Chase Manhattan Bank v Israel-British Bank (London) Ltd [198...

Facts

• Chase Manhattan Bank mistakenly made a duplicate payment to Israel-British Bank concerning the same transaction.
• Upon discovering this error, Chase Manhattan Bank sought recovery of the overpaid funds.
• The recipient, Israel-British Bank, was found to have knowledge of the mistaken payment at the time it was received.
• There was no valid legal basis for Israel-British Bank to retain the duplicate payment.
• The case centered on whether a constructive trust arose in favor of Chase Manhattan Bank as payer, given the recipient’s knowledge of the mistake and the absence of any legal justification for retaining the funds.

Issues

1. Whether a payment made under a mistake of fact gives rise to a constructive trust in equity.
2. Whether the recipient’s knowledge of the payer’s mistake is sufficient to trigger fiduciary duties to return the funds.
3. Whether the absence of a legal basis for retention mandates restitution through the imposition of a constructive trust.

Decision

• The court held that a constructive trust arises by operation of law when a payment is made by mistake of fact, and the recipient is aware of this mistake.
• Israel-British Bank was found to hold the mistakenly received funds on constructive trust for Chase Manhattan Bank, owing to its knowledge of the error and lack of any legitimate right to the funds.
• The court emphasized that knowledge of the mistake—not fraudulent intent—triggers the fiduciary obligation to return the funds.
• The decision clarified that constructive trusts are a remedy to prevent unjust enrichment in such circumstances.

Legal Principles

• Constructive trusts may be imposed by equity to prevent recipients from being unjustly enriched by mistaken payments.
• When a payment is made under a mistake of fact, the payer retains an equitable interest unless the recipient takes in good faith and without knowledge of the mistake.
• The recipient’s knowledge of the mistake is the determinative factor for fiduciary duties to arise, regardless of whether there was bad faith.
• The absence of a legal basis for retaining funds strengthens the grounds for imposing a constructive trust.
• Mistakes of fact, but not usually mistakes of law, can give rise to constructive trusts in the context of mistaken payments.

Conclusion

The judgment in Chase Manhattan Bank v Israel-British Bank established that recipients of mistaken payments who are aware of the mistake are subject to a constructive trust and must return the funds to avoid unjust enrichment, thereby reaffirming the equitable principles governing trust law and mistaken payments.