;
(b) considered necessary or desirable by the Corporation in the interests of municipal corporations then or that may thereafter be under contract with the Corporation for a supply of power, in carrying on, promoting or extending the operations of the Corporation in connection with the generation, distribution or supply of power or for any work or service considered by the Corporation incidental thereto,
may be included by the Corporation as part of the cost of supplying power to any of such municipalities and shall be apportioned by the Corporation as provided in this section and section 76.
[Page 387]
This provision authorizes the inclusion by the respondent in the “cost of supplying power” of “expenditures” made by the respondent for “works or services… not already… included in the cost of power” in the case of para, (a), and made “in connection with the generation, distribution or supply of power” in connection with para. (b). Obviously, there has been no expenditure made in an amount equal to the charges made against the appellant by the respondent under the 1966 scheme; and certainly none have been made thereto with reference to the construction of works or the provision of services or for the generation or distribution of power. It was argued by the respondent that the concluding words of para, (b), “for any work or service considered by the Commission incidental thereto,” would authorize the inclusion of the net charge under the 1966 scheme. Such an extension of the words produces an unnatural result and cannot, in my view, be reasonably interpreted to support the charges here before the Court. The learned trial judge concluded with reference to these sections:
As to section 7(3)(a), for the reasons stated earlier, charging for a “return on equity” is not an “expenditure” related to the cost of power; and in any event it is not one for which Ontario Hydro “has had other proper authority”; under section 7(3)(b) it is not an “expenditure” in connection with the generating, distribution or supply of power…”; under section 7(4) it does not come within “expenses”.
With respect, I agree with his conclusions.
These are the sections of the Act relied upon by the respondent as justifying the 1966 scheme under which the amount under claim by the appellant was charged against the appellant by the respondent. The Court of Appeal came to the same conclusion as the trial judge as to the correct interpretation of the statute and concluded:
It would require much clearer and more definitive words in the statute to give to Hydro the power and authority now claimed.
A word should be said about s. 82 of the Act which qualifies s. 76. It reads:
[Page 388]
82.—(1) The Corporation shall annually adjust and apportion the amounts payable by municipal corporations under sections 76 to 81.
(2) The Corporation shall also annually adjust and apportion among the municipal corporations all such expenditures made by the Corporation in exercise of the powers conferred upon the Corporation by this Act as have been incurred for or on behalf of the municipal corporations.
(3) The adjustment and apportionment made by the Corporation is final and binding upon the municipal corporations.
This section is, as in the case of the sections already examined, concerned with “such expenditures” made by the respondent. In contrast with accounting entries or deemed expenses and charges, one should read this as a reference to “actual” expenditures. One must also, in reading these sections in isolation, appreciate that the Act already has made provision for the charging by the respondent of such non-cash items as depreciation. The accounting system thus produces the charges to be made for the “cost of supplying power” by the respondent to its utility customers. It is only after this process has been completed that we come to the “equity” program instituted in the pre-1966 schemes by the respondent, and continued in a different form in the post-1966 scheme.
It was strenuously argued, and indeed found to be so in the courts below, that the respondent did not gain or lose revenue by reason of the operation of this scheme. Each customer utility received charges or credits according to the calculations made under the plan and this resulted in net charges or net credits to such utilities. Since the plan operated without reference to actual outstanding debts or debts amortized, but rather on a basis whereby credits were created in recognition of previous payments made by some utilities, and charges were made to other utilities which offset or matched the credits, the respondent neither gained nor lost revenue as a result. This would leave the respondent in a flat position having experienced neither gain nor loss by reason of the operation of the plan. All this is irrelevant to the determination of the issue. The plan is either
[Page 389]
authorized by statute or it is not.
For the respondent to succeed it is necessary to find a place in the Act in which to fit this scheme. This could only be found in the charge authorized by the statute to be made for power by the respondent to its customers, and in my view, no such place can be found for the scheme which produced the charges here in issue.
The conclusion that the scheme is not authorized must, of course, apply to all amounts put in issue both in the claim and in the counterclaim. The moneys paid by the appellant for which recovery is here sought were in payment of charges which the Act did not authorize. In the result, the courts below concluded, and I respectfully agree, that these moneys were paid by the appellant to the respondent under a mutual mistake of law. In the case of the claim by the appellant, therefore, we must proceed to the issue of the recoverability of the moneys paid by the appellant and received by the respondent under the 1966 scheme.
The law of mistake, with particular reference to the recovery of moneys paid under mistake law, was for many years regarded as settled. A concise record of the state of this branch of the law is found in Cheshire and Fifoot’s Law of Contract (9th ed. 1976), p. 641:
To entitle the plaintiff to recover, the mistake upon which he has acted must be one of fact, not of law. The distinction was drawn by Lord ELLENBOROUGH in Bilbie v. Lumley in 1802 [(1802), 2 East 469], and affirmed in Brisbane v. Dacres in 1813 [(1813), 5 Taunt. 143]. The Judicial Committee of the Privy Council, however, held in 1960 that a plaintiff may recover money paid on a mistake of law provided that he is not in pari delicto with the defendant. They relied especially on the observations of Lord MANSFIELD in a number of cases between 1760 and 1780. But it is difficult to believe that these observations survived the decisions in Bilbie v. Lumley and Brisbane v. Dacres. In 1943, indeed, CROOM-JOHNSON, J., thought the proposition
[Page 390]
that “a voluntary payment under a mistake of law cannot be recovered” to be “beyond argument at this period in our legal history.” English juristic opinion is categorical. Perhaps the most impressive statement is that of Winfield in his edition of Pollock on Contracts: “money paid under a mistake of law cannot in any case be recovered.”
In contrast with this principle is the law relating to the recovery of moneys paid under mistake of fact. Baron Parke in Kelly v. Solari (1841), 9 M.&W. 54, at p. 58 stated the rule:
…where money is paid to another under the influence of a mistake, that is, upon the supposition that a specific fact is true, which would entitle the other to the money, but which fact is untrue, and the money would not have been paid if it had been known to the payer that the fact was untrue, an action will lie to recover it back,…
The application of these principles in the courts went along for 150 years without significant variation until a judgment of the Judicial Committee of the Privy Council in Kiriri Cotton Co. Ltd. v. Dewani, [1960] A.C. 192. By a Uganda statute it was made an offence “[to ask] for… or receive… money other than rent…” The lessor demanded and the lessee paid a premium at the time of execution of a seven-year lease. The Judicial Committee found that neither party thought they were doing anything illegal and that the payment was made and received under a mutual mistake of law arising out of a failure of their respective lawyers to appreciate the true meaning of the statute in question. The offence thereby committed by the lessor was punishable by a fine or imprisonment. The statute did not make it an offence for the lessee to pay the premium. Lord Denning limited the general rule of mistake of law to instances where a party to an “illegal contract” sought the aid of a court in its enforcement. No remedy was of course available in such a circumstance. Where, however, the recovery of money already paid over was in issue the Judicial Committee considered two rules would operate. Where the contract was still executory, moneys paid thereunder were recoverable; but when fully exe-
[Page 391]
cuted, no recovery was possible “unless the parties were not in pari delicto”. The contract in Kiriri, supra, was executed, that is, the premium had been paid, the lease delivered, and the lessee was in possession. Hence the sole issue to be determined was whether, in connection with this executed contract, the parties thereto were “in pari delicto”. The principle upon which the Judicial Committee proceeded to that point is stated by Lord Denning at p. 204:
Nor is it correct to say that money paid under a mistake of law could never be recovered back. The true proposition is that money paid under a mistake of law, by itself and without more, cannot be recovered back. If there is something more in addition to a mistake of law—if there is something in the defendant’s conduct which shows that, of the two of them, he is the one primarily responsible for the mistake—then it may be recovered back. Thus, if as between the two of them the duty of observing the law is placed on the shoulders of the one rather than the other—it being imposed on him specially for the protection of the other—then they are not in pari delicto and the money can be recovered back; see Browning v. Morris [(1778) 2 Cowp. 790, 792], by Lord Mansfield. Likewise, if the responsibility for the mistake lies more on the one than the other—because he has misled the other when he ought to know better—then again they are not in pari delicto and the money can be recovered back; see Harse v. Pearl Life Assurance Co., [[1904] 1 K.B. 558, 564], by Romer L.J.
The Judicial Committee of the Privy Council then applied the principle to the statute in question and found at p. 205 that:
The duty of observing the law is firmly placed by the Ordinance on the shoulders of the landlord for the protection of the tenant: and if the law is broken, the landlord must take the primary responsibility.
because whatever be the circumstance it is the landlord who is to blame “…[for] using his property rights so as to exploit those in need of a roof over their heads” (p. 205). In applying the test of “in pari delicto”, the Judicial Committee analysed the statute, found that the statute was for the benefit of the plaintiff lessee and placed a primary responsibility for any breach upon the lessor-defendant, and ordered the repayment of the
[Page 392]
money. Thus the important step in the process in the eyes of the Judicial Committee of the Privy Council was the classification of the statute as to its object in order to locate a primary burden so as to ultimately determine if the parties to the contract were “in pari delicto”. It perhaps should be noted that Lord Denning makes reference to a Court of Appeal judgment (Green v. Portsmouth Stadium, Ltd., [1953] 2 All E.R. 102) where the plaintiff failed to recover although the statute again made it an offence for the defendant to recover from the plaintiff the moneys in issue. Lord Denning, sitting at the time in the Court of Appeal, denied recovery on the ground that the statute was silent as to recovery of the moneys wrongfully collected but imposed a penalty thereby raising the inference that “no other remedy is available”. The statute was there found not to be for the benefit of the bookmakers (of which the plaintiff was one) at a race track, but was for the regulation of race tracks. The Court of Appeal relied upon Browning v. Morris (1778), 2 Cowp. 790, to reach the opposite result (p. 104 of Green, supra) from that obtained on the analysis of the statute in Kiriri (supra, at p. 204)). The two cases can only be reconciled where the statute is found to have been enacted for the benefit of a section of the community which includes the plaintiff. In each statute an offence was created and penalties prescribed. In each case one class of members of the community were entitled to protection from overcharging by another class. In Green, however, it was considered that the presence of a penalty in the provision in the statute foreclosed an action for money had and received; but in Kiriri, supra, such an action succeeded. It is possible, therefore, that each was a case for the application of the exemption from the mistake of law rule by the application of the in pari delicto test, but one statute was taken as a bar to the action (Green, supra) and the other was construed as not barring the action (Kiriri, supra) because the statute was for the benefit and protection of the plaintiff and his ilk in the community. In Green, supra, Lord Denning concluded, at p. 104:
[Page 393]
…the Act was not passed for the protection of the bookmakers… It is for the regulation of racecourses, and the mode of regulation is by means of the criminal courts, and not by way of civil action.
It is difficult in any case to find support in Green, supra, although it was cited in Kiriri, supra, because it was not, on its facts or indeed on the reasoning in the judgment, a case where mistake of either fact or law was present.
The learned author of Treitel, The Law of Contract (5th ed. 1979), at p. 369 treats the principle of Kiriri as limited to “class-protecting statutes” and makes no reference to an “in pari delicto” exception to the general rule of non-recovery of moneys paid under mistake of law. In Goff and Jones, The Law of Restitution (2nd ed. 1978), at p. 96, Kiriri is taken as recognizing an exception to the prohibition against recovery of moneys paid under mistake of law as laid down by Hastelow v. Jackson (1828), 8 B. &c. 221 at p. 226, where the parties to an illegal contract, even if fully executed are not in pari delicto, or “on equal terms”.
Assuming for the moment the test to be as stated in Kiriri, supra, namely that if the plaintiff finds himself in the class for whose protection the offended statute was enacted, he may recover moneys paid to the offender, does the principle enable the appellant to succeed here? First of all there is no contract in the sense that the appellant and the respondent agreed, as in Kiriri, supra, and Green, supra, for the payment annually of a net “cost of return”. In 1964 the parties agreed respectively to take and supply electrical power and that the appellant would pay the respondent all charges therefor including a charge for the retirement of the respondent’s debt. No contract was subsequently entered into by the parties to cover the charges which give rise to the action for recovery now brought by the appellant. It was argued in the court below that the appellant had agreed through the Ontario Municipal Electric
[Page 394]
Association of which it is a member, to pay such charges, but the courts below found against the respondent on that argument and the submission was not advanced here. Thus we are not faced with the executed or executory tests mentioned in Kiriri, supra, nor are we concerned with the precise base of that case, namely, the recovery of moneys paid under an illegal contract. The parties here did not ‘agree’ to do something prohibited by the Act. The respondent submitted a claim for payment of charges for power supplied, which were not authorized by the Act under which the parties were operating and the appellant, in all innocence, paid the account so rendered. The “in pari delicto” test and its terminology seem most inappropriate and utterly unconnected to the realities of the transaction.
Furthermore, the Act in question cannot be said to have been passed for the benefit of the appellant, in the words of Green, supra; nor did the statute impose a duty on the respondent more than the appellant to observe its terms, in the words of Kiriri, supra; nor can the statute be said to impose a duty specially on the respondent “for the protection of” the appellant again in the words of Kiriri, supra, p. 204.
The statute here was enacted to continue a pre-existing Corporation engaged in the generation and supply of electric power throughout the province and to authorize it to carry on and expand its operations as the Lieutenant Governor in Council may authorize. Provisions incidental to these functions include the compensation of persons affected by works undertaken by the respondent, including municipal corporations and commissions. Part II of the statute applies to the supply of power by the respondent to municipal agencies such as the appellant and, in this connection, certain general municipal powers under other statutes are incorporated by reference. It is important to note that s. 76(3), supra, is found in a part of the Act dealing with the supply of power not just to municipal corporations but to the community generally.
[Page 395]
Other parts of the statute authorize the respondent to distribute power directly to the residents in any part of the province not serviced by municipal agencies who have contracts with the respondent. The purpose of the Act may be described in the simplest terms as being to establish the facilities for the production and supply of electric power at cost throughout the province either by the respondent directly or through municipal corporations or other agencies; (for the term “at cost” see ss. 7, 76 and 84; for the respondent’s supervising powers over the distribution of electrical energy see ss. 93 and 96).
The only offences established by the statute relate to breaches of the regulations of the respondent concerning inspection, equipment and construction and repair of facilities; and for the failure of a municipal commission to distribute power at rates approved by the respondent, but the penalty in that connection is disqualification of the members of the municipal corporation or commission from responsible posts for five years. By s. 101 of the Act, the respondents may, where a municipal agency neglects or refuses to carry out “any direction or regulation lawfully given or made under the Act,” appoint a person to remedy such default and the cost of doing so shall be added to the charges for power supplied under s. 76, supra. There is a general penalty imposed for breach of specified sections of the Act but these do not relate to those invoked by the respondent or the appellant in connection with the charges for power here in issue.
The Judicial Committee in Kiriri, supra, in reciting the general principle that “without more”, money paid under mistake of law may not be recovered, gave illustrations as to what “more” must be present. These are (all taken from p. 204):
[Page 396]
(a) ‘By the defendant’s conduct he is the one primarily responsible for the mistake.’ Here the payor and the payee are two public authorities operating under a statute enacted by the Legislature to bring electric power at cost to all members of the provincial community. Each has its staff and organization, including legal advisors. The appellant had for years gone along with the plan. H.R. McDonald, a member and sometime chairman of the appellant who acted as counsel for the appellant on this very issue on at least one occasion, had testified that while he frequently and vigorously spoke against the respondent’s equity “cost/credit” scheme, he did not realize that it was unlawful until 1974 when this action was instituted. The following exchange occurred in his cross-examination:
Q. Now, I think you’ve told my friend that no challenge of the legality of the return on equity and the cost of return was made until you made a submission to the Ontario Energy Board in May of 1974?
A. Yes, sir. That never occurred to me until then.
Q. But you, as a lawyer, particularly, and as an official of this utility, you appreciated that for—from 1966 to 1974, that Hydro had been paying out return on equity and had been charging that cost of return to and prorating it among all the utilities who were under contract with it?
A. Yes. I appreciated they had been doing that. I know that prior to that we had taken a strong opposition against it as we could everywhere we went, and the question of the legality of it, as I say, never occurred to me, as a practising lawyer.
I took the view that the Commission had solicitors and counsel, and I wasn’t sitting there to give legal advice, unfortunately, or fortunately.
I got into the Ontario Energy Board thing because it was sprung upon us, and it was really difficult to find counsel who understood anything about electrical energy; and I made the decision—the Commission made the decision that I would represent them then.
[Page 397]
And I must say that is the first time I really took a look at it from a legal point of view, as opposed to a management point of view, or a political point of view.
When one considers the complexity of the respondent’s scheme and the magnitude of the operations carried on by the respondent and the public utilities under the Act throughout the province, one must have the greatest sympathy for Mr. McDonald in attempting to determine the proper course of the appellant to follow as these events unfolded and the operations of the scheme progressed. I can find nothing in the statute to make either the respondent or the appellant primarily responsible for this mistake; nor can I find anything in the statute which makes the term “in pari delicto” appropriate in describing the action of either party.
(b) ‘As between the two of them, the duty of obeying the law is placed on the shoulders of one rather than the other.’ Because the statute here is administrative in nature and authorizes each party to undertake a role in the statutory plan, this test is inappropriate. Obviously the respondent is the dominant player on the team. It generates and distributes all electric power in the province. The appellant has a responsibility confined geographically and restricted to distribution of power. But in their respective spheres they are each responsible and accountable public agencies playing their roles in providing to the people of Ontario electricity at cost. The duties are complementary, not competitive or even matching.
(c) The duty of observing the law is imposed on the one for the protection of the other.’ The relationship in these proceedings does not lend itself to this type of analysis. The respondent has a duty to supply power to the appellant and all other distributors and consumers, at cost. That duty is to ensure a result, namely the delivery of electrical power to the population of the province, at cost. The duties of the parties in the plan are mutual, not reciprocal or even sequential. It can hardly be said that
[Page 398]
the provisions of this long and complex statute have been brought into the law for the protection of the appellant. Indeed, the appellant is subjected to numerous constraints in the statute, not for the protection of the respondent, but as in the case of the constraints applied to the respondent, for the purpose of achieving the object of the statute, that is the generation and delivery of electricity to the community at cost.
(d) ‘Does the responsibility for the mistake lie more on one party than on the other because he has misled the other when he ought to know better?’ The factual background here dictates otherwise. While the respondent calculated the charges for power delivered, it communicated those charges in an itemized account which clearly isolated the amounts now in dispute. The appellant was aware of the process applied by the respondent before and after 1966 when the plan in question began. The plan was the subject of much discussion, indeed debate, between the parties over several years. Legal practitioners experienced in the field were present and available for advice to the appellant at meetings, and representations on this very plan were made early in the period of implementation and throughout the operation of the plan. It cannot be said that the respondent misled the appellant. The respondent considered (and apparently considers) the scheme to be a valid exercise of the respondent’s discretion in calculating its costs for the supply of power under the statute and the respondent’s view of the statute and the plan was not challenged by litigation on the part of the appellant for eight years.
Another element which bears upon the determination of the equities between the parties is the absence of oppression, force or pressure of the circumstances which might have the effect of reducing the plaintiff-appellant to a subservient position at the time of the payment of the moneys in question. The learned justice at trial found:
In my view the payments were made without protest in the sense that it intended to preserve legal rights. Nepean did voice its objections from time to time; but in
[Page 399]
my view the circumstances do not go beyond what can be described as quibbling and grumbling. It cannot be inferred from the circumstances that the payments were involuntary in the legal sense.
While I find that in making payments from 1966 to 1974 there was no intention on the part of Nepean to preserve any legal rights, I would have difficulty in finding that the conversation between Mr. Hargreaves and Mr. Graham constituted a real threat to “put trustees in”, particularly in the light of what happened when Nepean eventually did refuse to pay in 1974.
For these reasons I find that Nepean made these payments under mistake of law; the payments were voluntary according to law and accordingly the claim for return of money fails, in so far as it is based on compulsion or practical compulsion.
This is not a case of an illegal agreement. Electric power was supplied by the respondent to the appellant under the statutory plan. The respondent billed the appellant. In doing so, charges not authorized in the statute for the supply of power at cost were included. The appellant paid the accounts as rendered. Neither party committed a wrong or delict in the sense of a tortious act, an act against common business morality, or an offence under a statute. Neither public body was authorized to make or receive these payments by the statute. Is the effect of the lack of authority in the Act for these additional charges, simply to reduce the burden otherwise arising under either a mutual or unilateral contract to pay the cost for electricity delivered? If so, the accounts rendered by the respondent were in breach of the contract arising on delivery of power under the Act and not susceptible to classification as an illegal transaction.
I therefore conclude that assuming the law to be as enunciated in Kiriri, supra, the appellant has not brought itself within that law in the circumstances of this case. Therefore, the general principles of mistake of law apply and the appellant is not entitled to recover the moneys paid.
[Page 400]
I do not believe, however, that the principle applicable here is that discussed in Kiriri, supra, and therefore I propose to dispose of this case on other grounds.
As noted above, the Judicial Committee of the Privy Council in Kiriri, supra, purported to find the root for the variation of the general law pertaining to the recovery of moneys paid under mistake of law in the judgments of Lord Mansfield from 1760 to 1780. These are the cases to which reference was made directly and indirectly: Smith v. Bromley (1760), 2 Doug. 696; 99 E.R. 441 (in notis); Browning v. Morris (1778), 2 Cowp. 790; 98 E.R. 1364; and Lowry and Another v. Bourdieu (1780), 2 Doug. 468; 99 E.R. 299. These judgments, however, concern the rule invoked in actions for the recovery of moneys paid under an illegal transaction. In Smith v. Bromley, supra, for example, Lord Mansfield was concerned with the recovery of moneys paid under extortionate circumstances by a relative of a bankrupt to a creditor of the bankrupt in order to facilitate bankruptcy proceedings. The payment was contrary to statute and, in the view of the Court, to the common law prior to the passage of the statute. There is no mention in the report of any mistake of law, fact or anything else. The sister of the bankrupt was the victim of simple extortion by a creditor and sued to recover the money extorted from her. His Lordship stated in part, at p. 444 of the English Reports:
But the present is the case of a transgression of a law made to prevent oppression, either on the bankrupt, or his family, and the plaintiff is in the case of a person oppressed, from whom money has been extorted and advantage taken of her situation and concern for her brother.
Earlier in the judgment Lord Mansfield said, at p. 443:
If the act is in itself immoral, or a violation of the general laws of public policy, there, the party paying shall not have this action; for where both parties are equally criminal against such general laws, the rule is, potior est conditio defendentis. But there are other laws, which are calculated for the protection of the subject against oppression, extortion, deceit, &c. If such laws
[Page 401]
are violated, and the defendant takes advantage of the plaintiffs condition or situation, there the plaintiff shall recover, and it is astonishing that the reports do not distinguish between the violation of the one sort and the other.
For good measure His Lordship added, at p. 444:
It is absurd to say, that any one transgresses a law made for his own advantage, willingly.
In Browning v. Morris, supra, Lord Mansfield pronounced the principle applicable to the recovery of moneys paid under a transaction prohibited by statute as follows, at pp. 1364-65 of the English Reports:
But, where contracts or transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men; the one, from their situation and condition, being liable to be oppressed or imposed upon by the other; there, the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring his action and defeat the contract. For instance, by the Statute of Usury, taking more than 5 per cent. is declared illegal, and the contract void; but these statutes were made, to protect needy and necessitous persons from the oppression of usurers and monied men, who are eager to take advantage of the distress of others;…
Again there is no reference in the report to a mistake of any kind, including a mistake of law. The Court was only concerned with a complicated lottery ticket insurance scheme operated between two professionals in the business. The transaction was apparently expressly prohibited by statute. His Lordship concluded at p. 1365:
So that the plaintiff was not only in pari delicto, but also stood in the light and under the description of that species of insurer, from whom the statute meant to protect the unwary.
In the result, the plaintiff failed to recover the moneys.
In the third case, Lowry v. Bourdieu, supra, the plaintiff sought recovery of a premium paid on a void insurance contract which, by reason of its nature, amounted to a gaming contract. The plain-
[Page 402]
tiff failed, the majority finding the policy to be a gaming contract, that it was contrary to the statute, and that the rule of in pari delicto barred the plaintiff. No mention was made of the law of mistake. The report continued at p. 301 of the English Reports:
Lord Mansfield said, he desired it might not be understood, that the Court held, that, in all cases where money has been paid on an illegal consideration, it cannot be recovered back. That in cases of oppression, when paid, for instance, to a creditor to induce him to sign a bankrupt’s certificate, or upon an usurious contract, it may be recovered, for, in such cases, the parties are not in pari delicto.
Buller J. dismissed the claim on the grounds that the contract was executed and while recovery might have been possible in the executory stage, the plaintiff must now fail. Willes J., in dissent, found that while the plaintiff may not have had an insurable interest, nonetheless the contract was not a gaming policy and consequently not an illegal contract. He then found this was a mistake because both thought that there was an insurable interest, “but it is a new point of law”. Thus, only the dissenting justice found a mistake to be present but whether he concluded it was a mistake of fact or law is not clear.
This group of cases seems an unlikely point of origin for a principle that moneys paid under mistake of law might be recoverable but only in the circumstances where the plaintiff and defendant are not in pari delicto and where the primary guilt or responsibility resides in the defendant. A more likely point of origin in the era of Lord Mansfield is found in Moses v. Macferlan (1760), 2 Burr. 1005; 97 E.R. 676 (likewise mentioned in Kiriri, supra), where Lord Mansfield stated at p. 1012:
This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It lies only for money
[Page 403]
which, ex aequo et bono, the defendant ought to refund: it does not lie for money paid by the plaintiff, which is claimed of him as payable in point of honor and honesty, although it could not have been recovered from him by any course of law; as in payment of a debt barred by the Statute of Limitations, or contracted during his infancy, or to the extent of principal and legal interest upon an usurious contract, or, for money fairly lost at play: because in all these cases, the defendant may retain it with a safe conscience, though by positive law he was barred from recovering. But it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through imposition, (express, or impled) or extortion; or oppression; or an undue advantage taken of the plaintiffs situation, contrary to laws made for the protection of persons under those circumstances.
In one word, the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.
That case arose out of an agreement between the payee and the endorsee of a bill of exchange whereby the endorsee agreed that he would not bring action against the payee-endorser if he would endorse the bill. Contrary to the agreement, he did so and recovered judgment which the payee-endorser successfully set aside in these proceedings. The only reference to mistake is the somewhat oblique comment, supra, by His Lordship in finding in the final analysis that the defendant here is bound in natural justice and equity to make refund. Again there is no reference in the report to any mistake on the part of anyone either as to fact or law.
Reference was made to Lowry v. Bourdieu, supra, by Lord Ellenborough C.J. a few years later in Bilbie v. Lumley and Others (1802), 2 East 469; 102 E.R. 448. The insurer in that case had paid under the policy upon the loss by capture of the defendant’s vessel. The plaintiff later discovered that non-disclosure of certain important information rendered the policy void. The plaintiff-insurer in fact was aware, prior to the payment of loss under the policy, of all the circumstances but did not appreciate at that time that non-disclosure
[Page 404]
vitiated the policy and hence the plaintiffs liability thereunder. Recovery was denied, Lord Ellenborough stating at pp. 449-50 of the English Reports:
Every man must be taken to be cognizant of the law; otherwise there is no saying to what extent the excuse of ignorance might not be carried. It would be urged in almost every case. In Lowrie [sic] v. Bourdieu, money paid under a mere mistake of the law (was endeavoured to be recovered back), and there Buller J. observed that ignorantia juris non excusat, &c.
In Langton and Others v. Hughes and Another (1813), 1 M.&S. 593; 105 E.R. 222, Lord Ellen-borough C.J. again found that a plaintiff could not recover moneys owing under a contract made contrary to the law. In reaching this conclusion, His Lordship stated at p. 223 of the English Reports:
So if a person sell goods with a knowledge and in furtherance of the buyer’s intention to convey them upon a smuggling adventure, he is not permitted by the policy of the law to recover upon such a sale; and in the same manner in the case of bricks sold under the statutable size, which the statute requires to be of certain dimensions, for the convenience of building, and perhaps for the benefit of the Revenue, the like doctrine has been held. Without multiplying instances of this sort it may be taken as a received rule of law, that what is done in contravention of the provisions of an Act of Parliament, cannot be made the subject-matter of an action. This is the rule which governs the decisions upon insurances on contraband trade, and all that class of cases where the party is connected with a previous knowledge of the illegality of the transaction.
The transaction was contrary to statute and this was pleaded by the defendant. It is true as Lord Denning has stated in Kiriri, supra, at p. 202 that these observations were not made with reference to the recovery of moneys paid over under an illegal transaction but rather in an instance where a party to an illegal transaction is seeking the aid of the court for its enforcement. Nonetheless it would appear to be a statement of the law at that time with reference to the recovery of moneys paid under a mistake of law. In the same year a four judge court under Chief Justice Mansfield rejected
[Page 405]
a claim in Brisbane v. Dacres (1813), 5 Taunt. 143; 128 E.R. 641, for recovery of moneys paid under a mistake of law. The headnote states the rule to be as follows:
If a person with knowledge of the facts, but under a mistake as to the law, pays over to another, claiming it as a right, money which he was not compellable to pay, he cannot, upon discovering what his legal right was, recover it back, there being nothing against conscience in the other party’s retaining it.
The captain of a naval vessel had unlawfully received payment for the transportation of private goods and had paid one-third of the payment so received over to the admiral under whose command he sailed. He did so believing this to be the law. On discovering that no such law existed, he brought action against the admiral’s estate for the recovery of these moneys. The whole of the transaction was illegal and there was no mistake of fact, but only an ignorance of the law. One judge, Chambre J., dissented and would have allowed recovery. Gibb J. reviewed the pronouncements by Lord Mansfield in Lowry v. Bourdieu, supra, and other cases as well as Bilbie v. Lumley, supra. The only exception wherein recovery was said to be possible was where the plaintiff could demonstrate fraud.
Finally, in Hastelow v. Jackson, supra, referred to by Lord Denning in Kiriri, supra, the Court confirmed the trial judge who allowed recovery by the plaintiff of moneys deposited with the defendant stake-holder to abide the outcome of an unlawful prize fight. The judgment only obliquely referred to the law of mistake but rather turned on the question as to whether the illegal contract was executory at the time of notice by the plaintiff to the defendant stake-holder and therefore entitled the plaintiff to recovery of the moneys though paid under the unlawful arrangement. Littledale J. went on to add, however, at p. 1028 of the English Reports:
…if the event happens and the money is paid over without dispute, that is considered as a complete execu-
[Page 406]
tion of the contract, and the money cannot be reclaimed;…
The case does not, in my view, form the basis for any broad rule supporting the recovery of moneys paid under mistake of law other than in the case where the recovery is sought while the contract is executory. It does not, in my view, support the general propositions in Kiriri, supra, and indeed was not cited therein for any such purpose. The excerpt from Cheshire and Fifoot, supra, therefore, would appear to correctly summarize the state of the law in England, notwithstanding the judgment in Kiriri, supra.
I turn back to the earlier reference to a right of recovery of moneys paid under illegal transactions. The words ‘unlawful’ and ‘illegal’ frequently appear in the authorities dealing with mistake of law and transactions contrary to the law. There appear to be three categories of actions or events which are contrary to the law and which sometimes fall into the descriptions ‘unlawful’ or ‘illegal’. These are:
(a) offences against statutes prohibiting defined conduct;
(b) actions which are without legal consequence in the sense of creating enforceable rights, such as gaming contracts;
(c) actions taken by statutory bodies outside the limits of authority granted or established in the statute.
In Jowitt’s Dictionary of English Law (2nd ed. 1977), we find this discussion of these terms:
Unlawful. “Unlawful” and “illegal” are generally used as synoymous [sic] terms, but a distinction is occasionally drawn between them; “unlawful,” as applied to promises, agreements, considerations and the like, is sometimes used to denote that they are ineffectual in law because they involve acts which, although not illegal (that is to say, positively forbidden), are disapproved of by the law, and are therefore not recognised as a ground of legal rights, either because they are immoral, or because they are against public policy. It is on this ground that contracts in restraint of marriage or of trade are generally void. As a general rule, an unlawful agreement cannot be enforced, nor can money paid or property delivered under it be recovered back: potior est conditio defendentis.
[Page 407]
We are not here concerned with categories (a) or (b) but rather with (c). The distinction between (b) and (c) is simply that the actions of the class described in (c) are ultra vires the actor but are not contrary to any announced public policy, either in statute law or common law. What then is the applicable policy or principle of law to the position of the parties to such an unauthorized but not prohibited action? The appellant and the respondent had been participating in the pre- and post-1966 scheme as part of their respective operations under the Act. Each was mistaken as to the basis for the scheme under that statute. The principles of law pertaining to the rights of parties to illegal transactions has no application because these relate to transactions contrary to public policy or prohibited by statute. Such is, of course, not the case here. We are concerned with unauthorized acts and mutual mistake with respect thereto. The law of mutual mistake applies because in the circumstances such a mistake occurred. Any exception to the general rule barring recovery of moneys paid in an illegal transaction when the parties are not in pari delicto does not apply here because neither party has committed a delict and no wrongful conduct in the sense of actions contrary to statute or public policy has taken place. The transaction entered into by these two creatures of statute was not authorized by any statute. Neither body has inherent powers even in the sense of those enjoyed by a corporation created by letters patent issued by the Crown. As was noted when examining the older authorities, this cannot be classified as an illegal transaction as neither party has offended any prohibition in law but rather each party has respectively asked for and paid a charge not included in the statutory term “cost”.
The appellant in this Court relied upon two decisions of this Court: Rural Municipality of Storthoaks v. Mobil Oil Canada, Ltd., [1976] 2 S.C.R. 147 and Eadie v. The Corporation of the Township of Brantford, [1967] S.C.R. 573. Storthoaks, supra, concerned a mistake of fact, and, in my respectful view, the judgment of Martland J., speaking on behalf of the full Court, cannot be
[Page 408]
read as supporting the submissions of the appellant as to the law applicable in an action for the recovery of moneys paid under mistake of law. I take the reference at p. 160 to The Dominion Bank v. The Union Bank of Canada (1908), 40 S.C.R. 366, and the included reference to Moses v. Macferlan, supra, as dealing with the form of action for the recovery of moneys paid under a mistake of fact with which the Court in Storthoaks, supra, was solely concerned.
In Eadie v. The Township of Brantford, supra, the plaintiff sought recovery of moneys paid and land transferred to the defendant municipality as required by a by-law in order to obtain approval of a land severance sought by the plaintiff to complete the sale of his residence. After the plaintiff had paid the money and transferred the required frontage from his lands to the defendant municipality, the by-law in question was quashed by a court in a proceeding to which the plaintiff was not a party. Speaking for the majority in this Court, Spence J. concluded that the plaintiff had parted with his money and property under a mutual mistake of law, and:
It is, of course, a trite principle that money paid under a mutual mistake of law cannot be recovered. That principle, however, is subject to several well-established exceptions.
The basis for the exception relied upon in Eadie, supra was found in Maskell v. Horner, [1915] 3 K.B. 106 which is not a case of mistake of either fact or law but was a case of involuntary payment made under compulsion in circumstances where the plaintiff made it clear at the time of payment that he was not giving up his right to recovery of the moneys so paid. Lord Reading found the plaintiff disentitled to recover the moneys so paid even if it were a mistake of fact (pp. 117-18). Recovery was, however, allowed on the basis of the principle applicable to payments made under compulsion. Lord Reading said at p. 118:
If a person with knowledge of the facts pays money, which he is not in law bound to pay, and in circum-
[Page 409]
stances implying that he is paying it voluntarily to close the transaction, he cannot recover it. Such a payment is in law like a gift, and the transaction cannot be reopened. If a person pays money, which he is not bound to pay, under the compulsion of urgent and pressing necessity or of seizure, actual or threatened, of his goods he can recover it as money had and received.
In Halsbury, 4th ed., vol. 9, p. 453, para. 664 it is noted that compulsion may be “ ‘practical’ as well as ‘actual legal’ compulsion”.
Spence J. also noted that Kerwin J. (as he then was) allowed recovery of moneys paid under ‘‘practical compulsion” in Knutson v. The Bourkes Syndicate and Others [1941] S.C.R. 419 at p. 425; vide also The Municipality of the City and County of St. John et al. v. Fraser-Brace Overseas Corporation, et al., [1958] S.C.R. 263 at p. 282. No element of mistake was present in either case.
Spence J. concluded that Eadie need only show practical compulsion in order to recover. He said at p. 582:
It was submitted by counsel for the respondent that in order to justify the plaintiff demanding repayment of money paid under mutual mistake in law upon the basis that he was under compulsion to do so, the plaintiff must have been faced with a situation where there was no other alternative available to him. I am of the opinion that the bar to the plaintiffs recovery is not so stringent and that a practical compulsion is alone necessary.
As will be seen below, I interpret the concluding sentence as referring only to the principle of law applicable to the payment of moneys under compulsion. The claimant there made the payment and transfer of property in order to complete a necessitous sale before the buyer withdrew and this Court found that practical compulsion was present. Spence J. concluded that the plaintiff was entitled to recovery of the money “paid under compulsion and in mutual mistake of law” (p. 583). In my view, the presence of mistake of law in the parties to the transaction was superfluous as the entitlement to recovery arose on the finding of payment
[Page 410]
under practical compulsion. The authorities relied on by the majority are all to this effect and are in accord with the older cases concerned with illegal transactions and payments under compulsion. It should be noted as well that Ritchie J. dissented on the grounds that Maskell v. Horner, supra, was not a case of payment under mistake of law; and that on the facts the money in Eadie, supra, was paid voluntarily under an agreement. Judson J. also dissented on the basis that the moneys had been paid and the property transferred under an agreement freely entered into and hence were unrecoverable. On the facts of the case, it is clear that the majority were proceeding on the basis that the elements of mistake of law and involuntary payment were both present. The remedy of recovery is clearly available when the latter alone is present. As we have seen, these separate doctrines have frequently been discussed in the same judgment and indeed there may have been a tendency at times to mingle the remedy of the one with the principle of the other.
A similar intermingling of the application of the rules concerning recovery of moneys paid under an illegal contract and the recovery of moneys paid under mutual mistake of law is well illustrated in Harse v. Pearl Life Assurance Company, [1904] 1 K.B. 558. The general rule that recovery of past payment and collection of future payments are alike barred is subject to no exception in the latter case, and in the former case only in the presence of “fraud, duress, or oppression, or difference in the position of the parties which created a fiduciary relationship to the plaintiff so as to make it inequitable for the defendants to insist on the bargain that they had made with the plaintiff,…” (per Collins M.R., at p. 563). Romer L.J., at p. 564 applies the same tests to determine entitlement to recovery of moneys paid under an illegal contract and categorizes these tests as the means of determining that the parties to the illegal transaction were or were not “in pari delicto”. On the facts, the policies of insurance were contrary to statute and hence were void and illegal. The agent of the
[Page 411]
insurer had misled the policyholder as to his insurable interest but nevertheless the parties were held to be “in pari delicto”, and the premiums paid under the policy could not be recovered. The insurer, of course, was at no time at risk in law although in receipt of premiums for coverage. That the parties were mistaken as to what in law was an insurable risk is clear, but recovery was not granted on the basis of mistake.
Mistake of law “without more” and without “something more in addition” (in the words of Lord Denning in Kiriri, supra, at p. 204) may be an allusion to the need to find compulsion or illegality to introduce a right of recovery on the happening of mutual mistake of law. In compulsion, recovery is allowed as the payment is not made voluntarily and there is no reason to suppose, only because of the fact of payment, that the plaintiff had surrendered his right to recover his moneys paid under practical compulsion. In the case of illegal transactions, the concept of in pari delicto is introduced to determine entitlement to recovery. In the absence of either of these elements, the “something more in addition to a mistake of law”, supra, is missing, and the rule applicable on mutual mistake of law operates to deny recovery.
The law applicable to the transaction in this appeal is not that applicable to the recovery of payments made under duress or to the recovery of moneys paid under an illegal transaction, but rather the law applicable to the recovery of moneys paid under mutual mistake of law occurring in the absence of either of the other two elements. Hence the rules for recovery applicable with respect to illegality and compulsion are not relevant. In such circumstances the exemptions relating to illegal transactions are not operable. The principle of mistake of law thus bars recovery of the moneys paid by the appellant.
[Page 412]
These authorities, both old and current, relating to the situation where mistake of law alone is present, are founded, in my respectful view, on good sense and practicality. Certainty in commerce and in public transactions such as we have here is an essential element of the well-being of the community. The narrower rule applicable to mistake of law as compared to that applicable to mistake of fact springs from the need for this security and the consequential freedom from disruptive undoing of past concluded transactions. Mistake of fact is, of course, limited to the parties and has no in rem consequences; hence the more generous view. In any event, nothing has been brought to light in the review of the law by the parties on this appeal to indicate any basis for the merging of the principles applicable to the categories of mistake, and indeed the wisdom embodied in the authorities augurs for the maintenance of this ancient distinction.
Since writing the foregoing I have had the opportunity of reading the reasons of my colleague Dickson J. The thrust of the appellant’s submission was centred on the question as to whether the parties to the mistake of law were in pari delicto. Unjust enrichment is mentioned in its factum only with reference to the argument that the appellant and the respondent were not in pari delicto. In the course of argument the appellant, in response to a question from the Court, stated that it was not urging and not founding its appeal on the abolition of the distinction in law between mistake of fact and mistake of law. Indeed, the rule was accepted, and the application sought in the appellant’s argument was that said to have been followed by this Court in Eadie v. The Township of Brantford, supra. Accordingly my considerations have been confined to the operation of the doctrine of mistake of law as argued.
This course may well have been taken by both counsel because of the nature of the statutes (concerned with the generation and distribution of electricity to the inhabitants throughout the province, at cost) and the nature of the contending bodies. Each party is a public body ‘owned’ by the
[Page 413]
people of the province in the one case and by the Township in the other (the latter, of course, participate in each organization). Neither has the authority to ‘accumulate’ surplus assets or resources. The concept of unjust enrichment is not easily associated with these relationships.
I therefore would dismiss this appeal with costs. As we have treated the notice to vary as a cross-appeal, I would likewise dismiss the cross-appeal with costs.
Appeal and notice to vary (cross-appeal) dismissed with costs, LASKIN C.J. and DICKSON J. dissenting.
Solicitors for the appellant: McCarthy & McCarthy, Toronto.
Solicitors for the respondent: Day, Wilson, Campbell, Toronto.
