Rethinking Section 142 of the Restatement of Restitution: Fault, Bad Faith, and Change of Position

I. IntroductionSection 142 of the Restatement ofRestitution articulates a set of rules establishing the restitutionary defense of change of position.1 In so doing, it has made an important contribution to the clarification and simplification of the analysis of restitutionary claims, in particular, claims pertaining to the recovery of benefits transferred by error. The paradigm case in this category of restitutionary claims is the recovery of moneys paid by the plaintiff to the defendant under a mistake. Consistent with the prior common law, the First Restatement articulates a series of rules supporting recovery of moneys paid on the basis of a series of different types of mistakes.2 Thus, where, for example, the payer has mistaken the identity of the payee, recovery of the moneys paid is allowed.3 The First Restatement then sets out in Section 69 a defense to such claims of "Change of Circumstances."4 The defense is essentially repeated in Section 142 of Chapter 8, the chapter of the First Restatement that sets forth the restitutionary defenses. By way of illustration, if the recipient ofthe mistaken payment reasonably believes that the payment was due and undertakes an unusual expenditure in reliance on the receipt - let us say, a spur ofthe moment vacation at an expensive resort - that would otherwise not have been made, the defense of Change of Circumstances or, as it is commonly called, "Change of Position," would be presumptively available to the payee as a complete or partial defense to the payer's claim for recovery. This change of circumstances defense is set forth in generalized language in Section 142 of the First Restatement in the following terms: "The right of a person to restitution from another because of a benefit received is terminated or diminished if, after the receipt of the benefit, circumstances have so changed that it would be inequitable to require the other to make full restitution."5The following commentary further explains that this rule is an application of a more general principle that "restitution is granted only where it is equitable so to do"6 and indicates that such a defense might be available where the benefits transferred to the recipient have been "lost, transferred, stolen or destroyed without benefit"7 to the recipient. It is widely accepted that the recognition of the change of position defense represents an important contribution to the rationalization of restitutionary doctrine.8In addition to its articulation ofthe general defense, Section 142 sets forth further rules - and here we enter into more controversial territory - establishing the relevance of fault on the part ofthe recipient. Subsection 2 of Section 142 permits the recipient to raise the defense only if "the conduct ofthe recipient was not tortious and he was no more at fault for his receipt, retention or dealing with the subject matter than was the claimant."9 This provision thus famously creates what is often referred to as a "balancing test," which requires the court to compare the relative fault ofthe payer and the payee and permit the defense only if the payee was "no more at fault" than the payer.10 Subsection 3 then precludes the recipient or payee altogether from relying on the defense if either the "conduct ofthe recipient in obtaining, retaining or dealing with the subject matter was tortious"11 or in circumstances where the change in circumstances occurred only "after the recipient had knowledge of the facts entitling the other to restitution and had an opportunity to make restitution."12 A consideration of whether Section 142 adopts a sound treatment of the relevance of fault on the part of the recipient in making the change of circumstances defense available is the primary focus of this Article.Consideration of the soundness of Section 142 of the First Restatement is timely for a number of reasons. First, and most importantly, the work on the Restatement of Restitution and Unjust Enrichment Third ("R3RUE") is proceeding apace, and the Reporter will soon turn to the task of restating the rules pertaining to restitutionary defenses. …