Please give us all that cash back

Last year's take over of Scottish Widows by Lloyds TSB resulted in some of the biggest windfall payments yet made - the average was more than £5,000. But for some "lucky" policyholders the deal seems to be ending in tears.

Lloyds TSB has done an audit and now claims some of the windfalls were over payments. A few hundred policy holders have already received letters asking for money back. More may be sent in the coming weeks.

Most of the recipients of such letters will consider the invitation to pay a few thousand pounds to one of the world's biggest banks for about five seconds and do the natural, normal and reasonable thing: throw the letter away with a few pithy thoughts on the lines that they can get stuffed.

Lloyds TSB could take the attitude that few will pay the money back voluntarily and then take a common sense view and write off the overpaid sums. The alternative would be a series of small but hard fought and relatively expensive court cases.

The bank claims there is "a long-established practice in the financial services industry that companies may seek to reclaim money paid out to customers in error," but this is a gross over simplification of the law.

As a rule money paid by mistake may be recoverable but according to the main book on the area "it is notoriously difficult to make an authoritative statement of the principles upon which recovery is based".

The mistake must be absolutely clear and fundamental one. In many of the Lloyds TSB cases it may relate to doubtful issues like who was the true owner of a policy. In cases where the slightest doubt remains, recovery could not be ordered.

In relation to demutualisations and overpayments the law is particularly uncertain. Most payments that are made by mistake result from a contract that has been freely entered into by both parties. Where there is a take over of this sort there is no contract, payment being unilaterally fixed by one side.

There is an argument that as there was no agreement to pay a specific amount, the payment of a greater amount than Lloyds TSB may have intended does not amount to a mistake.

An even bigger hurdle for the bank may be that many of the windfalls will already have been spent. Those who blew it on a holiday of a lifetime or a new kitchen will be in a stronger position than the "sensible" ones who reinvested.

Last year the High Court considered a similar situation involving the overpayment of £172,000 to Gordon Derby by the Scottish Equitable when he cashed in his pension.

On discovering its mistake the Equitable tried to recover the entire sum. Although, in contrast to Lloyds TSB's position, there was no real question about its entitlement it did not succeed in respect of £9,000 that Mr Derby had spent on luxuries shortly after receiving the payment. The balance had either been reinvested in another pension or used to repay his mortgage. He was ordered to return this money.

A court would probably take a similar approach to money invested by Scottish Widows policyholders. However many will have invested in the stock market which has fallen since last August. Money that has been lost in this way will not be recoverable by Lloyds TSB, but the bank cannot recover any profits or interest that may have resulted from investment.

If policyholders refuse to pay up, Lloyds TSB might consider deducting the overpaid sums from policies when they mature, but such action would probably result in punishment by the financial regulatory authorities.

The bank's current position can be regarded as little more than a posture. In reality the chances of legal action being taken, let alone succeeding, are remote and policy holders would do well to sit tight.

• Richard Colbey is a barrister